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Note 1. Basis of Presentation and New Accounting Standards
Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission and United States (U.S.) generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at September 30, 2009 and December 31, 2008, the results of its operations for the three and nine months ended September 30, 2009 and 2008 and its cash flows for the nine months ended September 30, 2009 and 2008. All material intercompany balances and transactions have been eliminated. Material subsequent events are evaluated and disclosed through the report issuance date, October 22, 2009. These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 included in our Current Report on Form 8-K filed on April 28, 2009. See “—Note 3. Business Segments” for discussion of the change in business segments, due to the Mead Johnson Nutrition Company (Mead Johnson) initial public offering. Certain reclassifications were made to conform to the current period presentation.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full year operating results.
The Company recognizes revenue when title and substantially all the risks and rewards of ownership have transferred to the customer. Generally, revenue is recognized at the time of shipment; however, for certain sales made by Mead Johnson and certain non-U.S. businesses within the BioPharmaceuticals segment, revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of recognition to reflect expected returns that are estimated based on historical experience and business trends. Additionally, provisions are made at the time of revenue recognition for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.
In addition, the Company includes alliance revenue in net sales. The Company has agreements to promote pharmaceuticals discovered by other companies. Alliance revenue is based upon a percentage of the Company’s copromotion partners’ net sales and is earned when the related product is shipped by the copromotion partners and title passes to the customer.
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of intangible assets; restructuring charges and accruals; sales rebate and return accruals; inventory obsolescence; legal contingencies; tax assets and tax liabilities; stock-based compensation; retirement and postretirement benefits (including the actuarial assumptions); financial instruments, including marketable securities with no observable market quotes; as well as in estimates used in applying the revenue recognition policy. Actual results may differ from the estimated results.
In October 2009, the Financial Accounting Standards Board (FASB) approved for issuance Emerging Issues Task Force (EITF) issue 08-01, Revenue Arrangements with Multiple Deliverables (currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 605-25). This statement provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The EITF introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact of adopting this pronouncement.
In July 2009, the FASB issued ASC topic 105 (formerly Statement of Financial Standards (SFAS) No. 168, The Hierarchy of Generally Accepted Accounting Principles). ASC 105 contains guidance which reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. This pronouncement is effective September 15, 2009. The adoption of this pronouncement did not have an effect on the consolidated financial statements.
The Company adopted the provisions of ASC 820-10, Fair Value Measurements and Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to non-financial assets and liabilities effective January 1, 2009. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of ASC 820-10 did not have an impact on the Company’s consolidated financial statements.
In June 2009, the FASB finalized SFAS No. 166, Accounting for Transfers of Financial Asset, an amendment of FASB Statement No. 140, which was later superseded by the FASB Codification and included in ASC topic 860. Among other items the provision removes the concept of a qualifying special-purpose entity and clarifies that the objective of paragraph ASC 860-10-40-4 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. This pronouncement is effective January 1, 2010. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated financial statements.
In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was later superseded by the FASB Codification and included in ASC topic 810. The provisions of ASC 810 provide guidance in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. This pronouncement also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. New provisions of this pronouncement are effective January 1, 2010. The Company is currently evaluating the impact of adopting this pronouncement.
The Company adopted ASC 810-10-65-1, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51) on January 1, 2009. As a result of adoption the following retroactive adjustment was made: the December 31, 2008 noncontrolling interest balance of $33 million, previously presented as $66 million of receivables and $33 million of non-current other liabilities, has been presented as part of equity. Also, noncontrolling interest has been presented as a reconciling item in the consolidated statements of earnings, the consolidated statements of comprehensive income and retained earnings and the consolidated statements of cash flows.
The Company adopted ASC 805 (formerly SFAS No. 141(R), Business Combinations), for business combinations on or after January 1, 2009. This requires recognition of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, this pronouncement requires recognition of identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This pronouncement also requires the fair value of acquired in-process research and development (IPRD) to be recorded as indefinite lived intangibles, contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. See “—Note 5. Medarex, Inc. Acquisition” for Medarex, Inc. purchase accounting details.
The Company adopted the provisions of ASC 808-10 Collaborative Arrangements (formerly Emerging Issues Task Force Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property), effective January 1, 2009 and the provisions have been applied retroactively. According to this pronouncement a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third-parties in connection with collaborative arrangements are presented gross or net based on the criteria in ASC 605-45-45 Overall Considerations of Reporting Revenue Gross as a Principal vs. Net as an Agent (EITF issue No. 99-19, Reporting Revenue Gross as a Principal vs. Net as an Agent) and other accounting literature. Payments to or from collaborators are evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are disclosed along with the accounting policies and the classification of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity are accounted for under other accounting literature; however, required disclosure under ASC 808-10 applies to the entire collaborative agreement. This pronouncement did not have a material impact on the Company’s consolidated financial statements.
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Note 2. Alliances and Collaborations
sanofi
The Company has agreements with sanofi-aventis (sanofi) for the codevelopment and cocommercialization of AVAPRO*/AVALIDE* (irbesartan/irbesartan-hydrochlorothiazide), an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy, and PLAVIX* (clopidogrel bisulfate), a platelet aggregation inhibitor. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the U.S., Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements expire on the later of (i) with respect to PLAVIX*, 2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas and Australia and 2013 in Europe and Asia and (ii) the expiration of all patents and other exclusivity rights in the applicable territory. The Company acts as the operating partner for the territory covering the Americas and Australia and owns a 50.1% majority controlling interest in this territory. Sanofi’s ownership interest in this territory is 49.9%. As such, the Company consolidates all country partnership results for this territory and records sanofi’s share of the results as a noncontrolling interest which was $443 million ($300 million after-tax) and $375 million ($250 million after-tax) for the three months ended September 30, 2009 and 2008, respectively, and $1,258 million ($849 million after-tax) and $1,063 million ($714 million after-tax) for the nine months ended September 30, 2009 and 2008, respectively. The Company recorded net sales in this territory and in comarketing countries outside this territory (Germany, Italy, Spain and Greece) of $1,883 million and $1,773 million for the three months ended September 30, 2009 and 2008, respectively, and $5,472 million and $5,108 million for the nine months ended September 30, 2009 and 2008, respectively. Discovery royalties owed to sanofi were included in cost of products sold and amounted to $305 million and $273 million during the three months ended September 30, 2009 and 2008, respectively, and $881 and $778 million during the nine months ended September 30, 2009 and 2008, respectively.
Cash flows from operating activities of the partnerships in the territory covering the Americas and Australia are recorded as operating activities within the Company’s consolidated statements of cash flows. Distributions of partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are also recorded within operating activities on the Company’s consolidated statements of cash flows.
Sanofi acts as the operating partner for the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest within this territory. The Company’s ownership interest in the partnership within this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statements of earnings. The Company’s share of income from these partnership entities before taxes was $141 million and $163 million for the three months ended September 30, 2009 and 2008, respectively, and $442 million and $487 million for the nine months ended September 30, 2009 and 2008, respectively.
The Company routinely receives distributions of profits and provides funding for the ongoing operations of the partnerships in the territory covering Europe and Asia. These transactions are recorded as operating activities within the Company’s consolidated statements of cash flows.
The Company and sanofi have a separate partnership governing the copromotion of irbesartan in the U.S. Under this alliance, the Company recognized other income of $8 million in each of the three month periods ended September 30, 2009 and 2008, and $24 million in each of the nine month periods ended September 30, 2009 and 2008, related to the amortization of deferred income associated with sanofi’s $350 million payment to the Company for their acquisition of an interest in the irbesartan license for the U.S. upon formation of the alliance. The unrecognized portion of the deferred income amounted to $99 million and $123 million at September 30, 2009 and December 31, 2008, respectively, and will continue to amortize through 2012, the expected expiration of the license.
The income attributed to certain packaging activities and development royalties with sanofi are reflected net in other income and were $20 million and $26 million during the three months ended September 30, 2009 and 2008, respectively, and $43 million and $76 million during the nine months ended September 30, 2009 and 2008, respectively.
The following is the summarized financial information for the Company’s equity interests in the partnerships with sanofi for the territory covering Europe and Asia:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||
|
Net sales |
$ | 732 | $ | 881 | $ | 2,259 | $ | 2,704 | ||||
|
Gross profit |
541 | 657 | 1,685 | 2,048 | ||||||||
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Net income |
279 | 318 | 863 | 978 | ||||||||
Otsuka
The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote with Otsuka, ABILIFY* (aripiprazole), for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company or Otsuka to third-party customers. The product is currently copromoted with Otsuka in the U.S., United Kingdom (UK), Germany, France and Spain. Currently in the U.S., Germany, France and Spain, where the product is invoiced to third-party customers by the Company on behalf of Otsuka, the Company records alliance revenue for its 65% contractual share of third-party net sales and records all expenses related to the product. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to third-party customers. In the UK and Italy, where the Company is presently the exclusive distributor for the product, the Company records 100% of the net sales and related cost of products sold and expenses. The Company also has an exclusive right to sell ABILIFY* in other countries in Europe, the Americas and a number of countries in Asia. In these countries, the Company records 100% of the net sales and related cost of products sold.
In April 2009, the Company and Otsuka announced an agreement to extend the U.S. portion of the commercialization and manufacturing agreement until the expected loss of product exclusivity in April 2015. Under the terms of the agreement, the Company paid Otsuka $400 million, which will be amortized as a reduction of net sales through the extension period. Beginning on January 1, 2010, the share of ABILIFY* U.S. net sales that the Company records will change from 65% to the following:
| Share as a % of U.S. Net Sales |
||
|
2010 |
58.0% | |
|
2011 |
53.5% | |
|
2012 |
51.5% |
During this period, Otsuka will be responsible for 30% of the expenses related to the commercialization of ABILIFY*.
Beginning January 1, 2013, and through the expected loss of U.S. exclusivity in 2015, the Company will receive the following percentages of U.S. annual net sales:
| Share as a % of U.S. Net Sales |
||
|
$0 to $2.7 billion |
50% | |
|
$2.7 billion to $3.2 billion |
20% | |
|
$3.2 billion to $3.7 billion |
7% | |
|
$3.7 billion to $4.0 billion |
2% | |
|
$4.0 billion to $4.2 billion |
1% | |
|
In excess of $4.2 billion |
20% |
During this period, Otsuka will be responsible for 50% of all expenses related to the commercialization of ABILIFY*.
In addition, the Company and Otsuka announced that they have entered into an oncology collaboration for SPRYCEL (dasatinab) and IXEMPRA (ixabepilone), which includes the U.S., Japan and European Union (EU) markets (the Oncology Territory). Beginning in 2010 through 2020, the collaboration fees the Company will pay to Otsuka annually are the following percentages of net sales of SPRYCEL and IXEMPRA in the Oncology Territory:
| % of Net Sales | ||||
| 2010 - 2012 | 2013 - 2020 | |||
|
$0 to $400 million |
30% | 65% | ||
|
$400 million to $600 million |
5% | 12% | ||
|
$600 million to $800 million |
3% | 3% | ||
|
$800 million to $1.0 billion |
2% | 2% | ||
|
In excess of $1.0 billion |
1% | 1% | ||
During these periods, Otsuka will contribute (i) 20% of the first $175 million of certain commercial operational expenses relating to the oncology products, and (ii) 1% of such commercial operational expenses relating to the products in the territory in excess of $175 million. Starting in 2011, Otsuka will have the right to co-promote SPRYCEL with the Company in the U.S. and Japan and in 2012, in the top five EU markets.
The U.S. extension and the oncology collaboration include a change-of-control provision in the case of an acquisition of the Company. If the acquiring company does not have a competing product to ABILIFY*, then the new company will assume the ABILIFY* agreement (as amended) and the oncology collaboration as it exists today. If the acquiring company has a product that competes with ABILIFY*, Otsuka can elect to request the acquiring company to choose whether to divest ABILIFY* or the competing product. In the scenario where ABILIFY* is divested, Otsuka would be obligated to acquire the Company’s rights under the ABILIFY* agreement (as amended). The agreements also provide that in the event of a generic competitor to ABILIFY* after January 1, 2010, the Company has the option of terminating the ABILIFY* April 2009 amendment (with the agreement as previously amended remaining in force). If the Company were to exercise such option then either (i) the Company would receive a payment from Otsuka according to a pre-determined schedule and the oncology collaboration would terminate at the same time or (ii) the oncology collaboration would continue for a truncated period according to a pre-determined schedule.
For the entire EU, the agreement remained unchanged and will expire in June 2014. In other countries where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the 10th anniversary of the first commercial sale in such country or expiration of the applicable patent in such country.
The Company recorded total revenue for ABILIFY* of $653 million and $564 million for the three months ended September 30, 2009 and 2008, respectively, and $1,885 million and $1,547 million for the nine months ended September 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $1 million for the each of the three months periods ended September 30, 2009 and 2008 and $5 million for the each of the nine months periods ended September 30, 2009 and 2008 for previously capitalized milestone payments. The unamortized capitalized payment balance is recorded in other intangible assets, net and was $18 million at September 30, 2009 and $23 million at December 31, 2008, and will continue to amortize through 2012. The Company amortized as a reduction of net sales $17 million and $33 million for the three and nine month periods ended September 30, 2009, related to the $400 million extension payment. The unamortized portion of this payment amounted to $367 million at September 30, 2009, and is included in other assets, net.
