-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E0Zvwt/inMldHtkbidTtaJu3b9EtJXHA+YMiMVXQi2qVA+ZfUrG7lMvoCvhPvKc0 gafe2LNd6DGxNTJUKZY2pA== 0000005187-05-000033.txt : 20050314 0000005187-05-000033.hdr.sgml : 20050314 20050311173939 ACCESSION NUMBER: 0000005187-05-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050314 DATE AS OF CHANGE: 20050311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYETH CENTRAL INDEX KEY: 0000005187 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 132526821 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01225 FILM NUMBER: 05676527 BUSINESS ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 BUSINESS PHONE: 9736605000 MAIL ADDRESS: STREET 1: 5 GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HOME PRODUCTS CORP DATE OF NAME CHANGE: 20020308 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HOME PRODUCTS CORP DATE OF NAME CHANGE: 19920703 10-K 1 form10-k.txt FORM 10-K DEC. 31, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-1225 Wyeth ----- (Exact name of registrant as specified in its charter) Delaware 13-2526821 - ----------------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Five Giralda Farms, Madison, NJ 07940-0874 - ----------------------------------------- -------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (973) 660-5000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ----------------------------------------- -------------------------------- $2 Convertible Preferred Stock, $2.50 New York Stock Exchange par value - ----------------------------------------- -------------------------------- Common Stock, $0.33 - 1/3 par value New York Stock Exchange - ----------------------------------------- -------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Aggregate market value at June 30, 2004 $48,227,194,281 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Outstanding at March 1, 2005 ------------- Common Stock, $0.33 - 1/3 par value 1,336,053,758 Documents incorporated by reference: List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statements; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes. (1) 2004 Annual Report to Stockholders - In Parts I, II and IV - --------------------------------------------------------------- (2) Proxy Statement to be filed on or about March 16, 2005 - In Part III - ------------------------------------------------------------------------- PART I ------ ITEM 1. BUSINESS -------- General ------- Unless stated to the contrary, or unless the context otherwise requires, references to the Company in this report include Wyeth and subsidiaries. Wyeth, a Delaware corporation (the "Company") organized in 1926, is currently engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in three primary businesses: Wyeth Pharmaceuticals ("Pharmaceuticals"), Wyeth Consumer Healthcare ("Consumer Healthcare") and Fort Dodge Animal Health ("Animal Health"). Pharmaceuticals include branded human ethical pharmaceuticals, biologicals, vaccines and nutritionals. Principal products include neuroscience therapies, cardiovascular products, nutritionals, gastroenterology drugs, anti-infectives, vaccines, oncology therapies, musculoskeletal therapies, hemophilia treatments, immunological products and women's health care products. Consumer Healthcare products include analgesics, cough/cold/allergy remedies, nutritional supplements, and hemorrhoidal, asthma and personal care items sold over-the-counter. Principal Animal Health products include vaccines, pharmaceuticals, parasite control and growth implants. In October 2000, the Company had an approximately 55% ownership in Immunex Corporation ("Immunex"), subsequently acquired by Amgen Inc. ("Amgen"). In November 2000, through a public equity offering, the Company sold 60.5 million shares of Immunex common stock with proceeds to the Company of approximately $2.405 billion resulting in a pre-tax gain on the sale of $2.061 billion. As a result of the reduction in ownership below 50%, the Company included the financial results of Immunex on an equity basis retroactive to January 1, 2000. In July 2002, Amgen completed its acquisition of Immunex. Under the terms of the acquisition agreement, the Company received 98,286,358 shares of Amgen common stock and $1.005 billion in cash in exchange for all of its shares of Immunex common stock. The Company began selling its Amgen shares in the 2002 fourth quarter and completed the sale of all such shares as of January 21, 2003 for aggregate net proceeds of $4.831 billion. The Company and Amgen continue to co-promote ENBREL in the United States and Canada with the Company having exclusive rights to ENBREL outside of North America. Additional information relating to the Immunex/Amgen common stock transactions is set forth in Note 2 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders and is incorporated herein by reference. The following are also described in Note 2: o The 2004, 2003 and 2002 net gains on sales of assets; o The co-development and co-commercialization agreement entered into between the Company and Solvay Pharmaceuticals to co-develop and co-commercialize four neuroscience compounds; o The equity purchase agreement between the Company and Takeda Chemical Industrial Co., Ltd. (Takeda), whereby the Company will buy out the 40% I-1 minority interest of the Company's affiliate in Japan presently held by Takeda; and o The 2002 first quarter sale of the Company's Rhode Island facility to Immunex (subsequently acquired by Amgen). On June 30, 2000, the Company completed the sale of its Cyanamid Agricultural Products business, a manufacturer, distributor, and seller of crop protection and pest control products worldwide, to BASF Aktiengesellschaft ("BASF") for $3.800 billion in cash and the assumption of certain debt. The Company recorded an after-tax loss on the sale of this business and reflected this business as a discontinued operation in the 2000 first quarter. The loss on the sale was determined based on the difference in the book value of the net assets sold compared with the price received for these net assets. The sale of the Cyanamid Agricultural Products business produced a gain for tax purposes and a loss for book purposes, as the Company did not get a step-up in cost basis for tax purposes. This divergence, primarily caused by goodwill, was included in the basis for book purposes but was not included in the basis for tax purposes. The lower tax basis created a taxable gain that required a tax provision of approximately $855.2 million. This tax provision was combined with the pre-tax book loss of approximately $717.8 million for a total after-tax loss on the sale of the business of $1.573 billion. Reportable Segments ------------------- Financial information, by reportable segment, for each of the three years ended December 31, 2004 is set forth in Note 15 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders and is incorporated herein by reference. The Company has four reportable segments: Pharmaceuticals, Consumer Healthcare, Animal Health and Corporate. The Company's Pharmaceuticals, Consumer Healthcare and Animal Health reportable segments are strategic business units that offer different products and services. Beginning in the 2003 fourth quarter, the Company changed its reporting structure to include the Animal Health business as a separate reportable segment. The Animal Health business was previously reported within the Pharmaceuticals segment. Prior period information presented in Note 15 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders was restated to be on a comparable basis. The reportable segments are managed separately because they manufacture, distribute and sell distinct products and provide services, which require differing technologies and marketing strategies. The Company sells its diversified line of products to wholesalers, pharmacies, hospitals, physicians, retailers and other health care institutions located in various markets in more than 145 countries throughout the world. Wholesale distributors and large retail establishments account for a large portion of the Company's net revenue and trade receivables, especially in the United States. The Company's top three customers accounted for 25%, 23% and 25% of the Company's net revenue in 2004, 2003 and 2002, respectively. The Company's largest customer accounted for 10% of net revenue in 2004, 2003 and 2002. The Company continuously monitors the creditworthiness of its customers and has established internal policies regarding customer credit limits. The product designations appearing in differentiated type herein are trademarks. I-2 PHARMACEUTICALS SEGMENT The Pharmaceuticals segment manufactures, distributes, and sells branded human ethical pharmaceuticals, biologicals, vaccines and nutritionals. These products are promoted and sold worldwide primarily to wholesalers, pharmacies, hospitals, physicians, retailers, and other human health care institutions. Some of these sales are made to large buying groups representing certain of these customers. Principal product categories and their respective products are: neuroscience therapies including EFFEXOR (marketed as EFEXOR internationally) and EFFEXOR XR; cardiovascular products including ALTACE (co-marketed with King Pharmaceuticals, Inc.) and INDERAL; nutritionals including S-26, 2ND AGE PROMIL and 3RD AGE PROGRESS (international markets only); gastroenterology drugs including ZOTON (international markets only) and PROTONIX (U.S. market only); anti-infectives including ZOSYN (marketed as TAZOCIN internationally); vaccines including PREVNAR (marketed as PREVENAR internationally); oncology therapies; musculoskeletal therapies including ENBREL; hemophilia treatments including BENEFIX Coagulation Factor IX (Recombinant) and REFACTO albumin-free formulated Factor VIII (Recombinant); immunological products including RAPAMUNE; and women's health care products including PREMARIN, PREMPRO, PREMPHASE, and ALESSE (marketed as LOETTE internationally). The Company manufactures these products in the United States and Puerto Rico, and in 15 foreign countries. Accounting for more than 10% of net revenue in 2004, 2003 and 2002 were sales of neuroscience therapies of $3.546 billion, $2.923 billion and $2.290 billion, respectively. Neuroscience therapies include 2004, 2003 and 2002 sales related to the EFFEXOR family of products of $3.347 billion, $2.712 billion and $2.072 billion, respectively. In addition, sales of gastroenterology drugs of $2.038 billion and $1.857 billion, which include sales of $1.591 billion and $1.493 billion related to PROTONIX also exceeded 10% of net revenue in 2004 and 2003, respectively. Sales of women's health care products totaling $1.865 billion and $2.456 billion accounted for more than 10% of net revenue in 2003 and 2002, respectively, which include sales of the PREMARIN family of products of $1.275 billion and $1.880 billion, respectively. Except as noted above, no other single pharmaceutical product or category of products accounted for more than 10% of net revenue in 2004, 2003 or 2002. CONSUMER HEALTHCARE SEGMENT The Consumer Healthcare segment manufactures, distributes and sells over-the-counter health care products. Principal Consumer Healthcare product categories and their respective products are: analgesics including ADVIL; cough/cold/allergy remedies including ROBITUSSIN, DIMETAPP and ALAVERT; nutritional supplements including CENTRUM products, CALTRATE and SOLGAR products; and hemorrhoidal, asthma and personal care items including CHAPSTICK. These products are generally sold to wholesalers and retailers and are promoted primarily to consumers worldwide through advertising. These products are manufactured in the United States and Puerto Rico, and in nine foreign countries. I-3 No single Consumer Healthcare product or category of products accounted for more than 10% of net revenue in 2004, 2003 or 2002. ANIMAL HEALTH SEGMENT The Animal Health segment manufactures, distributes and sells animal biological and pharmaceutical products. Principal Animal Health product categories include pharmaceuticals, vaccines including WEST NILE - INNOVATOR and parasite control including CYDECTIN, and growth implants. These products are sold to wholesalers, veterinarians and other animal health care providers. The Company manufactures these products in the United States and in seven foreign countries. No single Animal Health product or category of products accounted for more than 10% of net revenue in 2004, 2003 or 2002. CORPORATE SEGMENT Corporate is responsible for the treasury, tax and legal operations of the Company's businesses and maintains and/or incurs certain assets, liabilities, income, expenses, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments. These items include interest expense and interest income, gains on the sales of investments and other corporate assets, gains relating to Immunex/Amgen common stock transactions, certain litigation provisions, including the REDUX and PONDIMIN litigation charges, special charges and other miscellaneous items. See Note 15 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders for Corporate segment information, as well as additional disclosure relating to certain significant items listed above. Sources and Availability of Raw Materials ----------------------------------------- Generally, raw materials and packaging supplies are purchased in the open market from various outside vendors. The loss of any one source of supply would not have a material adverse effect on the Company's future results of operations. However, certain raw materials for BENEFIX, REFACTO, RAPAMUNE, ZOTON, ZOSYN and oral contraceptives are sourced from sole third-party suppliers. Patents and Trademarks ---------------------- Patent protection is, in the aggregate, considered to be of material importance in the Company's marketing of pharmaceutical products in the United States and in most major foreign markets. Patents may cover products, formulations, processes for, or intermediates useful in the manufacture of products or the uses of products. The Company owns, has applied for, or is licensed under, a large number of patents, both in the United States and other countries. Protection for individual products extends for varying periods in accordance with the date of grant and the legal life of patents in countries in which patents are granted. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage, and the availability of legal remedies in the country. There is no assurance that the patents the I-4 Company is seeking will be granted or that the patents the Company has been granted would be found valid if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or from marketing alternative products or formulations that might successfully compete with the Company's patented products. Patent portfolios developed for products introduced by the Company normally provide market exclusivity. The Company considers patent protection for certain products, processes, and uses to be important to its operations. For many of its products, in addition to compound patent protection, the Company holds other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the compound patent. Patents are in effect for the following major products in the United States. The anti-infective ZOSYN has patent protection until at least 2007. ENBREL has patent protection until at least 2014. The anti-depressants EFFEXOR and EFFEXOR XR have patent protection until at least 2008. (Below is a discussion of a lawsuit filed by the Company against Teva Pharmaceuticals USA, Inc. ("Teva") in connection with Teva's filing of an Abbreviated New Drug Application ("ANDA") relating to EFFEXOR XR.) PREMPRO, a combination estrogen and progestin product, has patent protection until at least 2015. BENEFIX Coagulation Factor IX (Recombinant), a blood-clotting factor for hemophilia B, has patent protection until at least 2011. REFACTO, a recombinant factor VIII product without human serum albumin, has patent protection until at least 2010. PREVNAR, the Company's 7-valent pneumococcal conjugate vaccine has patent protection until at least 2007. PROTONIX, the Company's product for the treatment and maintenance of healing of erosive esophagitis, has patent protection until at least 2010. (Below is a discussion of a lawsuit filed by the Company and Altana Pharma AG ("Altana") against Teva in connection with the filing of an ANDA relating to PROTONIX.) RAPAMUNE, an immunological product, has patent protection until at least 2009 and patent term extension, if granted, would extend protection until 2013. BMP-2, a protein therapy that induces bone growth, has patent protection until at least 2014. CYDECTIN, the Company's Animal Health parasite control product, has patent protection until at least 2007 and an application for patent extension has been filed which could extend exclusivity until 2012. ZOTON, a gastroenterology product, which is sold by the Company exclusively outside the United States, has patent protection in its principal markets until at least December 2005. The Company has other patent rights covering additional products that have smaller net revenues. Patents on some of its newest products and late-stage product candidates could become significant to the Company's business in the future. While the expiration of a product patent normally results in a loss of market exclusivity for the covered product, commercial benefits may continue to be derived from later-expiring patents on processes and intermediates, patents relating to the use of products, patents relating to novel compositions and formulations; manufacturing trade secrets; trademark use; and marketing exclusivity that may be available under pharmaceutical regulatory laws. The effect of product patent expiration also depends upon many other factors such as the nature of the market and the position of the product in it, the growth of the market, the complexities and economics of the process for manufacture of the active I-5 ingredient of the product and the requirements of new drug provisions of the Federal Food, Drug and Cosmetic Act or similar laws and regulations in other countries. Extensions to market exclusivity are sought in the United States and other countries through all relevant laws, including laws increasing patent life. Some of the benefits of increases in patent life have been partially offset by a general increase in the number of incentives for and use of generic products. In addition, improvements in intellectual property laws are sought in the United States and other countries through reform of patent and other relevant laws and implementation of international treaties. Outside the United States, the standard of intellectual property protection for pharmaceuticals varies widely. While many countries have reasonably strong patent laws, other countries currently provide little or no effective protection for inventions or other intellectual property rights. Under the Trade-Related Aspects of Intellectual Property Agreement administered by the World Trade Organization, over 140 countries have now agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to all patent owners. However, in many countries, this agreement will not become fully effective for many years. It is possible that changes to this agreement will be made in the future that will diminish or further delay its implementation in developing countries. It is too soon to assess how much, if at all, the Company will benefit commercially from these changes. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as "Hatch-Waxman," made a complex set of changes to both patent and new-drug-approval laws in the United States. Before Hatch-Waxman, no drug could be approved without providing the U.S. Food and Drug Administration ("FDA") complete safety and efficacy studies, i.e., a complete New Drug Application ("NDA"). Hatch-Waxman authorizes the FDA to approve generic versions of innovative medicines without such information by filing an ANDA. In an ANDA, the generic manufacturer must demonstrate only pharmaceutical equivalence and bioequivalence between the generic version and the NDA-approved drug - not safety and efficacy. Absent a successful patent challenge, the FDA cannot approve an ANDA until after the innovator's patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more of the patents listed in the innovator's NDA are invalid or not infringed. This allegation is commonly known as a "Paragraph IV certification." The innovator must then file suit against the generic manufacturer to protect its patents. If one or more of the NDA-listed patents are successfully challenged, the first filer of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and the Company expects this trend to continue. The Company has filed a suit against Teva alleging that the filing of an ANDA by Teva seeking FDA approval to market 37.5 mg, 75 mg and 150 mg venlafaxine HCl extended-release capsules infringes certain of the Company's patents. Venlafaxine HCl is the active ingredient used in EFFEXOR XR. This matter is more fully described in Item 3. Legal Proceedings, which discussion is incorporated herein by reference. I-6 Aventis Pharma Deutschland ("Aventis") and King Pharmaceuticals, Inc. ("King") have filed suit against Cobalt Pharmaceuticals ("Cobalt"). The complaint alleges that the filing of an ANDA by Cobalt seeking FDA approval to market generic 1.25 mg, 2.5 mg, 5 mg, and 10 mg ramipril capsules infringes an Aventis patent expiring October 2008. The Company co-promotes ALTACE (ramipril) together with King. This matter is more fully described in Item 3. Legal Proceedings, which discussion is incorporated herein by reference. The Company and Altana have filed a suit against Teva alleging that the filing of an ANDA seeking FDA approval to market generic pantoprazole tablets infringes a patent owned by Altana, the Company's licensing partner. Pantoprazole is the active ingredient used in PROTONIX. This matter is more fully discussed in Item 3, Legal Proceedings, which discussion is incorporated herein by reference. The Company expects that its Pharmaceuticals royalty income will decrease due primarily to the ending of royalty payments in certain countries at the end of 2005, relating to patents held by the Company and licensed to a third party for its marketed products. Royalty income recognized by the Company in all markets related to this royalty agreement approximated $139.0 million and $132.0 million in 2004 and 2003, respectively. Sales in the Consumer Healthcare business are largely supported by the Company's trademarks and brand names. These trademarks and brand names are a significant part of the Company's business and in some countries have a perpetual life as long as they remain in use. In some other countries, trademark protection continues as long as registered. Registration is for a fixed term and can be renewed indefinitely. In the aggregate, the value of these trademarks and brand names are important to the Company's operation. Seasonality ----------- Sales of Consumer Healthcare products are affected by seasonal demand for cough/cold products and, as a result, second quarter results for these products tend to be lower than results in other quarters. Competition ----------- PHARMACEUTICALS SEGMENT The Company operates in the highly competitive pharmaceutical industry. The Company has many major multinational competitors and numerous smaller U.S. and foreign competitors. Based on net revenue, the Company believes it ranks within the top 10 competitors in the global pharmaceutical industry. The Company's competitive position is affected by many factors including prices; costs and resources available to develop, enhance and promote products; customer acceptance; product quality and efficacy; patent protection; development of alternative therapies by I-7 competitors; scientific and technological advances; the availability of generic substitutes; and governmental actions affecting drug importation, pricing and generic substitutes. In the United States, the growth of managed care organizations, such as health maintenance organizations and pharmaceutical benefit management companies, has resulted in increased competitive pressures. Moreover, the continued growth of generic substitutes is further promoted by legislation, regulation and various incentives enacted and promulgated in both the public and private sectors. PREMARIN, the Company's principal conjugated estrogens product manufactured from pregnant mare's urine, and related products PREMPRO and PREMPHASE (which are single tablet combinations of the conjugated estrogens in PREMARIN and the progestin medroxyprogesterone acetate) are the leaders in their categories and contribute significantly to net revenue and results of operations. PREMARIN's natural composition is not subject to patent protection (although PREMPRO has patent protection). PREMARIN, PREMPRO and PREMPHASE are indicated for the treatment of certain menopausal symptoms. They also are approved for the prevention of osteoporosis, a condition involving a loss of bone mass in postmenopausal women. Their use for that purpose in women without symptoms should be limited to cases where non-hormonal treatments have been seriously considered and rejected. Estrogen-containing products manufactured by other companies have been marketed for many years for the treatment of menopausal symptoms. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. New products containing different estrogens and/or different progestins from those found in PREMPRO and PREMPHASE, utilizing various forms of delivery and having many forms of the same indications, have been introduced. Some companies also have attempted to obtain approval for generic versions of PREMARIN. These products, if approved, would be routinely substitutable for PREMARIN and related products under many state laws and third-party insurance payer plans. In May 1997, the FDA announced that it would not approve certain synthetic estrogen products as generic equivalents of PREMARIN given known compositional differences between the active ingredient of these products and PREMARIN. Although the FDA has not approved any generic equivalent to PREMARIN to date, PREMARIN will continue to be subject to competition from existing and new competing estrogen and other products for its approved indications and may be subject to generic competition from either synthetic or natural conjugated estrogens products in the future. One other company had announced that it had applied for FDA approval of a generic version of PREMARIN derived from the same natural source. Following a bench trial in November 2002, a federal court found, in an order issued on October 2, 2003, that the company which had developed the estrogens to be used in this product, Natural Biologics, Inc., had misappropriated certain of the Company's trade secrets relating to the manufacture of PREMARIN. The court has entered a permanent injunction that, inter alia, bars Natural Biologics, Inc. from using the misappropriated trade secrets and from engaging in the research, development, production or manufacture of estrogens from urine. Wyeth v. Natural Biologics, Inc., et al., No. 98-2469 (JNE/JGL), U.S.D.C., D. Minn. The trial court's injunction has been affirmed by the U.S. Court of Appeals for the Eighth Circuit. The company that had applied for FDA approval of a generic version of PREMARIN based on Natural Biologics, Inc.'s material has announced that it has withdrawn the application. The I-8 Company cannot predict the timing or outcome of any other efforts to seek FDA approval for generic versions of PREMARIN. Two of the Company's largest products, EFFEXOR XR and PROTONIX, are the subject of pending patent litigation involving potential generic competition. In the case of EFFEXOR XR, the Company has patent protection in the United States until at least June 2008, when the patent covering the active ingredient in EFFEXOR, venlafaxine, will expire. The pending litigation involves the infringement by a potential generic competitor of the Company's patents relating to extended-release venlafaxine that expire in 2017. In the event that the Company is not successful in this action, EFFEXOR XR may face generic competition as early as June 2008. In the case of PROTONIX, the Company and its partner, Altana, have patent protection until at least July 2010, when the patent covering the active ingredient in PROTONIX, pantoprazole, will expire. That patent is being asserted against a potential generic competitor. In the event the Company is not successful in this action, PROTONIX may face generic competition prior to July 2010. Although the Company believes that its patents are valid, there can be no assurance as to the outcome of these matters, which could materially affect future results of operations. These matters (together with a discussion of the ANDA filing being submitted by generic competitors related to ALTACE) are more fully described in Item 3. Legal Proceedings, which discussion is incorporated herein by reference. Eli Lilly has received approval in the United States and in the European Union for its new antidepressant, Cymbalta, which, like EFFEXOR XR, inhibits the uptake of serotonin and norepinephrine in the brain. In addition, growth in overall usage of antidepressants in the United States appears to be slowing for a variety of reasons. The FDA has recommended new class labeling for antidepressants that will, among other things, more prominently highlight the already labeled risk of suicide in children and adolescents in a "black box" warning. The Company already has implemented the labeling change for EFFEXOR. The FDA also has requested that data regarding suicidality from clinical trials in adults be re-examined using the same approach developed for evaluating the pediatric data. The Company will respond to the FDA's request. In addition, the regulatory authority in the United Kingdom recently has completed a review of the safety and efficacy of the selective serotonin reuptake inhibitor class of antidepressants as well as EFFEXOR. New class labeling for antidepressants as well as restrictions on the use of EFFEXOR in the United Kingdom have been implemented. The Company is appealing this decision. The Company expects further regulatory scrutiny of the drugs in this therapeutic area, including EFFEXOR. The Company cannot predict the level of impact these issues may have on future global usage of EFFEXOR. The proton pump inhibitor category is highly competitive. PROTONIX is subject to discounting demands by managed care and state organizations and price competition from generic omeprazole and other branded proton pump inhibitor products. This pricing pressure may have an effect on future net sales. I-9 Market demand for ENBREL continued its strong growth in 2004. North American net revenue increased by over 50% compared with 2003, while sales outside North America more than doubled. During this strong growth in demand, worldwide manufacture for ENBREL improved, delivering unconstrained supply for the first full year. Improvements in the existing Rhode Island and Boehringer Ingelheim facilities' performance, combined with the FDA approval of a second Boehringer Ingelheim facility in June 2004 and the October 2004 FDA approval of a Genentech, Inc. facility, were key contributors to the enhanced manufacturing capacity in 2004. While continued process improvements and the inclusion of Genentech material will once again contribute to the supply of ENBREL in 2005, market demand has continued to grow, and additional manufacturing supply is expected to be required. The anticipated approval of two new manufacturing facilities in 2005 will help to ensure uninterrupted supply and support the continued growth of ENBREL. Wyeth's application for approval of its Grange Castle, Ireland, facility was filed with the European Medicines Agency in January 2005. Additionally, Amgen anticipates approval of a second facility in Rhode Island in 2005. As is typical for new biological manufacturing facilities, manufacturing throughput from these new facilities is not expected to be at optimal levels during at least the initial year of production. The per unit costs of ENBREL produced during at least the first year of production at these facilities will be substantially higher than current per unit costs, which is likely to reduce the Company's alliance revenue and margins. The timing and magnitude of this revenue and margin effect will depend on a number of factors, some of which are outside the Company's control. These factors include the timing of approval of these new facilities and the timing of sale of the resulting inventory. As a result of delays in product availability of PREVNAR due to a late 2003 shutdown of the filling lines at the Company's Pearl River, New York, facility as well as other manufacturing and testing issues, product availability was constrained in all markets through the first half of 2004. During the first quarter of 2004, the Centers for Disease Control and Prevention ("CDC") issued interim recommendations to defer administration of the third and fourth doses for healthy children. Due to increased product availability, the CDC revised these recommendations in early July 2004 and again in September 2004 to recommend that health care providers return to the four-dose schedule for healthy children and initiate efforts to vaccinate those children who had the doses deferred. In March of 2004, the European Agency for the Evaluation of Medicinal Products issued interim dosing recommendations to reduce usage. In September 2004, these recommendations were revised to reinstate pre-shortage recommendations. Capacity was enhanced overall in 2004 due to internal improvements and the FDA approval of a third-party filling facility in the second quarter of 2004. The Company exceeded its 2004 production goal of 20 - 23 million doses. Management continually reviews the Company's supply chain structure with respect to utilization of production capacities as well as manufacturing efficiencies. Changes in product demand periodically create capacity imbalances within the manufacturing network. When such imbalances result in overcapacity, which management considers to I-10 be other than temporary, the network is restructured to gain optimal efficiency and to reduce production costs. As a result, additional restructuring charges may occur in future periods. The Company is in discussion with various regulatory authorities regarding manufacturing process issues at certain of the Company's European manufacturing sites. The Company is working with the authorities to resolve these issues but cannot predict the outcome of those discussions and what impact, if any, these issues will have on supply of the Company's products manufactured at these facilities. However, based on information currently available, the Company believes the impact, if any, on its consolidated statements of operations will not be material. CONSUMER HEALTHCARE SEGMENT The Consumer Healthcare business has many competitors. Based on sales, the Company believes it ranks within the top five major competitors in the global consumer health care industry. The Company's competitive position is affected by several factors including resources available to develop, enhance and promote products; customer acceptance; product quality; development of alternative therapies by competitors; growth of generic store brands; and scientific and technological advances. ANIMAL HEALTH SEGMENT The Company competes with many major multinational competitors and numerous other producers of animal health products worldwide. Based on net revenue, the Company believes it ranks within the top five competitors in the worldwide animal health marketplace. Important competitive factors include price and cost effectiveness; development of new products and processes; customer acceptance; quality and efficacy; patent protection; innovation; scientific and technological advances; and promotion to distributors, veterinary professionals and consumers. Research and Development ------------------------ Worldwide research and development activities are focused on discovering, developing and bringing to market new products to treat and/or prevent some of the most serious health care problems. During 2004, several major collaborative research and development arrangements were initiated or continued with other pharmaceutical and biotechnology companies including an agreement entered into between the Company and Solvay Pharmaceuticals to co-develop and co-commercialize four neuroscience compounds, most notably, bifeprunox. Research and development expenditures totaled approximately $2.461 billion in 2004, $2.094 billion in 2003 and $2.080 billion in 2002 with approximately 94%, 93% and 93% of these expenditures in the Pharmaceuticals segment in 2004, 2003 and 2002, respectively. I-11 During 2004, Pharmaceuticals entered 12 new compounds into development for the fourth year in a row. The Company also entered two new molecular entities and one life cycle management program into Phase 3, the final stage of drug development. At December 31, 2004, the Company's significant new product opportunities included two New Drug Applications and nine biologics license applications filed with the FDA for review, and 73 active Investigational New Drug Applications. Additionally, the Company has filed six Supplemental Drug Applications seeking approval for new uses of existing products. Late in 2004, the Company submitted a global registration filing for TYGACIL, an innovative broad-spectrum antibiotic for serious, hospital-based infections. Early in 2005, this application was given priority review status by the FDA, which could lead to its approval and market introduction later in 2005. During 2004, ENBREL received approval in the United States and in Europe for the treatment of psoriasis. Also, in the United States ENBREL received approval for a new, 50 mg pre-filled syringe dosage form. In January 2005, ENBREL received market clearance in Japan for the treatment of rheumatoid arthritis. Regulation ---------- The Company's various health care products are subject to regulation by government agencies throughout the world. The primary emphasis of these regulatory requirements is to assure the safety and effectiveness of the Company's products. In the United States, the FDA, under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act, regulates many of the Company's health care products, including human and animal pharmaceuticals, vaccines, and consumer health care products. The Federal Trade Commission ("FTC") has the authority to regulate the promotion and advertising of consumer health care products including over-the-counter drugs and dietary supplements. The U.S. Department of Agriculture regulates the Company's domestic animal vaccine products. The FDA's enforcement powers include the imposition of criminal and civil sanctions against companies, including seizures of regulated products, and criminal sanctions against individuals. The FDA's enforcement powers also include its inspection of the numerous facilities operated by the Company. To facilitate compliance, the Company from time to time may institute voluntary compliance actions such as product recalls when it believes it is appropriate to do so. In addition, many states have similar regulatory requirements. Most of the Company's pharmaceutical products, and an increasing number of its consumer health care products, are regulated under the FDA's new drug or biologics approval processes, which mandate pre-market approval of all new drugs. Such processes require extensive time, testing and documentation for approval, resulting in significant costs for new product introductions. The Company's U.S. Pharmaceuticals business is also affected by the Controlled Substances Act, administered by the Drug Enforcement Administration, which regulates strictly all narcotic and habit-forming drug substances. In addition, in the countries where the Company does business outside the United States, it is subject to regulatory and legislative climates that, in many instances, are similar to or more restrictive than that described above. The Company I-12 devotes significant resources to dealing with the extensive federal, state and local regulatory requirements applicable to its products in the United States and internationally. Federal law also requires drug manufacturers to pay rebates to state Medicaid programs in order for their products to be eligible for federal matching funds under the Social Security Act. Additionally, a number of states are, or may be, pursuing similar initiatives for rebates and other strategies to contain the cost of pharmaceutical products. The federal Vaccines for Children entitlement program enables states to purchase vaccines at federal vaccine prices and limits federal vaccine price increases in certain respects. Federal and state rebate programs are expected to continue. The FDA Modernization Act, which was passed in 1997, as extended by the Best Pharmaceuticals for Children Act, which was passed in 2002, includes a Pediatric Exclusivity Provision that may provide an additional six months of market exclusivity in the United States for new or currently marketed drugs, if certain pediatric studies requested by the FDA are completed by the applicant. The Company is considering seeking exclusivity based on pediatric studies for certain of the Company's products. The Company's Wyeth Pharmaceuticals division, a related subsidiary, and certain employees (including an executive officer of the Company) are subject to a consent decree entered into with the FDA in October 2000 following the seizure in June 2000 from the Company's distribution centers in Tennessee and Puerto Rico of a small quantity of certain of the Company's products then manufactured at the Company's Marietta, Pennsylvania facility. The seizures were based on FDA allegations that products were not manufactured in accordance with current Good Manufacturing Practices. The consent decree, which has been approved by the U.S. District Court for the Eastern District of Tennessee, does not represent an admission by the Company or the employees of any violation of the Federal Food, Drug and Cosmetic Act or its regulations. The consent decree allows the continued manufacture of all of the products that the Company intends to manufacture at its Marietta, Pennsylvania, facility, as well as the Company's Pearl River, New York, facility, subject to review by independent consultants of manufacturing records prior to distribution of individual lots. In addition, as provided in the consent decree, an expert consultant has conducted a comprehensive inspection of the Marietta and Pearl River facilities and the Company has identified various actions to address the consultant's observations. The Company is in an ongoing process of completing these actions and obtaining verification of the Company's actions by the expert consultant. The verification process is subject to review by the FDA. As of the end of 2004, the Company had ceased manufacturing operations at the Marietta facility and is in the process of decommissioning the facility. Health care costs will continue to be the subject of attention in both the public and private sectors in the United States. Similarly, health care spending, including pharmaceutical pricing, is subject to increasing governmental review in international markets. The Company cannot predict whether future health care initiatives will be adopted or the extent to which the Company's business may be affected by these initiatives or other potential future legislative or regulatory developments. I-13 Environmental ------------- Certain of the Company's operations are affected by a variety of federal, state and local environmental protection laws and regulations and the Company has, in a number of instances, been notified of its potential responsibility relating to the generation, storage, treatment and disposal of hazardous waste. In addition, the Company has been advised that it may be a responsible party in several sites on the National Priority List created by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), commonly known as Superfund (See Item 3. Legal Proceedings). In connection with the spin-off in 1993 by American Cyanamid Company (now known as Wyeth Holdings Corporation) ("Cyanamid") of Cytec Industries Inc. ("Cytec"), Cyanamid's former chemicals business, Cytec assumed the environmental liabilities relating to the chemicals businesses, except for the former chemical business site at Bound Brook, New Jersey, and certain sites for which there is shared responsibility between Cyanamid and Cytec. This assumption is not binding on third parties, and if Cytec were unable to satisfy these liabilities, they would, in the absence of other circumstances, be enforceable against Cyanamid. The Company has no reason to believe that it has any practical exposure to any of the liabilities against which Cytec has agreed to assume and indemnify Cyanamid. Cyanamid was acquired by the Company in 1994. Additional information on environmental matters is set forth in Note 7 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders and is incorporated herein by reference. Employees --------- At December 31, 2004, the Company had 51,401 employees worldwide, with 27,617 employed in the United States including Puerto Rico. Approximately 14% of the Company's worldwide employees are represented by various collective bargaining groups. Relations with most organized labor groups remain relatively stable. Financial Information about the Company's U.S. and International ---------------------------------------------------------------- Operations ---------- Financial information about U.S. and international operations for each of the three years ended December 31, 2004 is set forth in Note 15 of the Notes to Consolidated Financial Statements in the Company's 2004 Annual Report to Stockholders and is incorporated herein by reference. The Company's operations outside the United States are conducted primarily through subsidiaries. International net revenue in 2004 amounted to 43% of the Company's total worldwide net revenue. The Company's international businesses are subject to risks of currency fluctuations, governmental actions and other governmental proceedings, which are inherent in conducting business outside of the United States. The Company does not regard these factors as deterrents to maintaining or expanding its non-U.S. operations. Additional information about international operations is set forth under the caption Quantitative and Qualitative Disclosures about Market Risk in Management's Discussion and Analysis of I-14 Financial Condition and Results of Operations in the Company's 2004 Annual Report to Stockholders and is incorporated herein by reference. Availability of Information --------------------------- The annual report on Form 10-K and all other Company periodic reports (including quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments thereto) are available promptly after filing with the Securities and Exchange Commission ("SEC") on the Company's Internet website at www.wyeth.com. Copies are also available, without charge, by contacting Wyeth Investor Relations at (877) 552-4744. ITEM 2. PROPERTIES ---------- The Company's corporate headquarters and the headquarters of its Consumer Healthcare business are located in Madison, New Jersey. The Company's U.S. and international Pharmaceuticals operations are headquartered in owned facilities in Collegeville and Great Valley, Pennsylvania. The Company's Animal Health business is headquartered in Overland Park, Kansas, a leased facility. The Company's international subsidiaries and affiliates, which generally own their properties, have manufacturing facilities in 17 countries outside the United States. The properties listed below are the principal manufacturing plants (M) and research laboratories (R) of the Company as of December 31, 2004, listed in alphabetical order by state or country. All of these properties are owned except certain facilities in Guayama, Puerto Rico, which are under lease. The Company also owns or leases a number of other smaller properties worldwide, which are used for manufacturing, research, warehousing and office space. Pharmaceuticals (P), Consumer Healthcare (C) and Animal Health (A): United States: Reportable Segment -------------- ------------------ Charles City, Iowa (M) (A) Fort Dodge, Iowa (M, R) (A) Andover, Massachusetts (M, R) (P) Cambridge, Massachusetts (R) (P) Princeton, New Jersey (R) (P) Chazy, New York (R) (P) Pearl River, New York (M, R) (P) (C) Rouses Point, New York (M, R) (P) (C) Sanford, North Carolina (M, R) (P) Collegeville, Pennsylvania (R) (P) Carolina, Puerto Rico (M) (P) Guayama, Puerto Rico (M) (P) (C) Richmond, Virginia (M, R) (P) (C) International: Reportable Segment -------------- ------------------ St. Laurent, Canada (M, R) (P) (C) Suzhou, China, (M) (P) (C) Havant, England (M, R) (P) (C) I-15 International: Reportable Segment -------------- ------------------ Askeaton, Ireland (M, R) (P) Grange Castle, Ireland (M)* (P) Newbridge, Ireland (M) (P) Catania, Italy (M, R) (P) (A) Aprilia, Italy (M) (P) (C) Shiki, Japan (M, R) (P) Vallejo, Mexico (M) (P) (C) Cabuyao, Philippines (M) (P) Tuas, Singapore (M) (P) Gerona, Spain (M, R) (A) Hsin-Chu Hsien, Taiwan (M) (P) (C) (A) * Wyeth's application for approval of this facility was filed with the European Medicines Agency in January 2005. The Company is working to support larger scale manufacturing in Sanford, North Carolina, Guayama, Puerto Rico and Newbridge, Ireland. The Company believes its properties to be adequately maintained and suitable for their intended use. The facilities generally have sufficient capacity for existing needs and expected near-term growth and expansion projects are undertaken as necessary to meet future needs. I-16 ITEM 3. LEGAL PROCEEDINGS ----------------- The Company and its subsidiaries are parties to numerous lawsuits and claims arising out of the conduct of its business, including product liability and other tort claims. The Company has been named as a defendant in numerous legal actions relating to the diet drugs PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as "fen-phen") or REDUX, which the Company estimated were used in the United States, prior to their 1997 voluntary market withdrawal, by approximately 5.8 million people. These actions allege, among other things, that the use of REDUX and/or PONDIMIN, independently or in combination with phentermine, caused certain serious conditions, including valvular heart disease and primary pulmonary hypertension ("PPH"). On October 7, 1999, the Company announced a nationwide class action settlement (the "settlement") to resolve litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. The settlement covered all claims arising out of the use of REDUX or PONDIMIN, except for PPH claims, and was open to all REDUX or PONDIMIN users in the United States. As originally designed, the settlement was comprised of two settlement funds. Fund A (with a value at the time of settlement of $1 billion plus $200.0 million for legal fees) was created to cover refunds, medical screening costs, additional medical services and cash payments, education and research costs, and administration costs. Fund A has been fully funded by contributions by the Company. Fund B (which was to be funded by the Company on an as-needed basis up to a total of $2.55 billion) would compensate claimants with significant heart valve disease. Any funds remaining in Fund A after all Fund A obligations were met were to be added to Fund B to be available to pay Fund B injury claims. In December 2002, following a joint motion by the Company and plaintiffs' counsel, the Court approved an amendment to the settlement agreement which provided for the merger of Funds A and B into a combined Settlement Fund which now will cover all expenses and injury claims in connection with the settlement. The merger of the two funds took place in January 2003. Payments in connection with the nationwide settlement were $822.7 million in 2002. There were no payments made in 2003. Payments in connection with the nationwide settlement were $26.4 million in 2004. Payments may continue, if necessary, until 2018. On January 18, 2002, as collateral for the Company's financial obligations under the settlement, the Company established a security fund in the amount of $370.0 million. In April 2002, pursuant to an agreement among the Company, class counsel and representatives of the settlement trust (the "Trust"), an additional $45.0 million (later reduced to $35.0 million) was added to the security fund. In February 2003, as required by an amendment to the settlement agreement, an additional $535.2 million was added by the Company to the security fund, bringing the total amount in the security fund to $940.2 million, which is primarily included in Other assets including deferred taxes, at December 31, 2004. The amounts in the security fund are owned by the Company and will earn interest income for the Company while residing in the security fund. The Company will be required to deposit an additional $180.0 million in the security fund if I-17 the Company's credit rating, as reported by both Moody's and S&P, falls below investment grade. The Company recorded litigation charges of $4.5 billion in 2004, $2 billion in 2003 and $1.4 billion in 2002. Total pre-tax charges recorded to date amount to $21.1 billion. Payments to the nationwide class action settlement funds, individual settlement payments, legal fees and other items were $850.2 million, $434.2 million and $1.307 billion for 2004, 2003 and 2002, respectively. As noted above, in 2004 the Company increased its reserves in connection with the REDUX and PONDIMIN diet drug matters by $4.5 billion, bringing the total of the charges taken to date to $21.1 billion. The $7.166 billion reserve at December 31, 2004 represents management's best estimate, within a range of outcomes, of the aggregate amount required to cover diet drug litigation costs, including payments in connection with the nationwide settlement (as it would be amended by the proposed Seventh Amendment, discussed below), initial opt outs, PPH claims, downstream opt out cases and the Company's legal fees related to the diet drug litigation. The latest charge takes into account the Company's decision to proceed with the proposed Seventh Amendment, its settlement discussions with plaintiffs' attorneys representing a number of individuals who have opted out of the nationwide settlement, its experiences with the downstream opt out cases that have been litigated or settled to date and its projected expenses in connection with the diet drug litigation. However, due to the need for Court approval of the proposed Seventh Amendment, the preliminary status of the Company's settlement discussions with attorneys representing certain downstream opt out plaintiffs, the uncertainty of the Company's ability to consummate settlements with the downstream opt out plaintiffs, the number and amount of any future verdicts that may be returned in downstream opt out and PPH litigation, and the inherent uncertainty surrounding any litigation, it is possible that additional reserves may be required in the future and the amount of such additional reserves may be significant. The Company intends to vigorously defend itself and believes it can marshal significant resources and legal defenses to limit its ultimate liability in the diet drug litigation. However, in light of the circumstances discussed above, it is not possible to predict the ultimate liability of the Company in connection with its diet drug legal proceedings. It is therefore not possible to predict whether, and if so when, such proceedings will have a material adverse effect on the Company's financial condition, results of operations and/or cash flows and whether cash flows from operating activities and existing and prospective financing resources will be adequate to fund the Company's operations, pay all liabilities related to the diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on its outstanding obligations without the disposition of significant strategic core assets and/or reductions in certain cash outflows. I-18 Recent Developments ------------------- The Proposed Seventh Amendment to the Nationwide Settlement On August 26, 2004, U.S. District Judge Harvey Bartle III, the federal judge overseeing the settlement, granted a motion for preliminary approval of the proposed Seventh Amendment to the settlement. If approved by the District Court and upheld on any appeals that might be taken, the proposed Seventh Amendment would include the following key terms: o The amendment would create a new Supplemental Fund, to be administered by a Fund Administrator who will be appointed by the District Court and who will process most pending Level I and Level II matrix claims (as defined below); o After District Court approval, the Company would make initial payments of up to $50.0 million to facilitate the establishment of the Supplemental Fund and to begin reviewing claims. Following approval by the District Court and any Appellate Courts, the Company would make an initial payment of $400.0 million to enable the Supplemental Fund to begin paying claims. The timing of additional payments would be dictated by the rate of review and payment of claims by the Fund Administrator. The Company would ultimately deposit a total of $1.275 billion, net of certain credits, into the Supplemental Fund; o All participating matrix Level I and Level