Lilly
The Company has a commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s November 2008 acquisition of ImClone Systems Incorporated (ImClone) for the codevelopment and copromotion of ERBITUX* (cetuximab) in the U.S., which expires as to ERBITUX* in September of 2018. The Company also has codevelopment and copromotion rights in Canada and Japan. ERBITUX* is indicated for use in the treatment of patients with metastatic colorectal cancer and for use in the treatment of squamous cell carcinoma of the head and neck. Under the agreement covering North America, Lilly receives a distribution fee based on a flat rate of 39% of net sales in North America.
In October 2007, the Company and ImClone amended their codevelopment agreement with Merck KGaA to provide for cocommercialization of ERBITUX* in Japan, which expires in 2032. Lilly has the ability to terminate the agreement after 2018 if it determines that it is commercially unreasonable for Lilly to continue. ERBITUX* received marketing approval in Japan in July 2008 for the use of ERBITUX* in treating patients with advanced or recurrent colorectal cancer. Merck recorded sales of ERBITUX* in Japan and the Company receives 50% of the pre-tax profit which is further shared equally with Lilly. The Company records its share of profits from commercialization in Japan in other income which was $8 million and $18 million for the three and nine months ended September 30, 2009.
The Company recorded net sales for ERBITUX* of $179 million and $184 million for the three months ended September 30, 2009 and 2008, respectively, and $516 million and $567 million for the nine months ended September 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $9 million in each of the three month periods ended September 30, 2009 and 2008, respectively, and $28 million in each of the nine month periods ended September 30, 2009 and 2008, for previously capitalized milestone payments, which were accounted for as a license acquisition. The unamortized portion of the approval payments is recorded in other intangible assets, net and was $332 million at September 30, 2009 and $360 million at December 31, 2008, and will continue to amortize through 2018, the remaining term of the agreement.
Upon initial execution of the commercialization agreement, the Company acquired an ownership interest in ImClone which approximated 17% at the time of the transaction noted below, and had been accounting for its investment under the equity method. The Company recorded equity income of $2 million and an equity loss of $3 million in net income of affiliates for the three and nine months ended September 30, 2008, respectively, which was adjusted for revenue recognized by ImClone for pre-approved milestone payments made by the Company prior to 2004. The Company sold its shares of ImClone for $1.0 billion and recognized a pre-tax gain of $895 million in November 2008.
Gilead
The Company and Gilead Sciences, Inc. (Gilead) have a joint venture to develop and commercialize ATRIPLA* (efavirenz 600 mg/ emtricitabine 200 mg/ tenofovir disoproxil fumarate 300 mg), a once-daily single tablet three-drug regimen combining the Company’s SUSTIVA (efavirenz) and Gilead’s TRUVADA* (emtricitabine and tenofovir disoproxil fumarate), in the U.S., Canada and Europe.
Gilead records all ATRIPLA* revenues in the U.S., Canada and most countries in Europe and consolidates the results of the joint venture in its operating results. The Company records revenue for the bulk efavirenz component of ATRIPLA* upon sales of that product to third-party customers. In a limited number of EU countries, the Company records revenue for ATRIPLA* where the Company agreed to purchase the product from Gilead and distribute it to third-party customers. The Company recorded revenues of $218 million and $155 million for the three months ended September 30, 2009 and 2008, respectively, and $606 million and $405 million for the nine months ended September 30, 2009 and 2008, respectively, related to ATRIPLA* sales. The Company accounts for its participation in the U.S. joint venture under the equity method of accounting and records its share of the joint venture results in equity in net income of affiliates in the consolidated statements of earnings. The Company recorded an equity loss on the U.S. joint venture with Gilead of $2 million and $2 million for the three months ended September 30, 2009 and 2008, respectively, and $7 million and $6 million for the nine months ended September 30, 2009 and 2008, respectively.
AstraZeneca
The Company maintains two worldwide codevelopment and cocommercialization agreements with AstraZeneca PLC (AstraZeneca), one for the worldwide (except for Japan) codevelopment and cocommercialization of ONGLYZA (saxagliptin), a DPP-IV inhibitor (Saxagliptin Agreement), and one for the worldwide (including Japan) codevelopment and cocommercialization of dapagliflozin, a sodium-glucose cotransporter-2 (SGLT2) inhibitor (SGLT2 Agreement). Both compounds are being studied for the treatment of diabetes and were discovered by the Company. Under each agreement, the two companies will jointly develop the clinical and marketing strategy and share commercialization expenses and profits/losses equally on a global basis (excluding, in the case of saxagliptin, Japan), and the Company will manufacture both products. The companies will cocommercialize dapagliflozin in Japan and share profits/losses equally. Under each agreement, the Company has the option to decline involvement in cocommercialization in a given country and instead receive a royalty.
On July 31, 2009, the FDA approved ONGLYZA as an adjunct to diet and exercise to improve blood sugar (glycemic) control in adults for the treatment of type 2 diabetes mellitus. In August 2009, the Company and AstraZeneca launched ONGLYZA in the U.S. The Company recorded sales of $20 million in third quarter of 2009. Due to the ONGLYZA (saxagliptin) U.S. launch, the Company received a $100 million milestone payment from AstraZeneca in September 2009. On October 1, 2009 ONGLYZA received a Marketing Authorization for use in the EU to treat adults with type 2 diabetes in combination with either metformin, a sulfonylurea or a thiazolidinedione, when any of these agents alone, with diet and exercise, do not provide adequate glycemic control.
The $250 million in upfront and milestone payments received by the Company, including the $100 million milestone payment noted above, were deferred and are being recognized over the useful life of the products into other income. The Company amortized into other income $4 million and $1 million of these payments in the three months ended September 30, 2009 and 2008, respectively, and $10 million and $5 million in the nine months ended September 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $224 million at September 30, 2009 and $134 million at December 31, 2008. Additional milestone payments are expected to be received by the Company upon the successful achievement of various development and regulatory events as well as sales-related milestones. Under the Saxagliptin Agreement, the Company could receive up to an additional $150 million if all development and regulatory milestones for saxagliptin are met and up to an additional $300 million if all sales-based milestones for saxagliptin are met. Under the SGLT2 Agreement, the Company could receive up to an additional $350 million if all development and regulatory milestones for dapagliflozin are met and up to an additional $390 million if all sales-based milestones for dapagliflozin are met.
Under each agreement, the Company and AstraZeneca also share in development and commercialization costs. The majority of development costs under the initial development plans through 2009 will be paid by AstraZeneca (with AstraZeneca bearing all the costs of the initial agreed upon development plan for dapagliflozin in Japan) and any additional development costs will generally be shared equally. The net reimbursements to the Company for development costs related to saxagliptin and dapagliflozin are classified in research and development expenses and were $2 million and $29 million for the three months ended September 30, 2009 and 2008, respectively, and $31 million and $110 million for the nine months ended September 30, 2009 and 2008, respectively.
Pfizer
The Company and Pfizer Inc. (Pfizer) maintain a worldwide codevelopment and cocommercialization agreement for apixaban, an anticoagulant discovered by the Company being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions.
The Company received $290 million in upfront payments in the two year period ended December 31, 2008. In addition, the Company received a $150 million milestone payment in April 2009 for the commencement of Phase III clinical trials for prevention of major adverse cardiovascular events in acute coronary syndrome. The Company amortized into other income $7 million and $5 million of the upfront and milestone payments in the three months ended September 30, 2009 and 2008, respectively, and $19 million and $14 million for the nine months ended September 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $392 million at September 30, 2009 and $261 million at December 31, 2008. Pfizer will fund 60% of all development costs effective January 1, 2007 going forward, and the Company will fund 40%. The net reimbursements to the Company for apixaban development costs are classified in research and development expenses and were $49 million and $42 million for the three months ended September 30, 2009 and 2008, respectively, and $136 million and $125 million for the nine months ended September 30, 2009 and 2008, respectively. The Company may also receive additional payments from Pfizer of up to an additional $630 million based on development and regulatory milestones. The companies will jointly develop the clinical and marketing strategy, will share commercialization expenses and profits/losses equally on a global basis, and will manufacture product under this arrangement.
Exelixis
In December 2008, the Company and Exelixis, Inc. (Exelixis) entered into a global codevelopment and cocommercialization arrangement for XL184 (a MET/VEG/RET inhibitor), an oral anti-cancer compound, and a license for XL281 with utility in RAS and RAF mutant tumors under development by Exelixis. Under the terms of the arrangement, the Company paid Exelixis $195 million in 2008 upon execution of the agreement, and paid an additional $45 million in the first nine months of 2009, all of which was expensed as research and development in 2008. Exelixis will fund the first $100 million of development for XL184. If Exelixis elects to continue sharing development, Exelixis will fund 35% of future global development costs (excluding Japan) and share U.S. profits/losses equally and has an option to copromote in the U.S.; failing such elections, Exelixis receives milestones and royalties on U.S. sales. The Company will fund 100% of development costs in Japan. In addition to royalties on non-U.S. sales, the Company could pay up to $610 million if all development and regulatory milestones are met on both compounds and up to an additional $300 million if all sales-based milestones are met on both compounds.
In addition, the Company and Exelixis have a history of collaborations to identify, develop and promote oncology targets. In January 2007, the Company and Exelixis entered into an oncology collaboration and license agreement under which Exelixis is responsible for the identification and preclinical development of small molecule drug candidates directed against mutually selected targets. Under the terms of this agreement, the Company paid Exelixis $60 million of upfront fees in 2007. During 2008, the Company paid Exelixis $40 million in IND acceptance milestones. If Exelixis elects to codevelop and copromote in the U.S., both parties will equally share development costs and profits. If Exelixis opts out of the codevelopment and copromotion agreement, the Company will take over full development and U.S. commercial rights, and, if successful, will pay Exelixis development and regulatory milestones up to $380 million and up to an additional $180 million of sales-based milestones, as well as royalties.
Since July 2001, the Company has held an equity investment in Exelixis, which at September 30, 2009 represented less than 1% of their outstanding shares.
ZymoGenetics
In January 2009, the Company and ZymoGenetics, Inc. (ZymoGenetics) entered into a global codevelopment arrangement in the U.S. for PEG-Interferon lambda, a novel type 3 interferon for the treatment of hepatitis C. Under the terms of the arrangement, the Company paid ZymoGenetics $130 million of upfront and milestone payments in the first nine months of 2009, all of which was expensed as research and development. ZymoGenetics will fund the first $100 million of global development for PEG-Interferon lambda after which, ZymoGenetics will fund 20% of development costs in the U.S. and Europe and the Company will fund 100% of the development costs in the rest of the world. If ZymoGenetics elects to continue sharing development and commercialization costs in the U.S., ZymoGenetics will share 40% of U.S. profits/losses and has an option to copromote in the U.S. Failing such election to fund development costs in the U.S., ZymoGenetics will receive royalties on U.S. sales. The Company will pay ZymoGenetics royalties on all non-U.S. sales. In addition, the Company could pay up to $405 million if all hepatitis C development and regulatory milestones are met; up to $287 million if development and regulatory milestones for other potential indications are met; and up to an additional $285 million if all sales-based milestones are met.
|
|||
Note 3. Business Segments
Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company reports financial and operating information in two segments —BioPharmaceuticals and Mead Johnson. The BioPharmaceuticals segment is comprised of the global biopharmaceutical and international consumer medicines businesses. The Mead Johnson segment consists of the Company’s 83.1% interest in Mead Johnson Nutrition Company, which is primarily an infant formula and children’s nutrition business.
Effective January 1, 2009, the Company changed its measurement of segment income for all the periods presented. The following summarizes the most significant changes from the previously reported amounts:
| • |
Certain items that were previously excluded from segment results are now included, including, but not limited to, costs attributed to certain corporate administrative functions and programs, stock-based compensation expense and net interest expense; |
| • |
Certain items that were previously included in segment results are now excluded, including but not limited to, costs attributed to productivity transformation initiative (PTI), upfront milestone payments and acquired in-process research and development; and |
| • |
The pre-tax income attributable to noncontrolling interest is excluded from the segment results. |
The following table reconciles the Company’s segment results to earnings from continuing operations before income taxes:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Segment results: |
||||||||||||||||
|
BioPharmaceuticals |
$ | 1,216 | $ | 1,022 | $ | 3,556 | $ | 2,702 | ||||||||
|
Mead Johnson |
127 | 159 | 437 | 555 | ||||||||||||
|
Total segment results |
1,343 | 1,181 | 3,993 | 3,257 | ||||||||||||
|
Reconciliation of segment results to earnings from continuing operations before income taxes: |
||||||||||||||||
|
Productivity transformation initiative |
(88 | ) | (107 | ) | (199 | ) | (329 | ) | ||||||||
|
Auction rate securities (ARS) impairment charge |
— | (224 | ) | — | (247 | ) | ||||||||||
|
Upfront and milestone payments and acquired in-process research and development |
— | (37 | ) | (174 | ) | (120 | ) | |||||||||
|
Litigation and product liability charges |
— | (32 | ) | (125 | ) | (50 | ) | |||||||||
|
Mead Johnson separation costs |
(6 | ) | (9 | ) | (31 | ) | (10 | ) | ||||||||
|
Medarex acquisition (Note 5) |
10 | — | 10 | — | ||||||||||||
|
Mead Johnson gain on sale of trademark |
— | — | 12 | — | ||||||||||||
|
Debt buyback and swap terminations |
(4 | ) | — | 7 | — | |||||||||||
|
Noncontrolling interest |
469 | 383 | 1,356 | 1,082 | ||||||||||||
|
Earnings from continuing operations before income taxes |
$ | 1,724 | $ | 1,155 | $ | 4,849 | $ | 3,583 | ||||||||
Net sales of the Company’s key products and product categories within business segments were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||
|
BioPharmaceuticals |
||||||||||||
|
PLAVIX* |
$ | 1,554 | $ | 1,439 | $ | 4,528 | $ | 4,134 | ||||
|
AVAPRO*/AVALIDE* |
329 | 334 | 944 | 974 | ||||||||
|
REYATAZ |
360 | 342 | 1,013 | 963 | ||||||||
|
SUSTIVA Franchise (total revenue) |
315 | 294 | 919 | 849 | ||||||||
|
BARACLUDE |
191 | 144 | 522 | 388 | ||||||||
|
ERBITUX* |
179 | 184 | 516 | 567 | ||||||||
|
SPRYCEL |
107 | 82 | 302 | 224 | ||||||||
|
IXEMPRA |
28 | 25 | 81 | 76 | ||||||||
|
ABILIFY* |
653 | 564 | 1,885 | 1,547 | ||||||||
|
ORENCIA |
162 | 119 | 434 | 312 | ||||||||
|
ONGLYZA |
20 | — | 20 | — | ||||||||
|
Other |
890 | 983 | 2,611 | 3,139 | ||||||||
|
Total BioPharmaceuticals |
4,788 | 4,510 | 13,775 | 13,173 | ||||||||
|
Mead Johnson Nutrition Company products |
699 | 744 | 2,111 | 2,175 | ||||||||
|
Total |
$ | 5,487 | $ | 5,254 | $ | 15,886 | $ | 15,348 | ||||
|
|||
Note 4. Restructuring
The Company’s productivity transformation initiative is designed to fundamentally change the way it runs its business to meet the challenges of a changing business environment, to take advantage of the diverse opportunities in the marketplace as the Company is transforming into a next-generation biopharmaceutical company, and to create a total of $2.5 billion in annual productivity cost savings and cost avoidance by 2012. In connection with the PTI, the Company aims to achieve a culture of continuous improvement to enhance its efficiency, effectiveness and competitiveness and to substantially improve its cost base.
The charges associated with the PTI are estimated to be in the range of $1.3 billion to $1.6 billion, which includes $1.1 billion of costs already incurred. In addition, PTI also includes $231 million of gains related to the sale of mature product lines and businesses. The exact timing of the recognition of PTI charges cannot be predicted with certainty and will be affected by the existence of triggering events for expense recognition, among other factors.
The Company recorded the following PTI charges:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | |||||||||||
|
Provision for restructuring, net |
$ | 54 | $ | 26 | $ | 101 | $ | 67 | |||||||
|
Accelerated depreciation, asset impairment and other shutdown costs |
30 | 53 | 80 | 207 | |||||||||||
|
Pension curtailment charge (Note 19) |
— | — | 25 | — | |||||||||||
|
Process standardization implementation costs |
21 | 28 | 65 | 64 | |||||||||||
|
Gain on sale of product lines, businesses and assets |
(17 | ) | — | (72 | ) | (9 | ) | ||||||||
|
Total |
$ | 88 | $ | 107 | $ | 199 | $ | 329 | |||||||
Most of the accelerated depreciation, asset impairment charges and other shutdown costs were included in cost of products sold and primarily relate to the rationalization of the Company’s manufacturing network in the BioPharmaceuticals segment. These assets continue to be depreciated until the facility closures are complete. The remaining costs of PTI were primarily attributed to process standardization activities across the Company and are recognized as incurred.
Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 232 and 310 for the three months ended September 30, 2009 and 2008, respectively, and 587 and 680 for the nine months ended September 30, 2009 and 2008, respectively. The following tables present the detail of expenses incurred in connection with the restructuring activities:
| Three Months Ended September 30, 2009 | Three Months Ended September 30, 2008 | |||||||||||||||||
| Dollars in Millions | Termination Benefits |
Other Exit Costs |
Total | Termination Benefits |
Other Exit Costs |
Total | ||||||||||||
|
Charges |
$ | 49 | $ | 3 | $ | 52 | $ | 24 | $ | 1 | $ | 25 | ||||||
|
Changes in estimates |
2 | — | 2 | 1 | — | 1 | ||||||||||||
|
Provision for restructuring, net |
$ | 51 | $ | 3 | $ | 54 | $ | 25 | $ | 1 | $ | 26 | ||||||
| Nine Months Ended September 30, 2009 | Nine Months Ended September 30, 2008 | |||||||||||||||||
| Dollars in Millions | Termination Benefits |
Other Exit Costs |
Total | Termination Benefits |
Other Exit Costs |
Total | ||||||||||||
|
Charges |
$ | 90 | $ | 9 | $ | 99 | $ | 64 | $ | 2 | $ | 66 | ||||||
|
Changes in estimates |
2 | — | 2 | — | 1 | 1 | ||||||||||||
|
Provision for restructuring, net |
$ | 92 | $ | 9 | $ | 101 | $ | 64 | $ | 3 | $ | 67 | ||||||
The Company excludes the impact of restructuring charges and other related PTI costs from segment income. See “—Note 3. Business Segments” for a reconciliation of segment results to earnings from continuing operations before income taxes. Provisions for restructuring, net originating from the BioPharmaceuticals segment were $51 million and $26 million for the three months ended September 30, 2009 and 2008, respectively, and $89 million and $65 million for the nine months ended September 30, 2009 and 2008, respectively, with the remaining charges relating to the Mead Johnson segment.
The following table represents the reconciliation of restructuring liabilities and spending against those liabilities:
| Dollars in Millions | Termination Liability |
Other Exit Costs Liability |
Total | |||||||||
|
Liability at January 1, 2009 |
$ | 188 | $ | 21 | $ | 209 | ||||||
|
Charges |
90 | 9 | 99 | |||||||||
|
Change in estimates |
2 | — | 2 | |||||||||
|
Spending |
(115 | ) | (7 | ) | (122 | ) | ||||||
|
Liability at September 30, 2009 |
$ | 165 | $ | 23 | $ | 188 | ||||||
|
|||
Note 5. Medarex, Inc. Acquisition
On September 1, 2009 the Company acquired 100% of the remaining outstanding shares of Medarex, Inc. (Medarex) and its outstanding stock options and restricted stock units upon completion of tender offers that expired on August 27, 2009 and September 1, 2009. The total purchase price of $2.3 billion was allocated to the estimated fair value of the assets acquired and liabilities assumed as presented below. Acquisition costs were $11 million and classified as other (income)/expenses, net. Medarex is a biopharmaceutical company focused on the discovery, development and commercialization of fully human antibody-based therapeutic products to address major unmet healthcare needs in the areas of oncology, inflammation, autoimmune disorders and infectious diseases. As a result of the acquisition, the Company receives full rights over ipilimumab, currently in Phase III development, and increases the biologics development pipeline creating a more balanced portfolio of small molecules and biologics. This more balanced portfolio associated with our BioPharma model and potential to optimize our existing ipilimumab programs drives a significant amount of the goodwill arising from this acquisition. Goodwill along with in-process research and development and other intangible assets valued in this acquisition are non-deductible for tax purposes and is assigned to the biopharmaceutical segment.
The purchase price allocation presented below is considered preliminary pending completion of the final valuation.
| Dollars in Millions | ||||
|
Purchase price: |
||||
|
Cash |
$ | 2,285 | ||
|
Fair value of the Company’s equity in Medarex held prior to acquisition(1) |
46 | |||
|
Total purchase price |
2,331 | |||
|
Identifiable net assets: |
||||
|
Cash |
53 | |||
|
Marketable Securities |
269 | |||
|
Other current and long-term assets(2) |
133 | |||
|
In-process research and development(3) |
1,252 | |||
|
Intangible assets - Technology(4) |
120 | |||
|
Intangible assets - Licenses(5) |
320 | |||
|
Short-term borrowings (Note 21) |
(91 | ) | ||
|
Other current and long-term liabilities |
(92 | ) | ||
|
Deferred income taxes, net |
(281 | ) | ||
|
Total identifiable net assets |
1,683 | |||
|
Goodwill |
648 | |||
| (1) | Income of approximately $21 million was recognized from the re-measurement to fair value of our previous equity interest in Medarex of approximately 2.0% held before the acquisition and is included in other income for the three and nine months ended September 30, 2009. |
| (2) | Includes a 5.1% ownership interest in Genmab ($64 million) and an 18.7% ownership in Celldex Therapeutics, Inc. ($17 million), both of which are publicly traded securities and are accounted for by the Company as “available for sale” investments. |
| (3) | Includes approximately $1.0 billion related to ipilimumab. |
| (4) | Amortized over 10 years. |
| (5) | Amortized over 13 years. |
The results of Medarex operations have been included in the accompanying consolidated financial statements from August 27, 2009. Pro forma supplemental financial information was not included as the impact of the acquisition was not material to the operations of the Company.
A project is considered to be IPRD when the underlying project has not received regulatory approval and it has no alternative future use. IPRD projects are initially considered indefinite lived assets subject to annual impairment reviews or more often upon the occurrence of certain events. Upon commercialization, the assets are amortized over the expected useful lives. The fair value of the IPRD acquired in the business combination was determined based on the present value of each research project’s projected cash flows utilizing an income approach. Future cash flows are predominately based on the net income forecast of each project, consistent with historical pricing, margins and expense levels of similar products. Revenues are estimated based on relevant market size and growth factors, expected industry trends, individual project life cycles and the life of each research project’s underlying patent. In determining the fair value of each research project, expected revenues are first adjusted for technical risk of completion. The resulting cash flows are then discounted at a rate approximating the Company’s weighted-average cost of capital.
|
|||
Note 6. Mead Johnson Nutrition Company Initial Public Offering
In February 2009, Mead Johnson Nutrition Company completed an initial public offering (IPO), in which it sold 34.5 million shares of its Class A common stock at $24 per share. The net proceeds, after deducting $46 million of underwriting discounts, commissions and offering expenses, were $782 million, which were allocated to noncontrolling interest and capital in excess of par value of stock within the Company’s equity.
Upon completion of the IPO, the Company held 42.3 million shares of Mead Johnson Class A common stock and 127.7 million shares of Mead Johnson Class B common stock, representing an 83.1% interest in Mead Johnson and 97.5% of the combined voting power of the outstanding common stock. The rights of the holders of the shares of Class A common stock and Class B common stock are identical, except with regard to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time at the election of the holder into one share of Class A common stock. The Class B common stock will automatically convert into shares of Class A common stock in certain circumstances.
Mead Johnson continues to be consolidated for financial reporting purposes. The Company has entered into various agreements related to the separation of Mead Johnson, including a separation agreement, a transitional services agreement, a tax matters agreement, a registration rights agreement and an employee matters agreement.
|
|||
Note 7. Discontinued Operations
As discussed in our 2008 Annual Report on Form 10-K, the Company completed the divestitures of ConvaTec and Medical Imaging. The results of the ConvaTec and Medical Imaging businesses are included in net earnings from discontinued operations for the three months and nine months ended September 30, 2008. The Medical Imaging business divestiture was completed in the first quarter of 2008, resulting in a pre-tax gain of $25 million (after-tax loss of $43 million). The ConvaTec business divestiture was completed in the third quarter of 2008, resulting in a pre-tax gain of $3,394 million (after-tax gain of $1,982 million).
The following summarized financial information related to the ConvaTec and Medical Imaging businesses has been segregated from continuing operations in 2008 and reported as discontinued operations through the date of disposition and does not reflect the costs of certain services provided to ConvaTec and Medical Imaging by the Company. These costs were not allocated by the Company to ConvaTec and Medical Imaging and were for services that included legal counsel, insurance, external audit fees, payroll processing, certain human resource services and information technology systems support.
| Three Months Ended September 30, 2008 | Nine Months Ended September 30, 2008 | |||||||||||||||||||
| Dollars in Millions | ConvaTec | Medical Imaging |
Total | ConvaTec | Medical Imaging |
Total | ||||||||||||||
|
Net sales |
$ | 120 | $ | 7 | $ | 127 | $ | 732 | $ | 33 | $ | 765 | ||||||||
|
Earnings (loss) before income taxes |
$ | 28 | $ | (13 | ) | $ | 15 | $ | 194 | $ | (8 | ) | $ | 186 | ||||||
|
Curtailment losses and special termination benefits |
2 | — | 2 | 18 | — | 18 | ||||||||||||||
|
Provision (benefit) for income taxes |
8 | (3 | ) | 5 | 63 | (2 | ) | 61 | ||||||||||||
|
Earnings (loss), net of taxes |
$ | 18 | $ | (10 | ) | $ | 8 | $ | 113 | $ | (6 | ) | $ | 107 | ||||||
The consolidated statements of cash flows include the ConvaTec and Medical Imaging businesses through the date of disposition. The Company uses a centralized approach for cash management and financing of its operations; as such, debt was not allocated to these businesses.
|
|||
Note 9. Other (Income)/Expense, Net
The components of other (income)/expense, net were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Interest expense |
$ | 47 | $ | 84 | $ | 141 | $ | 237 | ||||||||
|
Interest income |
(13 | ) | (37 | ) | (40 | ) | (111 | ) | ||||||||
|
Loss/(Gain) on debt buyback and termination of interest rate swap agreements |
4 | — | (7 | ) | — | |||||||||||
|
ARS impairment charge (Note 11) |
— | 224 | — | 247 | ||||||||||||
|
Foreign exchange transaction losses/(gains) |
13 | (51 | ) | 17 | (34 | ) | ||||||||||
|
Gain on sale of product lines, businesses and assets |
(17 | ) | — | (84 | ) | (9 | ) | |||||||||
|
Medarex acquisition (Note 5) |
(10 | ) | — | (10 | ) | — | ||||||||||
|
Net royalty income and amortization of upfront and milestone payments received from alliance partners (Note 2) |
(50 | ) | (42 | ) | (119 | ) | (124 | ) | ||||||||
|
Pension curtailment charge (Note 19) |
— | — | 25 | — | ||||||||||||
|
Other, net |
(4 | ) | (9 | ) | (53 | ) | (18 | ) | ||||||||
|
Other (income)/expense, net |
$ | (30 | ) | $ | 169 | $ | (130 | ) | $ | 188 | ||||||
Interest expense was reduced by $32 million and $17 million for the three months ended September 30, 2009 and 2008, respectively, and $85 million and $39 million for the nine months ended September 30, 2009 and 2008, respectively, from the effects of interest rate swaps. In addition, interest expense was further reduced by $6 million and less than $1 million for the three months ended September 30, 2009 and 2008, respectively, and $18 million and less than $1 million for the nine months ended September 30, 2009 and 2008, respectively, from the termination of interest rate swaps during 2009 and 2008. See “—Note 22. Financial Instruments” for additional discussion on terminated swap contracts.