II claimants who qualify under the Seventh Amendment, who pass the Settlement Fund's medical review and who otherwise satisfy the requirements of the settlement ("Category One" class members) would receive a pro rata share of the $1.275 billion Supplemental Fund, after deduction of certain expenses and other amounts from the Supplemental Fund. The pro rata amount would vary depending upon the number of claimants who pass medical review, the nature of their claims, their age and other factors. A participating Category One class member who does not qualify for a payment after such medical review would be paid $2,000 from the Supplemental Fund; o Participating class members who might in the future have been eligible to file Level I and Level II matrix claims ("Category Two" class members) would be eligible to receive a $2,000 payment from the Trust; such payments would be funded by the Company apart from its other funding obligations under the nationwide settlement; o If the participants in the Seventh Amendment have heart valve surgery or other more serious medical conditions on Levels III through V of the nationwide settlement matrix by the earlier of 15 years from the date of their last diet drug ingestion or by December 31, 2011, they would remain eligible to submit claims to the existing Trust and be paid the current matrix amounts if they qualify for such payments under terms modified by the Seventh Amendment. In the event the existing Trust is unable to pay those claims, the Company would guarantee payment; and I-19 o All class members who participate in the Seventh Amendment would give up any further opt out rights as well as the right to challenge the terms of and the binding effect of the nationwide settlement. Approval of the Seventh Amendment also would preclude any lawsuits by the Trust or the Company to recover any amounts previously paid to class members by the Trust, as well as terminate the Claims Integrity Program (discussed below) as to all claimants who do not opt out of the Seventh Amendment. Pursuant to the terms of the proposed Seventh Amendment, the Company retained the right to withdraw from the Seventh Amendment if participation by class members was inadequate or for any other reason. Less than 5% of the class members who would be affected by the proposed Seventh Amendment (approximately 1,900 of the Category One class members and approximately 5,100 of the Category Two class members) elected to opt out of the Seventh Amendment and remain bound by the current settlement terms. On January 10, 2005, the Company announced that it would not exercise its right to withdraw from the proposed Seventh Amendment. The terms of the Seventh Amendment were thereupon reviewed by the District Court at a fairness hearing, which took place on January 18-19, 2005. The parties now are awaiting a decision by the District Court on approval of the proposed Seventh Amendment. There can be no assurance that the amendment will be approved by the Court and upheld on appeal. Challenges to the Nationwide Settlement Counsel representing approximately 8,600 class members have filed a motion with the District Court seeking a ruling that the nationwide settlement agreement is void. The motion asserts that there was inadequate representation of the class when the settlement agreement was negotiated, that the parties and their experts made mutual mistakes in projecting the amount of money that would be needed to pay all valid claims, that the original notice to the class was inadequate and that the Court had lacked subject matter jurisdiction over some of the class members' claims. The motion seeks an opportunity for all class members to decide a second time whether or not to be included in the class and therefore bound by the settlement agreement. The District Court has stayed briefing and consideration of the motion until after its decision on approval of the proposed Seventh Amendment, which as discussed above would preclude such claims on behalf of class members who participate. Counsel for the plaintiff class supported the stay but have stated that if the Seventh Amendment is not approved by the District Court, they intend to seek similar relief from the preclusive effect of the settlement agreement for uncompensated matrix claimants. Certain class members also have filed a number of other motions and lawsuits attacking both the binding effect of the settlement and the administration of the Trust, some of which have been decided against class members and currently are on appeal. The Company cannot predict the outcome of any of these motions or lawsuits. Downstream Opt Out Cases During 2004, the claims of approximately 200 class members who had taken advantage of the Intermediate and Back-End opt out rights created in the nationwide settlement reached the trial stage. Many of these cases were settled, dismissed or adjourned to a later date. The claims of approximately 34 of these plaintiffs went to verdict. Twelve of I-20 those verdicts were defense verdicts in favor of the Company. The remaining verdicts were returned in favor of the plaintiffs, with awards ranging from a low of less than $1,000 to a high of $1.25 million. All of the plaintiffs' verdicts in excess of $250,000 (and certain of the verdicts below that level) are being challenged by the Company on post-trial motions or appeal. On February 23, 2005, the Court hearing one such post-trial motion entered judgment in favor of the Company, dismissing a case in which a jury had returned a $780,000 verdict in favor of the plaintiff. Additional Intermediate and Back-End opt out trials are scheduled throughout 2005 and 2006. On January 18, 2005, the Company and counsel representing certain downstream opt out plaintiffs filed a motion with the District Court advising the Court that those parties had developed a proposed process by which large numbers of the downstream opt out cases might be negotiated and settled. On February 28, 2005, the Company disclosed that lawyers representing a substantial number of downstream opt out plaintiffs had agreed to participate in the process and that the Company would move forward with settlement discussions with those attorneys. However, the Company cannot predict the number of cases that might be settled as a result of such a process. PPH Cases On April 27, 2004, a jury in Beaumont, Texas, hearing the case of Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial District Court, Jefferson Cty., TX, returned a verdict in favor of the plaintiffs for $113.4 million in compensatory damages and $900.0 million in punitive damages for the wrongful death of the plaintiffs' decedent, allegedly as a result of PPH caused by her use of PONDIMIN. On May 17, 2004, the Trial Court entered judgment on behalf of the plaintiffs for the full amount of the jury's verdict, as well as $4.2 million in pre-judgment interest and $188,737 in guardian ad litem fees. On July 26, 2004, the Trial Court denied in their entirety the Company's motions for a new trial or for judgment notwithstanding the verdict, including the Company's request for application of Texas' statutory cap on punitive damage awards. The Company has filed an appeal from the judgment entered by the Trial Court and believes that it has strong arguments for reversal or reduction of the awards on appeal due to the significant number of legal errors made during trial and in the charge to the jury and due to a lack of evidence to support aspects of the verdict. In connection with its appeal, the Company was required by Texas law to post a bond in the amount of $25.0 million. The appeal process is expected to take one to two years at a minimum. As of December 31, 2004, the Company was a defendant in approximately 350 lawsuits in which the plaintiff alleges a claim of PPH, alone or with other alleged injuries. Almost all of these claimants must meet the definition of PPH set forth in the national settlement agreement in order to pursue their claims outside of the national settlement (payment of such claims, by settlement or judgment, would be made by the Company and not by the Trust). Approximately 130 of these cases appear to be eligible to pursue a PPH lawsuit under the terms of the national settlement. In approximately 20 of the 350 cases, the Company expects the PPH claims to be voluntarily dismissed by the claimants (although they may continue to pursue other claims). In approximately 100 of these cases, the Company has filed or expects to file motions under the terms of the national settlement to preclude plaintiffs from proceeding with their PPH claims. For the balance of these cases, the Company currently has insufficient medical information to assess whether or I-21 not the claimants meet the definition of PPH under the national settlement. The Company continues to work toward resolving the claims of individuals who allege that they have developed PPH as a result of their use of the diet drugs and intends to vigorously defend those PPH cases that cannot be resolved prior to trial. Background to Recent Developments --------------------------------- The number of individuals who have filed claims within the nationwide settlement that allege significant heart valve disease (known as "matrix" claims) has been higher than had been anticipated. The proposed Seventh Amendment to the nationwide settlement was negotiated in 2004 by the Company, counsel for the plaintiff class in the nationwide settlement and counsel for a number of individual class members. It is designed to create a new claims processing structure, funding arrangement and payment schedule for most of the Level I and Level II matrix claims, the most numerous, but least serious, claims in the nationwide settlement. Should the proposed Seventh Amendment not be approved by the District Court and upheld in the event of any appeal from a District Court approval, the pending matrix claims would be processed under the terms of the existing settlement agreement and under the procedures that have been adopted by the Settlement Trust and the District Court, all as described below. Nationwide Settlement Matrix Claim Data The settlement agreement grants the Company access to claims data maintained by the Trust. Based on its review of that data, the Company understands that, as of December 29, 2004, the Trust had recorded approximately 120,910 matrix claim forms. Approximately 33,200 of these forms were so deficient, incomplete or duplicative of other forms filed by the same claimant that, in the Company's view, it is unlikely that a significant number of these forms will result in further claims processing. The Company's understanding of the status of the remaining approximately 87,710 forms, based on its analysis of data received from the Trust through December 29, 2004, is as follows. Approximately 24,220 of the matrix claims had been processed to completion, with those claims either paid (approximately 3,720 payments, totaling $1.360 billion, had been made to approximately 3,560 claimants), denied or in show cause proceedings (approximately 18,880) or withdrawn. Approximately 2,290 claims were in some stage of the 100% audit process ordered in late 2002 by the Federal Court overseeing the national settlement. An additional approximately 18,120 claims alleged conditions that, if true, would entitle the claimant to receive a matrix award; these claims had not yet entered the audit process. Another approximately 24,000 claims with similar allegations have been purportedly substantiated by physicians or filed by law firms whose claims are now subject to the outcome of the Trust's Claims Integrity Program, discussed below. Approximately 18,980 claim forms did not contain sufficient information even to assert a matrix claim, although some of those claim forms could be made complete by the submission of additional information and could therefore become eligible to proceed to audit in the future. The remaining approximately 100 claims were in the data entry process and could not be assessed. In addition to the approximately 120,910 matrix claims filed as of December 29, 2004, additional class members may file matrix claims if they develop a matrix condition by I-22 2015, have registered with the Trust by May 3, 2003, and have demonstrated FDA+ regurgitation (i.e., mild or greater aortic regurgitation, or moderate or greater mitral regurgitation) or mild mitral regurgitation on an echocardiogram conducted after diet drug use and obtained either outside of the Trust by January 3, 2003 or within the Trust's screening program. A claimant who has demonstrated a matrix condition by 2015 may progress to advanced levels of the matrix beyond 2015. The Company's understanding, based on data received from the Trust through December 29, 2004, is that audits had produced preliminary or final results on 4,531 of the claims that had begun the 100% audit process since its inception. Of these, 1,640 were found to be payable at the amount claimed, and 161 were found to be payable at a lower amount than had been claimed. The remaining claims were found ineligible for a matrix payment, although the claimants may appeal that determination to the Federal Court overseeing the settlement. Because of numerous issues concerning the audit process raised in motions and related proceedings now pending before the Federal Court, the Company cannot predict the ultimate outcome of the audit process. Both the volume and types of claims seeking matrix benefits received by the Trust to date differ materially from the epidemiological projections on which the Court's approval of the settlement agreement was predicated. Based upon data received from the Trust, over 95% of the 42,120 matrix claimants who allege conditions that, if true, would entitle them to an award seek an award under Level II of the five-level settlement matrix. (Level II covers claims for moderate or severe mitral or aortic valve regurgitation with complicating factors; depending upon the claimant's age at the time of diagnosis, and assuming no factors are present that would place the claim on one of the settlement's reduced payment matrices, awards under Level II range from $199,872 to $669,497 on the settlement agreement's current payment matrix.) The Settlement Trust Claims Integrity Program An investigation that the Company understands was conducted by counsel for the Trust and discovery conducted to date by the Company in connection with certain Intermediate and Back-End opt out cases (brought by some of the same lawyers who have filed these Level II claims and supported by some of the same cardiologists who have certified the Level II claims) cast substantial doubt on the merits of many of these matrix claims and their eligibility for a matrix payment from the Trust. Therefore, in addition to the 100% audit process, the Trust has embarked upon a Claims Integrity Program, which is designed to protect the Trust from paying illegitimate or fraudulent claims. Pursuant to the Claims Integrity Program, the Trust has required additional information concerning matrix claims purportedly substantiated by 18 identified physicians or filed by two law firms in order to determine whether to permit those claims to proceed to audit. Based upon data obtained from the Trust, the Company believes that approximately 24,000 matrix claims were purportedly substantiated by the 18 physicians and/or filed by the two law firms covered by the Claims Integrity Program as of December 29, 2004. It is the Company's understanding that additional claims substantiated by additional physicians or filed by additional law firms might be subjected to the same requirements of the Claims Integrity Program in the future. As an initial step in the integrity review process, each of the identified physicians has been asked to complete a comprehensive I-23 questionnaire regarding each claim and the method by which the physician reached the conclusion that it was valid. The ultimate disposition of any or all claims that are subject to the Claims Integrity Program is at this time uncertain. Counsel for certain claimants affected by the program have challenged the Trust's authority to implement the Claims Integrity Program and to require completion of the questionnaire before determining whether to permit those claims to proceed to audit. While that motion was denied by the Court, additional challenges to the Claims Integrity Program and to the Trust's matrix claim processing have been filed. In late 2003, the Trust adopted a program to prioritize the handling of those matrix claims that it believed were least likely to be illegitimate. Under the program, claims under Levels III, IV and V were to be processed and audited on an expedited basis. (Level III covers claims for heart valve disease requiring surgery to repair or replace the valve or conditions of equal severity. Levels IV and V cover complications from, or more serious conditions than, heart valve surgery.) The program also prioritized the processing and auditing of, inter alia, Level I claims, all claims filed by a claimant without counsel (i.e., on a pro se basis) and Level II claims substantiated by physicians who have attested to fewer than 20 matrix claims. On April 15, 2004, the Trust announced that it would indefinitely suspend the payment and processing of claims for Level I and Level II matrix benefits. The Trust stated that it would continue to initiate audits with respect to Levels III, IV and V matrix claims and would continue to act on the results of audits of Levels III, IV and V claims. It also announced that "[d]ue to concerns about the manner in which echocardiograms have been taken, recorded and presented, the Trust is reviewing all echocardiograms and related materials prior to payment of claims on which they are based and, where possible, prior to initiation of a medical audit. This will result in a temporary delay in initiating audits and in payments following audit. Where the review of the echocardiogram reveals substantial evidence of an intentional, material misrepresentation that calls into question the validity of a claim, the Trust will not pay the claim." The Trust has indicated that one of the goals of the Claims Integrity Program referenced above is to recoup funds from those entities that caused the Trust to pay illegitimate claims, and the Trust has filed two lawsuits to that end. The Trust has filed a suit alleging violations of the Racketeer Influenced and Corrupt Organizations ("RICO") Act against a Kansas City cardiologist who attested under oath to the validity of over 2,500 matrix claims. The suit alleges that the cardiologist intentionally engaged in a pattern of racketeering activity to defraud the Trust. The Trust also has filed a lawsuit against a New York cardiologist who attested under oath to the validity of 83 matrix claims, alleging that the cardiologist engaged in, among other things, misrepresentation, fraud, conspiracy to commit fraud and gross negligence. As indicated above, approval of the Seventh Amendment would result in the dismissal of these lawsuits. The Trust has filed a number of motions directed at the conduct of the companies that performed the echocardiograms on which many matrix claims are based. In a pair of motions related to the activities of a company known as EchoMotion, the Trust has asked the Court to stay payment of claims already audited and found payable in whole or in part if the echocardiogram was performed by EchoMotion and to disqualify all I-24 echocardiograms by EchoMotion that have been used to support matrix claims that have not yet been audited. In addition, the Trust has filed a motion seeking discovery of 14 specific companies whose echocardiograms support a large number of claims to determine whether their practices violate the settlement. The Trust also has moved to stay and/or disqualify claims brought by claimants represented by certain law firms or attested to by certain physicians. The Company has joined in certain of these motions and has filed its own motions addressing the abuse of the matrix claims process and seeking an emergency stay of claim processing. All of these motions, as well as the Trust lawsuits referenced above, also have been stayed pending the resolution of the outstanding issues involving the proposed Seventh Amendment. As indicated above, approval of the Seventh Amendment would result in the withdrawal of these motions as to all class members participating in the Seventh Amendment. The order entered by the District Court on August 26, 2004 that preliminarily approved the proposed Seventh Amendment also stayed certain matrix claim processing and certain aspects of the Claims Integrity Program, as specified in that order. The order stayed the processing of all claims for matrix Level I and Level II benefits (except such claims that have been the subject of a Trust determination after audit as of a specified date) until the end of the opt out/objection period and thereafter for all claimants who participate in the Seventh Amendment. In addition, the order stayed the Claims Integrity Program as to all class members who are eligible to participate in the Seventh Amendment until the end of the opt out/objection period and thereafter for all such claimants who participate in the Seventh Amendment. This stay of the Claims Integrity Program does not prohibit the Trust from investigating whether there have been any material misrepresentations of fact in connection with claims for Levels III through V matrix benefits, as described in the order. The order further stays the motions described in the previous paragraph and the two lawsuits against physicians brought by the Trust that are described above, as well as any future legal actions similar to those two lawsuits, as defined in the Seventh Amendment. All of these stays will be discontinued if the Seventh Amendment is not approved by the Court and upheld on any appeal that may be filed. Certain Level I and Level II claims that had been found to have a reasonable medical basis following a Trust audit that was conducted prior to May 6, 2004 will continue to be processed as set forth in a District Court order also dated August 26, 2004. The Claims Integrity Program is stayed as to these claims, except that the Trust will have the right to investigate whether there has been intentional manipulation of the claim, as defined in that order. In addition to the specific matters discussed herein, the District Court overseeing the national settlement has issued rulings concerning the processing of matrix claims that are being challenged on appeal. The U.S. Court of Appeals for the Third Circuit has postponed deciding those appeals pending decision on whether the proposed Seventh Amendment would be approved, and the appealing plaintiffs have agreed to dismiss those appeals in the event of such approval. The Company cannot predict the outcome of any of these motions or lawsuits. The Company continues to monitor the progress of the Trust's audit process and its Claims Integrity Program. Even if substantial progress is made by the Trust, through its I-25 Claims Integrity Program or other means, in reducing the number of illegitimate matrix claims, a significant number of the claims which proceed to audit might be interpreted as satisfying the matrix eligibility criteria, notwithstanding the possibility that the claimants may not in fact have serious heart valve disease. If the proposed Seventh Amendment is not approved by the District Court and upheld on any appeal that may be filed, matrix claims found eligible for payment after audit may cause total payments to exceed the $3.750 billion cap of the Settlement Fund. Nationwide Settlement Opt Out Terms and Data Diet drug users choosing to opt out of the settlement class were required to do so by March 30, 2000. The settlement agreement also gave class members who participate in the settlement the opportunity to opt out of the settlement at two later stages, although they remain members of the class and there are restrictions on the nature of claims they can pursue outside of the settlement. Class members who were diagnosed with certain levels of valvular regurgitation within a specified time frame could opt out following their diagnosis and prior to receiving any further benefits under the settlement ("Intermediate opt outs"). Class members who are diagnosed with certain levels of regurgitation and who elect to remain in the settlement, but who later develop a more severe valvular condition, may opt out at the time the more serious condition develops ("Back-End opt outs"). Under either of these latter two opt out alternatives, class members may not seek or recover punitive damages, may sue only for the condition giving rise to the opt out right, and may not rely on verdicts, judgments or factual findings made in other lawsuits. The Sixth Amendment to the settlement agreement also gave certain class members an additional opt out right, which is discussed below. The Intermediate, Back-End and Sixth Amendment opt out rights are collectively referred to as the "downstream" opt out rights. Should the Settlement Fund be exhausted, most of the matrix claimants who filed their matrix claim on or before May 3, 2003 and who pass the audit process at a time when there are insufficient funds to pay their claim may pursue an additional opt out right created by the Sixth Amendment to the settlement agreement unless the Company first elects, in its sole discretion, to pay the matrix benefit after audit. Sixth Amendment opt out claimants may then sue the Company in the tort system, subject to the settlement's limitations on such claims. In addition to the limitations on all Intermediate and Back-End opt outs (such as the prohibition on seeking punitive damages and the requirement that the claimant sue only on the valve condition that gave rise to the claim), a Sixth Amendment opt out may not sue any defendant other than the Company and may not join his or her claim with the claim of any other opt out. The Company cannot predict the ultimate number of individuals who might be in a position to elect a Sixth Amendment opt out or who may, in fact, elect to do so, but that number could be substantial. Several class members affected by the terms of the Sixth Amendment opposed the approval of the amendment on the grounds that, should the Settlement Fund be exhausted, they should be entitled to pursue tort claims, including a claim for punitive damages, without the limitations imposed by the Sixth Amendment. The District Court overruled those objections and approved the amendment. The District Court's order approving the Sixth Amendment has been affirmed by the U.S. Court of Appeals for the Third Circuit. I-26 Some individuals who registered to participate in the settlement by May 3, 2003, who had demonstrated either FDA+ level regurgitation or mild mitral regurgitation on an echocardiogram completed after diet drug use and conducted either outside of the settlement prior to January 3, 2003 or within the settlement's screening program, and who subsequently develop (at any time before the end of 2015) a valvular condition that would qualify for a matrix payment may elect to pursue a Back-End opt out. Such individuals may pursue a Back-End opt out within 120 days of the date on which they first discover or should have discovered their matrix condition. The Company cannot predict the ultimate number of individuals who may be in a position to elect a Back-End opt out or who may, in fact, elect to do so, but that number also could be substantial. The Company's current understanding is that approximately 76,000 Intermediate opt out forms were submitted by May 3, 2003, the applicable deadline for most class members (other than qualified class members receiving echocardiograms through the Trust after January 3, 2003, who may exercise Intermediate opt out rights within 120 days after the date of their echocardiogram). The number of Back-End opt out forms received as of December 31, 2004 is estimated to be approximately 20,000, although certain additional class members may elect to exercise Back-End opt out rights in the future (under the same procedure as described above) even if the Settlement Fund is not exhausted. After eliminating forms that are duplicative of other filings, forms that are filed on behalf of individuals who already have either received payments from the Trust or settlements from the Company, and forms that are otherwise invalid on their face, it appears that approximately 75,000 individuals had filed Intermediate or Back-End opt out forms as of December 31, 2004. Purported Intermediate or Back-End opt outs (as well as Sixth Amendment opt outs) who meet the settlement's medical eligibility requirements may pursue lawsuits against the Company but must prove all elements of their claims - including liability, causation and damages - without relying on verdicts, judgments or factual findings made in other lawsuits. They also may not seek or recover punitive, exemplary or multiple damages and may sue only for the valvular condition giving rise to their opt out right. To effectuate these provisions of the settlement, the District Court overseeing the settlement had issued orders in several cases limiting the evidence that could be used by plaintiffs in such cases. Those orders, however, were challenged on appeal and were in large part reversed (certain portions of the District Court orders were upheld) by a panel of the U.S. Court of Appeals for the Third Circuit in May 2004. The Company's petition to the Third Circuit for a rehearing or rehearing en banc was subsequently denied, as was the Company's petition to the U.S. Supreme Court for a writ of certiorari. The District Court subsequently issued revised injunctions requiring some of the plaintiffs subject to the earlier injunctions to litigate causation and damages in a separate initial trial, with a subsequent trial on liability. The Court has declined to impose such a requirement on a class-wide basis, at least at this time. The plaintiffs affected by those revised injunctions filed an appeal with the U.S. Court of Appeals for the Third Circuit, which upheld the District Court's order (while modifying the language of the injunction in certain respects). As of December 31, 2004, approximately 62,000 individuals who had filed Intermediate or Back-End opt out forms had pending lawsuits against the Company. The claims of approximately 48% of the plaintiffs in the Intermediate and Back-End opt out cases I-27 served on the Company are pending in Federal Court, with approximately 39% pending in State Courts. The claims of approximately 13% of the Intermediate and Back-End opt out plaintiffs have been removed from State Courts to Federal Court but are still subject to a possible remand to State Court. In addition, a large number of plaintiffs have asked the U.S. Court of Appeals for the Third Circuit to review and reverse orders entered by the Federal Court overseeing the settlement which had denied the plaintiffs' motions to remand their cases to State Court. The Third Circuit has not determined whether or not it will hear that challenge. The Company expects to vigorously challenge all Intermediate and Back-End opt out claims of questionable validity or medical eligibility, and a number of cases already have been dismissed on eligibility grounds. However, the total number of filed lawsuits that meet the settlement's opt out criteria will not be known for some time. As a result, the Company cannot predict the ultimate number of purported Intermediate or Back-End opt outs that will satisfy the settlement's opt out requirements, but that number could be substantial. As to those opt outs who are found eligible to pursue a lawsuit, the Company also intends to vigorously defend these cases on their merits. As of December 31, 2004, approximately 2,500 Intermediate or Back-End opt out plaintiffs have had their lawsuits dismissed for procedural or medical deficiencies or for various other reasons. The Company has resolved the claims of all but a small percentage of the "initial" opt outs (i.e., those individuals who exercised their right to opt out of the settlement class) and continues to work toward resolving the rest. The Company intends to vigorously defend those initial opt out cases that cannot be resolved prior to trial. The Company is a party to various lawsuits involving alleged injuries as a result of the use of the NORPLANT SYSTEM, the Company's implantable contraceptive containing levonorgestrel. In March 2003, the Louisiana Court of Appeals for the Fourth Circuit affirmed a lower court's certification of a statewide class of Louisiana NORPLANT users and the Louisiana Supreme Court refused to hear a further appeal. Davis v. American Home Products Corporation, No. CDC 94-11684, Orleans Parish. The matter was returned to the trial court level for further proceedings, but there has been no further activity in the matter since that time. The Company continues to believe that it has compelling arguments against class certification, which has been denied in all other federal and state cases. The Company continues to defend several pending cases consisting of pro se plaintiffs alleging disparate injuries, including complications stemming from the removal of NORPLANT capsules, miscarriage and stroke. These matters are subject to being dismissed for want of prosecution and the Company is moving to do so when appropriate. In July 2002, the hormone therapy ("HT") subset of the Women's Health Initiative ("WHI") study, involving women who received a combination of conjugated estrogens and medroxyprogesterone acetate (PREMPRO), was stopped early (after the patients were followed in the study for an average of 5.2 years) because, according to the predefined stopping rule, certain increased risks exceeded the specified long-term benefits. Additional analyses of data from the HT subset of the WHI study were released during 2003, and further analyses of WHI data may be released in the future. I-28 In early March 2004, the National Institutes of Health ("NIH") announced preliminary findings from the estrogen-only arm of the WHI study and that it had decided to stop the study because they believed that the results would not likely change during the period until completion of the study in 2005 and the increased risk of stroke seen in the treatment arm could not be justified by what could be learned in an additional year of treatment. NIH concluded that estrogen alone does not appear to affect (either increase or decrease) coronary heart disease and did not increase the risk of breast cancer. In addition, NIH found an association with a decrease in the risk of hip fracture. This increased risk of stroke was similar to the increase seen in the HT subset of the WHI study. NIH also stated that analysis of preliminary data from the separate Women's Health Initiative Memory Study ("WHIMS") showed an increased risk of probable dementia and/or mild cognitive impairment in women age 65 and older when data from both the PREMARIN and PREMPRO arm were pooled. The study also reported a trend towards increased risk of possible dementia in women treated with PREMARIN alone. WHIMS data published in The Journal of American Medical Association (JAMA) in June 2004 and in a separate report published in JAMA at the same time indicated that HT did not improve cognitive impairment and may adversely affect it in some women. The Company is working with the FDA to update the labeling for its HT products to include the latest data. The Company is currently defending eight state putative court medical monitoring class action lawsuits relating to PREMPRO: Albertson, et al. v. Wyeth, No. 002944, Ct. Comm. Pleas, Phil. Cty., PA; Balita, et al v. Wyeth, No. ATL-L-2138-04, Sup. Ct., Atlantic Cty., NJ; Gottlieb, et al. v. Wyeth, No. 02-18165CA 27, Cir. Ct., 11th Jud. Cir., Dade Cty., FL; Katzman, et al. v. Wyeth, No. L-1285-03, Sup. Ct., Morris Cty., NJ; Luikart, et al. v. Wyeth, No. 04-C-127, Cir. Ct., Putnam Cty., WV; Phillips, et al. v. Wyeth, No. CV-03-005, Cir. Ct., Jefferson Cty., AL; Tiedemann, et al. v. Wyeth, No. 110063/04, Supreme Ct., NY; and Vitanza, et al. v. Wyeth, No. ATL-L-2093-04, Superior Ct., Atlantic Cty., NJ. The plaintiffs in these cases seek to represent statewide classes of women who have ingested the drug and seek purchase price refunds and medical monitoring expenses on their behalf. Plaintiffs in the Albertson, Gottlieb, Luikart, Phillips and Tiedemann cases are seeking this relief on behalf of putative classes of Pennsylvania, Florida, West Virginia, Alabama and New York, users of PREMPRO, respectively. The Balita, Katzman and Vitanza cases all seek this relief on behalf of New Jersey PREMPRO users. On February 1, 2005, in the Gottlieb case, the Florida Circuit Court certified a statewide medical monitoring class of asymptomatic PREMPRO users who have used the product for longer than six months. The Company plans to appeal this decision. A class certification hearing in the Albertson matter took place on January 10-13, 2005 in the Pennsylvania Court of Common Pleas, Philadelphia County. That case is now under consideration. A class action hearing in the New Jersey cases, Katzman, Balita and Vitanza, will likely not take place until mid-2005. The remaining cases remain inactive. Two putative medical monitoring class actions have now been dismissed: Gallo, et al. v. Wyeth, No. 02857, Ct. Comm. Pleas, Phil. Cty., PA and Lewers, et al. v. Wyeth, No. 02C 4970, U.S.D.C., N.D. Ill. I-29 The Company is also defending two putative personal injury class actions. The plaintiff in Michael, et al. v. Wyeth, No. 2:04-0435, U.S.D.C., S.D., WV, seeks to represent a nationwide class of PREMPRO users who have suffered injuries from the product. The plaintiff in Barker, et al. v. Wyeth, No. 04-C-1932, Cir. Ct., Kanawha Cty., WV, seeks to represent a class of West Virginia users who have suffered personal injuries. Both of these cases have been transferred to the federal multi-district litigation ("MDL") proceedings in Little Rock, Arkansas. Finally, the federal Judicial Panel on MDL has ordered that all federal PREMPRO cases be transferred for coordinated pretrial proceedings to the United States District Court for the Eastern District of Arkansas, before United States District Judge William R. Wilson, Jr. Plaintiffs have filed a Master Class Action Complaint in the MDL. That complaint seeks to represent PREMPRO users seeking to collect damages for purchase price refunds and medical monitoring costs. The complaint seeks to certify a consumer fraud subclass of PREMPRO users in 29 states, an unfair competition subclass of users in 29 states and a medical monitoring subclass purportedly covering PREMPRO users in 24 states. The states allegedly involved are not consistent between each subclass. This MDL Master Class Action Complaint subsumes all of the other putative class action complaints except those discussed above. The MDL class certification hearing is currently scheduled for June 2005. In addition to the class actions, the Company is defending 3,274 individual actions and 180 multi-plaintiff actions in various courts for personal injuries, including claims for breast cancer, stroke, ovarian cancer and heart disease. Together, these cases assert claims on behalf of 5,315 women alleged injured by PREMPRO or PREMARIN. In the litigation involving DURACT, the Company's non-narcotic analgesic pain reliever, which was voluntarily withdrawn from the market in 1998, one putative personal injury class action remains pending. Chimento, et al. v. Wyeth-Ayerst, et al., No. 982488, Dist. Ct. St. Bernard Parish, LA, seeks the certification of a class of Louisiana residents who were exposed to and who allegedly suffered injury from DURACT. Plaintiffs seek compensatory and punitive damages, the refund of all purchase costs, and the creation of a court-supervised medical monitoring program for the diagnosis and treatment of liver damage and related conditions allegedly caused by DURACT. In 2004, plaintiffs moved to dismiss the class allegations. There is also a putative class action filed by third party payors for economic damages. Blue Cross and Blue Shield of Alabama, et al. v. Wyeth, CV-03-6046, Cir. Ct. Jefferson Cty., Ala., seeks the certification of a nationwide class of third-party payers to recover monies paid for DURACT that would have been used after the withdrawal of DURACT from the market. The class certification hearing is scheduled for April 2005. Additionally, there are 4 individual lawsuits pending involving approximately 134 former DURACT users alleging various injuries, including kidney failure, hepatitis, liver transplant and death. I-30 In November 2000, the Company withdrew from the market those formulations of its DIMETAPP and ROBITUSSIN cough/cold products, which contained the ingredient phenylpropanolamine ("PPA") at the request of the FDA. The FDA's request followed the reports of a study that raised a possible association between PPA-containing products and the risk of hemorrhagic stroke. Effective November 6, 2000, the Company announced that it would no longer ship products containing PPA to its retailers. The Company is currently a named defendant in approximately 500 individual PPA lawsuits with approximately 775 plaintiffs filed in federal and state courts throughout the United States. In addition, there is one putative economic damage class action, which also contains personal injury allegations as to the class, pending in the Ontario Superior Court of Justice in Canada. In every instance to date in which class certification has been decided in a PPA case, certification has been denied. Twenty-six Wyeth cases are currently scheduled for trial in 2005 and five Wyeth cases are currently scheduled for trial in 2006. The Company has been served with approximately 380 lawsuits, eleven of which are putative class actions, alleging that the cumulative effect of thimerosal, a preservative used in certain vaccines manufactured and distributed by the Company as well as by other vaccine manufacturers, causes severe neurological damage, including autism in children. The class actions and relief sought are as follows: Daigle, et al. v. Aventis Pasteur Inc., et al., No. 02-2131F, Super. Ct., Suffolk Cty., MA (statewide class for medical monitoring, a fund for research and compensation for personal injuries); Demos, et al. v. Aventis Pasteur, et al., No. 01-22544CA15, Circ. Ct., Dade Cty., FL (nationwide class for medical monitoring, personal injuries and injunctive relief against future sales); Cyr, et al. v. Aventis Pasteur, Inc., et al., No. 01-C-663, Super. Ct., Hillsborough Cty., NH (statewide class for personal injuries and injunctive relief); King, et al. v. Aventis Pasteur, Inc., et al., No. 01-CV-1305, U.S.D.C., D. Ore. (nationwide class for personal injuries and injunctive relief); Mead, et al. v. Aventis Pasteur, Inc., et al.,No. 01-CV-1402, U.S.D.C., D. Ore. (nationwide class for medical monitoring); Garcia, et al. v. Abbott, et al., No. C02-168C, District Court, Western District of Seattle, WA (nationwide class on behalf of all individuals who purchased any childhood vaccine containing thimerosal); Shadie, et al. v. Abbott, et al., No. 3-CV-02-0702, U.S.D.C., M.D., Pa. (nationwide class on behalf of all children vaccinated with thimerosal-containing vaccines from 1990 to present); Ashton, et al. v. Aventis Pasteur Inc., et al., Class Action Complaint 004026, Ct. Comm. Pleas, Philadelphia Cty., PA (nationwide class action for medical monitoring, personal injuries and injunctive relief); Wax, et al. v. Abbott, et al., No. CV 02 2018, U.S.D.C., E.D.N.Y. (nationwide class on behalf of all persons residing in the U.S. who were exposed to thimerosal); Castaldi et al. v. Aventis Pasteur Inc., et al., Master Complaint No. 2, Coordination Proceeding, The Vaccine Cases, No. 4246, Super. Ct., Los Angeles Cty., CA (statewide class for medical monitoring); Ferguson v. Aventis Pasteur, Inc., et al., No, 04-CI-2048, U.S.D.C., E.D. Ky., (nationwide class for a fund for research and compensation for personal injuries). The Company generally files motions to dismiss in all of the cases for failure of the minor plaintiffs to file in the first instance under the National Vaccine Injury Compensation Program (the "Vaccine Act"). The Vaccine Act mandates that plaintiffs alleging injury from childhood vaccines first bring a claim under the Vaccine Act. At the conclusion of that proceeding, the plaintiff may bring a lawsuit in state or federal court. In July 2002, I-31 the United States Court of Federal Claims, (the "Vaccine Court") which handles all cases brought under the Vaccine Act, issued Autism General Order #1 (the "Order") accepting jurisdiction of the thimerosal matters by establishing an Omnibus Autism Proceeding, which allows petitioners who claim to suffer from autism or autism spectrum disorder as a result of receiving thimerosal-containing childhood vaccines the chance to proceed pursuant to a two-step procedure. The first step will be an inquiry into the general causation issues involved in the cases; the second step will entail the application of the general causation conclusions to the individual cases. In an Order issued September 24, 2003, the Special Master indefinitely postponed future calendar dates originally set in the Omnibus Autism Proceeding, including the date for the hearing on the issue of general causation. Under the terms of the Vaccine Court, if a claim has not been adjudicated by the Vaccine Act within 240 days, the claimant has 30 days to decide whether to opt out of the proceeding and pursue a lawsuit against the manufacturer; a claimant receives a second 30-day window to opt out of the proceeding if the claim is not adjudicated after 420 days. After this second window has passed, claimants must remain in Vaccine Court until a final decision is obtained. Thirty-three claimants who have elected to opt out of Vaccine Court under these provisions have active lawsuits against the Company. Approximately 415 other claimants have not yet passed the two opt out windows described above. There are approximately 4,300 claimants in Vaccine Court alleging injury from thimerosal-containing vaccines. In addition to the claims brought by or on behalf of children allegedly injured by exposure to thimerosal, certain of the approximately 380 thimerosal cases have been brought by parents in their individual capacities, for loss of services and loss of consortium of the injured child. These claims are not currently covered by the Vaccine Act. Additional thimerosal cases may be filed in the future against the Company and the other companies that marketed thimerosal-containing products. Two thimerosal cases are currently scheduled for trial, with the first scheduled for July 2005. The Company has been named as a defendant in a putative class action brought on behalf of all former or present EFFEXOR patients who, after August 20, 1997, suffered from an alleged dependency or withdrawal syndrome following the reduction or termination of their dosage of EFFEXOR, the Company's drug approved to treat depression and anxiety disorders. Carolina, et al. v. Wyeth, et al., No. 04CV-608P, U.S.D.C., N.D. Okla. The complaint asserts causes of action for strict liability, failure to warn, negligent failure to warn, fraud intentional infliction of emotional distress and violations of the federal Food, Drug & Cosmetic Act and seeks compensatory and punitive damages on behalf of the class. To date, the Company has not been served with the complaint, which was filed in August 2004. In addition, Wyeth is defending approximately 10 individual product liability lawsuits in various jurisdictions for personal injuries, including, among other alleged injuries, wrongful death from suicide or acts of hostility. Two putative class action lawsuits have been filed involving the veterinary product PROHEART 6, which the Company's Fort Dodge Animal Health subsidiary voluntarily recalled from the market in September 2004. The putative class representative in Dill, et al. v. American Home Products, et al., No. CJ 1004 05879 (Dist. Ct., Tulsa Cty., OK) I-32 seeks to represent a class of all Oklahoma individuals whose canines have been injured or died as a result of being injected with PROHEART 6. Compensatory and punitive damages are sought. The putative class representative in Deter v. Fort Dodge Animal Health, Inc., et al, No. 04-CP-40-5750, Ct. C. P., Richland Cty, SC, seeks to represent a class of all South Carolina individuals whose canines have been injured or died as a result of administration of PROHEART 6. That suit also seeks costs for testing and medical monitoring for the alleged effects of PROHEART 6. Compensatory and punitive damages are sought. In 2000, the Company entered into a consent decree with the FDA relating to the manufacturing of products by the Company at its facilities in Marietta, Pennsylvania and Pearl River, New York. This matter is discussed in greater detail under the caption "Regulation," herein, which discussion is incorporated herein by reference. In September 2002, Israel Bio-Engineering Project ("IBEP") filed an action against Amgen, Immunex, the Company and one of the Company's subsidiaries (Docket No. C02-6880 ER, D.Ca.) alleging infringement of U.S. Patent 5,981,701, by the manufacture, offer for sale, distribution and sale of ENBREL. IBEP is not the assignee of record of this patent, but is alleging ownership. IBEP seeks an accounting of damages and of any royalties or license fees paid to a third party and seeks to have the damages trebled on account of alleged willful infringement. IBEP also seeks to require the defendants to take a compulsory non-exclusive license. Under its agreement with Amgen for the promotion of ENBREL, the Company has an obligation to pay a portion of the patent litigation expenses related to ENBREL in the U.S. and Canada as well as a portion of any damages or other monetary relief awarded in such patent litigation. Yeda Research and Development Co., Ltd., the assignee of record of the patent, intervened in the case and filed a summary judgment motion seeking a ruling that it is the owner of the patent. On February 18, 2004, the court granted summary judgment in favor of the defendants that IBEP does not own the `701 Patent, which IBEP has appealed to the U.S. Court of Appeals for the Federal Circuit. The Company has received notifications from Teva Pharmaceuticals USA ("Teva"), Sandoz, Inc. and Sun Pharmaceutical Advanced Research Centre Limited ("Sun") that Abbreviated New Drug Applications ("ANDA") had been filed with the FDA seeking approval to market generic pantoprazole sodium 20 mg and 40 mg delayed release tablets. Pantoprazole sodium is the active ingredient used in PROTONIX. The Orange Book lists two patents in connection with PROTONIX tablets. The first of these patents covers pantoprazole and expires in July 2010. The other listed patent is a formulation patent and expires in December 2016. Wyeth's licensing partner, Altana Pharma AG ("Altana") is the owner of these patents. In May 2004, Altana and the Company filed a lawsuit against Teva and Teva Pharmaceutical Industries Ltd. in the U.S. District Court for the District of New Jersey, Docket No. 2:04-CV-02355, alleging infringement of the patent expiring in 2010. The Company intends, and is informed that Altana intends, to vigorously pursue the causes of action under this litigation. On March 4, 2005, the Company received a second notification from Sun, indicating that Sun has now certified that it believes that the patent expiring in 2010 is invalid, not infringed, or unenforceable. The Company is analyzing Sun's arguments. I-33 On March 24, 2003, the Company filed suit in the United States District Court for the District of New Jersey against Teva Pharmaceuticals, USA (Wyeth v. Teva Pharmaceuticals USA, Inc., Docket No. 03-CV-1293 (KSH), U.S.D.C., D. N.J.) alleging that the filing of an ANDA by Teva seeking FDA approval to market 37.5 mg, 75 mg, and 150 mg venlafaxine HC1 extended-release capsules infringes certain of the Company's patents. Venlafaxine HCl is the active ingredient used in EFFEXOR XR. The patents involved in the litigation relate to extended-release formulations of venlafaxine and/or methods of their use. These patents expire in 2017. Teva has asserted that these patents are invalid and/or not infringed. Under the 30-month stay provision of the Hatch-Waxman Act, any FDA approval of Teva's ANDA cannot be made effective before August 2005 unless the court earlier decides that the patents are invalid or not infringed. Teva has not, to date, made any allegations as to the Company's patent covering the compound, venlafaxine. Accordingly, Teva's ANDA may further not be approved until the expiration of that patent, and its associated pediatric exclusivity period, on June 13, 2008. On March 14, 2003, Aventis Pharma Deutschland ("Aventis") and King Pharmaceuticals, Inc. filed a patent infringement suit against Cobalt Pharmaceuticals ("Cobalt")in the United States District Court for the District of Massachusetts (Aventis Pharma Deutschland GmbH and King Pharmaceuticals, Inc. v. Cobalt Pharmaceuticals Inc., Docket No. 03-10492JLT, U.S.D.C., D. Mass.) alleging that Cobalt infringes an Aventis composition of matter patents for ramipril, which expires in October 2008, by filing an ANDA with the FDA seeking approval to market generic 1.25 mg, 2.5 mg, 5 mg, and 10 mg ramipril capsules. The Company co-promotes ALTACE (ramipril) together with King Pharmaceuticals, Inc. Cobalt has alleged that this patent is invalid. Under the 30-month stay provision of the Hatch-Waxman Act, any FDA approval of Cobalt's ANDA cannot be made effective before August 2005, unless the court earlier finds the patent invalid or not infringed. The suit does not concern a second patent, which also covers ramipril that expired in January 2005. Cobalt has stated that it is not seeking FDA approval until this second patent expires in January 2005. Boston Scientific brought a patent infringement lawsuit against Cordis, seeking to enforce a patent on stent coatings against Cordis' CYPHER sirolimus drug-eluting stent, Boston Scientific Scimed v. Cordis, Docket No. 03-283, U.S.D.C., D. Del. In an earlier filed action, Cordis sued Boston Scientific seeking to enforce Cordis' stent architecture patent. In the respective actions, both Boston Scientific and Cordis sought a preliminary injunction against the other. On November 21, 2003, the District Court denied both motions for preliminary injunction. Cordis appealed the denial of the injunction against Boston Scientific to the U.S. Court of Appeals for the Federal Circuit. In May 2004, the appellate court affirmed the District Courts' denial of the preliminary injunction. The case is scheduled for trial in 2005. Although the Company is not a party to this litigation, if Cordis were to be enjoined from selling the CYPHER stent, the Company could lose licensing income. Cordis has advised the Company that it intends to vigorously defend this litigation. In November 2003, the U.S. Patent and Trademark Office Board of Patent Appeals ruled for the Company in the interference concerning a Genentech patent application and a Company patent, which claims a truncated Factor VIII protein, which expires in February I-34 2010. Wyeth markets a truncated Factor VIII protein covered by the claims of the patents as REFACTO. The Board's decision in November 2003 concluded that the Company was the first to invent the claimed protein. Genentech and Bayer Healthcare LLC have challenged the Board's decision by filing an action pursuant to 35 U.S.C. Section 146 in the United States District Court for the District of Delaware on December 23, 2003. Medtronic Sofamor Danek ("Medtronic") is Wyeth's licensee for certain products utilizing Wyeth's recombinant BMP-2 protein, in particular the INFUSE Bone Graft/LT-CAGE Lumbar Tapered Fusing Device System ("Infuse"). In a case involving technology agreements, Medtronic Sofamor Danek, Inc. vs. Gary K. Michelson, M.D. and Karlin Technology, Inc., Civ. Action No. 01-2373 (U.S. District Court for the Western District of Tennessee), a jury found Medtronic liable for $109.0 million in compensatory damages and $400.0 million in punitive damages. As part of its verdict, the jury found that Infuse infringed U.S. patents 6,080,155, 6,270,498 and 6,210,412 and awarded royalties at a rate of 10%. The Company was not a party to that action and is not liable for the damages awarded or for the additional royalties. The patent owner has agreed to defer a request for an injunction as to sales of Infuse pending on-going settlement negotiations between the parties. If an injunction were to be issued, Wyeth's sales of BMP-2 could be impacted. Medtronic has advised Wyeth that it intends to appeal any adverse judgment. The Company is currently a defendant in a total of ten lawsuits in which plaintiffs allege that the Company and other defendant pharmaceutical companies artificially inflated the Average Wholesale Price ("AWP") of their drugs. AWP is the basis for determining the Medicare reimbursement rate and the co-payment amount. It is also usually the basis for determining Medicaid reimbursement rates under state Medicaid plans. The overstatement of AWP allegedly results in overpayment by, among others, Medicare and Medicare beneficiaries and by state Medicaid plans. Plaintiffs involved in these lawsuits allege that this "scheme" is fraudulent, violates the Sherman Antitrust Act and constitutes a civil conspiracy under the RICO Act. Two of these lawsuits are private class actions filed on behalf of Medicare beneficiaries who make co-payments, as well as private health plans and ERISA plans that purchase drugs based on AWP: Swanston v. TAP Pharmaceuticals Products, Inc., et al. No. CV2002-004988, Sup. Ct., Maricopa County, Ariz.; and International Union of Operating Engineers, et al. v. Astra Zeneca PLC, et al., No. 03-3226 JEI, U.S.D.C., N.J. Two other previously pending cases making similar claims against the Company, Thompson v. Abbott Laboratories, Inc., et al., No. C02-4450MJJ, U.S.D.C., N.D. Cal.; Turner v. Abbott Laboratories, Inc., et al., No. 412357, Sup. Ct., San Francisco County, Cal.; have now been dismissed. No activity is occurring in the International Union suit. In the Swanston case, the court has denied defendants' motion to dismiss and directed the parties to begin fact discovery. In addition to the two suits described above, the Company is currently a defendant in six government entity lawsuits claiming injuries on behalf of both the government entity and its citizens, allegedly due to Medicaid reimbursement fraud. These cases are as follows: State of California v. Abbott Laboratories, Inc. et al., No. BC 287198 A, Sup. Ct., Los Angeles County, Cal.; County of Suffolk v. Abbott Laboratories, Inc., et al. No. CV03-229, U.S.D.C., E.D.N.Y.; County of Rockland v. Abbott Laboratories, Inc., et al. No. CV03-7055, U.S.D.C., S.D.N.Y.; County of Westchester v. Abbott Laboratories, Inc., et I-35 al. No. CV03-6178 U.S.D.C., S.D.N.Y.; County of Nassau v. Abbott Laboratories, Inc., et al., No. CV 04 5126, U.S.D.C., E.D.N.Y.; and City of New York v. Abbott Laboratories, Inc., et al., No. 04 CV 6054 (BSJ) U.S.D.C., S.D.N.Y. All six of these actions have been removed to federal court and transferred to the U.S. District Court for the District of Massachusetts where they are pending under the caption: In re: Pharmaceutical Industry AWP Litigation, MDL-1456. The New York City and various New York county cases make identical claims based on the federal RICO Act, the Social Security Act, the New York Social Services Law and the New York General Business Law. They seek recovery for damages suffered as a result of alleged overcharging for prescription medication paid for by Medicaid. By stipulation, no activity is occurring in these matters pending the court's resolution of defendants' motion to dismiss in the County of Suffolk matter. The MDL judge has dismissed certain counts of the Complaint and directed plaintiff to make more definitive allegations against numerous defendants (including Wyeth) against whom they had previously made only conclusory allegations. The motion to dismiss remains pending and will likely be decided in the first half of 2005. The Company is also a defendant in two recently filed AWP matters pending in state courts: State of Alabama v. Abbott Laboratories, Inc., et al., No. CV 2005-219, Cir. Ct., Montgomery Cty., AL, and The People of Illinois v. Abbott Laboratories, Inc., et al., No. 05CH0274, Cir. Ct., Cook Cty., IL. In the State of Alabama case, the plaintiff alleges that defendants provided false and inflated AWP, Wholesale Acquisition Cost ("WAC") and/or Direct Price information for their drugs to various nationally known drug industry reporting services. In The People of Illinois case, the Attorney General brought the lawsuit on behalf of the State for itself and on behalf of its citizens, to recover damages and injunctive relief under similar theories. Both of these cases are in their earliest stages, with no answers yet having been filed. The Company has been served with a subpoena duces tecum from the United States Attorney's Office for the District of Massachusetts. The subpoena seeks documents from January 2000 to the present relating to the Company's quarterly calculations of the Average Manufacturer Price ("AMP") and Best Price for PROTONIX oral tablets and I.V. products. AMP and Best Price are defined terms under the Medicaid Drug Rebate statute and are used to calculate rebates due to state Medicaid programs under that statute. The Company understands that other pharmaceutical companies have received similar subpoenas relating to their calculations of Best Price from the same United States Attorney. In September 2000, Duramed Pharmaceuticals, Inc. ("Duramed"), which markets a hormone therapy drug called CENESTIN, filed a complaint against the Company, (Duramed Pharmaceuticals, Inc. v. Wyeth-Ayerst Labs, Inc., No. C-1-00-735, U.S.D.C., S.D. Oh.), alleging that the Company violated the antitrust laws through the use of exclusive contracts and "disguised exclusive contracts" with managed care organizations and pharmacy benefit managers concerning PREMARIN. Duramed, which has since been acquired by Barr Laboratories, Inc., also alleged that the Company monopolized the hormone therapy market in violation of the antitrust laws through the use of such exclusive contracts. The Company and Barr settled this litigation in June 2003 and the action has since been dismissed with prejudice. I-36 Following the filing of the Duramed case, several purported class action lawsuits were filed on behalf of "end-payors" (defined as the last persons and entities in the chain of distribution) and direct purchasers in federal district courts in Ohio and New Jersey, and California state courts. These plaintiffs allege that the Company's alleged anticompetitive exclusive contracts with managed care organizations and pharmacy benefit managers concerning PREMARIN allowed the Company to charge higher prices for PREMARIN than the Company would have charged in the absence of the alleged anticompetitive exclusive agreements. The complaints seek injunctive relief, damages and disgorgement of profits. Due to certain consolidations, six actions are presently pending against the Company. A certified class consisting of direct purchasers, J.B.D.L. Corp. v. Wyeth-Ayerst Pharmaceuticals, Inc., Civ. A. No. C-1-01-704, U.S.D.C., S.D. Oh., and a certified class consisting of indirect purchasers, Ferrell v. Wyeth-Ayerst Laboratories, Inc., Civ. A. No. C-1-01-447, U.S.D.C., S.D. Oh., are pending in Ohio federal district court. Additionally, two direct purchasers of PREMARIN during the relevant time period (CVS Meridian, Inc. and Rite Aid Corporation) have opted out of the federal direct-purchaser class action and have filed a separate action, CVS Meridian, Inc. et al. v. Wyeth, Civil A. No. C-1-03-781, U.S.D.C., S.D. Oh. The J.B.D.L. and CVS Meridian actions are scheduled for trial in August 2005. The Company has filed a motion for summary judgment in the J.B.D.L. and CVS Meridian actions. Moreover, one certified class of indirect purchasers and one putative class of indirect purchasers are pending in California state courts, (Blevins v. Wyeth-Ayerst Laboratories, Inc. et al., Case No. 324380, Cal. Sup. Ct., San Francisco Cty., Cal.; Sullivan v. Wyeth-Ayerst Laboratories, Inc., Case No. GIC796997, Cal. Sup. Ct., San Diego Cty., Cal.), respectively. Also, a purported class action was recently filed in Vermont Superior Court on behalf of all Vermont end-payors, which raises substantially the same allegations as the Ferrell indirect-purchaser action. Deyo v. Wyeth, No. 735-12-04 (Vt. Sup. Ct.). Plaintiffs have filed numerous lawsuits in federal and state courts following the issuance of an administrative complaint by the Federal Trade Commission ("FTC"), which challenged as anticompetitive the Company's 1998 settlement of certain patent litigation with Schering-Plough Corporation ("Schering") relating to ESI's proposed generic version of Schering's K-Dur 20, a potassium chloride product. The Company settled with the FTC in April 2002. The settlement of the FTC action was not an admission of liability and was entered to avoid the costs and risks of litigation in light of the Company's previously announced exit from the oral generics business. Generally, plaintiffs claim that the 1998 settlement agreement between the Company and Schering resolving the patent infringement action unlawfully delayed the market entry of generic competition for K-Dur 20, and that this caused plaintiffs and others to pay higher prices for potassium chloride supplements than plaintiffs claim they would have paid without the patent case settlement. Plaintiffs claim that this settlement constituted an agreement to allow Schering to monopolize the potassium chloride supplement markets in violation of federal and state antitrust laws, various other state statutes and common law theories such as unjust enrichment. Currently, the Company is aware of approximately 45 private antitrust lawsuits that have been filed against the Company based on the 1998 patent case settlement. Many of these lawsuits are currently pending in federal court and have been consolidated or are being I-37 coordinated as part of multi-district federal litigation being conducted in the United States District Court for the District of New Jersey, In re K-Dur Antitrust Litigation, MDL 1419, U.S.D.C., D. N.J. One of these cases is brought as a purported class action on behalf of direct purchasers of K-Dur 20 nationwide. The Company has executed a settlement agreement with the purported class of direct purchasers and the federal court has granted final approval to the settlement. One case is brought by the Commonwealth of Pennsylvania, through its Attorney General, on behalf of all departments, agencies and bureaus of the Commonwealth that purchased K-Dur 20 or reimbursed such purchases. The claims against the Company in another direct purchaser action, which is not a class action, have since been dismissed as a result of a settlement with the Company. In the remaining cases, some of which are pending in federal court and some of which are pending in various state courts, plaintiffs claim to be indirect purchasers or end-payors of K-Dur 20 or to be bringing suit on behalf of such indirect purchasers and seek to certify either a national class of indirect purchasers or classes of indirect purchasers from various states. These indirect purchaser cases are brought as purported class actions on behalf of various groups of indirect purchasers. These complaints seek various forms of relief including damages in excess of $100 million, treble damages, restitution, disgorgement, declaratory and injunctive relief and attorneys' fees. The Florida Attorney General's Office has initiated an inquiry into whether the Company's settlement with Schering violated Florida's antitrust laws. The Company has provided documents and information sought by the attorney general's office. The Company has been named as a defendant in an action brought by Compass Marketing, Inc. alleging that Schering and Wyeth Consumer Healthcare violated federal and state antitrust laws and state common laws by allegedly engaging in certain collusive practices regarding commission rates and credit terms. Compass Marketing, Inc. v. Schering-Plough Corp., et al., No. 1:04-CV-1663, U.S.D.C., D. Md. Compass Marketing, Inc. is a former Wyeth Consumer Healthcare broker that provided brokerage services for a small segment of the over-the-counter drug business. The complaint seeks treble damages under the federal antitrust laws and punitive and exemplary damages on the state common law claims. The Company has answered the complaint denying the allegations and asserted a counterclaim for breach of contract. The Company has been named as a defendant, along with other pharmaceutical manufacturers, in a civil action presently pending in federal district court in Minnesota, alleging that the defendant companies violated federal antitrust statutes and certain state laws by unlawfully agreeing to engage in conduct to prevent U.S. consumers from purchasing defendants' prescription drugs from Canada. In re Canadian Import Antitrust Litigation, Civ. No. 04-2724, U.S.D.C., D. Minn. The plaintiffs claim that, as a result of the alleged unlawful agreement, the purported class members have paid higher prices for the defendants' pharmaceutical products than they otherwise would have paid in the absence of the alleged agreement. The complaint seeks various forms of relief, including damages, treble damages, restitution, disgorgement, injunctive relief and attorneys' fees. A motion by the Company and its co-defendants to dismiss the complaint has been granted in part and denied in part by the Magistrate Judge hearing the matter. An appeal to the District Court from this ruling is expected. I-38 Additionally, another action, Clayworth v. Pfizer, et al., No. RG04172428, Calif. Super. Ct., Alameda County, has been filed against the Company in California state court alleging certain violations of California state law. This action is brought on behalf of California pharmacies and alleges that the defendant pharmaceutical manufacturers engaged in a price-fixing conspiracy in the United States that was carried out by, among other allegations, efforts to restrict Canadian drugs from coming into the United States. The California action alleges that, as a result of the claimed conspiracy, the pharmacy plaintiffs paid higher prices for the defendants' pharmaceutical products than they otherwise would have paid. The trial court dismissed plaintiffs' original complaint following a motion by defendants. Plaintiffs have now filed a Second Amended Complaint. In 1999 and 2000, the Brazilian Economic Defense Agency ("SDE") and local police authorities initiated investigations of Laboratories Wyeth-Whitehall Ltda., a Brazilian subsidiary of the Company ("LWWL"), and other pharmaceutical companies concerning possible violation of Brazilian competition laws. SDE alleged that the companies sought to establish uniform commercial policies regarding wholesalers and refused to sell product to wholesalers that distributed generic products manufactured by certain Brazilian pharmaceutical companies. Additionally, administrative investigations by SDE are examining allegations that LWWL and other pharmaceutical companies violated Brazilian competition and consumer protection laws by unlawfully raising prices. The Company provided information to both SDE and to police authorities. The police authorities have terminated their investigation, concluding that the companies were not engaged in any illegal action. In 2003, the SDE concluded that LWWL and other pharmaceutical companies violated Brazilian competition laws by agreeing to refuse to sell products to wholesalers that distributed generic products. The SDE, however, recommended the imposition of the minimum penalty of 1% of LWWL's annual gross sales (approximately $1 million). This recommendation does not become final until the Economic Defense Administrative Council decides whether to adopt the recommendation and impose the suggested penalty. The other SDE administrative proceedings are still pending. The United Kingdom's Competition Commission has recently investigated the pricing and distribution practices of Fort Dodge and other animal health suppliers. The inquiry focused on the rebate practices of animal health suppliers, the price differential between certain animal health products sold in the U.K. as opposed to other European countries and the industry practice of selling to wholesalers but not directly to pharmacists or veterinarians. The inquiry also examined transfer pricing for animal health products. On April 11, 2003, the U.K. Competition Commission issued its report on the investigation into the supply of prescription-only veterinary medicines and concluded that three monopoly situations existed for such medicines. According to the report, one such monopoly situation arose from the failure of eight animal health manufacturers, including Fort Dodge Animal Health U.K., to enable pharmacies to obtain supplies of prescription-only veterinary medicines on terms that would enable them to compete with veterinary surgeons. The report recommended two remedies for the situation, applicable to all of the relevant manufacturers, which are designed to allow the pharmacies to obtain I-39 prescription-only veterinary medicines on terms competitive with those offered to veterinary surgeons. On February 18, 2005, the U.K. Competition Commission issued a Draft Order proposing four specific remedies, two of which would apply to Fort Dodge. The Draft Order requires manufacturers to provide certain price information to veterinarians and pharmacists, and imposes a duty on manufacturers to make prescription only medications available to veterinarians and pharmacists on equal terms for equal volumes purchased. The Draft Order does not propose any fines or other penalties be levied against Fort Dodge. A final order will be issued after the close of the public comment period. The Company is cooperating in responding to a subpoena served on the Company in January 2004 from the U.S. Office of Personnel Management, Office of the Inspector General, requesting certain documents related to EFFEXOR. The subpoena requests documents related principally to educating or consulting with physicians, as well as marketing or promotion of EFFEXOR to physicians or pharmacists from January 1, 1997 to September 30, 2003. Other manufacturers of psychopharmacologic products have also received subpoenas. The Company has been sued by Aventis in a breach of contract case in the Commercial Court of Nanterre, France arising out of an October 12, 2000 Agreement between the parties relating to the development of hormone therapy drugs utilizing Aventis's trimegestone ("TMG") progestin. The agreement granted Wyeth a worldwide exclusive license of Aventis's patents and know-how relating to TMG and Wyeth agreed to develop, manufacture and sell two different hormone therapy products: a product combining Wyeth's PREMARIN product with TMG, and a product combining 17 beta estradiol and TMG, referred to as "Totelle". The Company terminated the agreement in December 2003, and Aventis claims that the termination was improper. The complaint seeks monetary damages in the amount of $579.0 million. It also seeks certain injunctive relief to ensure continued marketing of Totelle, including compelling continued manufacture of the product and the compulsory licensing of Totelle trademarks. Trial is expected to take place in the fall of 2005. As discussed in Item I (under the caption "Environmental"), the Company is a party to, or otherwise involved in, legal proceedings under CERCLA and similar state laws directed at the cleanup of various sites including the Cyanamid-owned Bound Brook, N.J. site. The Company's potential liability varies greatly from site to site. For some sites, the potential liability is de minimis and, for others, the final costs of cleanup have not yet been determined. As assessments and cleanups proceed, these liabilities are reviewed periodically and are adjusted as additional information becomes available. Environmental liabilities are inherently unpredictable. The liabilities can change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation required and other actions by governmental agencies or private parties. The Company's Wyeth Medica Ireland ("WMI") subsidiary has received a Statement of Claim filed in the Irish High Court in Dublin by Schuurmans & Van Ginneken ("SvG"), a Netherlands-based molasses and liquid storage concern. SvG seeks compensation for the I-40 contamination and disposal of up to 26,000 tons of molasses allegedly contaminated with medroxyprogesterone acetate ("MPA"). SvG allegedly purchased sugar recovered from a sugar water process stream disposed of by WMI for use in its molasses refining operations. SvG further seeks compensation on behalf of an unspecified number of its animal feed customers who are alleged to have used contaminated molasses in their livestock feed formulations. SvG seeks damages in excess of (euro)160 million. In July and August of 2003, formal claim letters on behalf of various Dutch claimants, including the Dutch Association for the Animal Feed Industry, the Dutch Trade Union for Stock-Breeders, the Central Organization for the Meat Sector, the Dutch Union of Traders in Cattle and Rined Fourages BV, a distributor of animal feed, were served upon the Company's AHP Manufacturing BV subsidiary. The damages alleged in the claim letters amount to several million euros and are akin to the claims brought by SvG, i.e., claims for loss of inventory and livestock due to contaminated animal feed. In connection with its formal Statement of Claim, SvG levied prejudgment attachments in the District Courts of Haarlem and Amsterdam in the Netherlands on certain assets of WMI. SvG lifted these attachments on December 18, 2003, after WMI provided SvG bank guarantees as security for the amounts claimed by SvG in its Statement of Claim. SvG has agreed to refrain from levying further attachments. In September 2004, the Company was served with a Complaint, filed in the Dutch courts on behalf of Dutch claimants, including, inter alia, the Dutch Association for the Animal Feed Industry and the Dutch Trade Union for Pig Farmers. The Complaint seeks reimbursement of approximately (euro) 8.2 million for payments made by the trade organizations to member pig farmers for purchases of pigs that were destroyed because of MPA contamination. Since the discovery of MPA in certain animal feed, several EU countries have initiated investigations and other official reviews of the extent of damage potentially caused by MPA. In addition, Ireland's Environmental Protection Agency has initiated an investigation into WMI's compliance with its Integrated Pollution Control license and possible violations of the Waste Management Act. This investigation was referred to the Department of Public Prosecution ("DPP") by the Irish EPA for possible prosecution. The DPP investigation is ongoing. On July 26, 2002, a Brazilian Federal Public Attorney filed a public civil action against the Federal Government of Brazil, LWWL, a Brazilian subsidiary of the Company, and Colgate Palmolive Company, as represented by its Brazilian subsidiary, Kolynos do Brasil Ltda. ("Kolynos"), seeking to nullify and overturn the April 11, 2000 decision by the Brazilian First Board of Tax Appeals which had found that the capital gain of LWWL from its divestiture of its oral health care business was not taxable in Brazil. The action seeks to hold LWWL jointly and severally liable with Kolynos and the Brazilian Federal Government. The amount of the Brazilian Federal Public Attorney's claim, as stated in current U.S. dollars, was approximately $109.0 million. The Company believes that this action is without merit. The Company intends to vigorously defend all of the foregoing litigation. In the opinion of the Company, although the outcome of any litigation cannot be predicted with certainty, the ultimate liability of the Company in connection with pending litigation and other matters discussed above (other than the litigation involving REDUX I-41 and PONDIMIN, the potential effects of which are discussed above) will not have a material adverse effect on the Company's financial position but could be material to the results of operations and cash flows in any one accounting period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. I-42 EXECUTIVE OFFICERS OF THE REGISTRANT AS OF MARCH 7, 2005 - -------------------------------------------------------- Each officer is elected to hold office until a successor is chosen or until earlier removal or resignation. None of the executive officers is related to another: Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Robert Essner 57 Chairman of the Board, President September 1997 and Chief Executive Officer Member of Executive Committee, Chairman of Management, Law/Regulatory Review, Operations, Human Resources and Benefits and Retirement Committees Business Experience: To March 1997, President, Wyeth-Ayerst Laboratories, U.S. Pharmaceuticals Business March 1997 to September 1997, President, Wyeth-Ayerst Laboratories Division September 1997 to July 2000, Executive Vice President July 2000 to May 2001, President and Chief Operating Officer May 2001 to December 2002, President and Chief Executive Officer January 2003 to date, Chairman of the Board, President and Chief Executive Officer I-43 Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Kenneth J. Martin 50 Executive Vice President and February 2000 Chief Financial Officer Member of Management, Law/Regulatory Review, Operations, Human Resources and Benefits and Retirement Committees Business Experience: To October 1996, President, American Home Foods November 1996 to February 1997, President, International Home Foods, Inc. February 1997 to March 1997, Executive Vice President, Wyeth-Ayerst International March 1997 to September 1998, President, Whitehall-Robins October 1998 to January 2000, Senior Vice President and Chief Financial Officer, Wyeth-Ayerst Pharmaceuticals February 2000 to June 2002, Senior Vice President and Chief Financial Officer June 2002 to date, Executive Vice President and Chief Financial Officer Bernard J. Poussot 53 Executive Vice President and January 2001 President, Wyeth Pharmaceuticals Member of Management, Law/Regulatory Review, Operations and Human Resources and Benefits Committees Business Experience: January 1996 to September 1997, President, Wyeth-Ayerst International September 1997 to January 2001, President, Wyeth-Ayerst Pharmaceuticals January 2001 to June 2002, Senior Vice President and President, Wyeth Pharmaceuticals June 2002 to date, Executive Vice President and President, Wyeth Pharmaceuticals I-44 Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Lawrence V. Stein 55 Senior Vice President and June 2001 General Counsel Member of Management, Law/Regulatory Review, Operations, Human Resources and Benefits and Retirement Committees Business Experience: November 1992 to September 1997, Senior Vice President and General Counsel, Genetics Institute September 1997 to July 2000, Associate General Counsel and Senior Vice President and Chief Legal Counsel, Wyeth-Ayerst and Genetics Institute July 2000 to June 2001, Vice President and Deputy General Counsel June 2001 to July 2003, Senior Vice President and Deputy General Counsel July 2003 to date, Senior Vice President and General Counsel Paul J. Jones 59 Vice President and Controller May 1995 Member of Law/Regulatory Review and Operations Committees Business Experience: May 1995 to date, Vice President and Controller Rene R. Lewin 58 Senior Vice President - Human June 1994 Resources Member of Management, Law/Regulatory Review, Operations, Human Resources and Benefits and Retirement Committees Business Experience: June 1994 to September 2004, Vice President - Human Resources September 2004 to date, Senior Vice President - Human Resources I-45 Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Marily H. Rhudy 57 Senior Vice President - Public Affairs June 2001 Member of Management and Operations Committees Business Experience: April 1994 to March 1997, Vice President - Public Affairs, Wyeth-Ayerst Laboratories Division March 1997 to September 1997, Vice President - Global Public Affairs, Wyeth-Ayerst Laboratories Division September 1997 to September 2004, Vice President - Public Affairs September 2004 to date, Senior Vice President - Public Affairs E. Thomas Corcoran 57 President, Fort Dodge Animal June 2001 Health Division Member of Management, Operations and Human Resources and Benefits Committees Business Experience: September 1995 to date, President, Fort Dodge Animal Health Division Ulf Wiinberg 46 President, Wyeth Consumer March 2002 Healthcare Member of Management, Law/Regulatory Review, Operations, and Human Resources and Benefits Committees Business Experience: To May 1997, Area Vice President for Africa and the Middle East, Wyeth-Ayerst May 1997 to February 2002, Managing Director of the United Kingdom subsidiary of Wyeth-Ayerst Pharmaceuticals February 2002 to date, President, Wyeth Consumer Healthcare I-46 Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Joseph M. Mahady 51 Senior Vice President and President, June 2001 Wyeth Pharmaceuticals - North America Member of Management and Operations Committees Business Experience: September 1997 to June 2002, President, Wyeth Pharmaceuticals - North America June 2002 to date, Senior Vice President and President, Wyeth Pharmaceuticals - North America Robert R. Ruffolo, Jr. 54 Senior Vice President and President, June 2001 Wyeth Research Member of Management, Law/Regulatory Review, Operations and Human Resources and Benefits Committees Business Experience: To November 2000, Senior Vice President and Director, Biological Sciences, SmithKline Beecham November 2000 to June 2002, Executive Vice President, Pharmaceutical Research and Development, Wyeth Research June 2002 to date, Senior Vice President and President, Wyeth Research Robert N. Power 48 President, Wyeth Pharmaceuticals - June 2002 International Member of Management and Operations Committees Business Experience: March 1998 to June 2002, President, Wyeth Pharmaceuticals - Europe/Middle East/Africa June 2002 to date, President, Wyeth Pharmaceuticals - International I-47 Elected as Executive Name Age Offices and Positions Officer ---- --- --------------------- ------- Thomas Hofstaetter 56 Senior Vice President, September 2004 Corporate Business Development, Wyeth Member of Management and Operations Committees Business Experience: To September 2004, Senior Vice President, Corporate Development, Aventis September 2004 to date, Senior Vice President, Corporate Business Development, Wyeth Charles Portwood 55 President, Technical January 2005 Operations & Product Supply, Wyeth Pharmaceuticals Member of Management and Law/Regulatory Review Committees Business Experience: November 2001 to July 2002, Senior Vice President, Global Supply Chain, Wyeth Pharmaceuticals July 2002 to date, President, Technical Operations & Product Supply, Wyeth Pharmaceuticals I-48 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ------------------------------------------------------------- MATTERS ------- (a) Market Information and Dividends The New York Stock Exchange is the principal market on which the Company's common stock is traded. Tables showing the high and low sales price for the common stock, as reported in the consolidated transaction reporting system, and the dividends paid per common share for each quarterly period during the past two years, as presented in Market Prices of Common Stock and Dividends on page 65 of the Company's 2004 Annual Report to Stockholders, are incorporated herein by reference. (b) Holders There were approximately 53,600 holders of record of the Company's Common Stock as of the close of business on March 1, 2005. ITEM 6. SELECTED FINANCIAL DATA ----------------------- The data with respect to the last five fiscal years, appearing in the Ten-Year Selected Financial Data presented on pages 30 and 31 of the Company's 2004 Annual Report to Stockholders, are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on pages 66 through 82 of the Company's 2004 Annual Report to Stockholders, is incorporated herein by reference. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The market risk disclosures as set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on pages 79 and 80 of the Company's 2004 Annual Report to Stockholders, are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 32 through 62 of the Company's 2004 Annual Report to Stockholders, the Report of Independent Registered Public Accounting Firm on page 63, and Quarterly Financial Data (Unaudited) on page 65, are incorporated herein by reference. II-1 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable ITEM 9(A). CONTROLS AND PROCEDURES ----------------------- DISCLOSURE CONTROLS As of December 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. INTERNAL CONTROL OVER FINANCIAL REPORTING Management's report on the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related report of the Company's independent registered public accounting firm, are included in the Company's 2004 Annual Report to Stockholders on pages 63 and 64 under the headings Report of Independent Registered Public Accounting Firm and Management Report on Internal Control over Financial Reporting, respectively, and are incorporated herein by reference. CHANGES IN INTERNAL CONTROLS During the 2004 fourth quarter, there were no significant changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. II-2 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- (a) Information relating to the Company's directors is incorporated herein by reference to pages 3 through 5 of a definitive proxy statement to be filed with the Securities and Exchange Commission on or about March 16, 2005 ("the 2005 Proxy Statement"). (b) Information relating to the Company's audit committee, including designation of "Financial Expert" under applicable Securities and Exchange Commission rules, is incorporated herein by reference to page 7 of the 2005 Proxy Statement. (c) Information relating to the Company's executive officers as of March 7, 2005 is furnished in Part I hereof under a separate unnumbered caption ("Executive Officers of the Registrant as of March 7, 2005"). (d) Information relating to certain filing obligations of directors and executive officers of the Company under the federal securities laws set forth on page 11 of the 2005 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. (e) Information relating to the Company's code of ethics, included within the Wyeth Code of Conduct, is available on the Wyeth Internet website at www.wyeth.com. Copies of the Wyeth Code of Conduct are also available, without charge, by contacting Wyeth Investor Relations at (877) 552-4722. (f) The Charters for the Company's Audit, Compensation and Benefits, Nominating and Governance and Corporate Issues Committees, the Nominating and Governance Committee Criteria and Procedures for Board Candidate Selection and Wyeth's Corporate Governance Guidelines are available on the Wyeth Internet website at www.wyeth.com. Copies of these documents are also available, without charge, by contacting Wyeth Investor Relations at (877) 552-4722. ITEM 11. EXECUTIVE COMPENSATION ---------------------- Information relating to executive compensation is incorporated herein by reference to pages 15 through 22 and the section titled "Change in Control Severance Agreements" on pages 24 through 26 of the 2005 Proxy Statement. Information with respect to compensation of directors is incorporated herein by reference to pages 6 and 7 of the 2005 Proxy Statement. III-1 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT AND RELATED STOCKHOLDER MATTERS ------------------------------------------ (a) Information relating to security ownership is incorporated herein by reference to pages 11 and 12 of the 2005 Proxy Statement. (b) Information regarding the Company's equity compensation plans is incorporated herein by reference to page 24 of the 2005 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Information regarding transactions with management and others is incorporated herein by reference to page 26 of the 2005 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES -------------------------------------- Information relating to principal accountant fees and services is incorporated herein by reference to pages 38 and 39 of the 2005 Proxy Statement. III-2 PART IV ------- ITEM 15. EXHIBITS and FINANCIAL STATEMENTS SCHEDULES ------------------------------------------- (a)1. Financial Statements -------------------- The following Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm, included on pages 32 through 63 of the Company's 2004 Annual Report to Stockholders, are incorporated herein by reference. Pages ----- Consolidated Balance Sheets as of December 31, 2004 and 2003 32 Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 33 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 34 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 35 Notes to Consolidated Financial Statements 36-62 Report of Independent Registered Public Accounting Firm 63 (a)2. Financial Statement Schedules ----------------------------- Schedules are omitted because they are not applicable. IV-1 ITEM 15. (Continued) (a)3. Exhibits -------- Exhibit No. Description ----------- ----------- (3.1) The Company's Restated Certificate of Incorporation is incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (3.2) The Company's By-Laws, as amended to date, is incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K dated November 23, 2004. (4.1) Indenture, dated as of April 10, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to Exhibit 2 of the Company's Form 8-A dated August 25, 1992 (File 1-1225). (4.2) Supplemental Indenture, dated October 13, 1992, between the Company and The Chase Manhattan Bank (successor to Chemical Bank), as Trustee, is incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (File 1-1225). (4.3) Second Supplemental Indenture, dated as of March 30, 2001, between the Company and The Chase Manhattan Bank (as successor to Manufacturers Hanover Trust Company) is incorporated by reference to Exhibit 4.3 of the Registration Statement of Form S-4 of the Company filed on April 27, 2001. (4.4) Third Supplemental Indenture, dated as of February 14, 2003, between the Company and JPMorgan Chase Bank (as successor to Manufacturers Hanover Trust Company) is incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (4.5) Fourth Supplemental Indenture, dated as of December 16, 2003, between the Company and JPMorgan Chase Bank (as successor to Manufacturers Hanover Trust Company) is incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-3 for the Company filed on February 3, 2004. (4.6) Fifth Supplemental Indenture, dated as of December 16, 2003, between the Company and JPMorgan Chase Bank (as successor to The Chase Manhattan Bank) is incorporated herein by reference to Exhibit 4.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.1) Purchase Agreement, by and among American Cyanamid Company, American Home Products Corporation and BASF Aktiengesellschaft, dated as of March 20, 2000 is incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000 (Confidential Treatment Requested - confidential portions have been omitted and filed separately with the Commission). IV-2 (10.2) First Amendment to the Purchase Agreement, by and among American Cyanamid Company, American Home Products Corporation, and BASF Aktiengesellschaft dated as of June 30, 2000 is incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 17, 2000 (Confidential Treatment Requested - confidential portions have been omitted and filed separately with the Commission). (10.3) Registration Rights Agreement, dated December 16, 2003, between Wyeth, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as Representatives of the several Initial Purchasers, is incorporated herein by reference to Exhibit 4.4 of the Registration Statement on Form S-3 of the Company filed on February 3, 2004. (10.4) Second Amendment to the Purchase Agreement, by and among American Cyanamid Company, American Home Products Corporation, and BASF Aktiengesellschaft dated as of December 9, 2000 is incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (Confidential Treatment Requested - confidential portions have been omitted and filed separately with the Commission). (10.5) 3-Year Credit Agreement, dated as of March 3, 2003, among the Company, the banks and other financial institutions from time to time parties thereto and JPMorgan Chase Bank, as administrative agent for the lenders thereto is incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.6) First Amendment to 3-Year Credit Agreement, dated as of February 11, 2004, among the Company, the banks and other financial institutions from time to time parties thereto and JPMorgan Chase Bank, as administrative agent for the lenders thereto is incorporated by reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.7) 5-Year Credit Agreement, dated as of February 11, 2004, among the Company, the banks and other financial institutions from time to time parties thereto and JPMorgan Chase Bank, as administrative agent for the lenders thereto is incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.8) Master Guarantee and Letter of Credit Agreement, dated as of December 16, 2003, between the Company and ABN AMRO BANK, N.V. is incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.9) Seventh Amendment, dated July 21, 2004, to the Nationwide Class Action Settlement, dated November 18, 1999, as amended is incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K, dated January 11, 2005. (10.10) Indemnity Agreement (relating to Consent Decree), dated as of September 29, 2000, by and between the Company and Bernard Poussot. IV-3 (10.11)* 1990 Stock Incentive Plan is incorporated by reference to Exhibit 28 of the Company's Form S-8 Registration Statement File No. 33-41434 under the Securities and Exchange Act of 1933, filed June 28, 1991 (File 1-1225). (10.12)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File 1-1225). (10.13)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File 1-1225). (10.14)* Amendment to the 1990 Stock Incentive Plan is incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (10.15)* 1993 Stock Incentive Plan, as amended to date, is incorporated by reference to Appendix III of the Company's definitive Proxy Statement filed March 18, 1999 (File 1-1225). (10.16)* Amendment to the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (10.17)* 1996 Stock Incentive Plan, as amended to date, is incorporated by reference to Appendix II of the Company's definitive Proxy Statement filed March 18, 1999 (File 1-1225). (10.18)* Amendment to the 1996 Stock Incentive Plan is incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (10.19)* 1999 Stock Incentive Plan is incorporated by reference to Appendix I of the Company's definitive Proxy Statement filed March 18, 1999 (File 1-1225). (10.20)* Amendment to the 1999 Stock Incentive Plan is incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. (10.21)* Form of Stock Option Agreement (phased vesting) is incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.22)* Form of Stock Option Agreement (transferable options) is incorporated by reference to Exhibit 10.22 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.23)* Form of Restricted Stock Performance Award Agreement under the 1996 Stock Incentive Plan, 1999 Stock Incentive Plan and 2002 Stock Incentive Plan (initial award) is incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-4 (10.24)* Form of Restricted Stock Performance Award Agreement under the 1996 Stock Incentive Plan, 1999 Stock Incentive Plan and 2002 Stock Incentive Plan (subsequent award) is incorporated by reference to Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.25)* Form of Special Stock Option Agreement with Robert Essner dated June 21, 2001 (transferable option) is incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.26)* Form of Restricted Stock Award Agreement with Robert Essner dated June 21, 2001 (cliff vesting) is incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.27)* Form of Restricted Stock Award Agreement with Robert Ruffolo dated January 23, 2001 (phased vesting) is incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.28)* Restricted Stock Trust Agreement under the 1993 Stock Incentive Plan is incorporated by reference to Exhibit 10.23 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File 1-1225). (10.29)* Management Incentive Plan, as amended to date, is incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (File 1-1225). (10.30)* 1994 Restricted Stock Plan for Non-Employee Directors, as amended to date, is incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (10.31)* Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (10.32)* Form of Stock Option Agreement under the Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.30 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (File 1-1225). (10.33)* Savings Plan, as amended to date, is incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (10.34)* Directors' Deferral Plan, as amended to date, is incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (10.35)* Executive Incentive Plan is incorporated by reference to Appendix D of the Company's definitive Proxy Statement filed March 20, 2002. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-5 (10.36)* Deferred Compensation Plan, as amended to date, is incorporated by reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (10.37)* Executive Retirement Plan is incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. (10.38)* Supplemental Employee Savings Plan, as amended to date, is incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (10.39)* Supplemental Executive Retirement Plan, as amended to date, is incorporated by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. (10.40)* Supplemental Employee Retirement Plan is incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (10.41)* 2002 Stock Incentive Plan is incorporated by reference to Appendix C of the Company's definitive Proxy Statement filed March 20, 2002. (10.42)* American Cyanamid Company's Supplemental Executive Retirement Plan is incorporated by reference to Exhibit 10K of American Cyanamid Company's Annual Report on Form 10-K for the year ended December 31, 1988 (File 1-3426). (10.43)* American Cyanamid Company's Supplemental Employees Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10K of American Cyanamid Company's Annual Report on Form 10-K for the year ended December 31, 1989 (File 1-3426). (10.44)* American Cyanamid Company's ERISA Excess Retirement Plan is incorporated by reference to Exhibit 10N of American Cyanamid Company's Annual Report on Form 10-K for the year ended December 31, 1988 (File 1-3426). (10.45)* American Cyanamid Company's Excess Retirement Plan Trust Agreement, dated September 19, 1989, between American Cyanamid Company and Morgan Guaranty Trust Company of New York is incorporated by reference to Exhibit 10M of American Cyanamid Company's Annual Report on Form 10-K for the year ended December 31, 1989 (File 1-3426). (10.46)* Form of Severance Agreement entered into between the Company and all executive officers and certain other key employees is incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File 1-1225). *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-6 (10.47)* Form of Severance Agreement entered into between the Company and key employees that have not entered into the Severance Agreement in Exhibit 10.46. (10.48)* Agreement, dated as of March 6, 2001, by and between the Company and John R. Stafford is incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. (10.49)* Amendatory Agreement, dated as of March 6, 2001, by and between the Company and John R. Stafford is incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. (10.50)* Union Savings Plan, as amended to date, is incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (10.51)* Summary Description of Performance Incentive Award Program. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 2004 Annual Report to Stockholders. Such report, except for those portions thereof, which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP, relating to their report dated March 3, 2005, consenting to the incorporation thereof in the Registration Statements on Form S-3 (No. 33-45324, No. 33-57339, No. 333-108312, No. 333-111093 and No. 333-112450), and S-8 (No. 2-96127, No. 33-24068, No. 33-41434, No. 33-53733, No. 33-55449, No. 33-45970, No. 33-14458, No. 33-50149, No. 33-55456, No. 333-15509, No. 333-76939, No. 333-67008, No. 333-64154, No. 333-59668, No. 333-89318, No. 333-98619 and No. 333-98623) by reference to the Form 10-K of the Company filed for the year ended December 31, 2004. (31.1) Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. IV-7 (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. (99.1) Final Nationwide Class Action Settlement Agreement, dated November 18, 1999, as amended to date is incorporated by reference to Exhibit 99.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. (99.2) Fifth Amendment, dated November 21, 2002, to Final Nationwide Class Action Settlement Agreement, dated November 18, 1999, as amended, is incorporated by reference to Exhibit 99.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (99.3) Sixth Amendment, dated January 10, 2003, to Final Nationwide Class Action Settlement Agreement, dated November 18, 1999, as amended, is incorporated by reference to Exhibit 99.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. (99.4) Joint Motion of Wyeth and Claims Facilitating Committee Pursuant to New Settlement Process to Approve Proposed Stay Procedure in Diet Drug Cases, together with supporting documentation, all as filed with the U.S. District Court for the Eastern District of Pennsylvania on January 18, 2005 is incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, dated January 19, 2005. (99.5) Consent Decree, dated October 3, 2000, is incorporated by reference to Exhibit 99.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. (99.6) Amended and Restated Promotion Agreement, dated as of December 16, 2001, by and between Immunex, the Company and Amgen Inc. (filed as Exhibit 10.1 to Amgen's Registration Statement on Form S-4 (File No. 333-81832) on January 31, 2002 and incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K, dated July 29, 2002). (99.7) Description of Amendment No. 1 to Amended and Restated Promotion Agreement, effective July 8, 2003, by and among the Company, Immunex Corporation and Amgen Inc. (filed as Exhibit 10.94 to Amgen's Annual Report on Form 10-K (File No. 1-2477) for the fiscal year ended December 31, 2003) is incorporated by reference to Exhibit 99.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. (99.8) Description of Amendment No. 2 to Amended and Restated Promotion Agreement, effective April 20, 2004, by and among the Company, Immunex Corporation and Amgen Inc. (filed as Exhibit 10.93 to Amgen's Amended Registration Statement on Form S-4/A (File No. 333-114820) filed on June 29, 2004) is incorporated by reference to Exhibit 99.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. IV-8 (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed by the Company: o November 23, 2004 relating to amendments to the Company's By-Laws (item 5.03 and 9.01 disclosure). o December 6, 2004 relating to labeling changes required by the United Kingdom for EFEXOR and EFEXOR XL products in the United Kingdom (items 8.01 and 9.01 disclosure). o January 11, 2005 relating to the Company's diet drug litigation (items 1.01 and 9.01 disclosure). o January 19, 2005 relating to the Company's diet drug litigation (items 7.01 and 9.01 disclosure). o January 31, 2005 relating to furnishing the Company's earnings results for the 2004 fourth quarter and full year (items 2.02 and 9.01 disclosure). o March 3, 2005 relating to departure of directors (item 5.02 disclosure). o March 9, 2005 relating to 2004 cash bonuses and 2005 base salaries and restricted stock awards for certain executive officers (item 1.01 disclosure). IV-9 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. WYETH ----- (Registrant) March 11, 2005 By /s/ Kenneth J. Martin --------------------------------- Kenneth J. Martin Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- Principal Executive Officer: /s/ Robert Essner Chairman of the Board, March 11, 2005 --------------------------------- President and Robert Essner Chief Executive Officer Principal Financial Officer: /s/ Kenneth J. Martin Executive Vice President March 11, 2005 --------------------------------- and Chief Financial Officer Kenneth J. Martin Principal Accounting Officer: /s/ Paul J. Jones Vice President and March 11, 2005 --------------------------------- Controller Paul J. Jones Directors: /s/ Clifford L. Alexander, Jr. Director March 11, 2005 --------------------------------- Clifford L. Alexander, Jr. /s/ Richard L. Carrion Director March 11, 2005 --------------------------------- Richard L. Carrion /s/ John D. Feerick Director March 11, 2005 --------------------------------- John D. Feerick /s/ Frances D. Fergusson, Ph.D. Director March 11, 2005 --------------------------------- Frances D. Fergusson, Ph.D. /s/ Robert S. Langer, Sc.D. Director March 11, 2005 --------------------------------- Robert S. Langer, Sc.D. IV-10 /s/ John P. Mascotte Director March 11, 2005 --------------------------------- John P. Mascotte /s/ Mary Lake Polan, M.D., Ph.D., Director March 11, 2005 M.P.H. --------------------------------- Mary Lake Polan, M.D., Ph.D., M.P.H. /s/ Ivan G. Seidenberg Director March 11, 2005 --------------------------------- Ivan G. Seidenberg /s/ Walter V. Shipley Director March 11, 2005 --------------------------------- Walter V. Shipley Director --------------------------------- John R. Torell III IV-11 INDEX TO EXHIBITS ----------------- Exhibit No. Description ----------- ----------- (10.10) Indemnity Agreement (relating to Consent Decree), dated as of September 29, 2000, by and between the Company and Bernard Poussot. (10.47)* Form of Severance Agreement entered into between the Company and key employees that have not entered into the Severance Agreement in Exhibit 10.46. (10.51)* Summary Description of Performance Incentive Award Program. (12) Computation of Ratio of Earnings to Fixed Charges. (13) 2004 Annual Report to Stockholders. Such report, except for those portions thereof, which are expressly incorporated by reference herein, is furnished solely for the information of the Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of the Company. (23) Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP, relating to their report dated March 3, 2005, consenting to the incorporation thereof in the Registration Statements on Form S-3 (No. 33-45324, No. 33-57339, No. 333-108312, No. 333-111093 and No. 333-112450), and S-8 (No. 2-96127, No. 33-24068, No. 33-41434, No. 33-53733, No. 33-55449, No. 33-45970, No. 33-14458, No. 33-50149, No. 33-55456, No. 333-15509, No. 333-76939, No. 333-67008, No. 333-64154, No. 333-59668, No. 333-89318, No. 333-98619 and No. 333-98623) by reference to the Form 10-K of the Company filed for the year ended December 31, 2004. (31.1) Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99) Cautionary Statements regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. *Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. EX-10.10 2 poussagr.txt INDEMNITY AGREEMENT (RELATING TO CONSENT DECREE) AGREEMENT This Agreement, made and entered into as of the 29th day of September, 2000 ("Agreement"), by and between AMERICAN HOME PRODUCTS CORPORATION, a Delaware corporation (the "Company"), and BERNARD POUSSOT ("Indemnitee"): WHEREAS, the Company has requested that the Indemnitee consent to the entry of a Consent Decree of Condemnation and Permanent Injunction in certain litigation consolidated in the United States District Court for the Eastern District of Tennessee bearing the docket number 3:00-CV-359 (the "Consent Decree"); and WHEREAS, the Company has determined that it is reasonable, prudent and appropriate for the Company to contractually obligate itself to indemnify the Indemnitee with respect to the Consent Decree on the terms and conditions set forth herein; and WHEREAS, Indemnitee is willing to consent to the entry of the Consent Decree on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: Section 1. Services by Indemnitee. Indemnitee agrees to enter into the Consent Decree and to use his diligent efforts to comply with the provisions thereof insofar as they apply to Indemnitee or persons under his supervision. Section 2. Indemnification. The Company shall indemnify Indemnitee with respect to any and all liabilities, costs or expenses arising out of the proceedings resulting in the Consent Decree (and any other litigation, including without limitation, shareholder derivative suits, related thereto) and the activities and responsibilities of the Indemnitee to be undertaken therein, in each case to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. Section 3. Miscellaneous. (a) The rights of indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company's Restated Certificate of Incorporation, the Company's By-Laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. Unless otherwise agreed to by the parties hereto, no amendment, alteration or termination of this Agreement or any provision hereof shall be effective with respect to any action taken or omitted by the Indemnitee prior to such amendment, alteration or termination. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery under any insurance policy or policies maintained by the Company covering the Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. Section 4. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as an employee of the Company, or (b) the final termination of the Consent Decree and any and all proceedings in respect of which Indemnitee is entitled to indemnification hereunder. Section 5. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 6. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 7. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 8. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any proceeding or matter which may be subject to indemnification covered hereunder. Section 9. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed. (a) If to Indemnitee, to: Bernard Poussot [Home address] (b) If to the Company, to: American Home Products Corporation Five Giralda Farms Madison, New Jersey 07940 Attn: General Counsel or such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. Section 10. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the day and year first above written. AMERICAN HOME PRODUCTS CORPORATION By: ______________________________________ --------------------------------------- Bernard Poussot EX-10.47 3 tier2.txt FORM OF SEVERANCE AGREEMENT SEVERANCE AGREEMENT This Severance Agreement (this "Agreement") is made as of ______________, by and between WYETH, a Delaware corporation (the "Company"), and ("Executive"). RECITALS WHEREAS the Board of Directors of the Company (the "Board") has approved a severance agreement to provide Executive with certain benefits upon the termination of his employment; NOW THEREFORE, the parties hereto agree as follows: 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through December 31,[current year plus two years]; provided, however, the term of this Agreement shall automatically be extended for one additional year beyond [current year plus two years] and successive one year periods thereafter, unless, not later than September 30, [the current year] (for the additional year ending on December 31, [current year plus three years]) or September 30 of each year thereafter (for each subsequent extension), the Company shall have given notice that it does not wish to extend this Agreement for an additional year, in which event this Agreement shall continue to be effective until the end of its then remaining term; provided, further, that, notwithstanding any such notice by the Company not to extend, if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond such Change in Control. Notwithstanding the foregoing, this Agreement shall terminate if Executive ceases to be an employee of the Corporation and its subsidiaries for any reason prior to a Change in Control which, for these purposes, shall include cessation of such employment as a result of the sale or other disposition of the division, subsidiary or other business unit by which the Executive is employed. 2. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, a Change in Control shall be deemed to have occurred if: (A) any person or persons acting in concert (excluding Company benefit plans) becomes the beneficial owner of securities of the Company having at least 20% of the voting power of the Company's then outstanding securities (unless the event causing the 20% threshold to be crossed is an acquisition of voting common securities directly from the Company); or (B) the consummation of any merger or other business combination of the Company, sale or lease of the Company's assets or combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company who owned shares immediately prior to the Transaction (including any trustee or fiduciary of any Company employee benefit plan) own, by virtue of their prior ownership of the Company's shares, at least 65% of the voting power, directly or indirectly, of (a) the surviving corporation in any such merger or other business combination; (b) the purchaser or lessee of the Company's assets; or (c) both the surviving corporation and the purchaser or lessee in the event of any combination of Transactions; or (C) within any 24 month period, the persons who were directors immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of a successor to the Company. For this purpose, any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors (so long as such director was not nominated by a person who has expressed an intent to effect a Change in Control or engage in a proxy or other control contest). 3. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events described in Section 2 hereof constituting a Change in Control shall have occurred, Executive shall be entitled to the benefits provided in Section 4(iv) hereof upon the subsequent termination of Executive's employment with the Company and its subsidiaries during the term of this Agreement unless such termination is (A) a result of Executive's death or Retirement (except as provided in Section 3(i) below), or (B) by Executive without Good Reason, or (C) by the Company or any of its subsidiaries for Disability or for Cause. (i) DISABILITY; RETIREMENT. For purposes of this Agreement, "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to whether Executive is subject to the Code. Any question as to the existence of Executive's Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, such selection shall be made by any adult member of Executive's immediate family or Executive's legal representative), and approved by the Company, said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to Executive shall be final and conclusive for all purposes of this Agreement. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment with the Company under any of the Company's retirement plans; provided, however, that notwithstanding the foregoing, no Retirement shall adversely affect, interfere with or otherwise impair in any way Executive's right to receive the payments and benefits to which he is entitled on account of a termination without Cause or with Good Reason. (ii) CAUSE. For purposes of this Agreement, "Cause" shall mean (A) the conviction of, or plea of guilty or nolo contendere to, a felony or (B) the willful engaging by an Executive in gross misconduct which is materially and demonstrably injurious to the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the Incumbent Directors of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 3(ii) and specifying the particulars thereof in detail. (iii) GOOD REASON. Executive shall be entitled to terminate employment with Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without Executive's express written consent, of any of the following circumstances unless, in the case of paragraphs 3(iii) (A), (E), (F), or (G), such circumstances are fully corrected prior to the date specified as the Date of Termination (as defined in Section 3(v)) in the Notice of Termination (as defined in Section 3(iv)) given in respect thereof: (A) the assignment to Executive of any duties inconsistent with Executive's status as an executive of the Company or its subsidiaries, Executive's removal from his or her position (as it existed immediately prior to the Change in Control), or a substantial diminution in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (B) a reduction by the Company or any of its subsidiaries in Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (C) a failure in any year after the Change in Control to grant stock options whose value at the time of grant on a Black-Scholes basis is no less than the greatest Black-Scholes value at the time of grant of stock options granted to Executive at any one time in any of the three years prior to the Change in Control (in calculating this value, (i) an initial employment grant shall be excluded unless it is the only grant made during such period, (ii) the one-time 1995 special stock option grant made May 25, 1995 to certain designated executives shall not be included, and (iii) any shares of restricted stock granted in lieu of shares subject to an option shall be converted to option shares in accordance with the formula used to determine the number of restricted shares to be granted and shall be treated as having been granted as shares subject to an option) (the "Stock Option Value"); provided, however, that the Black-Scholes value of any grant on a per option share basis shall be equal to the per option share value of a grant, if any, made on the same date as such grant and reported in the Company's proxy statement filed prior to a Change in Control and all determinations of the Black-Scholes value of other grants shall be made by Towers Perrin (or, if unavailable or unwilling to serve, any other nationally recognized compensation consulting firm chosen by the Company and reasonably acceptable to the Executive), using the same methodology and such assumptions consistent with those used for purposes of the Company's latest proxy statement filed prior to the Change in Control; (D) the relocation of Executive's place of business to a location more than 100 miles from the location where Executive was based and performed services immediately prior to the Change in Control; provided, however, that any relocation of greater than 25 miles, but less than or equal to 100 miles, will still constitute Good Reason unless Executive is provided with relocation benefits in the aggregate no less favorable than the 1993 Relocation Policy with respect to the relocation of the corporate offices to Madison, New Jersey from New York City; (E) the failure by the Company to pay to Executive any portion of any installment of deferred compensation under any deferred compensation program of the Company in which Executive participated within seven (7) days of the date such compensation is due; (F) the failure by the Company or any of its subsidiaries to continue in effect any incentive compensation plan in which Executive participated prior to the Change in Control, unless an equitable alternative compensation arrangement (embodied in an ongoing substitute or alternative plan) has been provided for Executive, or the failure by the Company or any of its subsidiaries to continue Executive's participation in any such incentive plan on a basis, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, that is no less than existed at any time during the three years prior to the Change in Control; (G) except as required by law, the failure by the Company or any of its subsidiaries to continue to provide Executive with benefits, in the aggregate, at least as favorable as those enjoyed by Executive under the employee benefit and welfare plans of the Company and its subsidiaries, including, without limitation, the pension, life insurance, medical, dental, health and accident, retiree medical, disability, deferred compensation and savings plans, in which Executive was participating at the time of the Change in Control, the taking of any action by the Company or any of its subsidiaries which would directly or indirectly materially reduce the fringe benefits enjoyed by Executive at the time of the Change in Control, or the failure by the Company or any of its subsidiaries to provide Executive with the number of paid vacation days to which Executive was entitled at the time of the Change in Control; (H) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 6 hereof; or (I) any purported termination of Executive's employment by the Company or its subsidiaries which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(iv) below (and, if applicable, the requirements of Section 3(ii) above); for purposes of this Agreement, no such purported termination shall be effective. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of Executive's employment by the Company and its subsidiaries or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 7 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail (other than with respect to a Good Reason termination pursuant to Section 3(iii)(I)) the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (v) DATE OF TERMINATION. "Date of Termination" shall mean (A) if Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of Executive's duties during such thirty (30) day period), and (B) if Executive's employment is terminated pursuant to Section 3(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 3(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 3(iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided, that, if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company and its subsidiaries will continue to pay Executive's full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary and bonus) and continue Executive as a participant in all incentive compensation, benefit and insurance plans in which Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 3(v). Amounts paid under this Section 3(v) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a Change in Control of the Company, as defined by Section 2, upon termination of Executive's employment or during a period of Disability, which, in either event, occurs during the term of this Agreement, Executive shall be entitled to the following benefits: (i) During any period that Executive fails to perform Executive's full-time duties with the Company and its subsidiaries as a result of the Disability, Executive shall continue to receive an amount equal to Executive's base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, Executive's benefits shall be determined in accordance with the employee benefit programs of the Company and its subsidiaries then in effect. (ii) If Executive's employment shall be terminated by the Company or any of its subsidiaries for Cause or by Executive without Good Reason (excluding death, Disability or Retirement) the Company (or one of its subsidiaries, if applicable) shall pay through the Date of Termination Executive's full base salary at the rate in effect at the time Notice of Termination is given and shall pay any amounts otherwise payable to Executive on or immediately prior to the Date of Termination pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to Executive under this Agreement. (iii) If Executive's employment shall be terminated by reason of Executive's death or Retirement, Executive's benefits shall be determined in accordance with the retirement and other benefit programs of the Company and its subsidiaries then in effect, except as otherwise provided in Section 3(i). (iv) If Executive's employment by the Company and its subsidiaries shall be terminated (other than for death or Disability) by (a) the Company and its subsidiaries other than for Cause or (b) Executive with Good Reason, then Executive shall be entitled to the benefits provided below: (A) The Company (or one of its subsidiaries, if applicable) shall pay Executive's full base salary, at the rate in effect at the time of the Change in Control and increased to reflect any subsequent increases in such base salary (the "Base Salary"), and a pro-rated Bonus calculated through the Date of Termination, no later than the thirtieth day following the Date of Termination, plus all other amounts to which Executive is entitled under any compensation plan of the Company applicable to Executive, at the time such payments are due. For purposes of this Agreement, the "Bonus" shall mean the highest amount of cash and the value (determined as of the time of the awards in the same manner as was used for the awards) of deferred stock awarded as an annual incentive under the Management Incentive Plan (or any other plan, policy or arrangement) to Executive in respect of any of the three years immediately prior to the year in which the Notice of Termination is given. (B) The Company shall pay Executive, on a date that is no later than the thirtieth day following the Date of Termination, as severance pay to Executive a severance payment equal to two (2) times the sum of (i) Executive's Base Salary, (ii) the Bonus, and (iii) the Stock Option Value (or, if greater, the highest value at the time of grant on a Black-Scholes basis, determined as provided for herein, of any option grant made to Executive after the Change in Control). (C) The Company shall also pay to Executive, no less frequently than monthly, all legal fees and expenses reasonably incurred by Executive in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement); and (D) (i) Upon the date of Termination, Executive (or Executive's spouse or applicable beneficiary in the event of Executive's death) will be eligible to receive a benefit, when such benefits otherwise become payable, from the Company's general funds to be calculated using the benefit calculation provisions of the WYETH Retirement Plan - U.S. (the "DB Plan") and, to the extent Executive participates therein, the WYETH Supplemental Executive Retirement Plan (the "SERP") and the WYETH Executive Retirement Plan (the "ERP") as if the provisions thereunder contained the assumptions set forth herein, and offset by any benefits actually payable under the DB Plan, the SERP, and the ERP not taking into account the assumptions set forth herein. Any elections made under the DB Plan, the SERP and the ERP for purposes of determining the form of payment will also apply for purposes of this benefit. The assumptions to be used in calculating Executive's benefit are: (x) Executive has continued in the employ of the Company for an additional two years (the "Severance Period") after the Date of Termination, and (y) Executive has earned annually from the Date of Termination to the date of Executive's assumed continued employment pursuant to clause (x) above the same compensation Executive earned in the twelve months preceding the Date of Termination or in the twelve months preceding the Change in Control, if greater. In addition, any pension payable to Executive at age 55 (or upon the Date of Termination, if Executive is then age 55 or over) shall not be reduced because it is payable prior to age 65 or 60, as the case may be. (ii) The length of the Severance Period will be added to Executive's actual age for determining whether or when Executive has attained or will attain age 55 for the purposes of Executive's eligibility to commence receiving payments of benefits pursuant to Section 4(iv)(D)(i) above. (E) Executive shall become eligible for all benefits, in addition to those described in Section 4(iv)(D) above, made available immediately prior to the Date of Termination (or, if greater, immediately prior to the date of the Change in Control) to retirees of the Corporation, including, without limitation, retiree medical coverage and life insurance benefits, if at the time of termination Executive has already attained age 45, as if Executive had at the Date of Termination satisfied the service and age conditions for coverage under the applicable provisions of the Company's employee benefit plans. If the Company is unable to provide Executive coverage under such plans, it shall provide Executive with separate comparable coverage, but in no event less than the retiree coverage in place immediately prior to the Change in Control; provided, however, that the retiree medical coverage provided by the Corporation shall be secondary to any other medical coverage the Executive may then have. (F) The Company will continue Executive's participation and coverage for the Severance Period from the Date of Termination under all the Company's life, medical, dental plans and other welfare benefit plans (but excluding the Company's disability plans) ("Insurance Benefits"), and all perquisites and fringe benefit plans and programs (other than the Company's pension and 401(k) plans) (the perquisites and fringe benefits together being the "Fringe Benefits") in which Executive is participating immediately prior to such employment termination, under the same coverages and on the same terms as in effect immediately prior to termination; provided, however, that if his continued participation is not possible under the general terms and provisions of such plans and programs, the Company shall arrange to provide him with substantially similar benefits; provided, further, that if any other Company plan, arrangement or agreement provides for continuation of Insurance Benefits and Fringe Benefits then the Executive shall receive such coverage under such other plan, arrangement or agreement, and if the period of such coverage is shorter than the Severance Period, then the Executive shall receive pursuant to this section, such coverage for the remainder of the Severance Period. (G) Upon the Date of Termination, to the extent that, under the terms of any plan, any "restricted" stock awards or options shall terminate or be forfeited upon or following Executive's termination of employment without, in the case of options, the opportunity to exercise after Notice of Termination and to sell the underlying shares immediately after exercise without legal impediment, then the Executive (or any permitted transferee) shall receive, within 10 days after the forfeiture or termination of such award or option, an amount in respect of such terminated or forfeited stock awards or options, equal to the sum of (i) the Cashout Value (as defined below) of all the shares covered by the restricted stock awards so forfeited (with units converted to shares based on the target awards), and (ii) the excess of (a) the Cashout Value of all the shares subject to options which were so forfeited over (b) the aggregate exercise price of the shares subject to such forfeited options. For purposes of this Section 4(iv)(G), the "Cashout Value" of a share shall mean the greater of (x) the average of the closing prices paid for the Company's common stock (or any other securities to which the restricted shares or options relate) on any national exchange on which such shares are traded on each of the five trading days prior to and including the date of Executive's termination of employment (or, if no such shares are traded any of such days, the most recent date preceding Executive's termination of employment on which such shares were traded) and (y) the closing price paid for the Company's common stock (or any other securities to which the restricted shares or options relate) on any such exchange on the date of Executive's termination of employment (or, if no such shares are traded on such day, the most recent date preceding Executive's termination of employment on which such shares were traded). (H) The Company shall also provide to Executive outplacement services or executive recruiting services provided by a professional outplacement provider or executive recruiter at a cost to the Company of not more than 10% of the Executive's base salary (not to exceed $25,000). 5. EXCISE TAXES. (i) In the event that any payment or benefit received or to be received by Executive pursuant to the terms of this Agreement (the "Contract Payments") or in connection with Executive's termination of employment or contingent upon a Change in Control of the Company pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to Executive, at the time specified in Section 5(ii) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income or other tax and Excise Tax upon the payment provided for by this Section 5(i), and any interest, penalties or additions to tax payable by Executive with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to Executive ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest effective rates of taxation applicable to individuals as are in effect in the state and locality of Executive's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (ii) The Gross-Up Payments provided for in Section 5(i) hereof shall be made upon the earlier of (i) the payment to Executive of any Contract Payment or Other Payment or (ii) the imposition upon Executive or payment by Executive of any Excise Tax. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 1) give the Company any information reasonably requested by the Company relating to such claim; 2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and reasonably satisfactory to the Executive; 3) cooperate with the Company in good faith in order to effectively contest such claim; and 4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (iv) The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after- tax basis, from any Excise Tax or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the Company without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). (v) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Company or the Tax Counsel hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the Company or the Tax Counsel shall determine the amount of the Underpayment that has occurred and any such Underpayment shall promptly be paid by the Company to or for the benefit of the Executive. (vi) If, after the receipt by Executive of the Gross-Up Payment or an amount advanced by the Company in connection with the contest of an Excise Tax claim, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company in connection with an Excise Tax claim, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid. 6. SUCCESSORS; BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated Executive's employment with Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there is no such designee, to Executive's estate. 7. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid (or its international equivalent), addressed to Five Giralda Farms, Madison, New Jersey 07940 with respect to the Company and on the signature page with respect to Executive, provided that all notices to the Company shall be directed to the attention of the Senior Vice President-General Counsel of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the State of New York, without regard to its conflict of law provisions. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state, local or other applicable law. The obligations of the Company under Sections 4 and 5 shall survive the expiration of the term of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not effect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. ARBITRATION; INDEMNIFICATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. Following any termination of employment of the Executive (other than a termination by the Company for Cause), the Company shall indemnify and hold harmless Executive to the fullest extent permitted under the Company's by-laws (as in effect prior to the Change in Control) and applicable law for any claims, costs and expenses arising out of or in connection with Executive's employment with the Company and shall maintain directors' and officers' liability insurance coverage for the benefit of the Executive which provides him with coverage, if any, no less favorable than that in effect prior to the Change in Control. 12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information pertaining to the business of the Company or any of its affiliates, except (i) while employed by the Company, in the business of and for the benefit of the Company, or (ii) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order Executive to divulge, disclose or make accessible such information. For purposes of this Section 12, "Confidential Information" shall mean any trade secret or other non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other non-public, proprietary and confidential information of the Company or its affiliates, that, in any case, is not otherwise available to the public (other than by Executive's breach of the terms hereof) or known to persons in the industry generally. 13. ENTIRE AGREEMENT. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. This Agreement constitutes the entire understanding between the parties with respect to Executive's severance pay in the event of a termination of Executive's employment with the Company, superseding all negotiations, prior discussions and preliminary agreements, written or oral, concerning said severance pay; provided, however, that any payments or benefits provided in respect of severance, or indemnification for loss of employment, pursuant to any severance, employment or similar agreement between the Company or any of its subsidiaries and the Executive, or as required by applicable law outside the United States, shall reduce any payments or benefits provided pursuant to this Agreement, except that the payments or benefits provided pursuant to this Agreement shall not be reduced below zero. Notwithstanding any provision of this Agreement: (i) Executive shall not be required to mitigate the amount of any payment provided by this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided by this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement benefits received after the Date of Termination or otherwise, and (ii) except as otherwise provided in this paragraph, the obligations of the Company to make payments to Executive and to make the arrangements provided for herein are absolute and unconditional and may not be reduced by any circumstances, including without limitation any set-off, counterclaim, recoupment, defense or other right which the Company may have against Executive or any third party at any time. 14. FURTHER ACTION. The Company shall take any further action necessary or desirable to implement the provisions of this Agreement or perform its obligations hereunder (including, without limitation, amending the SERP, the ERP, any stock option or stock bonus plan, or any other applicable plan, program or arrangement or obtaining any necessary consents or approvals in connection therewith). WYETH By: -------------------------------- Name: Rene Lewin Title: Senior Vice President, Human Resources By: -------------------------------- Executive Date: -------------------------------- Home Address: EX-10.51 4 piadescr.txt SUMMARY DESCRIPTION OF PIA PROGRAM Summary Description of the Company's Performance Incentive Award Program The Company maintains two cash bonus plans in which executive officers participate: (i) the Performance Incentive Award Program and (ii) the stockholder-approved Executive Incentive Plan. Generally, annual cash bonus awards made to the executive officers named in the Company's proxy statement are made under the Executive Incentive Plan, while awards to other executive officers are made under the Performance Incentive Award Program. The Executive Incentive Plan was previously filed with the SEC and is an exhibit to this Annual Report on Form 10-K. No employee is eligible to receive a bonus under both the Performance Incentive Award Program and the Executive Incentive Plan for any single performance year. The annual cash bonus award payable to each executive officer under the Performance Incentive Award Program is determined on a discretionary basis by the Compensation and Benefits Committee of the Board of Directors based upon a variety of factors. The Committee determines whether to make awards and individual award amounts based on a variety of factors, including the Company's achievement of overall and, if applicable, divisional financial goals, individual contribution toward achievement of the Company's objectives, effectiveness in carrying out Company initiatives, level of responsibility, other factors of individual performance, peer company comparisons, and prior salary and bonus levels. Annual awards under the Performance Incentive Award Program are normally awarded during the first quarter of the year with respect to the prior year's performance. EX-12 5 ex12.txt EARNINGS TO FIXED CHARGES
Exhibit 12 Wyeth Computation of Ratio of Earnings to Fixed Charges (in thousands except ratio amounts) Year Ended December 31, ---------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------- ---------- ---------- ---------- ----------- Earnings (Loss): - ---------------- Income (loss) from continuing operations before income taxes $(129,847) $2,361,612 $6,097,245 $2,868,747 $(1,101,040) Add: - ---- Fixed charges 360,805 346,564 430,449 439,058 324,887 Minority interests 27,867 32,352 27,993 20,841 26,784 Amortization of capitalized interest 9,350 8,772 8,866 2,497 1,917 Less: - ----- Equity income (loss) (524) (468) 20,766 70,372 55,991 Capitalized interest 86,750 115,800 88,008 94,257 43,303 -------- ---------- ---------- ---------- ----------- Total earnings (loss) as defined $181,949 $2,633,968 $6,455,779 $3,166,514 $(846,746) ======== ========== ========== ========== =========== Fixed Charges: - -------------- Interest and amortization of debt expense $221,598 $182,503 $294,160 $301,145 $238,840 Capitalized interest 86,750 115,800 88,008 94,257 43,303 Interest factor of rental expense (1) 52,457 48,261 48,281 43,656 42,744 -------- ---------- ---------- ---------- ----------- Total fixed charges as defined $360,805 $346,564 $430,449 $439,058 $324,887 ======== ========== ========== ========== =========== Ratio of earnings to fixed charges (2) 0.5 7.6 15.0 7.2 - (1) A 1/3 factor was used to compute the portion of rental expenses deemed representative of the interest factor. (2) The results of operations for the year ended December 31, 2000 was inadequate to cover total fixed charges as defined. The coverage deficiency for the year ended December 31, 2000 was $1,171,633.
EX-13 6 ars.txt 2004 ANNUAL REPORT Wyeth 29 FINANCIAL REVIEW 30 Ten-Year Selected Financial Data 32 Consolidated Balance Sheets 33 Consolidated Statements of Operations 34 Consolidated Statements of Changes in Stockholders' Equity 35 Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 63 Report of Independent Registered Public Accounting Firm 64 Management Reports to Wyeth Stockholders 65 Quarterly Financial Data (Unaudited) 65 Market Prices of Common Stock and Dividends 66 Management's Discussion and Analysis of Financial Condition and Results of Operations
30 Wyeth TEN-YEAR SELECTED FINANCIAL DATA (Dollar amounts in thousands except per share amounts)
Year Ended December 31, 2004 2003 2002 - ----------------------------------------------------------------------------------------------- SUMMARY OF NET REVENUE AND EARNINGS Net revenue(1) $17,358,028 $15,850,632 $14,584,035 Income (loss) from continuing operations(1)(2)(3) 1,233,997 2,051,192 4,447,205 Diluted earnings (loss) per share from continuing operations(1)(2)(4) 0.91 1.54 3.33 Dividends per common share 0.9200 0.9200 0.9200 YEAR-END FINANCIAL POSITION Current assets(1)(3) $14,438,029 $14,962,242 $11,605,699 Current liabilities(1)(3) 8,535,542 8,429,510 5,485,506 Ratio of current assets to current liabilities(1)(3) 1.69 1.77 2.12 Total assets(1)(3) 33,629,704 31,031,922 26,042,592 Long-term debt(1)(5) 7,792,311 8,076,429 7,546,041 Average stockholders' equity 9,571,142 8,725,147 6,114,243 STOCKHOLDERS -- OUTSTANDING SHARES Number of common stockholders 54,301 59,181 61,668 Weighted average common shares outstanding used for diluted earnings (loss) per share calculation (in thousands)(4) 1,354,489 1,336,430 1,334,127 EMPLOYMENT DATA(1) Number of employees at year end 51,401 52,385 52,762 Wages and salaries $ 3,280,328 $ 3,003,555 $ 2,792,379 Benefits (including Social Security taxes) 958,317 933,448 842,177
(1) As a result of the sale of the Cyanamid Agricultural Products business on June 30, 2000, amounts for the years 1995 through 1999 were restated to reflect this business as a discontinued operation with the net assets of the discontinued business held for sale related to the Cyanamid Agricultural Products business included in current assets. (2) See Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion of the diet drug litigation charges, gains related to Immunex Corporation (Immunex)/Amgen Inc. (Amgen) common stock transactions and special charges for the years ended December 31, 2004, 2003 and 2002. (3) As a result of pre-tax charges of $4,500,000, $2,000,000, $1,400,000, $950,000, $7,500,000 and $4,750,000 in 2004, 2003, 2002, 2001, 2000 and 1999, respectively, related to the litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN, current liabilities increased substantially beginning in 1999 compared with prior years and unfavorably impacted the ratio of current assets to current liabilities in years subsequent to 1998. In 2002, the Company sold 67,050,400 shares of Amgen common stock received in connection with Amgen's acquisition of Immunex for net proceeds of $3,250,753. The Company used a portion of these proceeds to pay down commercial paper and substantially reduce current liabilities. Additionally, the remaining 31,235,958 shares of Amgen common stock owned by the Company as of December 31, 2002 had a fair value of $1,509,947. The fair value of these shares as well as the proceeds from the shares sold in 2002 substantially increased total assets. In 2003, the Company completed the sale of the remaining 31,235,958 shares of its Amgen common stock holdings for net proceeds of $1,579,917. (4) The average number of common shares outstanding for diluted earnings per share has been restated for 2003 in accordance with Emerging Issues Task Force Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. The Company's Convertible Senior Debentures were issued in December 2003, and there was no impact on 2003 diluted earnings per share as a result of the restatement. (5) In 2001, the Company issued $3,000,000 of Senior Notes. In 2003, the Company issued $4,800,000 of Senior Notes and $1,020,000 of Convertible Senior Debentures. A portion of the proceeds from the 2003 borrowings was used to repurchase approximately $1,700,000 in previously issued Senior Notes. Wyeth 31
2001 2000 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- $ 13,983,745 $ 13,081,334 $ 11,695,061 $ 11,101,100 $ 11,916,623 $ 11,928,290 $ 11,274,927 2,285,294 (901,040) (1,207,243) 2,152,344 1,747,638 1,651,617 1,472,525 1.72 (0.69) (0.92) 1.61 1.33 1.28 1.18 0.9200 0.9200 0.9050 0.8700 0.8300 0.7825 0.7550 $ 9,766,753 $ 10,180,811 $ 12,384,778 $ 10,698,188 $ 10,025,512 $ 10,310,256 $ 11,084,841 7,257,181 9,742,059 6,480,383 3,478,119 3,476,322 3,584,256 3,929,940 1.35 1.05 1.91 3.08 2.88 2.88 2.82 22,967,922 21,092,466 23,123,756 20,224,231 19,851,517 19,924,666 20,721,093 7,357,277 2,394,790 3,606,423 3,839,402 5,007,610 6,010,297 7,806,717 3,445,333 4,516,420 7,914,772 8,895,024 7,568,672 6,252,545 4,898,550 64,698 58,355 62,482 65,124 64,313 67,545 68,763 1,330,809 1,306,474 1,308,876 1,336,641 1,312,975 1,287,790 1,250,902 52,289 48,036 46,815 47,446 54,921 54,194 58,957 $ 2,536,220 $ 2,264,258 $ 2,032,431 $ 2,175,517 $ 2,428,518 $ 2,439,604 $ 2,512,418 691,018 602,816 593,222 577,930 619,528 614,179 641,169
32 Wyeth CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts)
DECEMBER 31, 2004 2003 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 4,743,570 $ 6,069,794 Marketable securities 1,745,558 1,110,297 Accounts receivable less allowances (2004 -- $139,091 and 2003 -- $149,795) 2,798,565 2,529,613 Inventories 2,478,009 2,412,184 Other current assets including deferred taxes 2,672,327 2,840,354 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 14,438,029 14,962,242 Property, plant and equipment: Land 187,732 182,849 Buildings 4,630,910 4,130,838 Machinery and equipment 4,657,716 4,184,292 Construction in progress 3,600,993 3,188,273 - ------------------------------------------------------------------------------------------------------------------- 13,077,351 11,686,252 Less accumulated depreciation 3,553,001 3,025,201 - ------------------------------------------------------------------------------------------------------------------- 9,524,350 8,661,051 Goodwill 3,856,410 3,817,993 Other intangibles, net of accumulated amortization (2004 -- $166,827 and 2003 -- $128,137) 212,360 133,134 Other assets including deferred taxes 5,598,555 3,457,502 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 33,629,704 $ 31,031,922 =================================================================================================================== LIABILITIES Loans payable $ 330,706 $ 1,512,845 Trade accounts payable 949,251 1,010,749 Accrued expenses 7,051,557 5,461,835 Accrued taxes 204,028 444,081 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 8,535,542 8,429,510 Long-term debt 7,792,311 8,076,429 Accrued postretirement benefit obligations other than pensions 1,024,239 1,007,540 Other noncurrent liabilities 6,429,709 4,224,062 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 23,781,801 21,737,541 - ------------------------------------------------------------------------------------------------------------------- Contingencies and commitments (Note 14) - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY $2.00 convertible preferred stock, par value $2.50 per share; 5,000,000 shares authorized 40 42 Common stock, par value $0.33 1/3 per share; 2,400,000,000 shares authorized (1,335,091,774 and 1,332,451,733 issued and outstanding, net of 87,319,402 and 89,930,211 treasury shares at par, for 2004 and 2003, respectively) 445,031 444,151 Additional paid-in capital 4,817,024 4,764,390 Retained earnings 4,118,656 4,112,285 Accumulated other comprehensive income (loss) 467,152 (26,487) - ------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 9,847,903 9,294,381 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,629,704 $ 31,031,922 ===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Wyeth 33 CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts)
YEAR ENDED DECEMBER 31, 2004 2003 2002 - -------------------------------------------------------------------------------------------------------- Net Revenue $ 17,358,028 $ 15,850,632 $ 14,584,035 --------------------------------------------- Cost of goods sold 4,947,269 4,590,148 4,074,619 Selling, general and administrative expenses 5,799,791 5,468,174 5,010,507 Research and development expenses 2,460,610 2,093,533 2,080,191 Interest expense, net 110,305 103,140 202,052 Other income, net (330,100) (545,326) (539,163) Diet drug litigation charges 4,500,000 2,000,000 1,400,000 Gains related to Immunex/Amgen common stock transactions -- (860,554) (4,082,216) Special charges -- 639,905 340,800 --------------------------------------------- Income (loss) before income taxes (129,847) 2,361,612 6,097,245 Provision (benefit) for income taxes (1,363,844) 310,420 1,650,040 --------------------------------------------- NET INCOME $ 1,233,997 $ 2,051,192 $ 4,447,205 ============================================= BASIC EARNINGS PER SHARE $ 0.93 $ 1.54 $ 3.35 ============================================= DILUTED EARNINGS PER SHARE $ 0.91 $ 1.54 $ 3.33 =============================================
The accompanying notes are an integral part of these consolidated financial statements. 34 Wyeth CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands except per share amounts)
$2.00 ACCUMULATED CONVERTIBLE ADDITIONAL OTHER TOTAL PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2002 $ 51 $ 440,190 $ 4,295,051 $ 170,309 $ (833,028) $ 4,072,573 =================================================================================== Net income 4,447,205 4,447,205 Currency translation adjustments 226,797 226,797 Unrealized losses on derivative contracts, net (22,132) (22,132) Unrealized gains on marketable securities, net 520,483 520,483 Minimum pension liability adjustments (47,691) (47,691) ------------ Comprehensive income, net of tax 5,124,662 ------------ Cash dividends declared: Preferred stock (per share: $2.00) (38) (38) Common stock (per share: $0.92) (1,219,135) (1,219,135) Common stock acquired for treasury (667) (5,472) (107,788) (113,927) Common stock issued for stock options 2,349 213,021 215,370 Other exchanges (5) 147 80,173 (3,908) 76,407 ----------------------------------------------------------------------------------- Balance at December 31, 2002 46 442,019 4,582,773 3,286,645 (155,571) 8,155,912 =================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Net income 2,051,192 2,051,192 Currency translation adjustments 691,362 691,362 Unrealized losses on derivative contracts, net (32,887) (32,887) Unrealized gains on marketable securities, net 7,780 7,780 Realized gain on sale of Amgen stock reclassified to net income (515,114) (515,114) Minimum pension liability adjustments (22,057) (22,057) ------------ Comprehensive income, net of tax 2,180,276 ------------ Cash dividends declared: Preferred stock (per share: $2.00) (35) (35) Common stock (per share: $0.92) (1,223,123) (1,223,123) Common stock issued for stock options 2,058 124,837 126,895 Other exchanges (4) 74 56,780 (2,394) 54,456 ----------------------------------------------------------------------------------- Balance at December 31, 2003 42 444,151 4,764,390 4,112,285 (26,487) 9,294,381 =================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Net income 1,233,997 1,233,997 Currency translation adjustments 451,892 451,892 Unrealized gains on derivative contracts, net 10,354 10,354 Unrealized losses on marketable securities, net (8,226) (8,226) Minimum pension liability adjustments 39,619 39,619 ------------ Comprehensive income, net of tax 1,727,636 ------------ Cash dividends declared: Preferred stock (per share: $2.00) (33) (33) Common stock (per share: $0.92) (1,227,001) (1,227,001) Common stock issued for stock options 779 56,694 57,473 Other exchanges (2) 101 (4,060) (592) (4,553) ----------------------------------------------------------------------------------- Balance at December 31, 2004 $ 40 $ 445,031 $ 4,817,024 $ 4,118,656 $ 467,152 $ 9,847,903 ===================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Wyeth 35 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, 2004 2003 2002 - --------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 1,233,997 $ 2,051,192 $ 4,447,205 Adjustments to reconcile net income to net cash provided by operating activities: Diet drug litigation charges 4,500,000 2,000,000 1,400,000 Gains related to Immunex/Amgen common stock transactions -- (860,554) (4,082,216) Special charges -- 639,905 340,800 Net gains on sales of assets (156,175) (343,064) (329,364) Depreciation 581,567 505,702 461,554 Amortization 40,832 32,181 23,146 Change in deferred income taxes (1,470,532) (433,994) 1,109,535 Income tax adjustment (407,600) -- -- Diet drug litigation payments (850,200) (434,167) (1,307,013) Security fund deposits -- (535,215) (405,000) Contributions to defined benefit pension plans (273,318) (230,787) (909,602) Changes in working capital, net: Accounts receivable (130,325) 69,628 271,988 Inventories 4,295 (245,453) (185,611) Other current assets 38,403 48,870 (124,738) Trade accounts payable and accrued expenses (144,161) 469,661 (250,887) Accrued taxes (145,322) 115,990 (33,214) Other items, net 57,282 61,208 (240,853) ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,878,743 2,911,103 185,730 ========================================== - --------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (1,255,275) (1,908,661) (1,931,879) Proceeds from Amgen acquisition of Immunex -- -- 1,005,201 Proceeds from sales of Amgen common stock -- 1,579,917 3,250,753 Proceeds from sales of assets 351,873 402,692 798,274 Purchases of marketable securities (2,345,354) (1,272,995) (2,235,872) Proceeds from sales and maturities of marketable securities 1,697,864 1,217,114 2,532,538 ------------------------------------------ NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES (1,550,892) 18,067 3,419,015 ========================================== - --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Repayments of commercial paper, net -- (3,787,145) (1,030,060) Proceeds from issuance of long-term debt -- 5,820,000 -- Repayments of long-term debt (1,500,000) (691,087) (250,000) Other borrowing transactions, net (6,587) (76,522) (13,797) Dividends paid (1,227,034) (1,223,158) (1,219,173) Purchases of common stock for treasury -- -- (113,927) Exercises of stock options 57,473 126,895 215,370 ------------------------------------------ NET CASH PROVIDED BY/(USED FOR) FINANCING ACTIVITIES (2,676,148) 168,983 (2,411,587) ------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 22,073 28,037 5,712 ------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,326,224) 3,126,190 1,198,870 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,069,794 2,943,604 1,744,734 ------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,743,570 $ 6,069,794 $ 2,943,604 ==========================================
The accompanying notes are an integral part of these consolidated financial statements. 36 Wyeth NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Wyeth and subsidiaries (the Company). All per share amounts, unless otherwise noted in the footnotes and quarterly financial data, are presented on a diluted basis; that is, based on the weighted average number of outstanding common shares and the effect of all potentially dilutive common shares (primarily unexercised stock options and contingently convertible debt). USE OF ESTIMATES: The financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the use of judgments and estimates made by management. Actual results may differ from those estimates. DESCRIPTION OF BUSINESS: The Company is a U.S.-based multi-national corporation engaged in the discovery, development, manufacture, distribution and sale of a diversified line of products in three primary businesses: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare) and Fort Dodge Animal Health (Animal Health). Pharmaceuticals include branded human ethical pharmaceuticals, biologicals, vaccines and nutritionals. Principal products include neuroscience therapies, cardiovascular products, nutritionals, gastroenterology drugs, anti-infectives, vaccines, oncology therapies, musculoskeletal therapies, hemophilia treatments, immunological products and women's health care products. Consumer Healthcare products include analgesics, cough/cold/allergy remedies, nutritional supplements, and hemorrhoidal, asthma and personal care items sold over-the-counter. Principal Animal Health products include vaccines, pharmaceuticals, parasite control and growth implants. The Company sells its diversified line of products to wholesalers, pharmacies, hospitals, physicians, retailers and other health care institutions located in various markets in more than 145 countries throughout the world. Wholesale distributors and large retail establishments account for a large portion of the Company's Net revenue and trade receivables, especially in the United States. The Company's top three customers accounted for approximately 25%, 23% and 25% of the Company's Net revenue in 2004, 2003 and 2002, respectively. The Company's largest customer accounted for 10% of net revenue in 2004, 2003 and 2002. The Company continuously monitors the creditworthiness of its customers and has established internal policies regarding customer credit limits. The Company is not dependent on any one product or line of products for a substantial portion of its net revenue or results of operations other than EFFEXOR, which comprised approximately 19%, 17% and 14% of the Company's Net revenue in 2004, 2003 and 2002, respectively. EQUITY METHOD OF ACCOUNTING: The Company accounts for investments in 20%- to 50%-owned companies, for which the Company has significant influence, using the equity method. Accordingly, the Company's share of the earnings of these companies is included in Other income, net. The related equity method investment is included in Other assets including deferred taxes. In 2001, Immunex Corporation (Immunex) was the Company's only material equity method investment. During 2002, Amgen Inc. (Amgen) completed its acquisition of Immunex. As a result, the Company's investment in Immunex, which was previously accounted for on the equity method, was exchanged for an investment in Amgen and was accounted for on the cost method subsequent to July 15, 2002. The Company liquidated all of its Amgen common stock holdings by the end of the 2003 first quarter. As of December 31, 2003, the Company no longer held an investment in Amgen. See Note 2 for further description of Immunex/Amgen-related common stock transactions. At December 31, 2004 and 2003, the Company did not have any material equity method investments. CASH EQUIVALENTS consist primarily of commercial paper, fixed-term deposits, securities under repurchase agreements and other short-term, highly liquid securities with maturities of three months or less when purchased and are stated at cost. The carrying value of cash equivalents approximates fair value due to their short-term, highly liquid nature. MARKETABLE SECURITIES: The Company has marketable debt and equity securities, which are classified as either available-for-sale or held-to-maturity, depending on management's investment intentions relating to these securities. Available-for-sale securities are marked-to-market based on quoted market values of the securities, with the unrealized gains and losses, net of tax, reported as a component of Accumulated other comprehensive income (loss). Realized gains and losses on sales of available-for-sale securities are computed based upon initial cost adjusted for any other-than-temporary declines in fair value. Investments categorized as held-to-maturity are carried at amortized cost because the Company has both the intent and ability to hold these investments until they mature. Impairment losses are charged to income for other-than-temporary declines in fair value. Premiums and discounts are amortized or accreted into earnings over the life of the related available-for-sale or held-to-maturity security. Dividend and interest income is recognized when earned. The Company owns no investments that are considered to be trading securities. INVENTORIES are valued at the lower of cost or market. Inventories valued under the last-in, first-out (LIFO) method amounted to $344.8 million and $429.5 million at December 31, 2004 and 2003, respectively. The current value exceeded the LIFO value by $89.6 million and $74.0 million at December 31, 2004 and 2003, respectively. The remaining inventories are valued primarily under the first-in, first-out (FIFO) method. Wyeth 37 Inventories at December 31 consisted of:
(In thousands) 2004 2003 - -------------------------------------------------------------------------------- Finished goods $ 851,059 $ 821,637 Work in progress 1,340,245 1,141,916 Materials and supplies 286,705 448,631 ----------- ----------- $2,478,009 $2,412,184 =========== ===========
PROPERTY, PLANT AND EQUIPMENT is carried at cost. Depreciation is provided over the estimated useful lives of the related assets, principally on the straight-line method, as follows: - -------------------------------------------------------------------------------- Buildings 10 - 50 years Machinery and equipment 3 - 20 years - --------------------------------------------------------------------------------
Costs related to the validation of new facilities or assets are primarily recorded in Construction in progress and subsequently reclassified to the appropriate Property, plant and equipment category when placed in service. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on projected undiscounted cash flows associated with the affected assets. A loss is recognized for the difference between the fair value and the carrying amount of the asset. Fair value is determined based on market quotes, if available, or other valuation techniques. GOODWILL AND OTHER INTANGIBLES: Goodwill is defined as the excess of cost over the fair value of net assets acquired. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). With the adoption of SFAS No. 142, goodwill and other intangibles with indefinite lives no longer are amortized but are subject to at least an annual assessment for impairment by applying a fair value-based test. Other intangibles with finite lives continue to be amortized. See Note 5 for further detail relating to the Company's goodwill and other intangibles balances. DERIVATIVE FINANCIAL INSTRUMENTS: The Company currently manages its exposure to certain market risks, including foreign exchange and interest rate risks, through the use of derivative financial instruments and accounts for them in accordance with SFAS Nos. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. On the date that the Company enters into a derivative contract, it designates the derivative as: (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (cash flow hedge), (3) a foreign currency fair value or cash flow hedge (foreign currency hedge) or (4) a derivative instrument that is not designated for hedge accounting treatment. For certain derivative contracts that are designated and qualify as fair value hedges (including foreign currency fair value hedges), the derivative instrument is marked-to-market with gains and losses recognized in current period earnings to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges (including foreign currency cash flow hedges), the effective portion of gains and losses on these contracts is reported as a component of Accumulated other comprehensive income (loss) and reclassified into earnings in the same period the hedged transaction affects earnings. Any hedge ineffectiveness on cash flow hedges is immediately recognized in earnings. Ineffectiveness is minimized through the proper relationship of the hedging derivative contract with the hedged item. The Company also enters into derivative contracts that are not designated as hedging instruments. These derivative contracts are recorded at fair value with the gain or loss recognized in current period earnings. The cash flows from each of the Company's derivative contracts are reflected as operating activities in the consolidated statements of cash flows. The Company does not hold any derivative instruments for trading purposes. See Note 9 for further description of the Company's specific programs to manage risk using derivative financial instruments. CURRENCY TRANSLATION: The majority of the Company's international operations are translated into U.S. dollars using current foreign currency exchange rates with currency translation adjustments reflected in Accumulated other comprehensive income (loss). Currency translation adjustments related to international operations in highly inflationary economies are included in the results of operations. REVENUE RECOGNITION: Revenue from the sale of Company products is recognized in Net revenue when goods are shipped and title and risk of loss pass to the customer. Provisions for product returns, cash discounts, chargebacks/rebates, customer allowances and consumer sales incentives are provided for as deductions in determining Net revenue. These provisions are based on estimates derived from current promotional program requirements, wholesaler inventory data and historical experience. Revenue under co-promotion agreements from the sale of products developed by other companies, such as the Company's arrangement with Amgen to co-promote ENBREL and with King Pharmaceuticals, Inc. to co-promote ALTACE, is recorded as alliance revenue, which is included in Net revenue. Alliance revenue is primarily based upon a percentage of the co-promotion partners' gross margin. Such alliance revenue is earned when the co-promoting company ships the product and title and risk of loss pass to a third party. Additionally, alliance revenue includes revenue earned related to sirolimus, the active ingredient in RAPAMUNE, which coats the coronary stent marketed by Johnson & Johnson. There is no cost of goods sold associated with alliance revenue, and the selling and marketing expenses related to alliance revenue are included in Selling, general and administrative expenses. Alliance revenue totaled $789.9 million, $654.4 million and $418.8 million for 2004, 2003 and 2002, respectively. 38 Wyeth SALES DEDUCTIONS: The Company deducts certain items from gross sales, which primarily consist of provisions for product returns, cash discounts, chargebacks/rebates, customer allowances and consumer sales incentives. In most cases, these deductions are offered to customers based upon volume purchases, the attainment of market share levels, government mandates, coupons and consumer discounts. These costs are recognized at the later of (a) the date at which the related revenue is recorded or (b) the date at which the incentives are offered. Chargebacks/rebates are the Company's only significant deduction from gross sales and relate primarily to U.S. sales of pharmaceutical products provided to wholesalers and managed care organizations under contractual agreements or to certain governmental agencies that administer benefit programs, such as Medicaid. While different programs and methods are utilized to determine the chargeback or rebate provided to the customer, the Company considers both to be a form of price reduction. Chargeback/rebate accruals included in Accrued expenses at December 31, 2004 and 2003 were $917.0 million and $750.3 million, respectively. SHIPPING AND HANDLING COSTS, which include transportation to customers, transportation to distribution points, warehousing and handling costs, are included in Selling, general and administrative expenses. The Company typically does not charge customers for shipping and handling costs. Shipping and handling costs were $252.3 million, $234.3 million and $227.5 million in 2004, 2003 and 2002, respectively. STOCK-BASED COMPENSATION: As of December 31, 2004, the Company has three Stock Incentive Plans, a Stock Option Plan for Non-Employee Directors and a Restricted Stock Plan for Non-Employee Directors, which are described more fully in Note 12. The Company accounts for those plans using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). No stock-based employee compensation cost is reflected in net income, other than for the Company's restricted stock awards, as options granted under all other plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company's restricted stock awards are issued under the Company's Stock Incentive Plans. The following table illustrates the effect on net income and earnings per share (EPS) as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, Amendment of SFAS No. 123 (SFAS No. 148), to stock-based employee compensation:
(In thousands except per share amounts) YEAR ENDED DECEMBER 31, 2004 2003 2002 - --------------------------------------------------------------------------------------------------- Net income, as reported $ 1,233,997 $ 2,051,192 $ 4,447,205 Add: Stock-based employee compensation expense included in reported net income, net of tax 16,012 13,396 3,999 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax (275,327) (335,082) (301,964) -------------- -------------- -------------- Adjusted net income $ 974,682 $ 1,729,506 $ 4,149,240 ============== ============== ============== Earnings per share: Basic - as reported $ 0.93 $ 1.54 $ 3.35 ============== ============== ============== Basic - adjusted $ 0.73 $ 1.30 $ 3.13 ============== ============== ============== Diluted - as reported $ 0.91 $ 1.54 $ 3.33 ============== ============== ============== Diluted - adjusted $ 0.72 $ 1.29 $ 3.11 ============== ============== ==============
The fair value of issued stock options is estimated on the date of grant using the Black-Scholes option-pricing model incorporating the following assumptions for stock options granted:
YEAR ENDED DECEMBER 31, 2004 2003 2002 - ------------------------------------------------------------------------------------ Expected volatility of stock price 36.0% 35.6% 33.7% Expected dividend yield 2.3% 2.2% 1.9% Risk-free interest rate 3.5% 3.0% 4.1% Expected life of options 5 years 5 years 5 years
The weighted average fair value of stock options granted during 2004, 2003 and 2002 was $11.92, $11.86 and $16.12 per option share, respectively. RESEARCH AND DEVELOPMENT EXPENSES are expensed as incurred. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the respective intangible asset. Amounts capitalized for such payments are included in Other intangibles, net of accumulated amortization. Wyeth 39 EARNINGS PER SHARE: The following table sets forth the computations of basic earnings per share and diluted earnings per share:
(In thousands except per share amounts) YEAR ENDED DECEMBER 31, 2004 2003 2002 - -------------------------------------------------------------------------------------------------- Numerator: Net income less preferred dividends $1,233,964 $2,051,157 $4,447,167 Denominator: Weighted average common shares outstanding 1,333,691 1,330,276 1,325,577 ------------------------------------- Basic earnings per share $ 0.93 $ 1.54 $ 3.35 ===================================== Numerator: Net income $1,233,997 $2,051,192 $4,447,205 Interest expense on contingently convertible debt(1) 5,234 229 -- ------------------------------------- Net income, as adjusted $1,239,231 $2,051,421 $4,447,205 ------------------------------------- Denominator: Weighted average common shares outstanding 1,333,691 1,330,276 1,325,577 Common stock equivalents of outstanding stock options and deferred contingent common stock awards 3,908 5,634 8,550 Common stock equivalents of assumed conversion of contingently convertible debt(1) 16,890 520 -- ------------------------------------- Total shares(2) 1,354,489 1,336,430 1,334,127 ------------------------------------- Diluted earnings per share(1)(2) $ 0.91 $ 1.54 $ 3.33 =====================================
(1) Diluted earnings per share reflects the impact of the recently issued Emerging Issues Task Force (EITF) Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share, which requires the inclusion of the dilutive effect from contingently convertible debt instruments with market price contingencies in the calculation of diluted earnings per share. Accordingly, interest expense on the Company's contingently convertible debt, net of capitalized interest and taxes, is added back to reported net income, and the additional common shares (assuming conversion) are included in total shares outstanding for purposes of calculating diluted earnings per share. See Recently Issued Accounting Standards below for additional information. (2) At December 31, 2004, 2003 and 2002, 81,614,423, 106,967,641 and 90,360,361 common shares, respectively, related to options outstanding under the Company's Stock Incentive Plans were excluded from the computation of diluted earnings per share, as the effect would have been antidilutive. RECENTLY ISSUED ACCOUNTING STANDARDS: The Financial Accounting Standards Board (FASB) recently issued SFAS No. 151 and revised SFAS No. 123, and the EITF reached a final consensus on Issue No. 04-8, which are summarized below. - SFAS No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4 (SFAS No. 151), amends and clarifies the accounting guidance for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as current period charges regardless of whether they meet the criterion of "abnormal" as mentioned in ARB No. 43, Chapter 4, Inventory Pricing. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not anticipate the adoption of this Statement will have a material impact on its financial position or results of operations. - SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), replaces SFAS No. 123. In addition, SFAS No. 123R supersedes APB No. 25 and its related implementation guidance. This Statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense based on their fair values. Currently, the Company accounts for its stock-based compensation using the intrinsic value method in accordance with APB No. 25 and provides the required pro forma disclosures as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based employee compensation. SFAS No. 123R is effective for interim and annual periods beginning after June 15, 2005. This Statement applies to all awards granted after the required effective date and to awards modified, repurchased or canceled after that date. The Company currently is considering the following transition methods for adoption of this Statement: - Modified prospective method, which requires companies (1) to record compensation expense for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and (2) to record compensation expense for any awards issued, modified or settled after the effective date of the standard; - Modified retrospective method, which allows companies to recognize, in their prior period financial statements, the exact amounts of compensation expense that previously were disclosed in their SFAS No. 123 pro forma footnote disclosures; and - A variation of the modified prospective method, which allows companies to restate earlier interim periods in the year that SFAS No. 123R is adopted using the applicable SFAS No. 123 pro forma footnote disclosures. The Company plans to determine its method of transition during the first half of 2005 and expects that the adoption of SFAS No. 123R will have a material impact on its results of operations and earnings per share. However, the Company has not yet determined the impact of adopting SFAS No. 123R because of potential changes in the Company's share-based compensation plans. - EITF Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share (EITF No. 04-8), amends the guidance in SFAS No. 128, Earnings per Share, currently followed for diluted EPS calculations. EITF No. 04-8 requires contingently convertible debt instruments with a market price contingency, such as the Company's 40 Wyeth outstanding $1,020.0 million aggregate principal amount of Convertible Senior Debentures (Debentures) due 2024, to be treated the same as traditional convertible debt instruments for EPS purposes (i.e., using the "if-converted" method). Traditional convertible debt reflects shares in diluted EPS (if dilutive) even if the stock price is below the conversion price and assumes conversion at the beginning of the period (or at time of issuance, if later). In accordance with EITF No. 04-8, which is effective for all periods ending after December 15, 2004 with restatement of previously reported diluted EPS calculations, an additional 16,890,180 shares outstanding were included in the calculation of the Company's diluted earnings per share. Application of EITF No. 04-8 resulted in a dilution of $0.03 in the 2004 diluted earnings per share. The Company's Debentures were issued in December 2003, and there was no impact on the 2003 diluted earnings per share as a result of the restatement. RECLASSIFICATIONS: Certain reclassifications, including the reclassification of royalty income to Other income, net from Cost of goods sold, have been made to the December 31, 2003 and 2002 consolidated financial statements and accompanying notes to conform with the December 31, 2004 presentation. Royalty income was $223.0 million, $213.1 million and $156.2 million in 2004, 2003 and 2002, respectively. 2. DIVESTITURES AND OTHER SIGNIFICANT TRANSACTIONS Co-development and Co-commercialization Agreement - ------------------------------------------------- In 2004, the Company entered into an agreement with Solvay Pharmaceuticals (Solvay) to co-develop and co-commercialize four neuroscience compounds, most notably, bifeprunox. The Company recorded an upfront payment of $145.5 million ($94.6 million after-tax or $0.07 per share) within Research and development expenses in connection with the agreement and will make milestone payments upon achievement of certain future development and regulatory events. Also under the terms of the agreement, a portion of the Solvay sales force is promoting EFFEXOR. Equity Purchase Agreement - ------------------------- The Company has an equity purchase agreement with Takeda Chemical Industrial Co., Ltd. (Takeda), whereby the Company will buy out the 40% minority interest of an affiliated entity in Japan presently held by Takeda. The terms of the buyout call for 10% to be purchased in 2005, another 10% in 2006 and the final 20% in 2007. The purchase price of each buyout is based on a multiple of the entity's net sales in each of the buyout years with the total purchase price estimated to be approximately $400.0 to $500.0 million. Immunex/Amgen Transactions - -------------------------- Acquisition of Immunex by Amgen and Related Sales of Amgen Common Stock During 2002, the Company recorded gains totaling $4,082.2 million ($2,628.1 million after-tax or $1.97 per share) relating to the acquisition of Immunex by Amgen and the subsequent sale of Amgen common stock. Prior to July 15, 2002, the Company was the beneficial owner of 223,378,088 shares of Immunex common stock. On July 15, 2002, Amgen completed its acquisition of Immunex. Under the terms of the acquisition agreement, each share of Immunex common stock was exchanged for 0.44 shares of Amgen common stock and $4.50 in cash. Accordingly, the Company received 98,286,358 shares of Amgen common stock (representing approximately 7.7% of Amgen's outstanding common stock) and $1,005.2 million in cash in exchange for all of its shares of Immunex common stock. The pre-tax gains of $4,082.2 million recorded in 2002 consisted of $2,627.6 million relating to the initial acquisition of Immunex by Amgen and $1,454.6 million relating to the subsequent sale of Amgen common stock and were determined as follows: 1. As of July 15, 2002, the Company had valued its shares of Amgen common stock at $2,500.1 million based on the quoted market price in effect as of July 15, 2002 reduced by an overall discount of approximately 18%. The discount rate was based on valuations provided by independent valuation consultants. The book value of the Company's Immunex investment was $867.7 million at July 15, 2002. A gain of $2,627.6 million ($1,684.7 million after-tax or $1.26 per share) was recorded on the exchange during the 2002 third quarter and was calculated as follows:
(In thousands) - ---------------------------------------------------------- Value received: Cash $1,005,201 Amgen common stock 2,500,100 ----------- 3,505,301 Less: Equity investment in Immunex 867,701 Transaction costs 10,000 ----------- 877,701 ----------- Gain before federal taxes 2,627,600 Provision for federal taxes 942,877 ----------- Net gain $1,684,723 ===========
2. As of December 31, 2002, the Company sold 67,050,400 shares of Amgen common stock generating net proceeds of $3,250.8 million. The net proceeds of $3,250.8 million resulted in a gain of $1,454.6 million ($943.4 million after-tax or $0.71 per share). The gain was determined by comparing the basis of the shares sold of $1,782.7 million with the net proceeds received reduced by certain related expenses. The remaining 31,235,958 shares of Amgen common stock held by the Company at December 31, 2002 had a fair value of $1,509.9 million, which included a mark-to-market gain of $515.1 million, net of tax, recorded as a component of Accumulated other comprehensive income (loss). The Company completed the sale of its remaining Amgen shares in January 2003 and netted proceeds of $1,579.9 million, which resulted in a gain of $860.6 million ($558.7 million after-tax or $0.42 per share). Wyeth 41 The Company and Amgen continue to co-promote ENBREL in the United States and Canada with the Company having exclusive international rights to ENBREL. The financial aspects of the existing licensing and marketing rights to ENBREL remain unchanged. Sale of Rhode Island Facility During the first quarter of 2002, the Company completed the sale of a manufacturing plant located in West Greenwich, Rhode Island, to Immunex (subsequently acquired by Amgen) for $487.8 million. The Company received $189.2 million of these proceeds in 2001 and the remaining $298.6 million during the 2002 first quarter. The Company did not recognize a gain on this transaction because the facility was sold at net book value. In December 2002, the U.S. Food and Drug Administration (FDA) approved the Rhode Island facility, which has been dedicated to expanding the production capacity of ENBREL. Net Gains on Sales of Assets - ---------------------------- For the years ended December 31, 2004, 2003 and 2002, net gains on sales of assets of $156.2 million, $343.1 million and $329.4 million, respectively, were included in Other income, net and primarily consisted of the following: - 2004 net gains included sales of product rights to indiplon, DIAMOX in Japan and the Company's nutritionals products in France, which resulted in pre-tax gains of approximately $150.9 million. - 2003 net gains included sales of product rights in some or all territories to ATIVAN, ISORDIL, DIAMOX, ZIAC, ZEBETA, AYGESTIN, AYGESTIN and SONATA. These divestitures resulted in pre-tax gains of approximately $265.8 million. - 2002 net gains primarily resulted from the sale of certain assets related to the Company's generic human injectables product line to Baxter Healthcare Corporation for $305.0 million in cash. This transaction resulted in a pre-tax gain of $172.9 million. The net assets, sales and profits of these divested assets, individually or in the aggregate, were not material to any business segment or the Company's consolidated financial statements as of December 31, 2004, 2003 and 2002. 3. SPECIAL CHARGES 2003 Special Charges - -------------------- The Company recorded a special charge of $639.9 million ($466.4 million after-tax or $0.35 per share) in the 2003 fourth quarter for manufacturing restructurings, related asset impairments and the cost of debt extinguishment. 2003 Restructuring Charge and Related Asset Impairments In December 2003, the Company recorded a special charge for manufacturing restructurings and related asset impairments of $487.9 million ($367.6 million after-tax or $0.28 per share). The Company recorded its 2003 restructuring charges, including personnel and other costs, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and its asset impairments in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets (SFAS No. 144). The restructuring charges and related asset impairments impacted only the Pharmaceuticals segment and were recorded to recognize the costs of closing certain manufacturing facilities, as well as the elimination of certain positions at the Company's facilities. During 2004, total payments were $44.2 million, and the restructuring program was substantially completed. The reserve balance of $21.6 million as of December 31, 2004 consists primarily of contract settlement costs, which, based on the terms of the agreements, will be paid during 2005. Debt Extinguishment Costs In December 2003, the Company recorded a special charge of $152.0 million ($98.8 million after-tax or $0.07 per share) related to the early extinguishment of debt in connection with the repurchase of certain Senior Notes. The costs relate primarily to the excess of prepayment premiums and principal over the carrying value of the debt retired and the related write-off of debt issuance costs. See Note 6 for further discussion of debt extinguishment. 2002 Special Charge - ------------------- In December 2002, the Company recorded a special charge for restructuring and related asset impairments of $340.8 million ($233.5 million after-tax or $0.18 per share) to recognize the costs of closing certain manufacturing facilities and two research facilities, as well as the elimination of certain positions at the Company's facilities. The Company recorded these asset impairments in accordance with SFAS No. 144 and its restructuring charges, including personnel and other costs, in accordance with EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The restructuring resulted in the elimination of approximately 3,150 positions worldwide. As of December 31, 2004, substantially all of the payments have been made. 42 Wyeth 4. MARKETABLE SECURITIES The cost, gross unrealized gains (losses) and fair value of available-for-sale and held-to-maturity securities by major security type at December 31, 2004 and 2003 were as follows:
GROSS GROSS (In thousands) UNREALIZED UNREALIZED FAIR AT DECEMBER 31, 2004 COST GAINS (LOSSES) VALUE - -------------------- ----------- ----------- ----------- ----------- Available-for-sale: U.S. Treasury securities $ 60,439 $ -- $ (286) $ 60,153 Commercial paper 32,597 -- -- 32,597 Certificates of deposit 54,867 3 (52) 54,818 Corporate debt securities 485,007 130 (528) 484,609 Asset-backed securities 258,543 15 (166) 258,392 Mortgage-backed securities 77,983 4 (67) 77,920 Other debt securities 2,469 -- (12) 2,457 Equity securities 48,264 8,998 (6,918) 50,344 Institutional fixed income fund 531,929 16,713 -- 548,642 ----------- ----------- ----------- ----------- Total available-for-sale 1,552,098 25,863 (8,029) 1,569,932 ----------- ----------- ----------- ----------- Held-to-maturity: Commercial paper 175,626 -- -- 175,626 ----------- ----------- ----------- ----------- $ 1,727,724 $ 25,863 $ (8,029) $ 1,745,558 =========== =========== =========== ===========
GROSS GROSS (In thousands) UNREALIZED UNREALIZED FAIR AT DECEMBER 31, 2003 COST GAINS (LOSSES) VALUE - -------------------- ----------- ----------- ----------- ----------- Available-for-sale: U.S. Treasury securities $ 152,851 $ 44 $ (23) $ 152,872 Commercial paper 42,964 4 (4) 42,964 Certificates of deposit 63,643 22 (27) 63,638 Corporate debt securities 212,198 252 (32) 212,418 Other debt securities 4,296 -- (11) 4,285 Equity securities 21,078 13,158 (188) 34,048 Institutional fixed income fund 522,847 16,868 -- 539,715 ----------- ----------- ----------- ----------- Total available-for-sale 1,019,877 30,348 (285) 1,049,940 ----------- ----------- ----------- ----------- Held-to-maturity: Commercial paper 60,107 -- -- 60,107 Certificates of deposit 250 -- -- 250 ----------- ----------- ----------- ----------- Total held-to-maturity 60,357 -- -- 60,357 ----------- ----------- ----------- ----------- $ 1,080,234 $ 30,348 $ (285) $ 1,110,297 =========== =========== =========== ===========
The contractual maturities of debt securities classified as available-for-sale at December 31, 2004 were as follows:
FAIR (In thousands) COST VALUE - -------------- -------- -------- Available-for-sale: Due within one year $172,698 $172,533 Due after one year through five years 586,598 585,920 Due after five years through 10 years 57,708 57,658 Due after 10 years 154,901 154,835 -------- -------- $971,905 $970,946 ======== ========
All held-to-maturity debt securities are due within one year and had aggregate fair values of $175.6 million at December 31, 2004. 5. GOODWILL AND OTHER INTANGIBLES In accordance with SFAS No. 142, goodwill is required to be tested for impairment at the reporting unit level utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it with the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of this unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment then would be measured in the second step. Goodwill in each reporting unit is tested for impairment during the fourth quarter of each year. The Company determined there was no impairment of the recorded goodwill for any of its reporting units as of December 31, 2004 and 2003. The Company's Other intangibles, net of accumulated amortization were $212.4 million at December 31, 2004, the majority of which are licenses having finite lives that are being amortized Wyeth 43 over their estimated useful lives ranging from three to 10 years. As of December 31, 2004, there is one trade name with a carrying value of approximately $16.9 million, which is deemed to have an indefinite life because it is expected to generate cash flows indefinitely. During the 2004 third quarter, the Company acquired certain licenses and patents related to a product currently marketed by the Company. The cost of $104.6 million has been recorded within Other intangibles, net of accumulated amortization and is being amortized over the respective lives of the license agreements and patents. During 2004, approximately $27.4 million of amortization expense related to other intangibles was recorded within Selling, general and administrative expenses. The remaining portion of amortization expense related to other intangibles as of December 31, 2004 was recorded within Cost of goods sold. Total amortization expense for intangible assets in 2004, 2003 and 2002 was $40.8 million, $32.2 million and $23.1 million, respectively. The annual amortization expense expected for the years 2005 through 2009 is as follows:
(In thousands) AMORTIZATION EXPENSE - ------------------------------------------------ 2005 $37,000 2006 32,200 2007 30,200 2008 24,300 2009 18,300
The changes in the carrying value of goodwill by reportable segment for the years ended December 31, 2004 and 2003 were as follows:
CONSUMER ANIMAL (In thousands) PHARMACEUTICALS HEALTHCARE HEALTH TOTAL - -------------------------------- --------------- ----------- ---------- ---------- Balance at January 1, 2003 $2,622,949 $ 590,346 $ 532,454 $3,745,749 Currency translation adjustments 68,823 2,180 1,241 72,244 ---------- ---------- ---------- ---------- Balance at December 31, 2003 2,691,772 592,526 533,695 3,817,993 Currency translation adjustments 36,793 1,080 544 38,417 ---------- ---------- ---------- ---------- Balance at December 31, 2004 $2,728,565 $ 593,606 $ 534,239 $3,856,410 ========== ========== ========== ==========
6. DEBT AND FINANCING ARRANGEMENTS The Company's debt at December 31 consisted of:
(In thousands) 2004 2003 - ---------------------------------------------------------------------------------------- Notes payable: 5.875% Notes due 2004 $ -- $ 500,000 7.900% Notes due 2005 308,913 308,913 6.250% Notes due 2006* -- 1,000,000 4.125% Notes due 2008 300,000 300,000 6.700% Notes due 2011 1,500,000 1,500,000 5.250% Notes due 2013 1,500,000 1,500,000 5.500% Notes due 2014 1,750,000 1,750,000 7.250% Notes due 2023 250,000 250,000 6.450% Notes due 2024 500,000 500,000 6.500% Notes due 2034 750,000 750,000 Floating rate convertible debentures due 2024 1,020,000 1,020,000 Pollution control and industrial revenue bonds: 2.56% - 5.80% due 2006 - 2018 70,250 71,250 Other debt: 0.74% - 12.00% due 2004 - 2023 29,234 32,832 Fair value of debt attributable to interest rate swaps 144,620 106,279 --------------------------- 8,123,017 9,589,274 Less current portion 330,706 1,512,845 --------------------------- $7,792,311 $8,076,429 ===========================
* At December 31, 2003, these Notes were classified as Loans payable due to the Company's exercise of a make-whole call option, which was completed in January 2004. Fair value of outstanding debt as of December 31, 2004 and 2003 was $8,430.2 million and $10,084.8 million, respectively. Revolving Credit Facilities - --------------------------- In March 2003, the Company replaced its $3,000.0 million, 364-day facility with credit facilities totaling $2,700.0 million. These credit facilities were composed of a $1,350.0 million, 364-day facility and a $1,350.0 million, three-year facility. In February 2004, the Company replaced its $1,350.0 million, 364-day credit facility with a $1,747.5 million, five-year facility. The new facility contains substantially identical financial and other covenants, representations, warranties, conditions and default provisions as the replaced facility. The proceeds from the credit facilities may be used to support commercial paper and the Company's general corporate and working capital requirements. At December 31, 2004 and 2003, there were no borrowings outstanding under the facilities, nor did the Company have any commercial paper outstanding that was supported by these facilities. Notes and Debentures - -------------------- The Company has issued the following Senior Notes (Notes) and Convertible Senior Debentures (Debentures): - $3,000.0 million of Notes and $1,020.0 million of Debentures issued in December 2003 - $1,800.0 million of Notes issued February 11, 2003 - $3,000.0 million of Notes issued March 30, 2001 December 2003 Issuance On December 11, 2003, the Company issued $3,000.0 million of Notes through a registered public offering. These Notes consisted of three tranches, which pay interest semiannually on February 1 and August 1, as follows: - $1,750.0 million 5.50% Notes due February 1, 2014 - $500.0 million 6.45% Notes due February 1, 2024 - $750.0 million 6.50% Notes due February 1, 2034 44 Wyeth Concurrent with the above-noted issuance of Notes, on December 16, 2003, the Company completed the private placement of $1,020.0 million aggregate principal amount of Debentures due January 15, 2024 through an offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act). Interest on the Debentures accrues at the six-month London Interbank Offering Rate (LIBOR) minus 0.50% and is payable semiannually on January 15 and July 15. The Debentures contain a number of conversion features that include substantive contingencies. The Debentures are convertible by the holders at an initial conversion rate of 16.559 shares of the Company's common stock for each $1,000 principal amount of the Debentures, which is equal to an initial conversion price of $60.39 per share. The holders may convert their Debentures, in whole or in part, into shares of the Company's common stock under any of the following circumstances: (1) during any calendar quarter commencing after March 31, 2004 and prior to December 31, 2022 (and only during such calendar quarter) if the price of the Company's common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days during a 30-consecutive trading day period; (2) at any time after December 31, 2022 and prior to maturity if the price of the Company's common stock is greater than or equal to 130% of the applicable conversion price on any day after December 31, 2022; (3) if the Company has called the Debentures for redemption; (4) upon the occurrence of specified corporate transactions such as a consolidation, merger or binding share exchange pursuant to which the Company's common stock would be converted into cash, property or securities; or (5) if the credit rating assigned to the Debentures by either Moody's Investors Services (Moody's) or Standard & Poor's (S&P) is lower than Baa3 or BBB-, respectively, or if the Debentures no longer are rated by at least one of these agencies or their successors (the Credit Rating Clause). Upon conversion, the Company has the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock. The Company may redeem some or all of the Debentures at any time on or after July 20, 2009 at a purchase price equal to 100% of the principal amount of the Debentures plus any accrued interest. Upon a call for redemption by the Company, the holder of each $1,000 Debenture may convert such note to shares of the Company's common stock. The holders have the right to require the Company to purchase their Debentures for cash at a purchase price equal to 100% of the principal amount of the Debentures plus any accrued interest on July 15, 2009, January 15, 2014 and January 15, 2019 or upon a fundamental change as described in the offering memorandum issued in conjunction with the private placement of the Debentures. In accordance with the recently issued EITF No. 04-8, the Company has included an additional 16,890,180 shares outstanding related to the Debentures in its diluted earnings per share calculation (see Note 1). The Credit Rating Clause described above has been determined to be an embedded derivative as defined by SFAS No. 133. In accordance with SFAS No. 133, embedded derivatives are required to be recorded at their fair value. Based upon an external valuation, the Credit Rating Clause had a fair value of zero at December 31, 2004 and 2003. February 11, 2003 Issuance On February 11, 2003, the Company issued $1,800.0 million of Notes through a registered public offering. The issuance consisted of two tranches of Notes, which pay interest semiannually, as follows: - $300.0 million 4.125% Notes due March 1, 2008 with interest payments due on March 1 and September 1 - $1,500.0 million 5.25% Notes due March 15, 2013 with interest payments due on March 15 and September 15 March 30, 2001 Issuance On March 30, 2001, the Company issued $3,000.0 million of Notes. These Notes consisted of three tranches, which pay interest semiannually on March 15 and September 15, in a transaction exempt from registration under the Securities Act, pursuant to Rule 144A, as follows: - $500.0 million 5.875% Notes due and repaid March 15, 2004 - $1,000.0 million 6.25% Notes due March 15, 2006 (subsequently repurchased through the exercise of a make-whole call option, which was completed in January 2004 as discussed below) - $1,500.0 million 6.70% Notes due March 15, 2011 As of June 15, 2001, pursuant to an exchange offer made by the Company, substantially all of the Notes issued in March 2001 were exchanged for new Notes having almost identical terms and which were registered under the Securities Act. Other In addition to the Notes and the Debentures described above, the Company has outstanding the following non-callable, unsecured and unsubordinated debt instruments at December 31, 2004: - $308.9 million 7.90% Notes due February 2005 with interest payments due on February 15 and August 15 (originally $1,000.0 million in principal issued of which $691.1 million was repurchased through the December 2003 redemption discussed below) - $250.0 million 7.25% Notes due March 2023 with interest payments due on March 1 and September 1 At December 31, 2004, the aggregate maturities of debt during the next five years and thereafter are as follows:
(In thousands) - --------------------------------------------------- 2005 $ 330,706 2006 13,006 2007 715 2008 307,341 2009 7,897 Thereafter 7,463,352 ---------- Total debt $8,123,017 ==========
Wyeth 45 Interest Rate Swaps The Company entered into the following interest rate swaps, whereby the Company effectively converted the fixed rate of interest on its Notes to a floating rate, which is based on LIBOR. See Note 9 for further discussion of the interest rate swaps.
NOTIONAL AMOUNT (In thousands) ------------------------- HEDGED NOTES PAYABLE SWAP RATE 2004 2003 - ------------------------------------------------------------------------------------------------------------- $1,750.0 million 5.500% due 2014 6-month LIBOR in arrears + 0.6110% $ 750,000 $ 750,000 6-month LIBOR in arrears + 0.6085% 650,000 650,000 6-month LIBOR in arrears + 0.6085% 350,000 350,000 1,500.0 million 6.700% due 2011 3-month LIBOR + 1.0892% 750,000 750,000 3-month LIBOR + 0.8267% 750,000 750,000 1,500.0 million 5.250% due 2013 6-month daily average LIBOR + 0.8210% 800,000 800,000 6-month daily average LIBOR + 0.8210% 700,000 700,000 500.0 million 6.450% due 2024 6-month LIBOR in arrears + 1.0370% 250,000 250,000 300.0 million 4.125% due 2008 6-month daily average LIBOR + 0.6430% 150,000 150,000 6-month daily average LIBOR + 0.6430% 150,000 150,000
Credit Rating Trigger and Interest Expense Impact The interest rate payable on each of the tranches of the $6,300.0 million of Notes, as noted in the table below, is subject to a 0.25 percentage-point increase per level of downgrade in the Company's credit rating by Moody's or S&P. There is no adjustment to the interest rate payable on these Notes for the first single-level downgrade in the Company's credit rating by S&P. If Moody's or S&P subsequently were to increase the Company's credit rating, the interest rate payable on these Notes is subject to a 0.25 percentage-point decrease for each level of credit rating increase. The interest rate payable for these Notes cannot be reduced below the original coupon rate of the Notes, and the interest rate in effect on March 15, 2006 for these Notes thereafter will become the effective interest rate until maturity. In December 2003, Moody's downgraded the Company's long-term debt rating from A3 to Baa1. This triggered the 0.25 percentage-point increase in the interest rate on the Notes issued in March 2001 and February 2003. As a result of the downgrade, the Company incurred incremental interest on the Notes of $8.5 million in 2004. The following table summarizes, by respective Note, the maximum interest rate adjustment and the additional annual interest expense for every 0.25 percentage-point increase in the interest rate as of December 31, 2004:
MAXIMUM INCREMENTAL ANNUAL INTEREST INTEREST EXPENSE PER RATE 0.25% ADJUSTMENT NOTES PAYABLE ADJUSTMENT (In thousands) - ----------------------------------------------------------------------------------------- $1,750.0 million 5.500% due 2014 1.75% $ 4,375 1,500.0 million 6.700% due 2011* 2.00% 3,750 1,500.0 million 5.250% due 2013* 2.00% 3,750 750.0 million 6.500% due 2034 1.75% 1,875 500.0 million 6.450% due 2024 1.75% 1,250 300.0 million 4.125% due 2008* 2.00% 750 ------- $15,750 =======
* As of December 31, 2003, interest rates on these Notes increased 0.25% due to Moody's credit rating downgrade discussed above. In addition to the Moody's downgrade, on October 24, 2003 Fitch Ratings (Fitch) downgraded the Company's senior unsecured credit rating (long-term rating) to A- from A and its commercial paper credit rating (short-term rating) to F-2 from F-1. Due to the Fitch downgrade, the Company's commercial paper, which previously traded in the Tier 1 commercial paper market, would trade in the Tier 2 commercial paper market. On December 8, 2003, S&P affirmed the Company's A-1 short-term and A long-term ratings. In early 2005, both Moody's and Fitch affirmed the Company's short-term and long-term debt ratings. In addition, Moody's upgraded the Company's outlook from negative to developing. Interest Expense, net - --------------------- The components of Interest expense, net are as follows:
(In thousands) YEAR ENDED DECEMBER 31, 2004 2003 2002 - ------------------------------------------------------------------------------- Interest expense $ 308,348 $ 298,303 $ 382,168 Interest income (111,293) (79,363) (92,108) Less: Amount capitalized for capital projects (86,750) (115,800) (88,008) --------- --------- --------- Interest expense, net $ 110,305 $ 103,140 $ 202,052 ========= ========= =========
Interest payments in connection with the Company's debt obligations for the years ended December 31, 2004, 2003 and 2002 amounted to $270.7 million, $299.7 million and $375.8 million, respectively. Debt Extinguishment - ------------------- In December 2003, the Company completed the redemption of $691.1 million of its $1,000.0 million aggregate principal amount of 7.90% Notes due 2005, resulting in $308.9 million in remaining Notes due 2005 outstanding at December 31, 2004, which were classified as Loans payable. In addition, the Company exercised a make-whole call option on its $1,000.0 million aggregate principal amount of 6.25% Notes due 2006. The redemption period for the make-whole call option ended on January 12, 2004, and, as a result, as of December 31, 2003, the $1,000.0 million aggregate principal amount of 6.25% Notes due 2006 were classified as Loans payable. On January 12, 2004, the $1,000.0 million 6.25% Notes due 2006 were redeemed in full. 46 Wyeth In connection with the Note repurchases, the Company incurred early debt extinguishment costs of $152.0 million that primarily relate to the excess of prepayment premiums and principal over the carrying value of the debt retired and the related write-off of debt issuance costs. The Company recorded its debt extinguishment costs within Special charges on the consolidated statement of operations for the year ended December 31, 2003. See Note 3 for further discussion of special charges. In order to fund the Note repurchases, and for other general corporate purposes, the Company issued $3,000.0 million of Notes and $1,020.0 million of Debentures in December 2003 as further discussed above. 7. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities includes reserves for the REDUX and PONDIMIN diet drug litigation (see Note 14) and reserves relating to income taxes, environmental matters, product liability and other litigation, pension and other employee benefit liabilities, and minority interests. The Company has responsibility for environmental, safety and cleanup obligations under various local, state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. It is the Company's policy to accrue for environmental cleanup costs if it is probable that a liability has been incurred and the amount can be reasonably estimated. In many cases, future environmental-related expenditures cannot be quantified with a reasonable degree of accuracy. Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to current or future results of operations are expensed. As investigations and cleanups proceed, environmental-related liabilities are reviewed and adjusted as additional information becomes available. The aggregate environmental-related accruals were $311.7 million and $325.8 million at December 31, 2004 and 2003, respectively. Environmental-related accruals have been recorded without giving effect to any possible future insurance proceeds. See Note 14 for discussion of contingencies. Through 1998, the Company provided incentive awards under the Management Incentive Plan (MIP), which provided for cash and deferred contingent common stock awards to key employees. Deferred contingent common stock awards plus accrued dividends, related to the MIP program, totaling 552,860 and 651,287 shares were outstanding at December 31, 2004 and 2003, respectively. Beginning in 1999, the Company also provides an incentive program to employees, the Performance Incentive Award Program (PIA), which provides financial awards to employees based on the Company's operating results and the individual employee's performance. Substantially all U.S. and Puerto Rico exempt employees, who are not subject to other incentive programs, and key international employees are eligible to receive cash awards under PIA. The value of PIA awards for 2004, 2003 and 2002 was $181.7 million, $150.7 million and $39.6 million, respectively, and is included within Accrued expenses. 8. PENSIONS AND OTHER POSTRETIREMENT BENEFITS Plan Descriptions - ----------------- Pensions The Company sponsors various retirement plans for most full-time employees. These defined benefit and defined contribution plans cover all U.S. and certain international locations. Pension plan benefits for defined benefit plans are based primarily on participants' compensation and years of credited service. Generally, contributions to defined contribution plans are based on a percentage of the employee's compensation. The Company's 401(k) savings plans have been established for substantially all U.S. employees. Most employees are eligible to enroll in the savings plan on their hire date and can contribute between 1% and 16% of their base pay. The Company provides a matching contribution to eligible participants of 50% on the first 6% of base pay contributed to the plan, or a maximum of 3% of base pay. Employees can direct their contributions and the Company's matching contributions into any of the funds offered. These funds provide participants with a cross section of investing options, including the Company's common stock. All contributions to the Company's common stock, whether by employee or employer, can be transferred to other fund choices daily. Total pension expense for both defined benefit and defined contribution plans for 2004, 2003 and 2002 was $294.8 million, $302.4 million and $208.5 million, respectively. Pension expense for defined contribution plans for 2004, 2003 and 2002 totaled $90.1 million, $73.4 million and $71.1 million, respectively. Other Postretirement Benefits The Company provides postretirement health care and life insurance benefits for retired employees of most U.S. locations and Canada. Most full-time employees become eligible for these benefits after attaining specified age and service requirements. Pension Plan Assets - ------------------- U.S. Pension Plan Assets Pension plan assets to fund the Company's obligations are invested in accordance with certain asset allocation criteria and investment guidelines established by the Company. The Company's U.S. pension plan asset allocation, by broad asset class, was as follows as of December 31, 2004 and 2003, respectively:
PERCENTAGE OF PLAN ASSETS AS OF DECEMBER 31, ----------------------------------- ASSET CLASS 2004 2003 - ------------------------------------------------------------------------- U.S. Equity 44% 49% Non-U.S. Equity 28% 21% U.S. Fixed Income and cash 28% 30%
U.S. pension plan (the Plan) assets totaled $3,469.6 million and $3,261.6 million at December 31, 2004 and 2003, respectively. As of December 31, 2004, U.S. pension plan assets represented approximately 87% of total worldwide plan assets compared with 91% as of December 31, 2003. Investment responsibility for these assets is assigned to outside investment managers, and employees do not have the ability to direct the investment of Wyeth 47 these assets. Each of the Plan's asset classes is broadly diversified by security, market capitalization (e.g., exposure to "large cap" and "small cap"), industrial sector and investment style (i.e., exposure to "growth" and "value"). Every attempt is made to maintain asset class exposure in line with prevailing target asset allocation percentages - U.S. Equity (45%), Non-U.S. Equity (25%) and U.S. Fixed Income (30%) - through monthly rebalancing toward those targets. Within U.S. Equity, the Company uses a combination of passive index, enhanced index and active investment strategies. Investment vehicles utilized within these classes include both separately managed accounts and diversified funds. The Plan's active investment managers are prohibited from investing in the Company's common stock. The Company's Non-U.S. Equity composite is invested primarily in mature or developed markets using active investment strategies and separately managed accounts. The Plan's modest exposure to emerging or developing markets is achieved through investment in diversified funds. U.S. Fixed Income assets are invested largely in securities categorized as "investment grade" using active investment strategies, and investment vehicles utilized include separately managed accounts and diversified funds. The Plan, however, does maintain modest exposure to below investment grade debt - specifically, high-yield U.S. fixed income and emerging market debt. The Plan's separate fixed income account managers are prohibited from investing in debt securities issued by the Company. The Plan's assets are managed with the dual objectives of minimizing pension expense and cash contributions over the long term, as well as maintaining the Plan's fully funded status on an ongoing basis. With the assistance of the Company's outside pension consultant, asset-liability studies are performed every three to five years, and the Plan's target asset allocation percentages are adjusted accordingly. The investment managers of each separately managed account in which the Plan invests are prohibited from investing in derivative securities. With respect to the diversified funds in which the Plan invests, the existing investment guidelines permit derivative securities in the portfolio, but the use of leverage (i.e., margin borrowing) is strictly prohibited. Investment performance by total plan, asset class and individual manager is reviewed on a monthly basis, relative to one or more appropriate benchmarks. On a quarterly basis, the pension consultant performs a detailed statistical analysis of both investment performance and portfolio holdings. Formal meetings are held with each investment manager approximately twice per year to review investment performance and to ascertain whether any changes in process or turnover in professional personnel have occurred at the management firm. Non-U.S. Pension Plan Assets At December 31, 2004 and 2003, the Company's non-U.S. defined benefit pension plan assets totaled $522.6 million and $341.7 million, respectively, which represented approximately 13% and 9%, respectively, of total worldwide plan assets. The Company's United Kingdom (U.K.) and Canadian plan assets in the aggregate totaled $391.5 million and $256.6 million at December 31, 2004 and 2003, respectively, and represented approximately 75% of the non-U.S. total plan assets at both December 31, 2004 and 2003. U.K. defined benefit pension assets totaled $279.8 million, approximately 7% of total worldwide plan assets, at December 31, 2004 compared with $154.3 million, approximately 4% of total worldwide plan assets, at December 31, 2003. During 2004, the Company contributed a lump sum of approximately $100.0 million for the purpose of reducing the U.K. plan's funding deficit. Investment responsibility is assigned to an outside investment manager, and employees do not have the ability to direct the investment of these assets. The broad allocation of U.K. plan assets as of December 31, 2004 was U.K. Equities (32%), Non-U.K. Equities (12%) and U.K. Fixed Income and cash (56%), which represented a lower equity weighting and correspondingly higher fixed income allocation compared with December 31, 2003. Each of the U.K. plan's asset classes is broadly diversified and actively managed. Canadian defined benefit pension assets totaled $111.7 million and $102.3 million at December 31, 2004 and 2003, respectively, which represented approximately 3% of total worldwide plan assets at both December 31, 2004 and 2003. Investment responsibility is assigned to outside investment managers, and employees do not have the ability to direct the investment of these assets. The broad allocation of Canadian plan assets as of December 31, 2004 was Canadian Equity (44%), Non-Canadian Equity (24%) and Canadian Fixed Income and cash (32%), which is consistent with the 2003 asset mix. Each of the Canadian plan's asset classes is broadly diversified and actively managed. 48 Wyeth Plan Obligations, Plan Assets, Funded Status and Periodic Cost - -------------------------------------------------------------- The Company uses a December 31 measurement date for the majority of its defined benefit plans. The change in the projected benefit obligation for the Company's defined benefit plans (principally U.S.) for 2004 and 2003 was as follows:
CHANGE IN PROJECTED BENEFIT OBLIGATION PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------ ------------------------------- (In thousands) 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------------------------------------- Projected benefit obligation at January 1 $ 4,211,316 $ 3,894,769 $ 1,552,792 $ 1,433,126 Consolidation of Ireland benefit plan 50,672 -- -- -- Service cost 147,370 119,446 38,827 38,093 Interest cost 256,569 249,031 82,718 94,281 Amendments and other adjustments 4,503 (2,436) (60,765) (132,301) Net actuarial loss 298,703 338,845 117,392 213,722 Settlements -- (31,537) -- -- Benefits paid (359,903) (433,072) (104,410) (97,370) Currency translation adjustment 55,667 76,270 3,481 3,241 --------------------------------------------------------------------- Projected benefit obligation at December 31 $ 4,664,897 $ 4,211,316 $ 1,630,035 $ 1,552,792 =====================================================================
The change in the projected benefit obligation for pensions was impacted by increased service cost offset by lower net actuarial losses and benefits paid. The increase in service cost arose primarily from changes in assumptions used to estimate expected lump sum distributions as well as a decrease in the discount rate associated with determining net periodic benefit cost as described in the Plan Assumptions section herein. The decrease in benefits paid related to additional lump sum pension payments made in 2003 for employees whose positions were eliminated in connection with the Company's restructuring programs. The change in the projected benefit obligation for other postretirement benefit plans includes the impact of plan amendments and a decrease in the net actuarial loss. Amendments to the other postretirement benefit plans, effective December 31, 2004, consisted primarily of an increase in prescription drug copayment charges for all retirees, an increase in the medical plan deductible for post-2002 retirees, and a decrease in life insurance benefits for post-2004 retirees and post-2004 disabled employees. Amendments to the other postretirement benefit plans, effective December 31, 2003, also consisted of an increase in prescription drug copayment charges for all retirees and an increase in the medical plan deductible for post-2002 retirees. The decrease in the net actuarial loss for other postretirement benefits of $96.3 million resulted primarily from an unrecognized actuarial gain of $195.4 million as a result of the Company's remeasurement of its other postretirement benefit obligation as of January 1, 2004 in order to reflect the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act). This unrecognized actuarial gain was offset, in part, by losses associated with a change in the assumption for future increases in per capita cost of health care benefits and other changes in actuarial assumptions. At December 31, 2004 and 2003, the accumulated benefit obligation (ABO) for the Company's defined benefit pension plans was $4,041.0 million and $3,670.0 million, respectively. Projected benefit obligation, ABO and fair value of plan assets for defined benefit pension plans with an ABO in excess of plan assets were as follows:
DECEMBER 31, ----------------------- (In thousands) 2004 2003 - ------------------------------------------------------------ Projected benefit obligation $605,785 $706,035 Accumulated benefit obligation 492,067 624,972 Fair value of plan assets 131,119 239,362
The change in plan assets for the Company's defined benefit plans (principally U.S.) for 2004 and 2003 was as follows:
PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------ ------------------------------- CHANGE IN PLAN ASSETS (In thousands) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at January 1 $ 3,603,270 $ 3,215,028 $ -- $ -- Consolidation of Ireland benefit plan 28,575 -- -- -- Actual return on plan assets 411,698 583,366 -- -- Settlements -- (31,537) -- -- Company contributions 273,318 230,787 104,410 97,370 Benefits paid (359,903) (433,072) (104,410) (97,370) Currency translation adjustment 35,205 38,698 -- -- --------------------------------------------------------------------- Fair value of plan assets at December 31 $ 3,992,163 $ 3,603,270 $ -- $ -- =====================================================================
The Company made contributions to the U.S. qualified defined benefit pension plans of $136.7 million and $162.0 million as of December 31, 2004 and 2003, respectively. The contributions were made to fund current pension expense for the U.S. qualified defined benefit pension plans. In addition, during 2004, the Company made a contribution of approximately $100.0 million for the purpose of reducing the U.K. plan's funding deficit. There were no plan assets for the Company's other postretirement benefit plans at December 31, 2004 and 2003 as postretirement benefits are funded by the Company when claims are paid. The current portion of the accrued benefit liability for other postretirement benefits was approximately $103.5 million and $96.0 million at December 31, 2004 and 2003, respectively. The Company expects to contribute approximately $180.0 million to its qualified and non-qualified defined benefit pension plans and approximately $103.5 million to its other postretirement benefit plans in 2005. Wyeth 49 The reconciliation of funded status and the amounts recognized in the consolidated balance sheets for the Company's defined benefit plans (principally U.S.) for 2004 and 2003 were as follows:
PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------ ------------------------------- RECONCILIATION OF FUNDED STATUS (In thousands) 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------------------- Funded status $ (672,734) $ (608,046) $(1,630,035) $(1,552,792) Unrecognized net actuarial loss 1,517,919 1,383,581 701,882 603,346 Unrecognized prior service cost 31,284 38,834 (199,618) (153,691) Unrecognized net transition obligation 3,283 4,269 -- -- Company contributions between measurement date and fiscal year end 1,860 -- -- -- --------------------------------------------------------------------- Net amount recognized $ 881,612 $ 818,638 $(1,127,771) $(1,103,137) =====================================================================
The unrecognized net actuarial loss for pensions primarily represents the impact of the decline in the global equity markets that occurred during 2002 and 2001 since most of the difference between the expected return and actual return on plan assets incurred during those years is deferred. The increase between the 2004 and 2003 unrecognized net actuarial loss is primarily due to changes in the Plan's assumptions. The unrecognized net actuarial loss will be amortized through the net periodic benefit cost over the remaining estimated service life of employees to the extent the unrecognized net actuarial loss exceeds 10% of the greater of the projected benefit obligation or the fair value of plan assets.