Interest income relates primarily to interest earned on cash, cash equivalents and investments in marketable securities.
Foreign exchange transaction losses/(gains) were primarily due to a weakening U.S. dollar impact on non-qualifying foreign exchange hedges, discontinued hedges and the re-measurement of non-functional currency denominated transactions.
Gain on sale of product lines, businesses and assets were primarily related to the sale of mature brands, including the Pakistan and other middle eastern businesses in 2009 and sales of various trademarks.
Other, net includes gains and losses on the sale of property, plant and equipment, certain litigation charges/recoveries, and ConvaTec and Medical Imaging net transitional service fees.
|
|||
Note 10. Income Taxes
The effective income tax rate on earnings from continuing operations before income taxes was 25.2% and 27.6% for the three and nine months ended September 30, 2009, respectively, compared to 26.7% and 25.0% for the three and nine months ended September 30, 2008, respectively. The 1.5% lower effective tax rate in the three months ended September 30, 2009 was due to the impairment of auction rate security notes with little tax benefit in 2008 and the benefit of the research and development credit in 2009 partially offset by the tax effect of the Mead Johnson separation activities discussed below. The 2.6% higher effective tax rate in the nine months ended September 30, 2009 was due to the transfer of various international units of the Company to Mead Johnson prior to its initial public offering and a 2008 tax benefit of $91 million related to the effective settlement of the 2002—2003 audit with the Internal Revenue Service. The effect of these items were partially offset by the 2009 benefit of the research credit and a $40 million tax benefit related to the final settlement of certain state audits as well as the 2008 impairment of auction rate securities with little tax benefit.
U.S. income taxes have not been provided on the earnings of certain low tax non-U.S. subsidiaries that are not projected to be distributed since the Company has invested or expects to invest such earnings permanently offshore. If, in the future, these earnings are repatriated to the U.S., or if the Company determines such earnings will be remitted in the foreseeable future, additional tax provisions would be required.
President Obama’s Administration has proposed reforms to the international tax laws that if adopted may increase taxes and reduce the Company’s results of operations and cash flows.
The Company has recorded significant deferred tax assets related to U.S. foreign tax credit and research and development tax credit carryforwards. The foreign tax credit and research and development tax credit carryforwards expire in varying amounts beginning in 2014. Realization of foreign tax credit and research tax credit carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured, management believes it is more likely than not that these deferred tax assets will be realized.
The Company will continue to file a U.S. consolidated federal tax return and various state combined tax returns with Mead Johnson. As part of the initial public offering of Mead Johnson, a tax sharing agreement was put in place between the Company and Mead Johnson. Mead Johnson will make payments to the Company on a quarterly basis for its tax liability for U.S. federal purposes and various state purposes computed as a stand alone entity. These payments represent either Mead Johnson’s share of the tax liability or reimbursement to the Company for utilization of certain tax attributes. The Company has agreed to indemnify Mead Johnson for any outstanding tax liabilities or audit exposures (such as, income, sales and use, or property taxes) that existed for periods prior to the initial public offering.
The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense. The Company is currently under examination by a number of tax authorities, which have potential adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits at September 30, 2009 will decrease in the range of approximately $55 million to $85 million in the next 12 months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits, primarily settlement related, will involve the payment of additional taxes, the adjustment of certain deferred taxes, and/or the recognition of tax benefits. The Company also anticipates that it is reasonably possible that new issues will be raised by tax authorities, which may require increases to the balance of unrecognized tax benefits. However, an estimate of such increases cannot reasonably be made at this time.
|
|||
Note 11. Fair Value Measurement
Financial assets and liabilities carried at fair value at September 30, 2009 are classified in one of the three categories, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
| Dollars in Millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
|
Available for Sale: |
||||||||||||
|
U.S. Government Agency Securities |
$ | 500 | $ | — | $ | — | $ | 500 | ||||
|
U.S. Treasury Bills |
25 | — | — | 25 | ||||||||
|
Equity Securities |
79 | — | — | 79 | ||||||||
|
Prime Money Market Funds |
— | 2,782 | — | 2,782 | ||||||||
|
U.S. Treasury Money Market Funds |
— | 716 | — | 716 | ||||||||
|
U.S. Government Agency Money Market Funds |
— | 679 | — | 679 | ||||||||
|
Corporate Debt Securities |
— | 624 | — | 624 | ||||||||
|
FDIC Insured Debt Securities |
— | 201 | — | 201 | ||||||||
|
Floating Rate Securities |
— | — | 108 | 108 | ||||||||
|
Auction Rate Securities |
— | — | 94 | 94 | ||||||||
|
Total available for sale assets |
604 | 5,002 | 202 | 5,808 | ||||||||
|
Derivatives: |
||||||||||||
|
Interest Rate Swap Derivatives |
— | 299 | — | 299 | ||||||||
|
Foreign Exchange Derivatives |
— | 4 | — | 4 | ||||||||
|
Total derivative assets |
— | 303 | — | 303 | ||||||||
|
Total assets at fair value |
$ | 604 | $ | 5,305 | $ | 202 | $ | 6,111 | ||||
| Dollars in Millions | Level 1 | Level 2 | Level 3 | Total | ||||||||
|
Derivatives: |
||||||||||||
|
Foreign Exchange Derivatives |
$ | — | $ | 75 | $ | — | $ | 75 | ||||
|
Interest Rate Swap Derivatives |
— | 3 | — | 3 | ||||||||
|
Natural Gas Contracts |
— | 3 | — | 3 | ||||||||
|
Total derivative liabilities |
— | 81 | — | 81 | ||||||||
|
Total liabilities at fair value |
$ | — | $ | 81 | $ | — | $ | 81 | ||||
At September 30, 2009, the majority of the Company’s ARS are primarily rated ‘BBB/Baa1’ or better; however, $14 million in ARS are rated below investment grade at ‘BB/Caa2’. ARS primarily represent interests in insurance securitizations and, to a lesser extent, structured credits. Due to the lack of observable market quotes on the Company’s ARS portfolio, the Company utilizes valuation models that rely exclusively on Level 3 inputs, including those that are based on expected cash flow streams and collateral values including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company’s determination of fair value on its ARS investment portfolio at September 30, 2009 included internally developed valuations that were based in part on indicative bids received on the underlying assets of the securities and other non-observable evidence of fair value. Because the Company intends to sell these investments before recovery of their amortized cost basis, the Company will consider any further decline in fair value to be an other-than-temporary impairment. During the third quarter of 2008, the Company recorded an impairment charge of $224 million related to certain ARS.
Floating Rate Securities (FRS) are long-term debt securities with coupons that are reset periodically against a benchmark interest rate. During the third quarter of 2009, one rating agency withdrew its rating of the FRS securities and in the fourth quarter another lowered its rating to ‘BB’ on which the Company continues to rely. The Company also continues to receive principal payments and interest on all FRS securities and the Company is not aware of any reported defaults of the securities through September 30, 2009. The underlying assets of the FRS primarily consist of consumer loans, auto loans, collateralized loan obligations, monoline securities, asset-backed securities and corporate bonds and loans. Since the latter part of 2007, the general FRS market became less liquid or active due to continuing credit and liquidity concerns; as a result, there are no available observable market quotes in the active market (Level 1 inputs) or market quotes on similar or identical assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means (Level 2 inputs). Due to the current lack of an active market for the Company’s FRS and the general lack of transparency into their underlying assets, the Company relies on other qualitative analysis including discussion with brokers and fund managers, default risk underlying the security and overall capital market liquidity (Level 3 inputs) to value its FRS portfolio. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider any decline in fair value to be an other-than-temporary impairment. Therefore, any declines in fair value are reported as a temporary loss in other comprehensive income. During the nine months ended September 30, 2009 the Company received $131 million of principal at par for FRS.
For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR and EURIBOR yield curves, foreign exchange forward prices, NYMEX futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:
| • |
U.S. Government Agency Securities and U.S. Government Agency Money Market Funds – valued at the quoted market price from observable pricing sources at the reporting date. |
| • |
U.S. Treasury Bills and U.S. Treasury Money Market Funds – valued at the quoted market price from observable pricing sources at the reporting date. |
| • |
Equity Securities – valued using quoted stock prices from New York Stock Exchange or National Association of Securities Dealers Automated Quotation System at the reporting date. |
| • |
Prime Money Market Funds – net asset value of $1 per share. |
| • |
Corporate Debt Securities – valued at the quoted market price from observable pricing sources at the reporting date. |
| • |
FDIC Insured Debt Securities – valued at the quoted market price from observable pricing sources at the reporting date. |
| • |
Foreign exchange derivative assets and liabilities – valued using quoted forward foreign exchange prices at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the nine months ended September 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in the underlying foreign currencies. Due to the short-term maturities of the Company’s foreign exchange derivatives, which are 18 months or less, counterparty credit risk is not significant. |
| • |
Interest rate swap derivative assets and liabilities – valued using LIBOR and EURIBOR yield curves, less credit valuation adjustments, at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the nine months ended September 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which is driven by market conditions and the duration of the swap. In addition, credit valuation adjustment volatility may have a significant impact on the valuation of the Company’s interest rate swaps due to changes in counterparty credit ratings and credit default swap spreads. |
| • |
Natural gas forward contracts – valued using NYMEX futures prices for natural gas at the reporting date. Counterparties to these contracts are highly-rated financial institutions, none of which experienced any significant downgrades during the nine months ended September 30, 2009. Valuations may fluctuate considerably from period-to-period due to volatility in the underlying natural gas prices. Due to the short-term maturities of the Company’s natural gas derivatives, which are three months or less, counterparty credit risk is not significant. |
For further discussion on the Company’s September 30, 2009 fair value, carrying value and rollforward of activity that occurred during 2009, see “—Note 12. Cash, Cash Equivalents and Marketable Securities.”
|
|||
Note 12. Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents at September 30, 2009 and December 31, 2008 of $6,367 million and $7,976 million, respectively, primarily consisted of prime money market funds, government agency securities and treasury securities. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value. The Company maintains cash and cash equivalent balances in U.S. dollars and foreign currencies, which are subject to currency rate risk.
The following tables summarize the Company’s current and non-current marketable securities, which include U.S. dollar-denominated FRS and ARS, and are accounted for as “available for sale” debt securities:
| September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||||
| Dollars in Millions | Cost | Fair Value |
Carrying Value |
Unrealized (Loss)/Gain in Accumulated OCI |
Cost | Fair Value |
Carrying Value |
Unrealized (Loss)/Gain in Accumulated OCI |
||||||||||||||||||
|
Current marketable securities: |
||||||||||||||||||||||||||
|
U.S. government agency securities |
$ | 275 | $ | 275 | $ | 275 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
U.S. Treasury Bills |
25 | 25 | 25 | — | 179 | 180 | 180 | 1 | ||||||||||||||||||
|
Floating rate securities |
2 | 2 | 2 | — | 115 | 109 | 109 | (6 | ) | |||||||||||||||||
|
Total current |
$ | 302 | $ | 302 | $ | 302 | $ | — | $ | 294 | $ | 289 | $ | 289 | $ | (5 | ) | |||||||||
|
Non-current marketable securities: |
||||||||||||||||||||||||||
|
Corporate debt securities |
$ | 622 | $ | 624 | $ | 624 | $ | 2 | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
FDIC insured debt securities |
200 | 201 | 201 | 1 | — | — | — | — | ||||||||||||||||||
|
U.S. government agency securities |
175 | 175 | 175 | — | — | — | — | — | ||||||||||||||||||
|
Auction rate securities |
169 | 94 | 94 | — | 169 | 94 | 94 | — | ||||||||||||||||||
|
Floating rate securities |
121 | 106 | 106 | (15 | ) | 139 | 94 | 94 | (45 | ) | ||||||||||||||||
|
Other |
2 | 2 | 2 | — | — | — | — | — | ||||||||||||||||||
|
Total non-current |
$ | 1,289 | $ | 1,202 | $ | 1,202 | $ | (12 | ) | $ | 308 | $ | 188 | $ | 188 | $ | (45 | ) | ||||||||
|
Other assets: |
||||||||||||||||||||||||||
|
Equity securities(1) |
$ | 88 | $ | 79 | $ | 79 | $ | (9 | ) | $ | 31 | $ | 21 | $ | 21 | $ | (10 | ) | ||||||||
| (1) | Includes investments in Genmab ($64 million) and Celldex Therapeutics, Inc. ($17 million) acquired in September 2009. See “—Note 5. Medarex Inc., Acquisition.” |
The following table summarizes the activity for those financial assets where fair value measurements are estimated utilizing Level 3 inputs (ARS and FRS):
| 2009 | 2008 | ||||||||||||||||||||||||||||||
| Current | Non-current | Current | Non-current | ||||||||||||||||||||||||||||
| Dollars in Millions | FRS | FRS | ARS | Total | FRS | FRS | ARS | Total | |||||||||||||||||||||||
|
Carrying value at January 1 |
$ | 109 | $ | 94 | $ | 94 | $ | 297 | $ | 337 | $ | — | $ | 419 | $ | 756 | |||||||||||||||
|
Settlements |
(113 | ) | (18 | ) | — | (131 | ) | (105 | ) | — | (49 | ) | (154 | ) | |||||||||||||||||
|
Transfers between current and non-current |
— | — | — | — | (104 | ) | 104 | — | — | ||||||||||||||||||||||
|
Losses included in earnings |
— | — | — | — | — | — | (247 | ) | (247 | ) | |||||||||||||||||||||
|
Gains/(losses) included in OCI |
6 | 30 | — | 36 | (34 | ) | (20 | ) | 90 | 36 | |||||||||||||||||||||
|
Carrying value at September 30 |
$ | 2 | $ | 106 | $ | 94 | $ | 202 | $ | 94 | $ | 84 | $ | 213 | $ | 391 | |||||||||||||||
The following table summarizes the marketable securities that have been in an unrealized loss position for less than 12 months and those that have been in a loss position for more than 12 months at September 30, 2009:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||
| Dollars in Millions | Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
|||||||||||||||
|
Available for sale |
|||||||||||||||||||||
|
Floating Rate Securities |
$ | — | $ | — | $ | 108 | $ | (15 | ) | $ | 108 | $ | (15 | ) | |||||||
|
Equity Securities |
74 | (8 | ) | 5 | (1 | ) | 79 | (9 | ) | ||||||||||||
|
Carrying value at September 30 |
$ | 74 | $ | (8 | ) | $ | 113 | $ | (16 | ) | $ | 187 | $ | (24 | ) | ||||||
|
|||
Note 13. Receivables, Net
The major categories of receivables were as follows:
| Dollars in Millions | September 30, 2009 |
December 31, 2008 |
||||
|
Trade receivables |
$ | 2,482 | $ | 2,545 | ||
|
Alliance partners receivables |
874 | 804 | ||||
|
Income tax refund claims |
124 | 64 | ||||
|
Miscellaneous receivables |
346 | 359 | ||||
| 3,826 | 3,772 | |||||
|
Less allowances |
127 | 128 | ||||
|
Receivables, net |
$ | 3,699 | $ | 3,644 | ||
Receivables are netted with deferred income related to alliance partners until recognition of income. As a result, a corresponding reclassification was made which reduced alliance partner receivables and deferred income by $662 million and $566 million at September 30, 2009 and December 31, 2008, respectively. For additional information on the Company’s alliance partners, see “—Note 2. Alliances and Collaborations.”
In the aggregate, receivables due from three pharmaceutical wholesalers in the U.S. represented 40% and 35% of total trade receivables at September 30, 2009 and December 31, 2008, respectively.
|
|||
Note 14. Inventories, Net
The major categories of inventories were as follows:
| Dollars in Millions | September 30, 2009 |
December 31, 2008 |
||||
|
Finished goods |
$ | 732 | $ | 707 | ||
|
Work in process |
684 | 738 | ||||
|
Raw and packaging materials |
408 | 320 | ||||
|
Inventories, net |
$ | 1,824 | $ | 1,765 | ||
Inventories expected to remain on-hand beyond one year were $266 million at September 30, 2009 and $185 million at December 31, 2008 and were included in non-current other assets.
Inventories include capitalized costs related to production of products for programs in Phase III development subject to final U.S. Food and Drug Administration approval. The probability of future sales, as well as the status of the regulatory approval process was considered in assessing the recoverability of these costs. These capitalized costs were $36 million and $47 million at September 30, 2009 and December 31, 2008, respectively.
|
|||
Note 15. Property, Plant and Equipment, Net
The major categories of property, plant and equipment were as follows:
| Dollars in Millions | September 30, 2009 |
December 31, 2008 |
||||
|
Land |
$ | 208 | $ | 149 | ||
|
Buildings |
4,657 | 4,506 | ||||
|
Machinery, equipment and fixtures |
4,191 | 4,007 | ||||
|
Construction in progress |
848 | 787 | ||||
|
Total property, plant and equipment |
9,904 | 9,449 | ||||
|
Less accumulated depreciation |
4,343 | 4,044 | ||||
|
Property, plant and equipment, net |
$ | 5,561 | $ | 5,405 | ||
Capitalized interest was $10 million and $16 million for the nine months ended September 30, 2009 and 2008, respectively.
|
|||
Note 16. Accrued Expenses
The major categories of accrued expenses were as follows:
| Dollars in Millions | September 30, 2009 |
December 31, 2008 |
||||
|
Employee compensation and benefits |
$ | 668 | $ | 784 | ||
|
Royalties |
551 | 515 | ||||
|
Accrued research and development |
505 | 466 | ||||
|
Restructuring—current |
159 | 158 | ||||
|
Pension and postretirement benefits |
84 | 90 | ||||
|
Other |
1,021 | 923 | ||||
|
Total accrued expenses |
$ | 2,988 | $ | 2,936 | ||
|
|||
Note 17. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2009 were as follows:
| Dollars in Millions | BioPharmaceuticals Segment |
Mead Johnson Segment |
Total | ||||||
|
Balance at January 1, 2009 |
$ | 4,710 | $ | 117 | $ | 4,827 | |||
|
Acquisition of Medarex (Note 5) |
648 | — | 648 | ||||||
|
Balance at September 30, 2009 |
$ | 5,358 | $ | 117 | $ | 5,475 | |||
At September 30, 2009 and December 31, 2008, other intangible assets consisted of the following:
| September 30, 2009 | December 31, 2008 | |||||||||||||||||
| Dollars in Millions | Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, less Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Identifiable Intangible Assets, less Accumulated Amortization |
||||||||||||
|
Finite-lived intangible assets: |
||||||||||||||||||
|
Patents/Trademarks |
$ | 137 | $ | 93 | $ | 44 | $ | 156 | $ | 103 | $ | 53 | ||||||
|
Licenses |
973 | 285 | 688 | 650 | 250 | 400 | ||||||||||||
|
Technology |
1,227 | 781 | 446 | 1,107 | 704 | 403 | ||||||||||||
|
Capitalized software |
1,094 | 798 | 296 | 1,040 | 745 | 295 | ||||||||||||
|
Total |
$ | 3,431 | $ | 1,957 | $ | 1,474 | $ | 2,953 | $ | 1,802 | $ | 1,151 | ||||||
|
Indefinite-lived intangible assets: |
||||||||||||||||||
|
In-process research and development (Note 5) |
$ | 1,252 | $ | — | $ | 1,252 | $ | — | $ | — | $ | — | ||||||
|
Total identifiable intangible assets |
$ | 4,683 | $ | 1,957 | $ | 2,726 | $ | 2,953 | $ | 1,802 | $ | 1,151 | ||||||
The change in the carrying amount of other intangible assets for the nine months periods ended September 30, 2009 and 2008 were as follows:
| Total Other Intangible Assets | ||||||||
| Dollars in Millions | 2009 | 2008 | ||||||
|
Balance at the beginning of period |
$ | 1,151 | $ | 1,330 | ||||
|
Additions |
59 | 90 | ||||||
|
Acquisition of Medarex (Note 5) |
1,692 | — | ||||||
|
Amortization |
(177 | ) | (187 | ) | ||||
|
Sale of ConvaTec |
— | (20 | ) | |||||
|
Other |
1 | (1 | ) | |||||
|
Other intangible assets, net carrying amount at September 30 |
$ | 2,726 | $ | 1,212 | ||||
Amortization expense for other intangible assets related to ConvaTec and Medical Imaging reflected in discontinued operations was $4 million in 2008.
Expected amortization expense related to the September 30, 2009 net carrying amount of finite lived other intangible assets follows:
|
Years Ending December 31, |
Dollars in Millions | ||
|
2009 (three months) |
$ | 64 | |
|
2010 |
264 | ||
|
2011 |
254 | ||
|
2012 |
217 | ||
|
2013 |
135 | ||
|
Later Years |
540 | ||
|
|||
Note 18. Equity
Changes in common shares, treasury stock, capital in excess of par value of stock and restricted stock were as follows:
| Dollars and Shares in Millions | Common Shares Issued |
Treasury Stock |
Cost of Treasury Stock |
Capital in Excess of Par Value of Stock |
Restricted Stock |
||||||||||||
|
Balance at January 1, 2008 |
2,205 | 226 | $ | (10,584 | ) | $ | 2,722 | $ | (97 | ) | |||||||
|
Employee stock compensation plans |
— | — | 13 | 78 | 20 | ||||||||||||
|
Balance at September 30, 2008 |
2,205 | 226 | $ | (10,571 | ) | $ | 2,800 | $ | (77 | ) | |||||||
|
Balance at January 1, 2009 |
2,205 | 226 | $ | (10,566 | ) | $ | 2,828 | $ | (71 | ) | |||||||
|
Mead Johnson initial public offering |
— | — | — | 942 | — | ||||||||||||
|
Adjustments to the Mead Johnson net asset transfer |
— | — | — | (7 | ) | — | |||||||||||
|
Employee stock compensation plans |
— | (2 | ) | 62 | 45 | (4 | ) | ||||||||||
|
Balance at September 30, 2009 |
2,205 | 224 | $ | (10,504 | ) | $ | 3,808 | $ | (75 | ) | |||||||
The accumulated balances related to each component of other comprehensive income/(loss) (OCI), net of taxes, were as follows:
| Dollars in Millions | Foreign Currency Translation |
Derivatives Qualifying as Effective Hedges |
Pension and Other Postretirement Benefits |
Available for Sale Securities |
Accumulated Other Comprehensive Income/(Loss) |
|||||||||||||||
|
Balance at January 1, 2008 |
$ | (325 | ) | $ | (37 | ) | $ | (973 | ) | $ | (126 | ) | $ | (1,461 | ) | |||||
|
Other comprehensive income/(loss) |
(23 | ) | 36 | 70 | 25 | 108 | ||||||||||||||
|
Balance at September 30, 2008 |
$ | (348 | ) | $ | (1 | ) | $ | (903 | ) | $ | (101 | ) | $ | (1,353 | ) | |||||
|
Balance at January 1, 2009 |
$ | (424 | ) | $ | 14 | $ | (2,258 | ) | $ | (51 | ) | $ | (2,719 | ) | ||||||
|
Other comprehensive income/(loss) |
64 | (80 | ) | 482 | 35 | 501 | ||||||||||||||
|
Balance at September 30, 2009 |
$ | (360 | ) | $ | (66 | ) | $ | (1,776 | ) | $ | (16 | ) | $ | (2,218 | ) | |||||
The reconciliation of noncontrolling interest was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Balance at beginning of period |
$ | (160 | ) | $ | (12 | ) | $ | (33 | ) | $ | (27 | ) | ||||
|
Mead Johnson initial public offering |
— | — | (160 | ) | — | |||||||||||
|
Adjustments to the Mead Johnson net asset transfer |
7 | — | 7 | — | ||||||||||||
|
Net earnings attributable to noncontrolling interest |
467 | 383 | 1,331 | 1,082 | ||||||||||||
|
Other comprehensive income attributable to noncontrolling interest |
2 | — | 7 | — | ||||||||||||
|
Distributions |
(463 | ) | (376 | ) | (1,299 | ) | (1,060 | ) | ||||||||
|
Balance at September 30 |
$ | (147 | ) | $ | (5 | ) | $ | (147 | ) | $ | (5 | ) | ||||
Noncontrolling interest is primarily related to the Company’s partnerships with sanofi for the territory covering the Americas for sales of PLAVIX* and the 16.9% of Mead Johnson owned by the public. Net earnings attributable to noncontrolling interest are presented net of taxes of $145 million and $124 million for the three months ended September 30, 2009 and 2008, respectively, and $434 million and $352 million for the nine months ended September 30, 2009 and 2008, respectively, in the consolidated statements of earnings with a corresponding increase to the provision for income taxes. Distribution of the partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are included within operating activities in the consolidated statements of cash flows. The above activity includes the pre-tax income and distributions related to these partnerships.
|
|||
Note 19. Pension, Postretirement and Postemployment Liabilities
The net periodic benefit cost of the Company’s defined benefit pension and postretirement benefit plans included the following components:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
|
Service cost — benefits earned during the period |
$ | 28 | $ | 55 | $ | 2 | $ | 2 | $ | 135 | $ | 174 | $ | 5 | $ | 6 | ||||||||||||||||
|
Interest cost on projected benefit obligation |
92 | 98 | 9 | 9 | 285 | 294 | 28 | 29 | ||||||||||||||||||||||||
|
Expected return on plan assets |
(105 | ) | (118 | ) | (5 | ) | (7 | ) | (338 | ) | (354 | ) | (15 | ) | (21 | ) | ||||||||||||||||
|
Amortization of prior service cost/(credit) |
— | 3 | (1 | ) | (1 | ) | 4 | 8 | (3 | ) | (3 | ) | ||||||||||||||||||||
|
Amortization of net actuarial loss |
15 | 24 | 2 | 1 | 85 | 73 | 7 | 4 | ||||||||||||||||||||||||
|
Net periodic benefit cost |
30 | 62 | 7 | 4 | 171 | 195 | 22 | 15 | ||||||||||||||||||||||||
|
Curtailments and special termination benefits |
— | 2 | — | (1 | ) | 25 | 18 | — | (1 | ) | ||||||||||||||||||||||
|
Total net periodic benefit cost |
$ | 30 | $ | 64 | $ | 7 | $ | 3 | $ | 196 | $ | 213 | $ | 22 | $ | 14 | ||||||||||||||||
During June 2009, the Company amended its U.S. Retirement Income Plan (and several other plans) whereby, effective December 31, 2009, the crediting of future benefits relating to service will be eliminated. The Company will continue to consider salary increases for an additional five-year period in determining the benefit obligation related to prior service. The plan amendment was accounted for as a curtailment.