PENSIONS AMOUNTS RECOGNIZED IN THE ------------------------------- CONSOLIDATED BALANCE SHEETS (In thousands) 2004 2003 - -------------------------------------------------------------------------------- Prepaid benefit cost $ 1,188,866 $ 1,096,563 Accrued benefit liability (359,205) (390,385) Intangible asset 4,085 11,371 Accumulated other comprehensive loss 47,866 101,089 ------------------------------- Net amount recognized $ 881,612 $ 818,638 ===============================
Net periodic benefit cost for the Company's defined benefit plans (principally U.S.) for 2004, 2003 and 2002 was as follows:
PENSIONS OTHER POSTRETIREMENT BENEFITS COMPONENTS OF NET PERIODIC BENEFIT COST --------------------------------------- ----------------------------------------- (In thousands) 2004 2003 2002 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Service cost $ 147,370 $ 119,446 $ 95,695 $ 38,827 $ 38,093 $ 31,764 Interest cost 256,569 249,031 233,169 82,718 94,281 87,681 Expected return on plan assets (311,541) (270,502) (236,490) -- -- -- Amortization of prior service cost 8,544 8,399 7,146 (14,837) (2,249) 2,003 Amortization of transition obligation 1,180 1,098 1,057 -- -- -- Recognized net actuarial loss 100,348 104,367 36,798 19,907 18,703 7,164 Settlement loss 2,264 17,155 -- -- -- -- -------------------------------------------------------------------------------------- Net periodic benefit cost $ 204,734 $ 228,994 $ 137,375 $ 126,615 $ 148,828 $ 128,612 ======================================================================================
Net periodic benefit cost for pensions was lower in 2004 as compared with 2003 due primarily to a higher expected return on plan assets offset, in part, by increases in the service cost as discussed above. The higher expected return on plan assets is related to the increase in the Company's plan assets as a result of contributions made as described above. The recognized net actuarial loss represents the amortization of the deferred actuarial losses from prior periods as discussed above. Net periodic benefit cost for other postretirement benefits reflects the impact of the Medicare Act, which resulted in a decrease of $30.8 million in the Company's other postretirement benefits expense in 2004. This decrease was offset, in part, by increases associated with changes in assumptions used for future increases in per capita cost of health care benefits as well as a decrease in the discount rate noted below. Estimated Future Benefit Payments - --------------------------------- The Company expects to pay the following in benefit payments related to its defined benefit plans (principally U.S.), which reflect expected future service, as appropriate:
(In thousands) PENSIONS OTHER POSTRETIREMENT BENEFITS - -------------- ---------- ----------------------------- 2005 $ 238,500 $ 103,500 2006 252,800 98,300 2007 267,100 102,100 2008 293,900 104,300 2009 298,300 106,800 2010-2014 1,825,400 574,200
50 Wyeth Plan Assumptions - ---------------- Weighted average assumptions used in developing the benefit obligations and net periodic benefit cost at December 31 were as follows:
PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------------ ----------------------------- BENEFIT OBLIGATIONS 2004 2003 2002 2004 2003 2002 - -------------------------------------------------------------------------------------------------------------- Discount rate 6.00% 6.25% 6.75% 6.00% 6.25% 6.75% Rate of compensation increase 4.00% 4.00% 4.00% -- -- --
PENSIONS OTHER POSTRETIREMENT BENEFITS ------------------------------------ ----------------------------- NET PERIODIC BENEFIT COST 2004 2003 2002 2004 2003 2002 - -------------------------------------------------------------------------------------------------------------- Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25% Rate of compensation increase 4.00% 4.00% 4.00% -- -- -- Expected return on plan assets 9.00% 9.00% 9.00% -- -- --
The expected return on plan assets is determined on an annual basis, with input from the Company as well as an outside pension consultant. Every attempt is made to maintain a long-term investment horizon (e.g., 10 years or more) in developing the expected rate of return assumption, and the impact of current/short-term market factors is not permitted to exert a disproportionate influence on the process. While long-term historical returns are a factor in this process, consideration also is given to forward-looking factors, including, but not limited to, the following: - Expected economic growth and inflation; - The forecasted statistical relationship (i.e., degree of correlation, or co-movement) between the various asset classes in which the Plan invests; - Forecasted volatility for each of the component asset classes; - Current yields on debt securities; and - The likelihood of price-earnings ratio expansion or contraction. Finally, the expected return on plan assets does not represent the forecasted return for the near term; rather, it represents a best estimate of normalized capital market returns over the next decade or more, based on the target asset allocation in effect. The assumed health care cost trends for the Company's other postretirement benefit plans for 2004, 2003 and 2002 are as follows:
OTHER POSTRETIREMENT BENEFITS -------------------------------- ASSUMED HEALTH CARE COST TREND 2004 2003 2002 - ---------------------------------------------------------------------------------------- Health care cost trend rate assumed for next year 11.00% 11.00% 9.50% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00% 5.00% Year that the rate reaches the ultimate trend rate 2009 2008 2006
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1 PERCENTAGE- 1 PERCENTAGE- (In thousands) POINT INCREASE POINT DECREASE - --------------------------------------------------------------------------------------- Effect on total service and interest cost $18,979 $(15,193) Effect on postretirement benefit obligation 215,216 (177,228)
9. DERIVATIVE INSTRUMENTS AND FOREIGN CURRENCY RISK MANAGEMENT PROGRAMS Derivative financial instruments are measured at fair value and are recognized as assets or liabilities on the balance sheet with changes in the fair value of the derivatives recognized in either net income or accumulated other comprehensive income (loss), depending on the timing and designated purpose of the derivative. The fair value of forward contracts, currency option contracts and interest rate swaps reflects the present value of the contracts at December 31, 2004. The Company currently engages in two primary programs to manage its exposure to intercompany and third-party foreign currency risk. The two programs and the corresponding derivative contracts are as follows: 1. Short-term foreign exchange forward contracts and swap contracts are used to neutralize month-end balance sheet exposures. These contracts essentially take the opposite currency position of that projected in the month-end balance sheet to counterbalance the effect of any currency movement. These derivative instruments are not designated as hedges and are recorded at fair value with any gains or losses recognized in current period earnings. The Company Wyeth 51 recorded net losses of $96.9 million, $92.6 million and $88.1 million for 2004, 2003 and 2002, respectively, in Other income, net related to gains and losses on these foreign exchange forward contracts and swap contracts. These amounts consist of gains and losses from contracts settled during 2004, 2003 and 2002, as well as contracts outstanding at December 31, 2004, 2003 and 2002 that are recorded at fair value. 2. The Company uses combinations of option strategies that involve the simultaneous purchase of a put contract at one strike rate and the sale of a call contract at another strike rate as well as individual foreign currency put options and foreign currency forward contracts in its cash flow hedging program to partially cover foreign currency risk related to international intercompany inventory sales. These instruments are designated as cash flow hedges, and, accordingly, any unrealized gains or losses are included in Accumulated other comprehensive income (loss) with the corresponding asset or liability recorded on the balance sheet. The Company recorded after-tax net losses of $36.8 million, $47.2 million and $17.6 million for 2004, 2003 and 2002, respectively, in Accumulated other comprehensive income (loss) with the corresponding liabilities recorded in Accrued expenses related to these cash flow hedges. The unrealized net losses in Accumulated other comprehensive income (loss) will be reclassified into the consolidated statement of operations when the inventory is sold to a third party. As such, the Company anticipates recognizing these net losses during the next 12 months. In 2004, 2003 and 2002, the Company recognized net losses of $65.0 million, $41.2 million and $12.1 million, respectively, related to cash flow hedges on inventory that was sold to third parties. These losses are included in Other income, net. Put and combination option contracts outstanding as of December 31, 2004 expire no later than September 2005. Occasionally, the Company purchases foreign currency put options outside of the cash flow hedging program to protect additional intercompany inventory sales. These put options do not qualify as cash flow hedges and were recorded at fair value with all gains or losses, which were not significant for 2003, recognized in current period earnings. The Company did not purchase any foreign currency put options outside of the cash flow hedging program during 2004 or 2002. In addition to the programs identified above, the Company previously had entered into a foreign exchange forward contract to hedge against foreign exchange fluctuations on a yen-denominated long-term intercompany loan to the Company's Japanese subsidiary. This forward contract had been designated as and qualified for foreign currency cash flow hedge accounting treatment. As of December 31, 2002, the Company had recorded an after-tax gain of $3.3 million in Accumulated other comprehensive income (loss) relating to the unrealized gain on this foreign exchange forward contract. As of December 31, 2003, this foreign exchange forward contract had matured, resulting in a realized gain of $6.4 million included in Other income, net. The Company also has entered into the following effective fair value interest rate swaps to manage interest rate exposures:
FAIR VALUE --------------------------- ASSETS (LIABILITIES)* (In thousands) MATURITY --------------------------- HEDGED NOTES PAYABLE DATE NOTIONAL AMOUNT 2004 2003 - ---------------------------------------------------------------------------------------- $1,750,000, 5.500% 2014 $ 750,000 $ 9,584 $ (4,776) 2014 650,000 6,836 (5,954) 2014 350,000 4,403 (2,224) 1,500,000, 6.700% 2011 750,000 67,879 79,077 2011 750,000 67,405 78,624 1,500,000, 5.250% 2013 800,000 (6,938) (17,104) 2013 700,000 (6,967) (16,360) 500,000, 6.450% 2024 250,000 5,791 (2,912) 300,000, 4.125% 2008 150,000 (1,784) (1,452) 2008 150,000 (1,589) (640) ---------- ---------- $ 144,620 $ 106,279 ========== ==========
* Fair value amounts exclude accrued interest. These interest rate swaps effectively convert the fixed rate of interest on these Notes to a floating rate. Interest expense on these Notes is adjusted to include the payments made or received under the interest rate swap agreements. The fair value of these swaps has been recorded in Other assets including deferred taxes/Other noncurrent liabilities with the corresponding adjustment recorded to the respective underlying Notes in Long-term debt. 10. INCOME TAXES The components of the Company's Income (loss) before income taxes based on the location of operations were:
(In thousands) YEAR ENDED DECEMBER 31, 2004 2003 2002 - ----------------------------------------------------------------------------------------- U.S. $(2,936,581) $ (119,990) $ 3,486,356 Non-U.S 2,806,734 2,481,602 2,610,889 ------------------------------------------------- Income (loss) before income taxes $ (129,847) $ 2,361,612 $ 6,097,245 =================================================
The Provision (benefit) for income taxes consisted of:
(In thousands) YEAR ENDED DECEMBER 31, 2004 2003 2002 - ------------------------------------------------------------------------------------------------------ Current: Federal $ (241,064) $ 239,006 $ 159,487 Foreign 359,547 488,419 381,018 ------------------------------------------------- Current provision for income taxes 118,483 727,425 540,505 Deferred: Federal (1,262,450) (405,587) 1,126,839 State (300,000) -- -- Foreign 80,123 (11,418) (17,304) -------------------------------------------------- Deferred provision (benefit) for income taxes (1,482,327) (417,005) 1,109,535 -------------------------------------------------- Total provision (benefit) for income taxes $(1,363,844) $ 310,420 $ 1,650,040 ==================================================
52 Wyeth Net deferred tax assets inclusive of valuation allowances were reflected on the consolidated balance sheets at December 31 as follows:
(In thousands) 2004 2003 - ------------------------------------------------------------------------------------------------------- Net current deferred tax assets $ 1,968,499 $ 1,474,664 Net noncurrent deferred tax assets 2,388,775 1,304,593 Net current deferred tax liabilities (39,305) (17,163) Net noncurrent deferred tax liabilities (121,369) (31,036) ------------------------------- Net deferred tax assets $ 4,196,600 $ 2,731,058 ===============================
Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets result principally from the recording of certain accruals and reserves that currently are not deductible for tax purposes, from an elective deferral for tax purposes of research and development costs, from loss carryforwards and from tax credit carryforwards. Deferred tax liabilities result principally from the use of accelerated depreciation for tax purposes and contributions made to the Company's U.S. qualified pension plans. The components of the Company's deferred tax assets and liabilities at December 31 were as follows:
(In thousands) 2004 2003 - ------------------------------------------------------------------------------------------------------- Deferred tax assets: Diet drug product litigation accruals $ 2,508,212 $ 1,230,779 Product litigation and environmental liabilities and other accruals 547,522 641,082 Postretirement, pension and other employee benefits 683,471 651,357 Net operating loss (NOL) and other carryforwards 420,131 353,635 State tax NOL and other carryforwards, net of federal tax 267,235 262,007 State tax on temporary differences, net of federal tax 444,872 317,249 Goodwill impairment 40,870 44,853 Restructuring 12,601 39,630 Inventory reserves 159,806 241,968 Investments and advances 30,903 22,570 Property, plant and equipment 36,047 133,164 Research and development costs 588,081 431,294 Intangibles 67,198 76,383 Other 128,297 59,591 ------------------------------- Total deferred tax assets 5,935,246 4,505,562 ------------------------------- Deferred tax liabilities: Tax on earnings which may be remitted to the United States (205,530) (205,530) Depreciation (455,917) (419,923) Pension and other employee benefits (386,613) (380,504) Investments (10,117) (6,791) Other (204,748) (151,293) ------------------------------- Total deferred tax liabilities (1,262,925) (1,164,041) ------------------------------- Deferred tax asset valuation allowances (63,614) (31,207) State deferred tax asset valuation allowances, net of federal tax (412,107) (579,256) ------------------------------- Total valuation allowances (475,721) (610,463) ------------------------------- Net deferred tax assets $ 4,196,600 $ 2,731,058 ===============================
Deferred taxes for net operating losses and other carryforwards principally relate to federal tax credits that expire in 2021 to 2024 and foreign net operating loss and capital loss carryforwards that generally have an indefinite carryforward period. Valuation allowances have been established for certain deferred tax assets related to capital loss carryforwards, environmental liabilities and other operating accruals as the Company has determined that it is more likely than not that these benefits will not be realized. Except as it relates to these items, the Company has not established valuation allowances related to its net federal or foreign deferred tax assets of $3,896.6 million as the Company believes that it is more likely than not that the benefits of these assets will be realized. Valuation allowances also have been established for state deferred tax assets, net of federal tax, related to net operating losses, credits and accruals for which the Company has determined it is more likely than not that these benefits will not be realized. As of December 31, 2004, the Company had deferred state tax assets for net operating loss carryforwards and tax credit carryforwards, net of federal tax, of $267.2 million and net deferred state tax assets for cumulative temporary differences, net of federal tax, of $444.9 million. A valuation allowance, net of federal tax, of $412.1 million has been provided for these assets due to the uncertainty of generating sufficient taxable income in the state jurisdictions to utilize the deferred state tax assets before their expiration. Prior to the 2004 fourth quarter, a full valuation allowance, net of federal tax, was provided for all deferred state tax assets due to the uncertainty regarding the diet drug litigation. As discussed in Note 14, in the 2004 fourth quarter, the Company increased the diet drug litigation reserve by $4,500.0 million to an amount that represents the Company's best estimate of the overall diet drug litigation costs, rather than an estimate of the minimum cost of the litigation. The Company considered this change in circumstances in analyzing the realizability of the deferred state tax asset as of December 31, 2004. As a result, the Company has determined that deferred state tax assets, net of federal tax, of $300.0 million are more likely than not to be realized. This benefit has been included as part of the tax benefit on the diet drug litigation charge. On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the Act). The Act creates a temporary opportunity for U.S. corporations to repatriate certain foreign earnings by providing an 85 percent deduction for certain dividends received from controlled foreign corporations, provided certain criteria are met. The deduction is subject to a number of limitations, and, as such, the Company is not yet in a position to decide on whether, and to what extent, the Company might repatriate foreign earnings under the Act. Based on our analysis to date, the Company is considering the possible repatriation of up to approximately $2,700.0 million that would be eligible for the 85 percent deduction, which would result in a federal tax liability of up to approximately $150.0 million under the Act as currently enacted, or approximately $130.0 million if a proposed technical correction to the Act is enacted. We expect to be in a position to finalize our assessment during the fourth quarter of 2005. Wyeth 53 As of December 31, 2004, income taxes were not provided on unremitted earnings of $8,790.0 million expected to be permanently reinvested internationally. If income taxes were provided on those earnings, assuming the Company does not take advantage of the Act, they would approximate $2,140.0 million. The difference between income taxes based on the U.S. statutory rate and the Company's provision (benefit) was due to the following:
(In thousands) YEAR ENDED DECEMBER 31, 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------- Provision (benefit) at U.S. statutory tax rate $ (45,446) $ 826,564 $ 2,134,036 Increase (decrease) in taxes resulting from: Puerto Rico and Ireland manufacturing operations (489,142) (456,453) (388,578) Research tax credits (73,473) (71,000) (71,000) Favorable tax adjustment (407,600) -- -- State taxes, net of federal taxes (308,236) -- -- Gains related to Immunex/Amgen -- 665 25,317 Special charges -- 50,503 11,980 All other, net (39,947) (39,859) (61,715) --------------------------------------------- Provision (benefit) at effective tax rate $ (1,363,844) $ 310,420 $ 1,650,040 =============================================
The above analysis of the Company's tax provision (benefit) includes the effects of certain items that significantly affected the comparability of the Company's effective tax rate from year to year. These items consisted of the diet drug litigation charges in 2004, 2003 and 2002 (see Note 14), the upfront payment to Solvay in 2004 (see Note 2), the favorable income tax adjustment in 2004 (recorded in the third quarter and described below), gains relating to Immunex/Amgen common stock transactions in 2003 and 2002 (see Note 2), and special charges in 2003 and 2002 (see Note 3). Excluding the effects of these items, reconciliations between the resulting tax rate and the U.S. statutory tax rate were as follows:
YEAR ENDED DECEMBER 31, 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------- U.S. statutory tax rate 35.0% 35.0% 35.0% Effect of Puerto Rico and Ireland manufacturing operations (10.8) (11.0) (10.3) Research tax credits (1.6) (1.7) (1.9) All other, net (1.1) (1.0) (1.7) ---------------------------------------- Effective tax rate, excluding certain items affecting comparability 21.5% 21.3% 21.1% ========================================
The tax benefit attributable to the effect of Puerto Rico manufacturing operations is principally due to a government grant in Puerto Rico that reduces the tax rate on most of the Company's income from manufacturing operations in Puerto Rico from 39% to 2% through 2018. Total income tax payments, net of tax refunds, in 2004, 2003 and 2002 amounted to $759.2 million, $576.9 million and $535.8 million, respectively. In the third quarter of 2004, the Company recorded a favorable income tax adjustment of $407.6 million ($0.30 per share-diluted) within the Provision (benefit) for income taxes as a result of settlements of audit issues offset, in part, by a provision related to developments in the third quarter in connection with a prior year tax matter. The U.S. Internal Revenue Service (IRS) has completed its examination of the Company's tax returns for all years through 1997, and except for such prior year tax matter, there are no material unresolved issues outstanding for those years. The IRS currently is examining the Company's returns for the years 1998 through 2001. The Company believes its accruals for tax liabilities are adequate for all open years. Other than the 2004 third quarter favorable income tax adjustment discussed above, there were no material revisions to prior year taxes in the years presented. 11. CAPITAL STOCK There were 2,400,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized at December 31, 2004 and 2003. Of the authorized preferred shares, there is a series of shares (16,122 and 16,934 outstanding at December 31, 2004 and 2003, respectively), which is designated as $2.00 convertible preferred stock. Each share of the $2.00 series is convertible at the option of the holder into 36 shares of common stock. This series may be called for redemption at $60.00 per share plus accrued dividends. Changes in outstanding common shares during 2004, 2003 and 2002 were as follows:
(In thousands except shares of preferred stock) 2004 2003 2002 - ---------------------------------------------------------------------------------------------------------------- Balance at January 1 1,332,452 1,326,055 1,320,570 Issued for stock options 2,373 6,310 7,233 Purchases of common stock for treasury -- -- (2,000) Conversions of preferred stock (812, 1,384 and 2,168 shares in 2004, 2003 and 2002, respectively) and other exchanges 267 87 252 ------------------------------------------------------ Balance at December 31 1,335,092 1,332,452 1,326,055 ======================================================
The Company has a common stock repurchase program under which the Company is authorized to repurchase common shares. The Company made no repurchases during 2004 and 2003 but did repurchase 2,000,000 shares in 2002. At December 31, 2004, the Company was authorized to repurchase 4,492,460 common shares in the future. Treasury stock is accounted for using the par value method. Shares of common stock held in treasury at December 31, 2004 and 2003 were 87,319,402 and 89,930,211, respectively. The Company has not retired any shares held in treasury during 2004 and 2003. In 2003, the Board of Directors terminated the Company's Series A Junior Participating Preferred Stock Shareholder Rights Plan effective December 15, 2003. 54 Wyeth 12. STOCK OPTIONS As of December 31, 2004, the Company has three Stock Incentive Plans, a Stock Option Plan for Non-Employee Directors and a Restricted Stock Plan for Non-Employee Directors. Under the Stock Incentive Plans, options may be granted to purchase a maximum of 190,000,000 shares at prices not less than 100% of the fair market value of the Company's common stock on the date the option is granted. Restricted stock also may be granted under the plans. At December 31, 2004, there were 17,651,392 shares available for future grants under the Stock Incentive Plans, of which 9,178,719 were available for restricted stock awards. The plans provide for the granting of incentive stock options as defined under the Internal Revenue Code. Under the plans, grants of non-qualified stock options with a 10-year term or incentive stock options with a term not exceeding 10 years may be made to selected officers and employees. All stock option grants vest ratably over a three-year term. The plans also provide for the granting of stock appreciation rights (SAR), which entitle the holder to receive shares of the Company's common stock or cash equal to the excess of the market price of the common stock over the exercise price when exercised. At December 31, 2004, there were no outstanding SARs. The Stock Incentive Plans allow for, among other things, the issuance of up to 24,000,000 shares, in the aggregate, as restricted stock awards. Restricted stock awards representing 1,081,960 units in 2004, 978,990 units in 2003 and 326,510 units in 2002 were granted to certain employees, including key executives. The increase in 2003 awards was due to a substantial increase in the number of executives receiving restricted stock awards and an increase in the size of individual awards due to a reallocation of value to restricted stock in total long-term incentive compensation. Most of these units are converted to shares of restricted stock based on the achievement of certain performance criteria related to performance years 2003 through 2006. The remaining units are converted generally at the end of four years. Under the Stock Option Plan for Non-Employee Directors, a maximum of 250,000 shares may be granted to non-employee directors at 100% of the fair market value of the Company's common stock on the date of the grant. Under this plan, each continuing director who is not a current or former employee receives a grant of stock options (currently 4,000 options per year) on the day of each annual meeting of stockholders, which generally become exercisable on the next annual meeting date. For the year ended December 31, 2004, 40,000 stock options were granted to non-employee directors. In each of the years ended December 31, 2003 and 2002, 36,000 stock options were granted to non-employee directors. Shares available for future grants at December 31, 2004 were 60,000. Under the Restricted Stock Plan for Non-Employee Directors, a maximum of 100,000 restricted shares may be granted to non-employee directors. The restricted shares granted to each non-employee director are not delivered prior to the end of a five-year restricted period. At December 31, 2004, 59,200 shares were available for future grants. Stock option information related to the plans was as follows:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE STOCK OPTIONS 2004 PRICE 2003 PRICE 2002 PRICE - ----------------------------------------------------------------------------------------------------------------------- Outstanding at January 1 133,141,939 $ 50.05 122,811,755 $ 50.47 100,003,072 $ 48.57 Granted 23,542,609 40.07 22,903,370 41.08 32,907,776 52.29 Canceled/forfeited (7,394,605) 50.04 (6,263,646) 53.13 (2,866,185) 56.67 Exercised (2004 - $14.52 to $41.05 per share) (2,373,132) 24.23 (6,309,540) 22.47 (7,232,908) 30.09 ----------- ----------- ----------- Outstanding at December 31 146,916,811 48.84 133,141,939 50.05 122,811,755 50.47 =========== =========== =========== Exercisable at December 31 102,318,088 51.56 83,798,898 51.31 68,484,510 47.57 =========== =========== ===========
The following table summarizes information regarding stock options outstanding at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE - ------------------------------------------------------------------------------------------------------------- $16.94 to 19.99 3,140,111 0.4 years $ 19.06 3,140,111 $ 19.06 20.00 to 29.99 2,065,260 1.3 years 26.26 2,065,260 26.26 30.00 to 39.99 19,503,724 5.5 years 35.70 14,641,207 35.60 40.00 to 49.99 41,894,393 8.8 years 40.75 7,639,601 41.28 50.00 to 59.99 44,800,084 5.4 years 55.21 44,701,713 55.21 60.00 to 65.32 35,513,239 6.0 years 61.51 30,130,196 61.64 ----------- ----------- 146,916,811 102,318,088 =========== ===========
Wyeth 55 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, net unrealized gains (losses) on derivative contracts, net unrealized gains (losses) on marketable securities and minimum pension liability adjustments. The following table sets forth the changes in each component of Accumulated other comprehensive income (loss):
FOREIGN NET UNREALIZED NET UNREALIZED MINIMUM ACCUMULATED CURRENCY GAINS (LOSSES) GAINS (LOSSES) PENSION OTHER TRANSLATION ON DERIVATIVE ON MARKETABLE LIABILITY COMPREHENSIVE (In thousands) ADJUSTMENTS(1) CONTRACTS(2) SECURITIES(2) ADJUSTMENTS(2) INCOME (LOSS) - --------------------------- ------------- --------------- ---------------- -------------- ------------- Balance January 1, 2002 $ (851,663) $ 7,865 $ 10,770 $ - $ (833,028) Period change 226,797 (22,132) 520,483 (47,691) 677,457 ------------- --------------- ---------------- -------------- ------------- Balance December 31, 2002 (624,866) (14,267) 531,253 (47,691) (155,571) Period change(3) 691,362 (32,887) (507,334) (22,057) 129,084 ------------- --------------- ---------------- -------------- ------------- Balance December 31, 2003 66,496 (47,154) 23,919 (69,748) (26,487) Period change 451,892 10,354 (8,226) $39,619 493,639 ------------- --------------- ---------------- -------------- ------------- Balance December 31, 2004 $ 518,388 $ (36,800) $ 15,693 $ (30,129) $ 467,152 ============= =============== ================ ============== =============
(1) Income taxes are generally not provided for foreign currency translation adjustments, as such adjustments relate to permanent investments in international subsidiaries. (2) Deferred income tax assets (liabilities) provided for net unrealized (losses) gains on derivative contracts at December 31, 2004, 2003 and 2002 were $17,894, $24,300 and $9,500, respectively; for net unrealized gains on marketable securities at December 31, 2004, 2003 and 2002 were $(2,141), $(6,144) and $(279,200), respectively; and for minimum pension liability adjustments at December 31, 2004, 2003 and 2002 were $17,737, $31,341 and $23,390, respectively. (3) 2003 period change for net unrealized gains (losses) on marketable securities includes a realized gain on the sale of Amgen common stock reclassified to net income of $515,114. 14. CONTINGENCIES AND COMMITMENTS Contingencies - ------------- The Company is involved in various legal proceedings, including product liability and environmental matters of a nature considered normal to its business (see Note 7 for discussion of environmental matters). It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable. Prior to November 2003, the Company was self-insured for product liability risks with excess coverage on a claims-made basis from various insurance carriers in excess of the self-insured amounts and subject to certain policy limits. Effective November 2003, the Company became completely self-insured for product liability risks. In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings (other than the diet drug litigation discussed immediately below) will not have a material adverse effect on the Company's financial position but could be material to the results of operations or cash flows in any one accounting period. Diet Drug Litigation The Company has been named as a defendant in numerous legal actions relating to the diet drugs PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as "fen-phen") or REDUX, which the Company estimated were used in the United States, prior to their 1997 voluntary market withdrawal, by approximately 5.8 million people. These actions allege, among other things, that the use of REDUX and/or PONDIMIN, independently or in combination with phentermine, caused certain serious conditions, including valvular heart disease and primary pulmonary hypertension (PPH). On October 7, 1999, the Company announced a nationwide class action settlement (the settlement) to resolve litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. The settlement covered all claims arising out of the use of REDUX or PONDIMIN, except for PPH claims, and was open to all REDUX or PONDIMIN users in the United States. As originally designed, the settlement was comprised of two settlement funds. Fund A (with a value at the time of settlement of $1,000.0 million plus $200.0 million for legal fees) was created to cover refunds, medical screening costs, additional medical services and cash payments, education and research costs, and administration costs. Fund A has been fully funded by contributions by the Company. Fund B (which was to be funded by the Company on an as-needed basis up to a total of $2,550.0 million) would compensate claimants with significant heart valve disease. Any funds remaining in Fund A after all Fund A obligations were met were to be added to Fund B to be available to pay Fund B injury claims. In December 2002, following a joint motion by the Company and plaintiffs' counsel, the Court approved an amendment to the settlement agreement which provided for the merger of Funds A and B into a combined Settlement Fund which now will cover all expenses and injury claims in connection with the settlement. The merger of the two funds took place in January 2003. Payments in connection with the nationwide settlement were $822.7 million in 2002. There were no payments made in 2003. Payments in connection with the nationwide settlement were $26.4 million in 2004. Payments may continue, if necessary, until 2018. On January 18, 2002, as collateral for the Company's financial obligations under the settlement, the Company established a security fund in the amount of $370.0 million. In April 2002, pursuant to an agreement among the Company, class counsel and representatives of the settlement trust (the Trust), an additional $45.0 million (later reduced to $35.0 million) was added to the security fund. In February 2003, as required by an amendment to the settlement agreement, an additional $535.2 million 56 Wyeth was added by the Company to the security fund, bringing the total amount in the security fund to $940.2 million, which is primarily included in Other assets including deferred taxes, at December 31, 2004. The amounts in the security fund are owned by the Company and will earn interest income for the Company while residing in the security fund. The Company will be required to deposit an additional $180.0 million in the security fund if the Company's credit rating, as reported by both Moody's and S&P, falls below investment grade. The Company recorded litigation charges of $4,500.0 million ($2,625.0 million after-tax or $1.94 per share) in 2004, $2,000.0 million ($1,300.0 million after-tax or $0.97 per share) in 2003 and $1,400.0 million ($910.0 million after-tax or $0.68 per share) in 2002. Total pre-tax charges recorded to date amount to $21,100.0 million. Payments to the nationwide class action settlement funds, individual settlement payments, legal fees and other items were $850.2 million, $434.2 million and $1,307.0 million for 2004, 2003 and 2002, respectively. The remaining litigation accrual is classified as follows at December 31:
(In thousands) 2004 2003 - ---------------------------------------------------------- Accrued expenses $ 3,500,000 $ 2,000,000 Other noncurrent liabilities 3,666,300 1,516,500 ----------- ----------- Total litigation accrual $ 7,166,300 $ 3,516,500 =========== ===========
As noted above, in 2004 the Company increased its reserves in connection with the REDUX and PONDIMIN diet drug matters by $4,500.0 million, bringing the total of the charges taken to date to $21,100.0 million. The $7,166.3 million reserve at December 31, 2004 represents management's best estimate, within a range of outcomes, of the aggregate amount required to cover diet drug litigation costs, including payments in connection with the nationwide settlement (as it would be amended by the proposed Seventh Amendment, discussed below), initial opt outs, PPH claims, downstream opt out cases and the Company's legal fees related to the diet drug litigation. The latest charge takes into account the Company's decision to proceed with the proposed Seventh Amendment, its settlement discussions with plaintiffs' attorneys representing a number of individuals who have opted out of the nationwide settlement, its experiences with the downstream opt out cases that have been litigated or settled to date and its projected expenses in connection with the diet drug litigation. However, due to the need for Court approval of the proposed Seventh Amendment, the preliminary status of the Company's settlement discussions with attorneys representing certain downstream opt out plaintiffs, the uncertainty of the Company's ability to consummate settlements with the downstream opt out plaintiffs, the number and amount of any future verdicts that may be returned in downstream opt out and PPH litigation, and the inherent uncertainty surrounding any litigation, it is possible that additional reserves may be required in the future and the amount of such additional reserves may be significant. The Company intends to vigorously defend itself and believes it can marshal significant resources and legal defenses to limit its ultimate liability in the diet drug litigation. However, in light of the circumstances discussed herein, it is not possible to predict the ultimate liability of the Company in connection with its diet drug legal proceedings. It is therefore not possible to predict whether, and if so when, such proceedings will have a material adverse effect on the Company's financial condition, results of operations and/or cash flows and whether cash flows from operating activities and existing and prospective financing resources will be adequate to fund the Company's operations, pay all liabilities related to the diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on its outstanding obligations without the disposition of significant strategic core assets and/or reductions in certain cash outflows. Recent Developments The Proposed Seventh Amendment to the Nationwide Settlement On August 26, 2004, U.S. District Judge Harvey Bartle III, the federal judge overseeing the settlement, granted a motion for preliminary approval of the proposed Seventh Amendment to the settlement. If approved by the District Court and upheld on any appeals that might be taken, the proposed Seventh Amendment would include the following key terms: - The amendment would create a new Supplemental Fund, to be administered by a Fund Administrator who will be appointed by the District Court and who will process most pending Level I and Level II matrix claims (as defined below); - After District Court approval, the Company would make initial payments of up to $50.0 million to facilitate the establishment of the Supplemental Fund and to begin reviewing claims. Following approval by the District Court and any Appellate Courts, the Company would make an initial payment of $400.0 million to enable the Supplemental Fund to begin paying claims. The timing of additional payments would be dictated by the rate of review and payment of claims by the Fund Administrator. The Company would ultimately deposit a total of $1,275.0 million, net of certain credits, into the Supplemental Fund; - All participating matrix Level I and Level II claimants who qualify under the Seventh Amendment, who pass the Settlement Fund's medical review and who otherwise satisfy the requirements of the settlement (Category One class members) would receive a pro rata share of the $1,275.0 million Supplemental Fund, after deduction of certain expenses and other amounts from the Supplemental Fund. The pro rata amount would vary depending upon the number of claimants who pass medical review, the nature of their claims, their age and other factors. A participating Category One class member who does not qualify for a payment after such medical review would be paid $2,000 from the Supplemental Fund; - Participating class members who might in the future have been eligible to file Level I and Level II matrix claims (Category Two class members) would be eligible to receive a $2,000 payment from the Trust; such payments would be funded by the Company apart from its other funding obligations under the nationwide settlement; Wyeth 57 - If the participants in the Seventh Amendment have heart valve surgery or other more serious medical conditions on Levels III through V of the nationwide settlement matrix by the earlier of 15 years from the date of their last diet drug ingestion or by December 31, 2011, they would remain eligible to submit claims to the existing Trust and be paid the current matrix amounts if they qualify for such payments under terms modified by the Seventh Amendment. In the event the existing Trust is unable to pay those claims, the Company would guarantee payment; and - All class members who participate in the Seventh Amendment would give up any further opt out rights as well as the right to challenge the terms of, and the binding effect of, the settlement. Approval of the Seventh Amendment also would preclude any lawsuits by the Trust or the Company to recover any amounts previously paid to class members by the Trust, as well as terminate the Claims Integrity Program (discussed below) as to all claimants who do not opt out of the Seventh Amendment. Pursuant to the terms of the proposed Seventh Amendment, the Company retained the right to withdraw from the Seventh Amendment if participation by class members was inadequate or for any other reason. Less than 5% of the class members who would be affected by the proposed Seventh Amendment (approximately 1,900 of the Category One class members and approximately 5,100 of the Category Two class members) elected to opt out of the Seventh Amendment and remain bound by the current settlement terms. On January 10, 2005, the Company announced that it would not exercise its right to withdraw from the proposed Seventh Amendment. The terms of the Seventh Amendment were thereupon reviewed by the District Court at a fairness hearing, which took place on January 18-19, 2005. The parties now are awaiting a decision by the District Court on approval of the proposed Seventh Amendment. There can be no assurance that the amendment will be approved by the Court and upheld on appeal. Challenges to the Nationwide Settlement Counsel representing approximately 8,600 class members have filed a motion with the District Court seeking a ruling that the nationwide settlement agreement is void. The motion asserts that there was inadequate representation of the class when the settlement agreement was negotiated, that the parties and their experts made mutual mistakes in projecting the amount of money that would be needed to pay all valid claims, that the original notice to the class was inadequate and that the Court had lacked subject matter jurisdiction over some of the class members' claims. The motion seeks an opportunity for all class members to decide a second time whether or not to be included in the class and therefore bound by the settlement agreement. The District Court has stayed briefing and consideration of the motion until after its decision on approval of the proposed Seventh Amendment, which as discussed above would preclude such claims on behalf of class members who participate. Counsel for the plaintiff class supported the stay but have stated that if the Seventh Amendment is not approved by the District Court, they intend to seek similar relief from the preclusive effect of the settlement agreement for uncompensated matrix claimants. Certain class members also have filed a number of other motions and lawsuits attacking both the binding effect of the settlement and the administration of the Trust, some of which have been decided against class members and currently are on appeal. The Company cannot predict the outcome of any of these motions or lawsuits. Downstream Opt Out Cases During 2004, the claims of approximately 200 class members who had taken advantage of the Intermediate and Back-End opt out rights created in the nationwide settlement reached the trial stage. Many of these cases were settled, dismissed or adjourned to a later date. The claims of approximately 34 of these plaintiffs went to verdict. Twelve of those verdicts were defense verdicts in favor of the Company. The remaining verdicts were returned in favor of the plaintiffs, with awards ranging from a low of less than $1,000 to a high of $1.25 million. All of the plaintiffs' verdicts in excess of $250,000 (and certain of the verdicts below that level) are being challenged by the Company on post-trial motions or appeal. On February 23, 2005, the court hearing one such post-trial motion entered judgment in favor of the Company, dismissing a case in which a jury had returned a $780,000 verdict in favor of the plaintiff. Additional Intermediate and Back-End opt out trials are scheduled throughout 2005 and 2006. On January 18, 2005, the Company and counsel representing certain downstream opt out plaintiffs filed a motion with the District Court advising the Court that those parties had developed a proposed process by which large numbers of the downstream opt out cases might be negotiated and settled. On February 28, 2005, the Company disclosed that lawyers representing a substantial number of downstream opt out plaintiffs had agreed to participate in the process and that the Company would move forward with settlement discussions with those attorneys. However, the Company cannot predict the number of cases that might be settled as a result of such a process. PPH Cases On April 27, 2004, a jury in Beaumont, Texas, hearing the case of Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial District Court, Jefferson Cty., TX, returned a verdict in favor of the plaintiffs for $113.4 million in compensatory damages and $900.0 million in punitive damages for the wrongful death of the plaintiffs' decedent, allegedly as a result of PPH caused by her use of PONDIMIN. On May 17, 2004, the Trial Court entered judgment on behalf of the plaintiffs for the full amount of the jury's verdict, as well as $4.2 million in pre-judgment interest and $188,737 in guardian ad litem fees. On July 26, 2004, the Trial Court denied in their entirety the Company's motions for a new trial or for judgment notwithstanding the verdict, including the Company's request for application of Texas' statutory cap on punitive damage awards. The Company has filed an appeal from the judgment entered by the Trial Court and believes that it has strong arguments for reversal or reduction of the awards on appeal due to the significant number of legal errors made during trial and in the charge to the jury and due to a lack of evidence to support aspects of the verdict. In connection with its appeal, the 58 Wyeth Company was required by Texas law to post a bond in the amount of $25.0 million. The appeal process is expected to take one to two years at a minimum. As of December 31, 2004, the Company was a defendant in approximately 350 lawsuits in which the plaintiff alleges a claim of PPH, alone or with other alleged injuries. Almost all of these claimants must meet the definition of PPH set forth in the national settlement agreement in order to pursue their claims outside of the national settlement (payment of such claims, by settlement or judgment, would be made by the Company and not by the Trust). Approximately 130 of these cases appear to be eligible to pursue a PPH lawsuit under the terms of the national settlement. In approximately 20 of the 350 cases, the Company expects the PPH claims to be voluntarily dismissed by the claimants (although they may continue to pursue other claims). In approximately 100 of these cases, the Company has filed or expects to file motions under the terms of the national settlement to preclude plaintiffs from proceeding with their PPH claims. For the balance of these cases, the Company currently has insufficient medical information to assess whether or not the claimants meet the definition of PPH under the national settlement. The Company continues to work toward resolving the claims of individuals who allege that they have developed PPH as a result of their use of the diet drugs and intends to vigorously defend those PPH cases that cannot be resolved prior to trial. Background The number of individuals who have filed claims within the nationwide settlement that allege significant heart valve disease (known as "matrix" claims) has been higher than had been anticipated. The proposed Seventh Amendment to the nationwide settlement was negotiated in 2004 by the Company, counsel for the plaintiff class in the nationwide settlement and counsel for a number of individual class members. It is designed to create a new claims processing structure, funding arrangement and payment schedule for most of the Level I and Level II matrix claims, the most numerous, but least serious, claims in the nationwide settlement. Should the proposed Seventh Amendment not be approved by the District Court and upheld in the event of any appeal from a District Court approval, the pending matrix claims would be processed under the terms of the existing settlement agreement and under the procedures that have been adopted by the Settlement Trust and the District Court. Nationwide Settlement Matrix Claim Data The settlement agreement grants the Company access to claims data maintained by the Trust. Based on its review of that data, the Company understands that, as of December 29, 2004, the Trust had recorded approximately 120,910 matrix claim forms. Approximately 33,200 of these forms were so deficient, incomplete or duplicative of other forms filed by the same claimant that, in the Company's view, it is unlikely that a significant number of these forms will result in further claims processing. The Company's understanding of the status of the remaining approximately 87,710 forms, based on its analysis of data received from the Trust through