As a result, the Company re-measured the applicable plan assets and obligations. The re-measurement resulted in a $455 million reduction to accumulated OCI ($295 million net of taxes) and a corresponding decrease to the unfunded status of the plan due to the curtailment, updated plan asset valuations and a change in the discount rate from 7.0% to 7.5%. A curtailment charge of $25 million was also recognized in other (income)/expense, net during the second quarter of 2009 for the remaining amount of unrecognized prior service cost. In addition, the Company has reclassified all participants as inactive for benefit plan purposes and will amortize actuarial gains and losses over the expected weighted-average remaining lives of plan participants (32 years).
In connection with the plan amendment, the Company will also increase its expected contributions to its principal defined contribution plans in the U.S. and Puerto Rico effective January 1, 2010. The net impact of the above actions is expected to reduce the future retiree benefit costs, although future costs will continue to be subject to market conditions and other factors including actual and expected plan asset performance, interest rate fluctuations and lump-sum benefit payments.
In February 2009, the Company re-measured the U.S. Retirement Income Plan (and several other plans) upon the transfer of certain plan assets and related obligations to new Mead Johnson plans for active Mead Johnson participants. The re-measurement resulted in a $170 million reduction to accumulated OCI ($110 million net of taxes) in the first quarter of 2009 and a corresponding decrease to the unfunded status of the plan due to updated plan asset valuations and a change in the discount rate from 6.5% to 7.0%.
During the third quarter of 2009, the actuarial valuations for the US pension plans were completed resulting in a $18 million reduction in the net pension cost including amounts attributed to earlier interim periods.
Contributions to the U.S. pension plans are expected to be approximately $650 million during 2009, of which $643 million was contributed in the nine months ended September 30, 2009. Contributions to the international plans are expected to be in the range of $120 million to $140 million in 2009, of which $70 million was contributed in the nine months ended September 30, 2009.
In 2008, concurrent with the agreement to sell ConvaTec, a revaluation of various pension plans’ assets and obligations was performed. The revaluation resulted in a curtailment charge of $5 million and special termination benefit charge of $13 million, which are included in discontinued operations.
|
|||
Note 20. Employee Stock Benefit Plans
The following table summarizes stock-based compensation expense, net of taxes:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Stock options |
$ | 18 | $ | 17 | $ | 54 | $ | 56 | ||||||||
|
Restricted stock |
20 | 21 | 55 | 61 | ||||||||||||
|
Long-term performance awards |
4 | 6 | 21 | 15 | ||||||||||||
|
Total stock-based compensation expense |
42 | 44 | 130 | 132 | ||||||||||||
|
Less tax benefit |
(13 | ) | (14 | ) | (42 | ) | (43 | ) | ||||||||
|
Stock-based compensation expense, net of taxes |
$ | 29 | $ | 30 | $ | 88 | $ | 89 | ||||||||
In the nine months ended September 30, 2009, the Company granted 23.8 million stock options, 6.3 million restricted stock units and 1.6 million long-term performance awards. The weighted-average grant date fair value of stock options granted was $3.70 per share. The weighted-average grant date fair value for restricted stock and long-term performance awards granted during the nine months ended September 30, 2009 was $17.97 and $16.52, respectively.
Total compensation costs, related to nonvested awards not yet recognized and the weighted-average period over which such awards are expected to be recognized at September 30, 2009 were as follows:
| Dollars in Millions | Stock Options | Restricted Stock | Long-Term Performance Awards |
||||||
|
Unrecognized compensation cost |
$ | 121 | $ | 191 | $ | 29 | |||
|
Expected weighted-average period of compensation cost to be recognized |
2.4 years | 2.8 years | 1.4 years | ||||||
|
|||
Note 21. Short-Term Borrowings and Long-Term Debt
Short-term borrowings were $286 million and $154 million at September 30, 2009 and December 31, 2008, respectively, and consist primarily of outstanding bank drafts.
As part of the Medarex, Inc. acquisition in September 2009 (see “—Note 5. Medarex, Inc. Acquisition,”), the Company’s consolidated financial statements now reflect Medarex’s outstanding 2.25% Convertible Senior Notes due May 15, 2011 (the “2.25% Notes”). These notes, originally convertible into Medarex shares at the rate of $72.9129 per each $1,000 principal amount ($13.72 per share), were adjusted into the right to receive $1,167 in cash for each $1,000 principal amount outstanding (the equivalent of $16 per share). Short-term borrowings include $88 million related to these notes as of September 30, 2009.
As of September 30, 2009, the 1.81% Yen Notes due 2010 amounting to $38 million were reclassified to short-term borrowings.
The components of long-term debt were as follows:
| Dollars in Millions | September 30, 2009 |
December 31, 2008 |
||||||
|
Principal Value |
||||||||
|
6.125% Notes due 2038 |
$ | 1,000 | $ | 1,000 | ||||
|
5.875% Notes due 2036 |
960 | 1,023 | ||||||
|
4.375% Euro Notes due 2016 |
734 | 698 | ||||||
|
4.625% Euro Notes due 2021 |
734 | 698 | ||||||
|
5.45% Notes due 2018 |
600 | 600 | ||||||
|
5.25% Notes due 2013 |
597 | 597 | ||||||
|
6.80% Debentures due 2026 |
332 | 350 | ||||||
|
7.15% Debentures due 2023 |
304 | 339 | ||||||
|
6.88% Debentures due 2097 |
287 | 287 | ||||||
|
Floating Rate Convertible Senior Debentures due 2023 |
50 | 50 | ||||||
|
5.75% Industrial Revenue Bonds due 2024 |
35 | 35 | ||||||
|
1.81% Yen Notes due 2010 |
— | 39 | ||||||
|
Variable Rate Industrial Revenue Bonds due 2030 |
15 | 15 | ||||||
|
Other |
8 | 6 | ||||||
|
Subtotal |
$ | 5,656 | $ | 5,737 | ||||
|
Adjustments to Principal Value |
||||||||
|
Fair value of interest rate swaps |
$ | 296 | $ | 647 | ||||
|
Unamortized basis adjustment from swap terminations |
384 | 233 | ||||||
|
Unamortized bond discounts |
(29 | ) | (32 | ) | ||||
|
Total |
$ | 6,307 | $ | 6,585 | ||||
The increase in the Euro Notes due 2016 and 2021 was due to the U.S. dollar weakening as of September 30, 2009 from December 31, 2008.
In the third quarter of 2009, the Company repurchased approximately $35 million principal amount of its 7.15% Notes due 2023 and $18 million of its 6.8% Notes due 2026 for $44 million and $21 million, respectively. The loss attributed to the transactions amounted to $4 million, which also included the termination of approximately $18 million notional amount of fixed-to-floating interest rate swaps associated with the 7.15% Notes due 2023 for proceeds of $3 million.
In June 2009, the Company repurchased approximately $63 million principal amount of its 5.875% Notes due 2036 for $67 million. The total gain attributed to this transaction amounted to $11 million, which also included the termination of approximately $35 million notional amount of fixed-to-floating interest rate swaps for proceeds of $5 million.
In June 2009, the Company executed several fixed-to-floating interest rate swaps to convert $200 million of its 5.45% Notes due 2018 from fixed rate debt to variable rate debt. In April 2009, the Company executed several fixed-to-floating interest rate swaps to convert $597 million of its 5.25% Notes due 2013 from fixed rate debt to variable rate debt. In January 2009, the Company terminated $1,061 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $187 million. The basis adjustment on the debt, which was equal to the proceeds from this swap termination, is being recognized as a reduction to interest expense over the remaining life of the underlying debt. For further discussion of the Company’s interest rate swaps, refer to “—Note 22. Financial Instruments.”
In February 2009, Mead Johnson & Company as borrower and Mead Johnson as guarantor, both of which are indirect, majority-owned subsidiaries of the Company, entered into a three-year syndicated revolving credit facility agreement. The facility is unsecured and matures in February 2012, subject to annual extensions if sufficient lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time is $410 million, which may be increased up to $500 million, at the option of Mead Johnson and with the consent of the lenders, subject to customary conditions contained in the facility. There were no borrowings outstanding under this revolving credit facility at September 30, 2009.
The Company has a $2.0 billion, revolving credit facility from a syndicate of lenders maturing in December 2011, which is extendable with the consent of the lenders. This facility contains customary terms and conditions, including a financial covenant whereby the ratio of consolidated debt to consolidated capital cannot exceed 50% at the end of each quarter. The Company has been in compliance with this covenant since the inception of this new facility. There were no borrowings outstanding under this revolving credit facility at September 30, 2009.
|
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Note 22. Financial Instruments
The Company is exposed to market risk due to changes in currency exchange rates, interest rates and to a lesser extent natural gas pricing. To reduce that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. Derivative financial instruments are not used for speculative purposes.
Cash Flow Hedges
Foreign Exchange contracts — The Company utilizes foreign currency contracts to hedge forecasted transactions, primarily intercompany transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. The notional and fair value amounts of the Company’s foreign exchange derivative contracts at September 30, 2009 and December 31, 2008 were $1,351 million and $70 million net liabilities and $1,151 million and $49 million net assets, respectively. For these derivatives, the majority of which qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulated OCI and recognized in earnings when the hedged item affects earnings.
At September 30, 2009, the balance of deferred losses on foreign exchange forward contracts that qualified for cash flow hedge accounting included in accumulated OCI on a pre-tax basis was $73 million ($46 million net of taxes), all of which is expected to be reclassified into earnings within the next 19 months.
The Company assesses effectiveness at the inception of the hedge and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of change in fair value is not deferred in accumulated OCI and is included in current period earnings. For the three and nine months ended September 30, 2009, the impact of hedge ineffectiveness on earnings was not significant. The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. For the three and nine months ended September 30, 2009, the impact of discontinued foreign exchange hedges was a pre-tax loss of $5 million and $6 million, respectively, and was reported in other (income)/expense, net.
Natural Gas contracts — The Company utilizes forward contracts to hedge forecasted purchases of natural gas and designates these derivative instruments as cash flow hedges when appropriate. For these derivatives the effective portion of changes in fair value is temporarily reported in accumulated OCI and recognized in earnings when the hedged item affects earnings. The notional and fair value amounts of the Company’s natural gas derivative contracts at September 30, 2009 and December 31, 2008 were 772 thousand decatherms and $3 million liability and 3 million decatherms and $7 million liability, respectively.
At September 30, 2009, the balance of deferred losses on natural gas forward contracts that qualified for cash flow hedge accounting included in accumulated OCI on a pre-tax basis was $1 million ($1 million net of taxes), all of which is expected to be reclassified into earnings within the next three months.
Non-Qualifying Foreign Exchange Contracts
In addition to the foreign exchange contracts noted above, the Company utilizes forward contracts to hedge foreign currency-denominated monetary assets and liabilities. The primary objective of these forward contracts is to protect the U.S. dollar value of foreign currency-denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement in U.S. dollars. These forward contracts are not designated as hedges and are marked to fair value through other (income)/expense, net, as they occur, and substantially offset the change in spot value of the underlying foreign currency denominated monetary asset or liability. The notional and fair value amounts of purchased and sold foreign exchange forward contracts at September 30, 2009 were not material.
Furthermore, the Company uses foreign exchange forward contracts to offset its exposure to certain assets and liabilities and earnings denominated in certain foreign currencies. These foreign exchange forward contracts are not designated as hedges; therefore, changes in the fair value of these derivatives are recognized in earnings in other (income)/expense, net, as they occur. The notional and fair value amounts of purchased and sold foreign exchange forward contracts at September 30, 2009 were $6 million and a $1 million net liability, respectively.
Hedge of Net Investment
The Company uses non-U.S. dollar borrowings, primarily the €500 Million Notes due 2016 and the €500 Million Notes due 2021, to hedge the foreign currency exposures of the Company’s net investment in certain foreign affiliates. These non-U.S. dollar borrowings are designated as a hedge of net investment. The effective portion of foreign exchange gains or losses on these hedges is recorded as part of the foreign currency translation (CTA) component of accumulated OCI. At September 30, 2009, $194 million was recorded in the CTA component of accumulated OCI.
Fair Value Hedges
Interest Rate contracts — The Company uses derivative instruments as part of its interest rate risk management strategy. The derivative instruments used are comprised principally of fixed-to-floating interest rate swaps, which are designated in fair-value hedge relationships. The total notional amounts of outstanding interest rate swaps were $2.3 billion and €1 billion ($1.5 billion) at September 30, 2009. For the three and nine months ended September 30, 2009, the effect of the interest rate swaps was to decrease interest expense by $32 million and $85 million, respectively, from the effects of interest rate swaps.
The swaps, as well as the underlying debt for the benchmark risk being hedged, are recorded at fair value. Swaps are generally held to maturity and are intended to create an appropriate balance of fixed and floating rate debt for the Company. The basis adjustment to the debt hedged in qualifying fair value hedging relationships where the underlying swap is terminated prior to maturity is amortized to earnings as an adjustment to interest expense over the remaining life of the debt.
In September 2009, the Company terminated $18 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $3 million.
In June 2009, the Company terminated $35 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $5 million.
In June 2009, the Company executed several fixed-to-floating interest rate swaps to convert $200 million of its 5.45% Notes due 2018 from fixed rate debt to variable rate debt.
In April 2009, the Company executed several fixed-to-floating interest rate swaps to convert $597 million of its 5.25% Notes due 2013 from fixed rate debt to variable rate debt.
In January 2009, the Company terminated $1,061 million notional amount of fixed-to-floating interest rate swap agreements for proceeds of $187 million.
The effective portion of the fair value of swaps that qualify as cash flow hedges that are terminated, but for which the hedged debt remains outstanding, are reported in accumulated OCI and amortized to earnings as an adjustment to interest expense over the remaining life of the debt. At September 30, 2009, the balance of deferred losses on forward starting swaps included in accumulated OCI was $19 million, which will be reclassified into earnings over the remaining life of the debt.
For further discussion on the Company’s debt refer to “—Note 21. Short-Term Borrowings and Long-Term Debt.”
The following table summarizes the interest rate swaps outstanding at September 30, 2009:
| Dollars in Millions | Notional Amount of Underlying Debt |
Variable Rate Received |
Year of Transaction |
Maturity | Fair Value |
||||||||
|
Swaps associated with: |
|||||||||||||
|
5.25% Note due 2013 |
$ | 597 | 1 month U.S. $ LIBOR +3.084% | 2009 | 2013 | $ | (3 | ) | |||||
|
5.45% Notes due 2018 |
400 | 1 month U.S. $ LIBOR +1.065% | 2008 | 2018 | 32 | ||||||||
|
5.45% Notes due 2018 |
200 | 1 month U.S. $ LIBOR +1.541% | 2009 | 2018 | 8 | ||||||||
|
4.375% €500 Million Notes due 2016 |
734 | 3 month EUR € EURIBOR +0.40% | 2006 | 2016 | 37 | ||||||||
|
4.625% €500 Million Notes due 2021 |
734 | 3 month EUR € EURIBOR +0.56% | 2006 | 2021 | 26 | ||||||||
|
7.15% Notes due 2023 |
157 | 1 month U.S. $ LIBOR +1.66% | 2004 | 2023 | 29 | ||||||||
|
5.875% Notes due 2036 |
537 | 1 month U.S. $ LIBOR +0.62% | 2006 | 2036 | 110 | ||||||||
|
6.125% Notes due 2038 |
200 | 1 month U.S. $ LIBOR +1.3255% | 2008 | 2038 | 28 | ||||||||
|
6.125% Notes due 2038 |
200 | 1 month U.S. $ LIBOR +1.292% | 2008 | 2038 | 29 | ||||||||
|
Total interest rate swaps |
$ | 3,759 | $ | 296 | |||||||||
The following table summarizes the Company’s fair value of outstanding derivatives at September 30, 2009 and December 31, 2008 on the consolidated balance sheets:
| Dollars in Millions |
Balance Sheet Location |
2009 | 2008 |
Balance Sheet Location |
2009 | 2008 | ||||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||||||||||
|
Interest rate contracts |
Other assets | $ | 299 | $ | 647 | Accrued expenses | $ | (3 | ) | $ | — | |||||||
|
Foreign exchange contracts |
Other assets | 4 | 89 | Accrued expenses | (74 | ) | (40 | ) | ||||||||||
|
Hedge of net investments |
— | — | Long-term debt | (1,281 | ) | (1,319 | ) | |||||||||||
|
Natural gas contracts |
— | — | Accrued expenses | (3 | ) | (7 | ) | |||||||||||
|
Subtotal |
303 | 736 | (1,361 | ) | (1,366 | ) | ||||||||||||
|
Derivatives not designated as hedging instruments: |
||||||||||||||||||
|
Foreign exchange contracts |
Other assets | — | 1 | Accrued expenses | (1 | ) | (5 | ) | ||||||||||
|
Total Derivatives |
$ | 303 | $ | 737 | $ | (1,362 | ) | $ | (1,371 | ) | ||||||||
The impact on earnings from interest rate swaps that qualified as fair value hedges for the three and nine months ended September 30, 2009 and 2008 was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | ||||||||
|
Interest expense |
$ | 32 | $ | 17 | $ | 85 | $ | 39 | ||||
|
Amortized basis adjustment from swap terminations recognized in interest expense |
6 | — | 18 | — | ||||||||
|
Total |
$ | 38 | $ | 17 | $ | 103 | $ | 39 | ||||
The impact on OCI and earnings from foreign exchange contracts, natural gas contracts, and forward starting swaps that qualified as cash flow hedges for the nine months ended September 30, 2009 and 2008 was as follows:
| Foreign Exchange Contracts |
Natural Gas Contracts |
Forward Starting Swaps |
Total Impact | |||||||||||||||||||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
|
Net carrying amount at January 1 |
$ | 35 | $ | (37 | ) | $ | (2 | ) | $ | — | $ | (19 | ) | $ | — | $ | 14 | $ | (37 | ) | ||||||||||||
|
Cash flow hedges deferred in OCI |
(52 | ) | 5 | 2 | (1 | ) | — | (19 | ) | (50 | ) | (15 | ) | |||||||||||||||||||
|
Cash flow hedges reclassified to cost of products sold (effective portion) |
(63 | ) | 78 | — | — | — | — | (63 | ) | 78 | ||||||||||||||||||||||
|
Change in deferred taxes |
34 | (27 | ) | (1 | ) | — | — | — | 33 | (27 | ) | |||||||||||||||||||||
|
Net carrying amount at September 30 |
$ | (46 | ) | $ | 19 | $ | (1 | ) | $ | (1 | ) | $ | (19 | ) | $ | (19 | ) | $ | (66 | ) | $ | (1 | ) | |||||||||
The impact on OCI and earnings from non-derivative debt designated as a hedge of net investment for the nine months ended September 30, 2009 and 2008 was as follows:
| Net Investment Hedges | ||||||||
| Dollars in Millions | 2009 | 2008 | ||||||
|
Net carrying amount at January 1 |
$ | (131 | ) | $ | (168 | ) | ||
|
Change in spot value of non-derivative debt designated as a hedge deferred in CTA/OCI |
(63 | ) | (23 | ) | ||||
|
Net carrying amount at September 30 |
$ | (194 | ) | $ | (191 | ) | ||
The impact on earnings from non-qualifying derivatives recorded in other (income)/expense, net for the three and nine months ended September 30, 2009 and 2008 was as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
| Dollars in Millions | 2009 | 2008 | 2009 | 2008 | |||||||||
|
Loss recognized in other (income)/expense, net |
$ | 1 | $ | (12 | ) | $ | 1 | $ | 2 | ||||
For a discussion on the fair value of financial instruments, see —Note 11. Fair Value Measurement. For a discussion on cash, cash equivalents and marketable securities, see —Note 12. Cash, Cash Equivalents and Marketable Securities.
The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide with Standard & Poor’s and Moody’s long-term debt ratings of A or higher. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at September 30, 2009 failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.
|
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Note 23. Legal Proceedings and Contingencies
Various lawsuits, claims, proceedings and investigations are pending involving the Company and certain of its subsidiaries. The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. These matters involve antitrust, securities, patent infringement, pricing, sales and marketing practices, environmental, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage.
The most significant of these matters are described in Item 8. Financial Statements—Note 25. Legal Proceedings and Contingencies in the Company’s 2008 Annual Report on Form 10-K. The following discussion is limited to certain recent developments related to these previously described matters, and certain new matters that have not previously been described in a prior report. Accordingly, the disclosure below should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009. Unless noted to the contrary, all matters described in those earlier reports remain outstanding and the status is consistent with what has previously been reported.
There can be no assurance that there will not be an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material.
INTELLECTUAL PROPERTY
PLAVIX* Litigation
PLAVIX* is currently the Company’s largest product ranked by net sales. The PLAVIX* patents are subject to a number of challenges in the U.S., including the litigation with Apotex Inc. and Apotex Corp. (Apotex) described below, and in other less significant markets for the product. It is not possible reasonably to estimate the impact of these lawsuits on the Company. However, loss of market exclusivity of PLAVIX* and sustained generic competition in the U.S. would be material to the Company’s sales of PLAVIX*, results of operations and cash flows, and could be material to the Company’s financial condition and liquidity. The Company and its product partner, sanofi, (the Companies) intend to vigorously pursue enforcement of their patent rights in PLAVIX*.
PLAVIX* Litigation – U.S.
Patent Infringement Litigation against Apotex and Related Matters
As previously disclosed, the Company’s U.S. territory partnership under its alliance with sanofi is a plaintiff in a pending patent infringement lawsuit instituted in the United States District Court for the Southern District of New York (District Court) entitled Sanofi-Synthelabo, Sanofi-Synthelabo, Inc. and Bristol-Myers Squibb Sanofi Pharmaceuticals Holding Partnership v. Apotex. The suit is based on U.S. Patent No. 4,847,265 (the ‘265 Patent), a composition of matter patent, which discloses and claims, among other things, the hydrogen sulfate salt of clopidogrel, a medicine made available in the U.S. by the Companies as PLAVIX*. Also, as previously reported, the District Court upheld the validity and enforceability of the ‘265 Patent, maintaining the main patent protection for PLAVIX* in the U.S. until November 2011. The District Court also ruled that Apotex’s generic clopidogrel bisulfate product infringed the ‘265 Patent and permanently enjoined Apotex from engaging in any activity that infringes the ‘265 Patent, including marketing its generic product in the U.S. until after the patent expires.
Apotex appealed the District Court’s decision and on December 12, 2008, the United States Court of Appeals for the Federal Circuit (Circuit Court) affirmed the District Court’s ruling sustaining the validity of the ‘265 Patent. Apotex filed a petition with the Circuit Court for a rehearing en banc, and in March 2009, the Circuit Court denied Apotex’s petition. The case has been remanded to the District Court for further proceedings. In July 2009, Apotex filed a petition for writ of certiorari with the U.S. Supreme Court requesting the Supreme Court to review the Circuit Court’s decision.
As previously disclosed, the Company’s U.S. territory partnership under its alliance with sanofi is also a plaintiff in five additional pending patent infringement lawsuits against Dr. Reddy’s Laboratories, Inc. and Dr. Reddy’s Laboratories, LTD (Dr. Reddy’s), Teva Pharmaceuticals USA, Inc. (Teva), Cobalt Pharmaceuticals Inc. (Cobalt), Watson Pharmaceuticals, Inc. and Watson Laboratories, Inc. (Watson) and Sun Pharmaceuticals (Sun). The lawsuits against Dr. Reddy’s, Teva and Cobalt relate to the ‘265 Patent. In May 2009, Dr Reddy’s signed a consent judgment in favor of sanofi and BMS conceding the validity and infringement of the ‘265 Patent. As previously reported, the patent infringement actions against Teva and Cobalt were stayed pending resolution of the Apotex litigation, and the parties to those actions agreed to be bound by the outcome of the litigation against Apotex. Consequently, on July 12, 2007, the District Court entered judgments against Cobalt and Teva and permanently enjoined Cobalt and Teva from engaging in any activity that infringes the ‘265 Patent until after the Patent expires. Cobalt and Teva each filed an appeal. In July 2009, the Circuit Court issued a mandate in the Teva appeal binding Teva to the decision in the Apotex litigation. In August 2009, Cobalt consented to entry of judgment in its appeal agreeing to be bound by Circuit Court’s decision in the Apotex litigation. The lawsuit against Watson, filed in October 2004, is based on U.S. Patent No. 6,429,210 (the ‘210 Patent), which discloses and claims a particular crystalline or polymorph form of the hydrogen sulfate salt of clopidogrel, which is marketed as PLAVIX*. In December 2005, the court permitted Watson to pursue its declaratory judgment counterclaim with respect to U.S. Patent No. 6,504,030. In January 2006, the Court approved the parties’ stipulation to stay this case pending the outcome of the trial in the Apotex matter. On May 1, 2009, BMS and Watson entered into a stipulation to dismiss the case. In April 2007, Pharmastar filed a request for inter partes reexamination of the ‘210 Patent. The U.S. Patent and Trademark Office (PTO) granted this request in July of 2007. In July 2009, the U.S. Patent and Trademark Office vacated the reexamination proceeding. The lawsuit against Sun, filed on July 11, 2008, is based on infringement of the ‘265 Patent and the ‘210 Patent. With respect to the ‘265 Patent, Sun has agreed to be bound by the outcome of the Apotex litigation. Each of Dr. Reddy’s, Teva, Cobalt, Watson and Sun have filed an aNDA with the FDA, and, with respect to Dr. Reddy’s, Teva, Cobalt and Watson all exclusivity periods and statutory stay periods under the Hatch-Waxman Act have expired. Accordingly, final approval by the FDA would provide each company authorization to distribute a generic clopidogrel bisulfate product in the U.S., subject to various legal remedies for which the Companies may apply including injunctive relief and damages.
On June 1, 2009, Apotex filed a request for ex parte reexamination of the ‘265 Patent at the PTO and in August 2009, the PTO agreed to reexamine the patent.
It is not possible at this time reasonably to assess the outcome of any petition for writ of certiorari by Apotex requesting an appeal of the Circuit Court’s decision, or the other PLAVIX* patent litigations or the timing of any renewed generic competition for PLAVIX* from Apotex or additional generic competition for PLAVIX* from other third-party generic pharmaceutical companies. However, if Apotex were to prevail in an appeal of the patent litigation, the Company would expect to face renewed generic competition for PLAVIX* promptly thereafter. Loss of market exclusivity for PLAVIX* and/or sustained generic competition would be material to the Company’s sales of PLAVIX*, results of operations and cash flows, and could be material to the Company’s financial condition and liquidity. Additionally, it is not possible at this time reasonably to assess the amount of damages that could be recovered by the Company and Apotex’s ability to pay such damages in the event the Company prevails in the patent litigation.
Additionally, on November 13, 2008, Apotex filed the lawsuit in New Jersey Superior Court entitled, Apotex Inc., et al. v. sanofi-aventis, et al., seeking payment of $60 million, plus interest, related to the break-up of the proposed settlement agreement. On December 31, 2008, the defendants removed the case to the Federal District Court for New Jersey. Apotex moved to remand the case back to state court and, in June 2009, the Federal District Court of New Jersey remanded the case back to the New Jersey Superior Court.
PLAVIX* Litigation – International
PLAVIX* – Australia
As previously disclosed, sanofi was notified that, in August 2007, GenRx Proprietary Limited (GenRx) obtained regulatory approval of an application for clopidogrel bisulfate 75mg tablets in Australia. GenRx, formerly a subsidiary of Apotex, has since changed its name to Apotex. In August 2007, Apotex filed an application in the Federal Court of Australia seeking revocation of sanofi’s Australian Patent No. 597784 (Case No. NSD 1639 of 2007). Sanofi filed counterclaims of infringement and sought an injunction. On September 21, 2007, the Australian court granted sanofi’s injunction. A subsidiary of the Company was subsequently added as a party to the proceedings. In February 2008, a second company, Spirit Pharmaceuticals Pty. Ltd., also filed a revocation suit against the same patent. This case was consolidated with the Apotex case and a trial occurred in April. On August 12, 2008, the Federal Court of Australia held that claims of Patent No. 597784 covering clopidogrel bisulfate, hydrochloride, hydrobromide, and taurocholate salts are valid. The Federal Court also held that the process claims, pharmaceutical composition claims, and claim directed to clopidogrel and its pharmaceutically acceptable salts are invalid. In view of this decision, it is possible a generic company could develop and seek registration in Australia for an alternate salt form of clopidogrel (other than bisulfate, hydrochloride, hydrobromide, or taurocholate). The Company and sanofi filed notices of appeal in the Full Court of the Federal Court of Australia appealing the holding of invalidity of the claim covering clopidogrel and its pharmaceutically acceptable salts, process claims, and pharmaceutical composition claims which have stayed the Federal Court’s ruling. Apotex filed a notice of appeal appealing the holding of validity of the clopidogrel bisulfate, hydrochloride, hydrobromide, and taurocholate claims. A hearing on the appeals occurred in February 2009. On September 29, 2009, the Full Federal Court of Australia held all of the claims of Patent No. 597784 invalid. The Company and sanofi are considering their legal options.
PLAVIX* – Korea
As previously disclosed, in June 2006, the Korean Intellectual Property Tribunal (KIPT) invalidated all claims of sanofi’s Korean Patent No. 103,094, including claims directed to clopidogrel and pharmaceutically acceptable salts and to clopidogrel bisulfate, and sanofi appealed. In January 2008, the Patent Court affirmed the KIPT decision. The Company and sanofi filed an appeal to the Supreme Court of Korea and in October 2009, the Supreme Court of Korea affirmed the lower courts’ decisions that the claims to the clopidogrel patent are invalid.
OTHER INTELLECTUAL PROPERTY LITIGATION
REYATAZ
In October 2009, Teva filed an aNDA to manufacture and market a generic version of REYATAZ. The Company received a Paragraph IV certification letter from Teva challenging the two Orange-Book listed patents for REYATAZ. The Company is currently reviewing its legal options.
GENERAL COMMERCIAL LITIGATION
RxUSA Wholesale Litigation
As previously disclosed, in July 2006, a complaint was filed by drug wholesaler RxUSA Wholesale, Inc. in the U.S. District Court for the Eastern District of New York against the Company, 15 other drug manufacturers, five drug wholesalers, two officers of defendant McKesson and a wholesale distribution industry trade group, RxUSA Wholesale, Inc. v. Alcon Labs., Inc., et al. The complaint alleges violations of Federal and New York antitrust laws, as well as various other laws. Plaintiff claims that defendants allegedly engaged in anti-competitive acts that resulted in the exclusion of plaintiff from the relevant market and seeks $586 million in damages before any trebling, and other relief. The Company, together with the other manufacturer defendants, filed a motion to dismiss the case in November 2006, which was granted in September 2009 by the District Court.
SHAREHOLDER DERIVATIVE ACTIONS
As previously disclosed, on July 31, 2007, certain members of the Board of Directors, current and former officers and the Company were named in two derivative actions filed in the New York State Supreme Court, John Frank v. Peter Dolan, et al. (07-602580) and Donald Beebout v. Peter Dolan, et al. (07-602579), and one derivative action filed in the federal district court, Steven W. Sampson v. James D. Robinson, III, et al. (07-CV-6890). The complaints allege breaches of fiduciary duties for allegedly failing to disclose material information relating to efforts to settle the PLAVIX* patent infringement litigation with Apotex. Plaintiffs seek monetary damages on behalf of the Company, contribution and indemnification. By decision filed on December 13, 2007, the state court granted motions to dismiss the complaints, Frank and Beebout, relating to certain members of the Board of Directors, but did not dismiss the complaints as to the former officers. By decision dated August 20, 2008, the federal district court granted the Company’s motion to dismiss the Sampson action. Plaintiffs appealed the district court’s decision to the U.S. Circuit Court of Appeals for the Second Circuit. In June 2009, the parties reached a settlement in principle to resolve this matter, for an amount that is not material to the Company. In August 2009, the District Court granted preliminary approval of the settlement. A final approval hearing is currently scheduled for December 2009.
SECURITIES LITIGATION
In Re Bristol-Myers Squibb Co. Securities Litigation
As previously disclosed, in June and July 2007, two putative class action complaints, Minneapolis Firefighters’ Relief Assoc. v. Bristol-Myers Squibb Co., et al. (07 CV 5867) and Jean Lai v. Bristol-Myers Squibb Company, et al., were filed in the U.S. District for the Southern District of New York against the Company, the Company’s former Chief Executive Officer, Peter Dolan and former Chief Financial Officer, Andrew Bonfield. The complaints allege violations of securities laws for allegedly failing to disclose material information relating to efforts to settle the PLAVIX* patent infringement litigation with Apotex. On September 20, 2007, the Court dismissed the Lai case without prejudice, changed the caption of the case to In re Bristol-Myers Squibb, Co. Securities Litigation, and appointed Ontario Teachers’ Pension Plan Board as lead plaintiff. On October 15, 2007, Ontario Teachers’ Pension Plan Board filed an amended complaint making similar allegations as the earlier filed complaints, naming an additional former officer but no longer naming Andrew Bonfield as a defendant. By decision dated August 20, 2008, the federal district court denied defendants’ motions to dismiss. In May 2009, the parties reached a settlement in principle to resolve this litigation for payment of $125 million. In August 2009, the District Court granted preliminary approval of the settlement. A final approval hearing is currently scheduled for December 2009.
PRICING, SALES AND PROMOTIONAL PRACTICES LITIGATION AND INVESTIGATIONS
AWP Litigation
As previously disclosed, the Company, together with a number of other pharmaceutical manufacturers, has been a defendant in a number of private class actions as well as suits brought by the attorneys general of various states. In these actions, plaintiffs allege that defendants caused the Average Wholesale Prices (AWPs) of their products to be inflated, thereby injuring government programs, entities and persons who reimbursed prescription drugs based on AWPs. The Company remains a defendant in four state attorneys general suits pending in state courts around the country.
As previously reported, one set of class actions, together with a suit by the Arizona attorney general, were consolidated in the U.S. District Court for the District of Massachusetts (AWP MDL). In August 2009, the District Court granted preliminary approval of a proposed settlement of the AWP MDL plaintiffs’ claims against the Company for $19 million, plus half the costs of class notice up to a maximum payment of $1 million. A final approval hearing is currently scheduled for February 2010. Additionally, in August 2009, the Company settled the AWP lawsuit filed by the state of Arizona for an amount that is not material to the Company.
ENVIRONMENTAL PROCEEDINGS
As previously reported, the Company is a party to several environmental proceedings and other matters, and is responsible under various state, Federal and foreign laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), for certain costs of investigating and/or remediating contamination resulting from past industrial activity at the Company’s current or former sites or at waste disposal or reprocessing facilities operated by third-parties.
CERCLA Matters
With respect to CERCLA matters for which the Company is responsible under various state, Federal and foreign laws, the Company typically estimates potential costs based on information obtained from the U.S. Environmental Protection Agency, or counterpart state agency and/or studies prepared by independent consultants, including the total estimated costs for the site and the expected cost-sharing, if any, with other “potentially responsible parties,” and the Company accrues liabilities when they are probable and reasonably estimable. As of September 30, 2009, the Company estimated its share of the total future costs for these sites to be approximately $60 million, recorded as other liabilities, which represents the sum of best estimates or, where no simple estimate can reasonably be made, estimates of the minimal probable amount among a range of such costs (without taking into account any potential recoveries from other parties, which are not currently expected). These estimated future costs include a site in Brazil where the Company is working with the Brazilian environmental authorities to determine what remediation steps must be undertaken.
New Brunswick Facility – Environmental & Personal Injury Lawsuits
As previously disclosed, in May 2008, lawsuits were filed against the Company in Superior Court, Middlesex County, NJ, by or on behalf of current and former residents of New Brunswick, NJ who live adjacent to the Company’s New Brunswick facility. The complaints allege various personal injuries and property damage resulting from soil and groundwater contamination on their property stemming from historical operations at the New Brunswick facility. In October 2008, the New Jersey Supreme Court granted Mass Tort status to these cases and transferred them to the New Jersey Superior Court in Atlantic County for centralized case management purposes. In March 2009, the court denied most of the Company’s motion to dismiss and, with respect to the claims it did dismiss, the court afforded plaintiffs the opportunity to re-plead without prejudice. Also in March 2009, a few additional lawsuits were filed in Atlantic County. The total number of cases is over 100. The Company intends to defend itself vigorously in this litigation. It is not possible at this time to reasonable assess the outcome of these lawsuits, or the potential impact on the Company.
North Brunswick Township/Board of Education Claims
As previously disclosed, in October 2003, the Company was contacted by counsel representing the North Brunswick, NJ Board of Education (BOE) regarding a site where waste materials from E.R. Squibb and Sons may have been disposed from the 1940’s through the 1960’s. Fill material containing industrial waste and heavy metals in excess of residential standards was discovered during an expansion project at the North Brunswick Township High School, as well as at a number of neighboring residential properties and adjacent public park areas. In January 2004, the New Jersey Department of Environmental Protection (NJDEP) sent the Company and others an information request letter about possible waste disposal at the site, to which the Company responded in March 2004. The BOE and the Township, as the current owners of the school property and the park, are conducting and jointly financing soil remediation work and ground water investigation work under a work plan approved by NJDEP, and have asked the Company to contribute to the cost. The Company is actively monitoring the clean-up project, including its costs. To date, neither the school board nor the Township has asserted any claim against the Company. Instead, the Company and the local entities have negotiated an agreement to attempt to resolve the matter by informal means, including mediation and binding allocation as necessary. A central component of the agreement is the provision by the Company of interim funding to help defray cleanup costs and assure the work is not interrupted. The Company transmitted an initial interim funding payment in December 2007, and has escrowed a second required payment pending resolution of questions about the use of the funds to defray local debt financing obligations. The parties commenced mediation in late 2008, and it is uncertain whether further sessions will be productive. If not, the parties will move to a binding allocation process. In addition, in September 2009, the Township and BOE filed suits against several other parties alleged to have contributed waste materials to the site. Although per the mediation agreement the BOE and Township have agreed to forbear from asserting claims against the Company, it remains to be seen whether any of the defendants in these new suits will seek to implead the Company.
OTHER PROCEEDINGS
SEC Germany Investigation
As previously disclosed, in October 2004, the SEC notified the Company that it is conducting an informal inquiry into the activities of certain of the Company’s German pharmaceutical subsidiaries and its employees and/or agents. On October 4, 2006, the SEC informed the Company that its inquiry is now formal. The SEC’s inquiry encompasses matters formerly under investigation by the German prosecutor in Munich, Germany. The Company understands the inquiry and investigation concern potential violations of the Foreign Corrupt Practices Act and German law, respectively. The Company is cooperating with the SEC. The investigation by the German prosecutor has been terminated for an amount previously accrued.
Medarex Shareholder Litigation
On July 22, 2009, the Company and Medarex announced the signing of a merger agreement providing for the acquisition of Medarex by the Company, through a tender offer, for $16.00 per share in cash. Following that announcement, certain Medarex shareholders filed similar lawsuits in state and federal court relating to this transaction against Medarex, the members of Medarex’s board of directors, and the Company.
Following the consolidation of the state court actions, on August 20, 2009, the parties entered into a memorandum of understanding (MOU), pursuant to which the parties reached an agreement in principle to settle all of the state and federal actions. Pursuant to the agreements in the MOU, Medarex made certain supplemental disclosures during the tender offer period, among other things. The parties also agreed to present to the Superior Court of New Jersey a Stipulation of Settlement and any other documentation as may be required in order to obtain approval by the court of the settlement and the dismissal of the Actions upon the terms set forth in the MOU.
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