December 29, 2004, is as follows. Approximately 24,220 of the matrix claims had been processed to completion, with those claims either paid (approximately 3,720 payments, totaling $1,359.5 million, had been made to approximately 3,560 claimants), denied or in show cause proceedings (approximately 18,880) or withdrawn. Approximately 2,290 claims were in some stage of the 100% audit process ordered in late 2002 by the Federal Court overseeing the national settlement. An additional approximately 18,120 claims alleged conditions that, if true, would entitle the claimant to receive a matrix award; these claims had not yet entered the audit process. Another approximately 24,000 claims with similar allegations have been purportedly substantiated by physicians or filed by law firms whose claims are now subject to the outcome of the Trust's Claims Integrity Program, discussed below. Approximately 18,980 claim forms did not contain sufficient information even to assert a matrix claim, although some of those claim forms could be made complete by the submission of additional information and could therefore become eligible to proceed to audit in the future. The remaining approximately 100 claims were in the data entry process and could not be assessed. In addition to the approximately 120,910 matrix claims filed as of December 29, 2004, additional class members may file matrix claims if they develop a matrix condition by 2015, have registered with the Trust by May 3, 2003, and have demonstrated FDA+ regurgitation (i.e., mild or greater aortic regurgitation, or moderate or greater mitral regurgitation) or mild mitral regurgitation on an echocardiogram conducted after diet drug use and obtained either outside of the Trust by January 3, 2003 or within the Trust's screening program. A claimant who has demonstrated a matrix condition by 2015 may progress to advanced levels of the matrix beyond 2015. The Company's understanding, based on data received from the Trust through December 29, 2004, is that audits had produced preliminary or final results on 4,531 of the claims that had begun the 100% audit process since its inception. Of these, 1,640 were found to be payable at the amount claimed, and 161 were found to be payable at a lower amount than had been claimed. The remaining claims were found ineligible for a matrix payment, although the claimants may appeal that determination to the Federal Court overseeing the settlement. Because of numerous issues concerning the audit process raised in motions and related proceedings now pending before the Federal Court, the Company cannot predict the ultimate outcome of the audit process. Both the volume and types of claims seeking matrix benefits received by the Trust to date differ materially from the epidemiological projections on which the Court's approval of the settlement agreement was predicated. Based upon data received from the Trust, over 95% of the 42,120 matrix claimants who allege conditions that, if true, would entitle them to an award seek an award under Level II of the five-level settlement matrix. (Level II covers claims for moderate or severe mitral or aortic valve regurgitation with complicating factors; depending upon the claimant's age at the time of diagnosis, and assuming no factors are present that would place the claim on one of the settlement's reduced payment matrices, awards under Level II range from $199,872 to $669,497 on the settlement agreement's current payment matrix.) Wyeth 59 The Settlement Trust Claims Integrity Program An investigation that the Company understands was conducted by counsel for the Trust and discovery conducted to date by the Company in connection with certain Intermediate and Back-End opt out cases (brought by some of the same lawyers who have filed these Level II claims and supported by some of the same cardiologists who have certified the Level II claims) cast substantial doubt on the merits of many of these matrix claims and their eligibility for a matrix payment from the Trust. Therefore, in addition to the 100% audit process, the Trust has embarked upon a Claims Integrity Program, which is designed to protect the Trust from paying illegitimate or fraudulent claims. Pursuant to the Claims Integrity Program, the Trust has required additional information concerning matrix claims purportedly substantiated by 18 identified physicians or filed by two law firms in order to determine whether to permit those claims to proceed to audit. Based upon data obtained from the Trust, the Company believes that approximately 24,000 matrix claims were purportedly substantiated by the 18 physicians and/or filed by the two law firms covered by the Claims Integrity Program as of December 29, 2004. It is the Company's understanding that additional claims substantiated by additional physicians or filed by additional law firms might be subjected to the same requirements of the Claims Integrity Program in the future. As an initial step in the integrity review process, each of the identified physicians has been asked to complete a comprehensive questionnaire regarding each claim and the method by which the physician reached the conclusion that it was valid. The ultimate disposition of any or all claims that are subject to the Claims Integrity Program is at this time uncertain. Counsel for certain claimants affected by the program have challenged the Trust's authority to implement the Claims Integrity Program and to require completion of the questionnaire before determining whether to permit those claims to proceed to audit. While that motion was denied by the Court, additional challenges to the Claims Integrity Program and to the Trust's matrix claim processing have been filed. In late 2003, the Trust adopted a program to prioritize the handling of those matrix claims that it believed were least likely to be illegitimate. Under the program, claims under Levels III, IV and V were to be processed and audited on an expedited basis. (Level III covers claims for heart valve disease requiring surgery to repair or replace the valve or conditions of equal severity. Levels IV and V cover complications from, or more serious conditions than, heart valve surgery.) The program also prioritized the processing and auditing of, inter alia, Level I claims, all claims filed by a claimant without counsel (i.e., on a pro se basis) and Level II claims substantiated by physicians who have attested to fewer than 20 matrix claims. On April 15, 2004, the Trust announced that it would indefinitely suspend the payment and processing of claims for Level I and Level II matrix benefits. The Trust stated that it would continue to initiate audits with respect to Levels III, IV and V matrix claims and would continue to act on the results of audits of Levels III, IV and V claims. It also announced that "[d]ue to concerns about the manner in which echocardiograms have been taken, recorded and presented, the Trust is reviewing all echocardiograms and related materials prior to payment of claims on which they are based and, where possible, prior to initiation of a medical audit. This will result in a temporary delay in initiating audits and in payments following audit. Where the review of the echocardiogram reveals substantial evidence of an intentional, material misrepresentation that calls into question the validity of a claim, the Trust will not pay the claim." The Trust has indicated that one of the goals of the Claims Integrity Program referenced above is to recoup funds from those entities that caused the Trust to pay illegitimate claims, and the Trust has filed two lawsuits to that end. The Trust has filed a suit alleging violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act against a Kansas City cardiologist who attested under oath to the validity of over 2,500 matrix claims. The suit alleges that the cardiologist intentionally engaged in a pattern of racketeering activity to defraud the Trust. The Trust also has filed a lawsuit against a New York cardiologist who attested under oath to the validity of 83 matrix claims, alleging that the cardiologist engaged in, among other things, misrepresentation, fraud, conspiracy to commit fraud and gross negligence. As indicated above, approval of the Seventh Amendment would result in the dismissal of these lawsuits. The Trust has filed a number of motions directed at the conduct of the companies that performed the echocardiograms on which many matrix claims are based. In a pair of motions related to the activities of a company known as EchoMotion, the Trust has asked the Court to stay payment of claims already audited and found payable in whole or in part if the echocardiogram was performed by EchoMotion and to disqualify all echocardiograms by EchoMotion that have been used to support matrix claims that have not yet been audited. In addition, the Trust has filed a motion seeking discovery of 14 specific companies whose echocardiograms support a large number of claims to determine whether their practices violate the settlement. The Trust also has moved to stay and/or disqualify claims brought by claimants represented by certain law firms or attested to by certain physicians. The Company has joined in certain of these motions and has filed its own motions addressing the abuse of the matrix claims process and seeking an emergency stay of claim processing. All of these motions, as well as the Trust lawsuits referenced above, also have been stayed pending the resolution of the outstanding issues involving the proposed Seventh Amendment. As indicated above, approval of the Seventh Amendment would result in the withdrawal of these motions as to all class members participating in the Seventh Amendment. The order entered by the District Court on August 26, 2004 that preliminarily approved the proposed Seventh Amendment also stayed certain matrix claim processing and certain aspects of the Claims Integrity Program, as specified in that order. The order stayed the processing of all claims for matrix Level I and Level II benefits (except such claims that have been the subject of a Trust determination after audit as of a specified date) until the end of the opt out/objection period and thereafter for all claimants who participate in the Seventh Amendment. In addition, the order stayed the Claims Integrity Program as to all class members who are eligible to participate in the Seventh Amendment until the end of the opt out/objection period and thereafter for all such claimants who participate in the Seventh Amendment. This stay 60 Wyeth of the Claims Integrity Program does not prohibit the Trust from investigating whether there have been any material misrepresentations of fact in connection with claims for Levels III through V matrix benefits, as described in the order. The order further stays the motions described in the previous paragraph and the two lawsuits against physicians brought by the Trust that are described above, as well as any future legal actions similar to those two lawsuits, as defined in the Seventh Amendment. All of these stays will be discontinued if the Seventh Amendment is not approved by the Court and upheld on appeal. Certain Level I and Level II claims that had been found to have a reasonable medical basis following a Trust audit that was conducted prior to May 6, 2004 will continue to be processed as set forth in a District Court order also dated August 26, 2004. The Claims Integrity Program is stayed as to these claims, except that the Trust will have the right to investigate whether there has been intentional manipulation of the claim, as defined in that order. In addition to the specific matters discussed herein, the District Court overseeing the national settlement has issued rulings concerning the processing of matrix claims that are being challenged on appeal. The U.S. Court of Appeals for the Third Circuit has postponed deciding those appeals pending decision on whether the proposed Seventh Amendment would be approved, and the appealing plaintiffs have agreed to dismiss those appeals in the event of such approval. The Company cannot predict the outcome of any of these motions or lawsuits. The Company continues to monitor the progress of the Trust's audit process and its Claims Integrity Program. Even if substantial progress is made by the Trust, through its Claims Integrity Program or other means, in reducing the number of illegitimate matrix claims, a significant number of the claims which proceed to audit might be interpreted as satisfying the matrix eligibility criteria, notwithstanding the possibility that the claimants may not in fact have serious heart valve disease. If the proposed Seventh Amendment is not approved by the District Court and upheld on any appeal that may be filed, matrix claims found eligible for payment after audit may cause total payments to exceed the $3,750.0 million cap of the Settlement Fund. Nationwide Settlement Opt Out Terms and Data Diet drug users choosing to opt out of the settlement class were required to do so by March 30, 2000. The settlement agreement also gave class members who participate in the settlement the opportunity to opt out of the settlement at two later stages, although they remain members of the class and there are restrictions on the nature of claims they can pursue outside of the settlement. Class members who were diagnosed with certain levels of valvular regurgitation within a specified time frame could opt out following their diagnosis and prior to receiving any further benefits under the settlement (Intermediate opt outs). Class members who are diagnosed with certain levels of regurgitation and who elect to remain in the settlement, but who later develop a more severe valvular condition, may opt out at the time the more serious condition develops (Back-End opt outs). Under either of these latter two opt out alternatives, class members may not seek or recover punitive damages, may sue only for the condition giving rise to the opt out right, and may not rely on verdicts, judgments or factual findings made in other lawsuits. The Sixth Amendment to the settlement agreement also gave certain class members an additional opt out right, which is discussed below. The Intermediate, Back-End and Sixth Amendment opt out rights are collectively referred to as the "downstream" opt out rights. Should the Settlement Fund be exhausted, most of the matrix claimants who filed their matrix claim on or before May 3, 2003 and who pass the audit process at a time when there are insufficient funds to pay their claim may pursue an additional opt out right created by the Sixth Amendment to the settlement agreement unless the Company first elects, in its sole discretion, to pay the matrix benefit after audit. Sixth Amendment opt out claimants may then sue the Company in the tort system, subject to the settlement's limitations on such claims. In addition to the limitations on all Intermediate and Back-End opt outs (such as the prohibition on seeking punitive damages and the requirement that the claimant sue only on the valve condition that gave rise to the claim), a Sixth Amendment opt out may not sue any defendant other than the Company and may not join his or her claim with the claim of any other opt out. The Company cannot predict the ultimate number of individuals who might be in a position to elect a Sixth Amendment opt out or who may, in fact, elect to do so, but that number could be substantial. Several class members affected by the terms of the Sixth Amendment opposed the approval of the amendment on the grounds that, should the Settlement Fund be exhausted, they should be entitled to pursue tort claims, including a claim for punitive damages, without the limitations imposed by the Sixth Amendment. The District Court overruled those objections and approved the amendment. The District Court's order approving the Sixth Amendment has been affirmed by the U.S. Court of Appeals for the Third Circuit. Some individuals who registered to participate in the settlement by May 3, 2003, who had demonstrated either FDA+ level regurgitation or mild mitral regurgitation on an echocardiogram completed after diet drug use and conducted either outside of the settlement prior to January 3, 2003 or within the settlement's screening program, and who subsequently develop (at any time before the end of 2015) a valvular condition that would qualify for a matrix payment may elect to pursue a Back-End opt out. Such individuals may pursue a Back-End opt out within 120 days of the date on which they first discover or should have discovered their matrix condition. The Company cannot predict the ultimate number of individuals who may be in a position to elect a Back-End opt out or who may, in fact, elect to do so, but that number also could be substantial. The Company's current understanding is that approximately 76,000 Intermediate opt out forms were submitted by May 3, 2003, the applicable deadline for most class members (other than qualified class members receiving echocardiograms through the Trust after January 3, 2003, who may exercise Intermediate opt out rights within 120 days after the date of their echocardiogram). The number of Back-End opt out forms received as of December 31, 2004 is estimated to be approximately 20,000, although certain additional class members may elect to exercise Back-End opt out rights in the future (under the same procedure as described above) even if the Settlement Fund is not exhausted. After eliminating forms that are duplicative of other filings, Wyeth 61 forms that are filed on behalf of individuals who already have either received payments from the Trust or settlements from the Company, and forms that are otherwise invalid on their face, it appears that approximately 75,000 individuals had filed Intermediate or Back-End opt out forms as of December 31, 2004. Purported Intermediate or Back-End opt outs (as well as Sixth Amendment opt outs) who meet the settlement's medical eligibility requirements may pursue lawsuits against the Company but must prove all elements of their claims - including liability, causation and damages - without relying on verdicts, judgments or factual findings made in other lawsuits. They also may not seek or recover punitive, exemplary or multiple damages and may sue only for the valvular condition giving rise to their opt out right. To effectuate these provisions of the settlement, the District Court overseeing the settlement had issued orders in several cases limiting the evidence that could be used by plaintiffs in such cases. Those orders, however, were challenged on appeal and were in large part reversed (certain portions of the District Court orders were upheld) by a panel of the U.S. Court of Appeals for the Third Circuit in May 2004. The Company's petition to the Third Circuit for a rehearing or rehearing en banc was subsequently denied, as was the Company's petition to the U.S. Supreme Court for a writ of certiorari. The District Court subsequently issued revised injunctions requiring some of the plaintiffs subject to the earlier injunctions to litigate causation and damages in a separate initial trial, with a subsequent trial on liability. The Court has declined to impose such a requirement on a class-wide basis, at least at this time. The plaintiffs affected by those revised injunctions filed an appeal with the U.S. Court of Appeals for the Third Circuit, which upheld the District Court's order (while modifying the language of the injunction in certain respects). As of December 31, 2004, approximately 62,000 individuals who had filed Intermediate or Back-End opt out forms had pending lawsuits against the Company. The claims of approximately 48% of the plaintiffs in the Intermediate and Back-End opt out cases served on the Company are pending in Federal Court, with approximately 39% pending in State Courts. The claims of approximately 13% of the Intermediate and Back-End opt out plaintiffs have been removed from State Courts to Federal Court but are still subject to a possible remand to State Court. In addition, a large number of plaintiffs have asked the U.S. Court of Appeals for the Third Circuit to review and reverse orders entered by the Federal Court overseeing the settlement which had denied the plaintiffs' motions to remand their cases to State Court. The Appellate Court has not determined whether or not it will hear that challenge. The Company expects to vigorously challenge all Intermediate and Back-End opt out claims of questionable validity or medical eligibility, and a number of cases already have been dismissed on eligibility grounds. However, the total number of filed lawsuits that meet the settlement's opt out criteria will not be known for some time. As a result, the Company cannot predict the ultimate number of purported Intermediate or Back-End opt outs that will satisfy the settlement's opt out requirements, but that number could be substantial. As to those opt outs who are found eligible to pursue a lawsuit, the Company also intends to vigorously defend these cases on their merits. As of December 31, 2004, approximately 2,500 Intermediate or Back-End opt out plaintiffs have had their lawsuits dismissed for procedural or medical deficiencies or for various other reasons. The Company has resolved the claims of all but a small percentage of the "initial" opt outs (i.e., those individuals who exercised their right to opt out of the settlement class) and continues to work toward resolving the rest. The Company intends to vigorously defend those initial opt out cases that cannot be resolved prior to trial. Commitments - ----------- The Company leases certain property and equipment for varying periods under operating leases. Future minimum rental payments under non-cancelable operating leases with terms in excess of one year in effect at December 31, 2004 are as follows:
(In thousands) - ------------------------------------------------- 2005 $ 97,900 2006 79,400 2007 65,100 2008 49,600 2009 42,400 Thereafter 120,600 ---------- Total rental commitments $ 455,000 ==========
Rental expense for all operating leases was $181.2 million, $133.6 million and $156.0 million in 2004, 2003 and 2002, respectively. 15. COMPANY DATA BY SEGMENT The Company has four reportable segments: Pharmaceuticals, Consumer Healthcare, Animal Health and Corporate. The Company's Pharmaceuticals, Consumer Healthcare and Animal Health reportable segments are strategic business units that offer different products and services. Beginning in the 2003 fourth quarter, the Company changed its reporting structure to include the Animal Health business as a separate reportable segment. The Animal Health business was previously reported within the Pharmaceuticals segment. Prior period information presented herein has been restated to be on a comparable basis. The reportable segments are managed separately because they manufacture, distribute and sell distinct products and provide services that require differing technologies and marketing strategies. The Pharmaceuticals segment manufactures, distributes and sells branded human ethical pharmaceuticals, biologicals, vaccines and nutritionals. Principal products include neuroscience therapies, cardiovascular products, nutritionals, gastroenterology drugs, anti-infectives, vaccines, oncology therapies, musculoskeletal therapies, hemophilia treatments, immunological products and women's health care products. The Consumer Healthcare segment manufactures, distributes and sells over-the-counter health care products that include analgesics, cough/cold/allergy remedies, nutritional supplements, and hemorrhoidal, asthma and personal care items. The Animal Health segment manufactures, distributes and sells animal biological and pharmaceutical products that include vaccines, pharmaceuticals, parasite control and growth implants. 62 Wyeth Corporate is responsible for the treasury, tax and legal operations of the Company's businesses and maintains and/or incurs certain assets, liabilities, income, expenses, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments. The accounting policies of the segments described above are the same as those described in Summary of Significant Accounting Policies in Note 1. The Company evaluates the performance of the Pharmaceuticals, Consumer Healthcare and Animal Health reportable segments based on income (loss) before income taxes, which includes gains on the sales of non-corporate assets and certain other items. Corporate includes interest expense and interest income, gains on the sales of investments and other corporate assets, gains relating to Immunex/Amgen common stock transactions, certain litigation provisions, including the REDUX and PONDIMIN litigation charges, special charges and other miscellaneous items. Company Data by Reportable Segment - ---------------------------------- (In millions)
YEAR ENDED DECEMBER 31, 2004 2003 2002 - -------------------------------------------------------------------------------- NET REVENUE FROM CUSTOMERS Pharmaceuticals $13,964.1 $12,622.7 $11,733.3 Consumer Healthcare 2,557.4 2,434.5 2,197.4 Animal Health 836.5 793.4 653.3 ----------------------------------- Consolidated total $17,358.0 $15,850.6 $14,584.0 =================================== INCOME (LOSS) BEFORE INCOME TAXES Pharmaceuticals(1) $ 4,040.1 $ 3,798.5 $ 3,441.4 Consumer Healthcare 578.6 592.4 608.0 Animal Health 134.8 127.4 64.1 Corporate(2) (4,883.3) (2,156.7) 1,983.7 ----------------------------------- Consolidated total $ (129.8) $ 2,361.6 $ 6,097.2 =================================== DEPRECIATION AND AMORTIZATION EXPENSE Pharmaceuticals $ 529.5 $ 458.0 $ 409.6 Consumer Healthcare 45.7 34.9 32.1 Animal Health 29.9 25.9 25.2 Corporate 17.3 19.1 17.8 ----------------------------------- Consolidated total $ 622.4 $ 537.9 $ 484.7 =================================== EXPENDITURES FOR LONG-LIVED ASSETS(4) Pharmaceuticals $ 1,226.5 $ 1,742.1 $ 1,758.2 Consumer Healthcare 33.2 53.8 40.1 Animal Health 40.0 28.4 31.2 Corporate 83.4 126.3 126.3 ----------------------------------- Consolidated total $ 1,383.1 $ 1,950.6 $ 1,955.8 =================================== TOTAL ASSETS AT DECEMBER 31, Pharmaceuticals $15,771.2 $14,513.7 $12,608.7 Consumer Healthcare 1,701.4 1,742.8 1,709.8 Animal Health 1,340.9 1,328.4 1,293.1 Corporate 14,816.2 13,447.0 10,431.0 ----------------------------------- Consolidated total $33,629.7 $31,031.9 $26,042.6 ===================================
Company Data by Geographic Segment - ---------------------------------- (In millions)
YEAR ENDED DECEMBER 31, 2004 2003 2002 - -------------------------------------------------------------------------------- NET REVENUE FROM CUSTOMERS(3) United States $ 9,856.5 $ 9,581.0 $ 9,233.8 United Kingdom 1,088.7 863.0 750.6 Other international 6,412.8 5,406.6 4,599.6 ----------------------------------- Consolidated total $17,358.0 $15,850.6 $14,584.0 =================================== LONG-LIVED ASSETS AT DECEMBER 31,(3)(4) United States $ 7,491.4 $ 7,256.1 $ 7,468.9 Ireland 3,130.2 2,472.0 1,341.0 Other international 3,117.7 2,996.6 2,939.0 ----------------------------------- Consolidated total $13,739.3 $12,724.7 $11,748.9 ===================================
(1) 2004 Pharmaceuticals included a charge of $145.5 within Research and development expenses related to the upfront payment to Solvay in connection with the co-development and co-commercialization of four neuroscience compounds (see Note 2). (2) 2004, 2003 and 2002 Corporate included litigation charges of $4,500.0, $2,000.0 and $1,400.0, respectively, relating to the litigation brought against the Company regarding the use of the diet drug products REDUX or PONDIMIN (see Note 14). The charges related to the Pharmaceuticals reportable segment. 2003 Corporate also included: - A gain of $860.6 relating to the sale of the Company's remaining Amgen common stock holdings (see Note 2). The gain related to the Pharmaceuticals reportable segment. - A special charge of $639.9 for manufacturing restructurings and related asset impairments and the cost of debt extinguishment (see Note 3). The charge related to the reportable segments as follows: Pharmaceuticals - $487.9 and Corporate - $152.0. 2002 Corporate also included: - A gain of $2,627.6 relating to the acquisition of Immunex by Amgen. The gain represents the excess of $1,005.2 in cash plus the fair value of 98,286,358 Amgen shares received, $2,500.1, over the Company's book basis of its investment in Immunex and certain transaction costs (see Note 2). The gain related to the Pharmaceuticals reportable segment. - A gain of $1,454.6 on the sale of a portion of the Company's Amgen common stock holdings. The gain was determined by comparing the basis of the shares sold, $1,782.7, with the net proceeds received, $3,250.8, reduced by certain related expenses (see Note 2). The gain related to the Pharmaceuticals reportable segment. - A special charge of $340.8 for restructuring and related asset impairments (see Note 3). The charge related to the reportable segments as follows: Pharmaceuticals - $291.5, Consumer Healthcare - $17.1, Animal Health - $16.1 and Corporate - $16.1. (3) Other than the United States and the United Kingdom, no other country in which the Company operates had net revenue of 5% or more of the respective consolidated total. Other than the United States and Ireland, no country in which the Company operates had long-lived assets of 5% or more of the respective consolidated total. The basis for attributing net revenue to geographic areas is the location of the customer. (4) Long-lived assets consist primarily of property, plant and equipment, goodwill, other intangibles and other assets, excluding deferred taxes, net investments in equity companies and various financial assets. Wyeth 63 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Wyeth: We have completed an integrated audit of Wyeth's 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements - --------------------------------- In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Wyeth and its subsidiaries (the Company) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reporting - ----------------------------------------- Also, in our opinion, management's assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP Florham Park, New Jersey March 3, 2005 64 Wyeth MANAGEMENT REPORTS TO WYETH STOCKHOLDERS Management Report on Consolidated Financial Statements - ------------------------------------------------------ Management has prepared and is responsible for the Company's consolidated financial statements and related notes to consolidated financial statements. They have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and necessarily include amounts based on judgments and estimates made by management. All financial information in this Annual Report is consistent with the consolidated financial statements. The independent registered public accounting firm audits the Company's consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our Audit Committee is composed of non-employee members of the Board of Directors, all of whom are independent from our Company. The Committee charter, which is published in the proxy statement and on our Internet website (www.wyeth.com), outlines the members' roles and responsibilities and is consistent with the newly enacted corporate reform laws, regulations and New York Stock Exchange guidelines. It is the Audit Committee's responsibility to appoint the independent registered public accounting firm subject to stockholder ratification; approve audit, audit-related, tax and other services performed by the independent registered public accounting firm; and review the reports submitted by them. The Audit Committee meets several times during the year with management, the internal auditors and the independent registered public accounting firm to discuss audit activities, internal controls and financial reporting matters, including reviews of our externally published financial results. The internal auditors and the independent registered public accounting firm have full and free access to the Committee. We are dedicated to ensuring that we maintain the high standards of financial accounting and reporting that we have established. We are committed to providing financial information that is transparent, timely, complete, relevant and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. In addition, we have the highest confidence in our financial reporting, our underlying system of internal controls and our people, who are expected to operate at the highest level of ethical standards pursuant to our Code of Conduct. Finally, we have personally executed all certifications required to be filed with the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002 and the regulations thereunder regarding the accuracy and completeness of the consolidated financial statements. In addition, in 2004, we provided to the New York Stock Exchange the annual CEO certification regarding the Company's compliance with the New York Stock Exchange's corporate governance listing standards. Management Report on Internal Control over Financial Reporting - -------------------------------------------------------------- Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may deteriorate. Management performed an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 based upon criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management determined that the Company's internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein. Robert Essner Kenneth J. Martin Chairman, President and Executive Vice President and Chief Executive Officer Chief Financial Officer Wyeth 65 QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (In thousands except per share amounts) 2004 2004 2004 2004 - ------------------------------------------------------------------------------------------------------------ Net revenue $ 4,014,789 $ 4,223,205 $ 4,471,836 $ 4,648,198 Gross profit(1) 2,853,425 3,043,068 3,249,495 3,264,771 Net income (loss)(2) 749,703 827,345 1,421,292 (1,764,343) Diluted earnings (loss) per share(2) 0.55 0.61 1.05 (1.32)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER (In thousands except per share amounts) 2003 2003 2003 2003 - ------------------------------------------------------------------------------------------------------------ Net revenue $ 3,689,057 $ 3,746,556 $ 4,081,609 $ 4,333,410 Gross profit(1) 2,694,891 2,683,563 2,902,294 2,979,736 Net income (loss)(3) 1,277,882 864,405 (426,358) 335,263 Diluted earnings (loss) per share(3) 0.96 0.65 (0.32) 0.25
(1) Amounts have been restated to reflect the reclassification of royalty income to Other income, net, which previously had been recorded as an offset to Cost of goods sold. (2) First Quarter 2004 included a charge of $94,575 after-tax or $0.07 per share within Research and development expenses related to the upfront payment to Solvay Pharmaceuticals in connection with the co-development and co-commercialization of four neuroscience compounds. Third Quarter 2004 included a favorable income tax adjustment of $407,600 or $0.30 per share related to settlements of audit issues offset, in part, by a provision related to developments in the third quarter in connection with a prior year tax matter. Fourth Quarter 2004 included a charge of $2,625,000 after-tax or $1.97 per share to increase the reserve relating to the litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. The first, second and third quarters have been restated to include the dilutive effect of the Company's outstanding convertible debt in the calculation of diluted earnings per share in accordance with the recently issued Emerging Issues Task Force Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. There was no impact on 2003. The sum of the 2004 first quarter, second quarter, third quarter and fourth quarter diluted earnings (loss) per share does not add to year-to-date diluted earnings per share due to the antidilutive effect of contingently convertible debt and common stock equivalents in the fourth quarter. (3) First Quarter 2003 included a gain of $558,694 after-tax or $0.42 per share on the sale of the remaining 31,235,958 shares of Amgen, Inc. common stock. Third Quarter 2003 included a charge of $1,300,000 after-tax or $0.98 per share to increase the reserve relating to the litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. Fourth Quarter 2003 included a special charge of $466,441 after-tax or $0.35 per share for manufacturing restructurings, asset impairments and the cost of debt extinguishment. MARKET PRICES OF COMMON STOCK AND DIVIDENDS
2004 RANGE OF PRICES* 2003 RANGE OF PRICES* ---------------------------------- ---------------------------------- DIVIDENDS PAID DIVIDENDS PAID HIGH LOW PER SHARE HIGH LOW PER SHARE - ----------------------------------------------------------------------------------------------------- First quarter $ 44.70 $ 36.62 $ 0.23 $ 40.00 $ 32.75 $ 0.23 Second quarter 40.63 34.50 0.23 49.95 34.46 0.23 Third quarter 39.08 33.50 0.23 49.29 41.32 0.23 Fourth quarter 43.00 36.57 0.23 48.32 36.81 0.23
* Prices are those of the New York Stock Exchange - Composite Transactions. 66 Wyeth MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements on pages 32 to 62. OVERVIEW Wyeth is one of the world's largest research-based pharmaceutical and health care products companies and is a leader in the discovery, development, manufacturing and marketing of pharmaceuticals, biologicals, vaccines, non-prescription medicines and animal health care. The Company has four reportable segments: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare), Fort Dodge Animal Health (Animal Health) and Corporate, which are managed separately because they manufacture, distribute and sell distinct products and provide services which require differing technologies and marketing strategies. These segments reflect how senior management reviews the business, makes investing and resource allocation decisions, and assesses operating performance. Our Pharmaceuticals segment, which provided 80% of our worldwide Net revenue for both 2004 and 2003, manufactures, distributes and sells branded human ethical pharmaceuticals, biologicals, vaccines and nutritionals. Principal products include neuroscience therapies, cardiovascular products, nutritionals, gastroenterology drugs, anti-infectives, vaccines, oncology therapies, musculoskeletal therapies, hemophilia treatments, immunological products and women's health care products. These products are promoted and sold worldwide primarily to wholesalers, pharmacies, hospitals, physicians, retailers and other human health care institutions. The Consumer Healthcare segment, which provided 15% of our worldwide Net revenue for both 2004 and 2003, manufactures, distributes and sells over-the-counter health care products, which include analgesics, cough/cold/allergy remedies, nutritional supplements, and hemorrhoidal, asthma and personal care items. These products generally are sold to wholesalers and retailers and are promoted primarily to consumers worldwide through advertising. Our Animal Health segment, which provided 5% of our worldwide Net revenue for both 2004 and 2003, manufactures, distributes, and sells animal biological and pharmaceutical products, including vaccines, pharmaceuticals, parasite control and growth implants. These products are sold to wholesalers, retailers, veterinarians and other animal health care institutions. The Corporate segment is responsible for the treasury, tax and legal operations of the Company's businesses. It maintains and/or incurs certain assets, liabilities, income, expenses, gains and losses related to the overall management of the Company that are not allocated to the other reportable segments. Wyeth exhibited strong revenue growth for 2004, achieving a 10% increase in worldwide Net revenue compared with 2003. Pharmaceuticals had net revenue growth of 11% to $13,964.1 million for 2004. EFFEXOR, our novel antidepressant, achieved net revenue of $3,347.4 million, an increase of 23% over 2003. PROTONIX, our proton pump inhibitor for gastroesophegeal reflux disease, increased net revenue by 7% to $1,590.6 million. ENBREL, our biopharmaceutical for rheumatoid arthritis and psoriasis as well as other indications, for which we have exclusive rights outside of North America, reached $680.0 million in net revenue (internationally) in 2004, a 127% increase compared with 2003. PREVNAR, our vaccine for preventing invasive pneumococcal disease in infants and children, increased net revenue by 11% to $1,053.6 million, making PREVNAR the first ever billion-dollar vaccine. Over the past year, upgrades and improvements have been made to our PREVNAR manufacturing facilities, and additional vial filling capacity also became available through a third-party filler. We have made enhancements at every stage of the PREVNAR production process to provide availability in those countries where PREVNAR currently is approved as well as to support its introduction into new markets. Other areas of revenue growth for the Pharmaceuticals segment for 2004 included ZOSYN (sold outside the U.S. as TAZOCIN), which reached net revenue of $760.3 million, an increase of 19% compared with 2003 as well as ZOTON, BENEFIX, RAPAMUNE and rhBMP-2. Additionally, alliance revenue increased 21% for 2004 from combined sales of ENBREL (in North America), ALTACE and the CYPHER stent. The active ingredient in RAPAMUNE, sirolimus, coats the CYPHER coronary stent marketed by Johnson & Johnson. In July 2002, the National Institutes of Health (NIH) announced that it was discontinuing a portion of its Women's Health Initiative (WHI) study assessing the value of combination estrogen plus progestin therapy, and, in early March 2004, the portion of the study addressing estrogen-only therapy also was discontinued. The Company remains committed to women's health care and stands behind the PREMARIN family of products as the standard of therapy to help women address serious menopausal symptoms. We introduced low-dose versions of PREMARIN and PREMPRO in 2003, launched a direct-to-consumer advertising campaign featuring PREMPRO 0.3 mg/1.5 mg in 2004, and continue to focus our sales and marketing on these low-dose options. Despite these efforts, sales of the PREMARIN family of products declined from $1,275.3 million for 2003 to $880.2 million for 2004; however, the launch of low-dose PREMARIN and PREMPRO has helped to moderate the decrease in sales. Wyeth 67 Both Consumer Healthcare and Animal Health posted increases in net revenue for 2004. Consumer Healthcare net revenue increased 5% for 2004 primarily from increased sales of CENTRUM, ADVIL, CALTRATE and CHAPSTICK. Animal Health net revenue also increased 5% for 2004, reflecting strong sales of companion animal and livestock products despite the impact of the voluntary recall of PROHEART 6 in the U.S. market in September 2004. On a combined basis, Pharmaceuticals and Consumer Healthcare realized aggregate pre-tax gains from product divestitures amounting to approximately $170.9 million for 2004 compared with $351.3 million for 2003. In order for us to sustain the growth of our core group of products, we must continue to meet the global demand of our customers. Two of our important core products are PREVNAR and ENBREL, both biological products that are extremely complicated and difficult to manufacture. Improved manufacturing capacity for PREVNAR in 2004 allowed global regulatory authorities to reinstate this vaccine's full four-dose regimen after manufacturing shortages had previously limited supplies of this product. Strong growth for PREVNAR is expected to continue over the next several years as we launch the vaccine in new markets. We also anticipate the approval in 2005 of the production of ENBREL at our Grange Castle, Ireland, site as well as at Amgen Inc.'s (Amgen) BioNext facility in Rhode Island. This additional manufacturing capacity should help this breakthrough therapy reach its full commercial potential, although, as is typical for new biological manufacturing facilities, margins are expected to be affected during at least the initial year of production. ENBREL, which received approval of a new indication for psoriasis this year, recorded approximately $2,500.0 million in global sales. International sales of ENBREL more than doubled, and, early in 2005, ENBREL received market clearance in Japan for the treatment of rheumatoid arthritis. Wyeth's focus is on maximizing the strong growth potential of our core group of patent-protected innovative products that we have introduced in recent years as well as actively pursuing in-licensing opportunities. In March 2004, we announced an important alliance with Solvay Pharmaceuticals (Solvay) to co-develop and co-commercialize four neuroscience compounds, most notably, bifeprunox. This alliance is intended to supplement new product introductions expected to begin primarily in the 2007 time period. The Company's principal strategy for success is based on research and development (R&D) innovations, hence the significant increase in our R&D spending, which we expect to reach about $2,700.0 million in 2005. The Company intends to leverage its breadth of knowledge and resources across three scientific development platforms (traditional pharmaceuticals, biologicals and vaccines) to produce first-in-class and best-in-class therapies for significant unmet medical needs around the world. During 2004, we entered 12 new compounds into development for the fourth year in a row. We also entered two new molecular entities and one life cycle management program into Phase 3, the final stage of drug development. We have seen a threefold increase in Phase 2 and Phase 3 clinical projects relative to our performance just two years ago. Late in 2004, we submitted a global registration filing for TYGACIL, an innovative broad-spectrum antibiotic for serious, hospital-based infections. Early in 2005, this application was given priority review status by the U.S. Food and Drug Administration (FDA) in the United States, which could lead to its approval and market introduction later in 2005. The Company continues to strategically focus its resources. In April 2004, the Company announced the dissolution of our collaboration with MedImmune, Inc. (MedImmune) for the nasal flu vaccine FLUMIST (Influenza Virus Vaccine Live, Intranasal) and an investigational second-generation liquid formulation, Cold Adapted Influenza Vaccine-Trivalent (CAIV-T). As a result of the dissolution, MedImmune has worldwide rights to these products and assumed full responsibility for the manufacturing, marketing and selling of FLUMIST. Wyeth received from MedImmune an upfront payment and will receive milestone payments upon achievement of certain future development and regulatory events as well as royalties on future product sales. MedImmune also acquired Wyeth's distribution facility in Louisville, Kentucky, as part of the dissolution process. In November 2004, the Company entered into an agreement with Genzyme Corporation (Genzyme) for the sale of the Company's marketing rights to SYNVISC in the U.S. and five European countries. The transaction was completed in January 2005. Under the terms of the agreement, Genzyme paid upfront payments of $121.0 million and will also pay a series of milestone payments, based on the volume of SYNVISC sales, which could extend out to June 2012. The Company continues to address the challenges of its diet drug litigation. As discussed in more detail below and in the notes to our consolidated financial statements, the Company recorded an additional diet drug litigation charge of $4,500.0 million ($2,625.0 million after-tax or $1.94 per share-diluted) during 2004. Generally, the Company faces the same difficult challenges that all research-based pharmaceutical companies are confronting. Pressure from government agencies and consumers to lower prices either through leveraged purchasing plans, importation or reduced reimbursement for prescription drugs poses significant challenges for our Company. Health care providers and the general public want more information about our products, and they want it delivered efficiently and effectively. Regulatory burdens are increasing the demands on our Company, and they increase both the cost and time it takes to bring new drugs to market. We also are faced with the moderating rate of growth of some of our major products. We have met many of these challenges on a number of fronts, and we intend to embark on a series of long-term initiatives, beginning in 2005, in response to the changes in the environment that have an impact on our businesses to make Wyeth more efficient, more effective and more profitable so that we may continue to thrive in this increasingly challenging pharmaceutical environment. 68 Wyeth RESULTS OF OPERATIONS 2004 VS. 2003 Net Revenue - ----------- Worldwide Net revenue increased 10% to $17,358.0 million for 2004. U.S. and international net revenue increased 3% and 20%, respectively, for 2004. The following table sets forth 2004, 2003 and 2002 worldwide Net revenue by reportable segment together with the percentage changes in worldwide Net revenue from prior years:
(Dollar amounts in millions) YEAR ENDED DECEMBER 31, % INCREASE ----------------------------------------- -------------------------------- NET REVENUE 2004 2003 2002 2004 VS. 2003 2003 vs. 2002 - --------------------------------------------------------------------------------------------------------------------- Pharmaceuticals $ 13,964.1 $ 12,622.7 $ 11,733.3 11% 8% Consumer Healthcare 2,557.4 2,434.5 2,197.4 5% 11% Animal Health 836.5 793.4 653.3 5% 21% - --------------------------------------------------------------------------------------------------------------------- Consolidated net revenue $ 17,358.0 $ 15,850.6 $ 14,584.0 10% 9% =====================================================================================================================
Worldwide Pharmaceuticals net revenue increased 11% for 2004. Excluding the favorable impact of foreign exchange, worldwide Pharmaceuticals net revenue increased 8% for 2004. U.S. Pharmaceuticals net revenue increased 3% for 2004 due primarily to higher sales of EFFEXOR, PROTONIX, RAPAMUNE and rhBMP-2 and increased alliance revenue offset, in part, by lower sales of the PREMARIN family of products as a result of lower prescription volume and a reduction of inventory levels at one wholesaler and lower sales of PREVNAR. Higher sales of EFFEXOR reflect growth resulting primarily from higher volume and price increases compared with the prior year. Strong prescription volume growth contributed to the increase in PROTONIX net revenue despite the impact of discounting in this product category. Refer to Certain Factors That May Affect Future Results herein for additional product discussion. Additionally, alliance revenue increased as a result of higher sales of ENBREL (in North America) and the CYPHER coronary stent, which is coated with sirolimus, the active ingredient in RAPAMUNE, and marketed by Johnson and Johnson. International Pharmaceuticals net revenue increased 22% for 2004 due primarily to higher sales of EFFEXOR, PREVNAR (increased manufacturing and filling capacity), ENBREL (for which the Company has exclusive marketing rights outside of North America), ZOTON and TAZOCIN offset, in part, by lower sales of the PREMARIN family of products as a result of lower prescription volume. Worldwide Consumer Healthcare net revenue increased 5% for 2004. Excluding the favorable impact of foreign exchange, worldwide Consumer Healthcare net revenue increased 3% for 2004. U.S. Consumer Healthcare net revenue increased 2% for 2004 due primarily to higher sales of ADVIL, CENTRUM, CALTRATE and CHAPSTICK partially offset by lower sales of ALAVERT as compared with 2003 when the product launch was under way. International Consumer Healthcare net revenue increased 11% for 2004 due primarily to higher sales of CENTRUM, CALTRATE, ADVIL and DIMETAPP. Worldwide Animal Health net revenue increased 5% for 2004. Excluding the favorable impact of foreign exchange, worldwide Animal Health net revenue increased 2% for 2004. U.S. Animal Health net revenue increased 1% for 2004 due primarily to higher sales of livestock and companion animal products offset, in part, by lower sales of PROHEART products and lower sales of equine products as a result of decreases in sales of WEST NILE-INNOVATOR. PROHEART products, which are included in the companion animal products category, were negatively impacted by product returns and reduced product sales resulting from the voluntary recall of PROHEART 6 in the U.S. market in September 2004. International Animal Health net revenue increased 9% for 2004 due to higher sales of companion animal and livestock products. Wyeth 69 The following tables set forth significant 2004, 2003 and 2002 Pharmaceuticals, Consumer Healthcare and Animal Health worldwide net revenue by product:
PHARMACEUTICALS - -------------------------------------------------------------------------------- (In millions) 2004 2003 2002 - ------------------------------------- --------------------------------------- EFFEXOR $ 3,347.4 $ 2,711.7 $ 2,072.3 PROTONIX 1,590.6 1,493.3 1,070.8 PREVNAR 1,053.6 945.6 647.5 Nutritionals 943.3 857.6 834.7 PREMARIN family 880.2 1,275.3 1,879.9 ZOSYN/TAZOCIN 760.3 638.7 406.1 ENBREL 680.0 298.9 158.8 Oral contraceptives 590.1 589.2 576.3 ZOTON 447.7 363.2 309.4 BENEFIX 301.5 248.1 219.2 RAPAMUNE 259.0 169.8 129.7 REFACTO 249.4 224.2 197.5 ATIVAN 198.4 211.5 217.2 SYNVISC 197.5 222.6 212.5 rhBMP-2 165.3 58.1 66.5 Generics -- -- 187.4 Alliance revenue 789.9 654.4 418.8 Other 1,509.9 1,660.5 2,128.7 --------------------------------------- Total Pharmaceuticals $ 13,964.1 $12,622.7 $11,733.3 =======================================
CONSUMER HEALTHCARE - -------------------------------------------------------------------------------- (In millions) 2004 2003 2002 - ------------------------------------- --------------------------------------- CENTRUM $ 616.6 $ 545.6 $ 516.2 ADVIL 490.4 450.9 442.7 ROBITUSSIN 237.9 230.3 210.0 CALTRATE 179.0 153.4 142.4 ADVIL Cold & Sinus 129.7 134.7 111.6 CHAPSTICK 123.2 113.9 111.3 SOLGAR 105.5 105.1 100.1 DIMETAPP 87.8 85.2 84.1 ALAVERT 56.0 81.6 8.5 Other 531.3 533.8 470.5 --------------------------------------- Total Consumer Healthcare $2,557.4 $2,434.5 $2,197.4 =======================================
ANIMAL HEALTH - -------------------------------------------------------------------------------- (In millions) 2004 2003 2002 - ------------------------------------------- --------------------------------- Livestock products $351.0 $329.2 293.7 Companion animal products(1) 252.6 226.7 158.0 Equine products(2) 138.2 147.2 117.7 Poultry products 94.7 90.3 83.9 -------------------------------- Total Animal Health $836.5 $793.4 $653.3 ================================
(1) Companion animal products include net revenue from PROHEART products of $35.2, $38.1 and $(18.8) for 2004, 2003 and 2002, respectively. Negative net revenue in 2002 resulted from significant PROHEART returns. (2) Equine products include WEST NILE-INNOVATOR net revenue of $46.1, $64.3 and $51.5 for 2004, 2003 and 2002, respectively. The following table sets forth the percentage changes in 2004 and 2003 worldwide Net revenue by reportable segment and geographic area compared with the prior year, including the effect volume, price and foreign exchange had on these percentage changes:
% INCREASE (DECREASE) % Increase (Decrease) YEAR ENDED DECEMBER 31, 2004 Year Ended December 31, 2003 -------------------------------------- -------------------------------------- FOREIGN TOTAL NET Foreign Total Net VOLUME PRICE EXCHANGE REVENUE Volume Price Exchange Revenue - -------------------------------------------------------------- -------------------------------------- PHARMACEUTICALS United States (1)% 4% -- 3% (5)% 7% -- 2% International 15% -- 7% 22% 4% 2% 11% 17% -------------------------------------- -------------------------------------- Total 5% 3% 3% 11% (1)% 5% 4% 8% ====================================== ====================================== CONSUMER HEALTHCARE United States 1% 1% -- 2% 3% 2% -- 5% International 1% 3% 7% 11% 9% 3% 10% 22% -------------------------------------- -------------------------------------- Total 1% 2% 2% 5% 6% 2% 3% 11% ====================================== ====================================== ANIMAL HEALTH United States (6)% 7% -- 1% 24% 5% -- 29% International -- 2% 7% 9% 5% 1% 9% 15% -------------------------------------- -------------------------------------- Total (3)% 5% 3% 5% 14% 2% 5% 21% ====================================== ====================================== TOTAL United States (1)% 4% -- 3% (2)% 6% -- 4% International 12% 1% 7% 20% 4% 2% 11% 17% - -------------------------------------------------------------- -------------------------------------- Total 4% 3% 3% 10% -- 5% 4% 9% ============================================================== ======================================
70 Wyeth Sales deductions - ---------------- The Company deducts certain items from gross sales, which primarily consist of provisions for product returns, cash discounts, chargebacks/rebates, customer allowances and consumer sales incentives. The provision for chargebacks/rebates relates primarily to U.S. sales of pharmaceutical products provided to wholesalers and managed care organizations under contractual agreements or to certain governmental agencies that administer benefit programs, such as Medicaid. While different programs and methods are utilized to determine the chargeback or rebate provided to the customer, the Company considers both to be a form of price reduction. The change in the accrual for chargebacks/rebates for 2004 and 2003 was as follows:
(In millions) 2004 2003 - -------------------------------------------------------------------------------- Balance at January 1 $ 750.3 $ 624.2 Provision 2,362.5 1,720.7 Payments/credits (2,195.8) (1,594.6) ------------------------------ Balance at December 31 $ 917.0 $ 750.3 ==============================
The increase in the provision for chargebacks/rebates for 2004 was due primarily to higher rebate rates and increased volumes of PROTONIX. Except for chargebacks/rebates, provisions for each of the other components of sales deductions, including product returns, are individually less than 2% of gross sales. The provisions charged against gross sales for product returns for 2004, 2003 and 2002 were $214.0 million, $337.7 million and $324.9 million, respectively. Operating Expenses - ------------------ The following table sets forth 2004, 2003 and 2002 Cost of goods sold and Selling, general and administrative expenses as a percentage of net revenue:
% OF NET REVENUE INCREASE / (DECREASE) --------------------------- ----------------------------- 2004 2003 2002 2004 VS. 2003 2003 vs. 2002 - ----------------------------------------------------------------------------------------------------------------- Cost of goods sold 28.5% 29.0% 27.9% (0.5%) 1.1% Selling, general and administrative expenses 33.4% 34.5% 34.4% (1.1%) 0.1%
The increase in gross margin for 2004 was primarily due to higher alliance revenue (with no corresponding cost of goods sold) from higher sales of ENBREL in North America. This increase in gross margin was partially offset by higher royalty costs associated with higher sales of ENBREL in Europe and a less profitable product mix caused by lower sales of higher margin products, including the PREMARIN family of products, and higher sales of lower margin products such as PROTONIX, ZOSYN/TAZOCIN and ENBREL (outside of North America). This unfavorable product mix was partially offset by higher sales of higher margin EFFEXOR. Excluding alliance revenue, Cost of goods sold, as a percentage of net sales, for 2004 was 29.9%, a 0.3% decrease from 30.2% in 2003. The slight decrease in Cost of goods sold, as a percentage of Net revenue, also was due to lower inventory and manufacturing losses in the Pharmaceuticals segment and lower manufacturing costs in the Consumer Healthcare and Animal Health segments. Cost of goods sold includes the impact of the reclassification of royalty income to Other income, net. Royalty income previously had been recorded as an offset to Cost of goods sold. Selling, general and administrative expenses increased 6% while Net revenue increased at a rate of 10% for 2004 as compared with 2003. This difference is primarily attributable to the significant increase in net revenue of PREVNAR and ENBREL, which generally require lower promotional spending than mass-marketed Pharmaceuticals products. In addition, net revenue of EFFEXOR also increased significantly as compared with 2003 while promotional spending rose at a much lower rate. The following table sets forth 2004, 2003 and 2002 total Research and development expenses and Pharmaceuticals research and development expenses together with the percentage changes from prior years:
% INCREASE --------------------------------- (Dollar amounts in millions) 2004 2003 2002 2004 VS. 2003 2003 vs. 2002 - ------------------------------------------------------------------------------------------------------------------------ Research and development expenses $2,460.6 $2,093.5 $2,080.2 18% 1% Pharmaceuticals research and development expenses 2,307.2 1,938.7 1,944.3 19% -- Pharmaceuticals as a percentage of total research and development expenses 94% 93% 93% 1% --
The increase in research and development expenses was due primarily to higher clinical grant spending in the Pharmaceuticals segment as a result of the initiation of several Phase 3 programs and higher cost-sharing expenditures relating to pharmaceutical collaborations offset, in part, by lower other research operating expenses (including lower chemical and material costs). The increase in Research and development expenses also reflects the impact of the upfront payment and charge in the 2004 first quarter of $145.5 million ($94.6 million after-tax or $0.07 per share-diluted) made in connection with the agreement Wyeth 71 entered into between the Company and Solvay to co-develop and co-commercialize four neuroscience compounds, most notably, bifeprunox. Pharmaceuticals research and development expenses, as a percentage of worldwide Pharmaceuticals net revenue, exclusive of nutritional sales, were 18% and 16% in 2004 and 2003, respectively. Interest Expense and Other Income - --------------------------------- Interest expense, net increased 7% for 2004 due primarily to lower capitalized interest and higher interest expense offset, in part, by higher interest income. Weighted average debt outstanding during 2004 and 2003 was $8,247.3 million and $7,346.7 million, respectively. The impact of higher weighted average debt outstanding on interest expense was partially offset by increases in interest income earned on higher cash balances in 2004 vs. 2003. The lower capitalized interest resulted from lower interest rates used for capitalization purposes applied against the spending for long-term capital projects in process. These projects include the new Grange Castle facility in Ireland, as well as the expansion of existing manufacturing facilities in Ireland and Puerto Rico. Other income, net decreased 39% for 2004 primarily as a result of decreases in gains from the divestitures of certain Pharmaceuticals and Consumer Healthcare products. Other income, net includes the reclassification of royalty income, which previously had been recorded as an offset to Cost of goods sold. 2003 VS. 2002 Net Revenue - ----------- Worldwide Net revenue increased 9% to $15,850.6 million for 2003. U.S. and international net revenue increased 4% and 17%, respectively, for 2003. Worldwide Pharmaceuticals net revenue increased 8% for 2003. Excluding the favorable impact of foreign exchange, worldwide Pharmaceuticals net revenue increased 4% for 2003. U.S. Pharmaceuticals net revenue increased 2% for 2003 due primarily to higher sales of EFFEXOR, PROTONIX, PREVNAR and ZOSYN and increased alliance revenue offset, in part, by lower sales of the PREMARIN family of products and CORDARONE I.V. (market exclusivity ended October 2002). Refer to Certain Factors That May Affect Future Results herein for additional product discussion. International Pharmaceuticals net revenue increased 17% for 2003 due primarily to higher sales of EFFEXOR, PREVNAR, ENBREL (for which the Company has exclusive marketing rights outside of North America) and TAZOCIN offset, in part, by lower sales of the PREMARIN family of products. Worldwide Consumer Healthcare net revenue increased 11% for 2003. Excluding the favorable impact of foreign exchange, worldwide Consumer Healthcare net revenue increased 8% for 2003. U.S. Consumer Healthcare net revenue increased 5% for 2003 due primarily to higher sales of ALAVERT, which was introduced in the 2002 fourth quarter, and cough/cold/allergy products partially offset by lower sales of CENTRUM. International Consumer Healthcare net revenue increased 22% for 2003 due primarily to higher sales of CENTRUM, ADVIL, CALTRATE and cough/cold/allergy products. Worldwide Animal Health net revenue increased 21% for 2003. Excluding the favorable impact of foreign exchange, worldwide Animal Health net revenue increased 16% for 2003. U.S. Animal Health net revenue increased 29% for 2003 due primarily to higher sales of PROHEART 6 compared with 2002, which was impacted by significant PROHEART 6 product returns, as well as higher sales of the Company's WEST NILE-INNOVATOR biological vaccine for horses. International Animal Health net revenue increased 15% for 2003 due to higher sales of pharmaceutical and biological products. Operating Expenses - ------------------ Cost of goods sold, as a percentage of Net revenue, increased to 29.0% for 2003 compared with 27.9% in 2002 primarily due to a less profitable product mix as a result of lower sales of higher margin products (e.g., PREMARIN family of products and CORDARONE I.V.) and higher sales of lower margin products (e.g., PROTONIX, ZOSYN and ENBREL) offset, in part, by increased sales of higher margin EFFEXOR and PREVNAR in the Pharmaceuticals segment. Cost of goods sold includes the impact of the reclassification of royalty income to Other income, net. Royalty income previously had been recorded as an offset to cost of goods sold. Excluding alliance revenue, Cost of goods sold, as a percentage of net sales, for 2003 was 30.2%, a 1.4% increase from 28.8% in 2002. Gross margin also was negatively impacted by higher royalty costs associated with the launch of ALAVERT in the Consumer Healthcare segment and inventory write-offs related to REFACTO, the PREMARIN family of products and FLUMIST in the Pharmaceuticals segment, combined with increased costs associated with addressing various manufacturing issues. The Animal Health segment margin improved due primarily to a more profitable product mix as a result of higher domestic sales of WEST NILE-INNOVATOR combined with the non-recurrence of significant PROHEART 6 product returns, which occurred during 2002. The slight increase in Selling, general and administrative expenses, as a percentage of Net revenue, for 2003 resulted from higher marketing expenses in the Pharmaceuticals and Consumer Healthcare segments and higher expenses associated with increased general insurance and employee benefit costs. The 1% increase in Research and development expenses for 2003 was partially due to higher clinical grant spending, primarily in the field of women's health care and infectious diseases, and higher cost-sharing expenditures relating to pharmaceutical collaborations offset, in part, by lower other research operating expenses (including lower chemical and material costs). Pharmaceuticals research and development expenditures accounted for 93% of total Research and development expenses in both 2003 and 2002. Pharmaceuticals research and development expenses, as a percentage of worldwide Pharmaceuticals net revenue, exclusive of nutritional sales, were 16% and 18% in 2003 and 2002, respectively. The increase in research and development expenses also was due to higher expenditures relating to Animal Health line extensions and combination product projects. 72 Wyeth Interest Expense and Other Income - --------------------------------- Interest expense, net decreased 49% for 2003 due primarily to lower weighted average debt outstanding compared with 2002 levels. Weighted average debt outstanding during 2003 and 2002 was $7,346.7 million and $10,155.2 million, respectively. The decrease in Interest expense, net also was affected by higher capitalized interest resulting from spending for long-term capital projects in process. These projects include a new biopharmaceutical and vaccine manufacturing facility in Ireland, as well as the expansion of an existing manufacturing facility in Ireland. Other income, net increased 1% for 2003 due primarily to higher royalty income in the Pharmaceuticals segment and higher gains on sales of non-strategic Pharmaceuticals and Consumer Healthcare product rights offset, in part, by the non-recurrence of income received in 2002 in connection with the sale of certain assets relating to the generic human injectables product line, which resulted in a gain of $172.9 million; the non-recurrence of a 2002 settlement regarding price fixing by certain vitamin suppliers; and higher foreign exchange losses. Other income, net includes the reclassification of royalty income, which previously had been recorded as an offset to Cost of goods sold. 2004, 2003 and 2002 Significant Items - ------------------------------------- Diet Drug Litigation Charges The Company recorded a charge of $4,500.0 million ($2,625.0 million after-tax or $1.94 per share-diluted) in 2004, a charge of $2,000.0 million ($1,300.0 million after-tax or $0.97 per share-diluted) in 2003 and a charge of $1,400.0 million ($910.0 million after-tax or $0.68 per share-diluted) in 2002 to increase the reserve relating to the PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as "fen-phen") and REDUX diet drug litigation, bringing the total of the pre-tax charges taken to date to $21,100.0 million. The $7,166.3 million reserve at December 31, 2004 represents management's best estimate of the aggregate amount anticipated to cover payments in connection with the settlement trust (the Trust), initial opt outs, primary pulmonary hypertension (PPH) claims, Intermediate, Back-End or Sixth Amendment opt outs (collectively, the "downstream" opt outs), and the Company's legal fees related to the diet drug litigation. However, due to the need for court approval of the proposed Seventh Amendment, the preliminary status of the Company's settlement discussions with attorneys representing certain downstream opt out plaintiffs, the uncertainty of the Company's ability to consummate settlements with the downstream opt out plaintiffs, the number and amount of any future verdicts that may be returned in downstream opt out and PPH litigation, and the inherent uncertainty surrounding any litigation, it is possible that additional reserves may be required in the future and the amount of such additional reserves may be significant (see Note 14 to the consolidated financial statements and the Liquidity, Financial Condition and Capital Resources section herein for further discussion relating to the Company's additional financing requirements for future diet drug litigation exposure). Co-development and co-commercialization Agreement In 2004, the Company entered into an agreement with Solvay to co-develop and co-commercialize four neuroscience compounds, most notably, bifeprunox. The Company recorded an upfront payment of $145.5 million ($94.6 million after-tax or $0.07 per share-diluted) within Research and development expenses in connection with the agreement (see Note 2 to the consolidated financial statements). Gains Related to Immunex/Amgen Common Stock Transaction During the first quarter of 2003, the Company completed the sale of the remaining 31,235,958 shares of Amgen common stock held by the Company at December 31, 2002. These remaining shares netted proceeds of $1,579.9 million and resulted in a gain of $860.6 million ($558.7 million after-tax or $0.42 per share-diluted). In the 2002 fourth quarter, the Company recorded a gain of $1,454.6 million ($943.4 million after-tax or $0.71 per share-diluted) from the sale of 67,050,400 shares of Amgen common stock received in connection with Amgen's acquisition of Immunex Corporation (Immunex), which generated net proceeds of $3,250.8 million. In the 2002 third quarter, the Company recorded a gain of $2,627.6 million ($1,684.7 million after-tax or $1.26 per share-diluted) related to the initial acquisition of Immunex by Amgen. The gain represented the excess of $1,005.2 million in cash plus the fair value of 98,286,358 Amgen shares received, $2,500.1 million, over the Company's book basis of its investment in Immunex and certain transaction costs. The gain on the shares exchanged was based on the quoted market price of Amgen common stock on July 15, 2002 (the closing date) reduced by an overall discount rate based on valuations provided by independent valuation consultants (see Note 2 to the consolidated financial statements). Special Charges 2003 Restructuring and Related Asset Impairments In December 2003, the Company recorded a special charge for manufacturing restructurings and related asset impairments of $487.9 million ($367.6 million after-tax or $0.28 per share-diluted). The restructuring and related asset impairments impacted only the Pharmaceuticals segment and were recorded to recognize the costs of closing certain manufacturing facilities, as well as the elimination of certain positions at the Company's facilities. These restructuring initiatives were designed to achieve optimal efficiencies and reduce production costs in response to changes in demand projections for certain products. Specifically, the Company closed its pharmaceutical plant in Singapore and rationalized its network of collection sites for PREMARIN-related raw materials as a result of lower volume in the PREMARIN family of products. Restructuring charges of $208.2 million were recorded to recognize the costs of closing the Singapore manufacturing facility, the elimination of certain positions at the facility and contract settlement costs related to purchase commitments with suppliers. Approximately 175 positions were eliminated at the Singapore facility, and all of the employee Wyeth 73 terminations were completed in 2004. Also in December 2003, the Company recorded fixed and intangible asset impairment charges of $108.6 million related to rhBMP-2 and FLUMIST as a result of reduced demand projections and discontinued manufacturing operations at its St. Louis, Missouri, biopharmaceutical facility due to a decline in projected demand for REFACTO, the Company's treatment for hemophilia A. Total charges of $171.1 million for restructuring and asset impairments related to the closure of the St. Louis facility. During 2004, the restructuring program was completed; however, certain contract settlement costs will continue to be paid through 2005 based on the terms of the agreements (see Note 3 to the consolidated financial statements). Debt Extinguishment Costs In December 2003, the Company recorded a special charge of $152.0 million ($98.8 million after-tax or $0.07 per share-diluted) related to the early extinguishment of debt in connection with the repurchase of certain Senior Notes. The costs relate primarily to the excess of prepayment premiums and principal over the carrying value of the debt retired and the related write-off of debt issuance costs (see Note 6 to the consolidated financial statements). 2002 Restructuring and Related Asset Impairments In the 2002 fourth quarter, the Company recorded a special charge for restructuring and related asset impairments of $340.8 million ($233.5 million after-tax or $0.18 per share-diluted). The restructuring charge and related asset impairments were recorded to recognize the costs of closing certain manufacturing facilities and two research facilities, as well as the elimination of certain positions at the Company's facilities. The closing of the manufacturing and research facilities and reduction of sales and administrative-related positions cover approximately 3,150 employees worldwide. As of December 31, 2004, substantially all of the payments have been made (see Note 3 to the consolidated financial statements). Income (Loss) Before Income Taxes - --------------------------------- The following table sets forth 2004, 2003 and 2002 worldwide Income (loss) before income taxes by reportable segment together with the percentage changes in worldwide Income (loss) before income taxes from prior years:
(Dollar amounts in millions) YEAR ENDED DECEMBER 31, % INCREASE / (DECREASE) --------------------------------- ------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 2004 2003 2002 2004 VS. 2003 2003 vs. 2002 - -------------------------------------------------------------------------------------------------------------------- Pharmaceuticals(1) $ 4,040.1 $ 3,798.5 $ 3,441.4 6 % 10 % Consumer Healthcare 578.6 592.4 608.0 (2)% (3)% Animal Health 134.8 127.4 64.1 6 % 99 % Corporate(2) (4,883.3) (2,156.7) 1,983.7 -- -- -------------------------------------------------------------------- Total(3) $ (129.8) $ 2,361.6 $ 6,097.2 -- (61)% ====================================================================
(1) Pharmaceuticals included a 2004 charge of $145.5 within Research and development expenses related to the upfront payment to Solvay in connection with the co-development and co-commercialization of four neuroscience compounds (see Note 2 to the consolidated financial statements). Excluding the upfront payment, Pharmaceuticals income before income taxes increased 10%. (2) 2004, 2003 and 2002 Corporate included litigation charges of $4,500.0, $2,000.0 and $1,400.0, respectively, relating to the litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN (see Note 14 to the consolidated financial statements). The charges related to the Pharmaceuticals reportable segment. 2003 Corporate also included: - A gain of $860.6 relating to the sale of the Company's remaining Amgen common stock holdings (see Note 2 to the consolidated financial statements). The gain related to the Pharmaceuticals reportable segment. - A special charge of $639.9 for manufacturing restructurings and related asset impairments and the cost of debt extinguishment (see Note 3 to the consolidated financial statements). The charge related to the reportable segments as follows: Pharmaceuticals - $487.9 and Corporate - $152.0. 2002 Corporate also included: - A gain of $2,627.6 relating to the acquisition of Immunex by Amgen. The gain represents the excess of $1,005.2 in cash plus the fair value of 98,286,358 Amgen shares received, $2,500.1, over the Company's book basis of its investment in Immunex and certain transaction costs (see Note 2 to the consolidated financial statements). The gain related to the Pharmaceuticals reportable segment. - A gain of $1,454.6 from the sale of 67,050,400 shares of Amgen common stock. The gain was determined by comparing the basis of the shares sold, $1,782.7, with the net proceeds received, $3,250.8, reduced by certain related expenses (see Note 2 to the consolidated financial statements). The gain related to the Pharmaceuticals reportable segment. - A special charge of $340.8 for restructuring and related asset impairments (see Note 3 to the consolidated financial statements). The charge related to the reportable segments as follows: Pharmaceuticals - $291.5, Consumer Healthcare - $17.1, Animal Health - $16.1 and Corporate - $16.1. Excluding the 2004, 2003 and 2002 litigation charges, 2003 and 2002 gains relating to Immunex/Amgen common stock transactions, and 2003 and 2002 special charges, Corporate expenses, net increased 2% and 6% for 2004 and 2003, respectively. (3) Excluding the 2004, 2003 and 2002 litigation charges, 2004 upfront payment to Solvay, 2003 and 2002 gains relating to Immunex/Amgen common stock transactions, and 2003 and 2002 special charges, total Income (loss) before income taxes increased 6% and 10% for 2004 and 2003, respectively. The following explanations of changes in Income (loss) before income taxes, by reportable segment, for 2004 compared with 2003 and 2003 compared with 2002, exclude items listed in footnote (2) to the table above. Pharmaceuticals Worldwide Pharmaceuticals income before income taxes increased 6% for 2004 due primarily to higher worldwide net revenue and slightly higher gross profit margins earned on worldwide sales of Pharmaceuticals products offset, in part, by 74 Wyeth higher research and development expenses, higher selling and general expenses, and lower other income, net related to product divestiture gains. The increase in research and development expenses reflects the impact of the upfront payment to Solvay in connection with co-development and co-commercialization of four neuroscience compounds. Worldwide Pharmaceuticals income before income taxes increased 10% for 2003 due primarily to higher worldwide net revenue offset, in part, by slightly lower gross profit margins earned on worldwide net revenue, higher research and development expenses, higher selling and general expenses, and lower other income, net. Lower gross margins were due primarily to a less profitable product mix and inventory write-offs. Consumer Healthcare Worldwide Consumer Healthcare income before income taxes decreased 2% for 2004, while Consumer Healthcare net revenue increased 5% for 2004. The difference between the decrease in income before income taxes and net revenue growth is primarily attributable to lower other income, net related to product divestiture gains and higher selling and general expenses offset, in part, by higher gross profit margins earned on worldwide sales of Consumer Healthcare products. Worldwide Consumer Healthcare income before income taxes decreased 3% for 2003 due primarily to lower gross profit margins earned on worldwide sales, lower other income, net and higher selling and general expenses as a result of increased marketing expenses associated with the launch of ALAVERT. Lower other income, net was due primarily to the non-recurrence of income received in 2002 in connection with a class action settlement gain related to price fixing by certain vitamin suppliers. Animal Health Worldwide Animal Health income before income taxes increased 6% for 2004 due primarily to higher worldwide net revenue and increased gross profit margins earned on worldwide sales of Animal Health products offset, in part, by higher selling and general expenses. Worldwide Animal Health income before income taxes increased 99% for 2003 due primarily to higher worldwide sales and higher gross margins earned on worldwide sales offset, in part, by higher selling, general and administrative expenses. Gross margins improved during 2003 due primarily to a more profitable product mix as a result of higher domestic sales of WEST NILE-INNOVATOR combined with the non-recurrence of significant PROHEART 6 product returns in 2002. Corporate Corporate expenses, net increased 2% for 2004 due primarily to the non-recurrence of certain 2003 items offset, in part, by lower general and administrative expenses. Corporate expenses, net increased 6% for 2003 due primarily to higher general and administrative expenses offset, in part, by lower interest expense due primarily to lower weighted average debt outstanding compared with 2002 levels. Income Tax Rate - --------------- The resulting income tax rates for 2004, 2003 and 2002, excluding certain items affecting comparability, were 21.5%, 21.3% and 21.1%, respectively. See the significant items identified above and the 2004 income tax adjustment discussed in Note 10 to the consolidated financial statements for additional information. Consolidated Net Income and Diluted Earnings per Share - ------------------------------------------------------ Net income and diluted earnings per share in 2004 decreased to $1,234.0 million and $0.91, respectively, compared with $2,051.2 million and $1.54 for 2003. The Company's management uses various measures to manage and evaluate the Company's performance and believes it is appropriate to specifically identify certain significant items included in net income and diluted earnings per share to assist investors with analyzing ongoing business performance and trends. In particular, the Company's management believes that comparisons of 2004 vs. 2003 and 2003 vs. 2002 results of operations are influenced by the impact of the following items that are included in net income and diluted earnings per share: 2004: - Diet drug litigation charge of $4,500.0 million ($2,625.0 million after-tax or $1.94 per share-diluted); - Favorable income tax adjustment of $407.6 million ($0.30 per share-diluted) within the Provision (benefit) for income taxes related to settlements of audit issues offset, in part, by a provision related to developments in the third quarter in connection with a prior year tax matter; and - Upfront payment of $145.5 million ($94.6 million after-tax or $0.07 per share-diluted) within Research and development expenses to Solvay. 2003: - Diet drug litigation charge of $2,000.0 million ($1,300.0 million after-tax or $0.97 per share-diluted); - Gain of $860.6 million ($558.7 million after-tax or $0.42 per share-diluted) related to the Company's liquidation of Amgen shares received in connection with Amgen's acquisition of Immunex; and - Special charge of $639.9 million ($466.4 million after-tax or $0.35 per share-diluted) for manufacturing restructurings and related asset impairments and the cost of debt extinguishment. 2002: - Diet drug litigation charge of $1,400.0 million ($910.0 million after-tax or $0.68 per share-diluted); - Gain of $1,454.6 million ($943.4 million after-tax or $0.71 per share-diluted) related to the Company's liquidation of Amgen shares received in connection with Amgen's acquisition of Immunex; - Gain of $2,627.6 million ($1,684.7 million after-tax or $1.26 per share-diluted) related to the initial acquisition of Immunex by Amgen; and - Special charge of $340.8 million ($233.5 million after-tax or $0.18 per share-diluted) for restructuring and related asset impairments. The 2004, 2003 and 2002 diet drug charges increased the reserve balance for a continuing legal matter that first resulted Wyeth 75 in a charge in 1999 and has been identified by the Company's management when evaluating the Company's performance due to its magnitude. The income tax adjustment relates to certain prior tax years and has been identified due to its nature and magnitude. The significant upfront payment related to the co-development and co-commercialization of the four neuroscience compounds being developed with Solvay, which was immediately expensed and included in Research and development expenses, also has been identified. Additionally, the gains related to the Immunex/Amgen common stock transactions have been identified due to the fact that the Company previously had not nor currently does it hold a position for investment purposes in an entity that, if acquired by another entity, would impact the Company's financial position or results of operations to the significant extent of the Immunex/Amgen common stock transactions. Finally, the special charges, which include costs related to manufacturing restructurings and asset impairments, have been identified as the Company's management does not consider these charges to be recurring and therefore not indicative of continuing operating results. The remaining special charge, which consists of costs related to debt extinguishment, also has been identified due to its unusual one-time nature. Isolating these items when reviewing the Company's results provides a useful view of ongoing operations for these accounting periods. For further details related to the items listed above, refer to the discussion of 2004, 2003 and 2002 Significant Items herein. Excluding the items noted above, the increases in net income and diluted earnings per share for 2004 were due primarily to higher Net revenue and lower Cost of goods sold, as a percentage of Net revenue, offset, in part, by higher Selling, general and administrative expenses, research and development spending and lower Other income, net related to product divestiture gains. The increase in gross margin for 2004 was primarily due to higher alliance revenue (with no corresponding cost of goods sold) from higher sales of ENBREL in North America. This increase in gross margin was partially offset by higher royalty costs associated with higher sales of ENBREL in Europe and a less profitable product mix caused by lower sales of higher margin products, including the PREMARIN family of products, and higher sales of lower margin products such as PROTONIX, ZOSYN/TAZOCIN and ENBREL (outside of North America). This unfavorable product mix was partially offset by higher sales of higher margin EFFEXOR. The increase in gross margin also was due to lower inventory and manufacturing losses. The higher Selling, general and administrative expenses were due primarily to higher marketing and selling expenses and lower Other income, net was due primarily as a result of decreases in gains from product divestitures. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The consolidated financial statements are presented in accordance with accounting principles that are generally accepted in the United States. All professional accounting standards effective as of December 31, 2004 have been taken into consideration in preparing the consolidated financial statements. The preparation of the consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Some of those estimates are subjective and complex, and, therefore, actual results could differ from those estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Company's consolidated financial statements: - Chargebacks/rebates, which are the Company's only significant deductions from gross sales, are offered to customers based upon volume purchases, the attainment of market share levels, government mandates, coupons and consumer discounts. Chargeback/rebate accruals, included in Accrued expenses, are established at the later of (a) the date at which the related revenue is recorded or (b) the date at which the incentives are offered. Reserves for chargebacks/rebates are estimated using historical rates and current wholesaler inventory data. Rebate rates are determined based on historical experience, trend analysis, demand conditions, competition and projected market conditions in the various markets served. Internal data as well as information obtained from external sources such as independent market research agencies and data from wholesalers are considered when establishing these reserves. Other factors, including identification of which products have been sold subject to a rebate, which customer or government price terms apply, and the estimated lag time between sale and payment of a rebate, also are considered. The Company continually monitors the adequacy of the accruals by analyzing historical rebate rates, making adjustments to originally recorded reserves when trends or specific events indicate that adjustment is appropriate and comparing actual payments with the estimates used in establishing the accrual. Historically, actual payments have not varied significantly from the reserves provided. - Provisions for product returns are provided for as deductions to arrive at Net revenue. The Company considers many factors in determining its reserves for product returns. Typically, those factors that influence the reserves do not change significantly from period to period and include: actual historical return activity, level of inventory in the distribution network, inventory turnover, demand history, demand projections, estimated product shelf life, pricing and competition. Internal data as well as information obtained from the wholesalers themselves are considered when establishing these reserves. The Company has identified historical patterns of returns for major product classes, including new products. Return rates for new products are estimated by comparing the new product with similar product types that exist in the Company's product line. The Company reviews its reserves for product returns quarterly to verify that the trends being considered to estimate the reserves have not changed materially. The reserves for product returns cover all products, and, 76 Wyeth historically, actual returns have not varied significantly from the reserves provided. - The Company does not, as a matter of policy, provide incentives to wholesalers to carry inventory in excess of the wholesalers' ordinary course of business inventory level. The Company has entered into inventory management agreements with the majority of its full-line pharmaceutical wholesalers in the United States, whereby the wholesalers have agreed to maintain inventory at certain targeted levels in return for the opportunity to buy specific amounts of product at pre-price increase prices whenever the Company implements a price increase. The Company does not believe that these agreements result in the wholesaler carrying excess levels of inventory. Subsequent to the execution of these inventory management agreements, Wyeth's three largest wholesaler customers, accounting for approximately 25% of Net revenue in 2004, have requested that the Company enter into new compensation arrangements based on services performed. The wholesalers have indicated they may discontinue purchasing Wyeth's pharmaceutical products upon expiration of the current inventory management agreements unless the Company enters into the new compensation arrangements. The Company is currently in discussions with the three wholesalers but cannot predict whether changes in the contractual arrangements will occur. - The Company is involved in various legal proceedings, including product liability and environmental matters that arise from time to time in the ordinary course of business. These include allegations of injuries caused by drugs and other over-the-counter products, including REDUX, PONDIMIN, ROBITUSSIN, DIMETAPP, PREMPRO and EFFEXOR, among others. The estimated costs the Company expects to pay in these cases are accrued when the liability is considered probable and the amount can be reasonably estimated. In assessing the estimated costs, the Company considers many factors, including past litigation experience, scientific evidence and the specifics of each matter. Additionally, the Company records insurance receivable amounts from third-party insurers when it is probable of recovery. Prior to November 2003, the Company was self-insured for product liability risks with excess coverage on a claims-made basis from various insurance carriers in excess of the self-insured amounts and subject to certain policy limits. Effective November 2003, the Company became completely self-insured for product liability risks. In addition, the Company has responsibility for environmental, safety and cleanup obligations under various local, state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. In many cases, future environmental-related expenditures cannot be quantified with a reasonable degree of accuracy. As investigations and cleanups proceed, environmental-related liabilities are reviewed and adjusted as additional information becomes available. - The Company applies an asset and liability approach to accounting for income taxes. Deferred tax liabilities and assets are recognized for the future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon the Company's assessment that it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to realize the deferred tax asset. In the event the Company determines future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. In the event the Company were to determine that it would be able to realize all or a portion of its net deferred tax assets, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company subsequently determine that it would not be able to realize all or a portion of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. As of December 31, 2004, valuation allowances have been established for certain capital loss carryforwards, environmental liabilities and other operating accruals. Except as it relates to these items, the Company has not established valuation allowances related to its net federal or foreign deferred tax assets as the Company believes that it is more likely than not that the benefits of these assets will be realized. Valuation allowances also have been established for state deferred tax assets, net of federal tax, related to net operating losses, credits and accruals. In addition, the Company records deferred income taxes on foreign subsidiaries' earnings that are not considered to be permanently invested in those subsidiaries. Income taxes are provided for the probable assessment of taxes on items that have been or may be contested by taxing authorities. These items relate to areas of judgment on which the Company and the taxing authorities may differ in their interpretations of the related tax rules. - On an annual basis, the Company performs an internal study of actuarial assumptions. Based on this study, the Company determines the appropriate discount rate and expected long-term rate of return on plan assets for its pension plans. In 2004, the discount rate used to determine the Company's benefit obligation was decreased by 25 basis points to 6.00%, while the expected rate of return on plan assets was maintained at 9.00%, consistent with the prior year. The net periodic benefit cost for the Company's U.S. pension plans is expected to increase by approximately $13.0 million to $181.6 million in 2005 compared with 2004 due to the increase in net periodic benefit cost associated with the decrease in the discount rate offset, in part, by positive returns on plan assets and contributions to the pension trust. As a sensitivity measure, the effect of a 25 basis-point decrease in the discount rate assumption would increase the Company's net periodic benefit cost by approximately $19.0 million. Wyeth 77 The Company also reviews the principal actuarial assumptions relating to its other postretirement benefit plans on an annual basis. In response to the recent increase in health care costs in the United States, the Company has maintained the health care cost trend rate for 2004 at 11.0%, consistent with 2003. This growth rate, ultimately, is expected to decrease to 5% for 2009 and remain constant thereafter. In reviewing postretirement claims data and other related assumptions, the Company believes that this trend rate appropriately reflects the trend aspects of the Company's other postretirement benefit plans as of December 31, 2004. Similar to the pension plans discussed above, in 2004, the discount rate used to determine the Company's benefit obligation was decreased by 25 basis points to 6.00%. 2005 net periodic benefit cost for other postretirement benefit plans is expected to increase by approximately $30.4 million to $154.6 million compared with 2004 primarily due to higher per capita claim costs, the selection of the health care cost trend rate and the increase in net periodic benefit cost associated with the decrease in the discount rate offset, in part, by changes the Company has made to its other postretirement benefit plans. The Company has not participated in, nor has created, any off-balance sheet financing or other off-balance sheet special purpose entities other than operating leases. In addition, the Company has not entered into any derivative financial instruments for trading purposes and uses derivative financial instruments solely for managing its exposure to certain market risks from changes in foreign currency exchange rates and interest rates. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the Company's disclosure presented above. LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES Cash and cash equivalents decreased $1,326.2 million, and total debt decreased by $1,466.3 million in 2004, including the fair value change of interest rate swaps. The activity of these cash flows during 2004 related primarily to the following items: - Payments of $850.2 million related to the PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as "fen-phen") and REDUX litigation. As discussed in Note 14 to the consolidated financial statements, during 1999, the Company announced a nationwide class action settlement to resolve litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. Payments into the Trust may continue, if necessary, until 2018. Payments made to date and future payments related to the diet drug litigation are anticipated to be financed through existing cash resources, cash flows from operating activities and commercial paper borrowings (if available), as well as term debt financings and international earnings remitted back to the United States, if necessary. - Capital expenditures of $1,255.3 million due primarily to new production capacity expansion worldwide, including biotechnology facilities, research and development facilities, and the improvement of compliance of U.S. technical operations and product supply processes. The Company expects capital expenditures in 2005 to be consistent with 2004 spending levels. - Repayments of $1,500.0 million of long-term debt related to the redemption of the $1,000.0 million aggregate principal amount of 6.25% Notes due 2006 through a make-whole call option in January 2004 and the repayment of $500.0 million aggregate principal amount of 5.875% Notes in March 2004. These repayments were made using a portion of the proceeds received in connection with the Company's 2003 debt issuances as discussed in Note 6 to the consolidated financial statements. - Dividends totaling $1,227.0 million consisting primarily of the Company's annual common stock dividend of $0.92 per share. - Contributions to fund the Company's defined benefit pension plans totaling $273.3 million. These uses of cash were partially offset by the following items: - Proceeds of $1,697.9 million related to the sales and maturities of marketable securities. - Proceeds of $351.9 million related to sales of assets, including property, plant and equipment and the divestiture of certain Pharmaceuticals and Consumer Healthcare products. Divestitures included product rights to indiplon, DIAMOX in Japan and the Company's nutritionals products in France. The change in deferred income taxes as of December 31, 2004 primarily related to an increase in deferred taxes associated with the 2004 diet drug litigation charge of $4,500.0 million. The change in working capital, which used $377.1 million of cash as of December 31, 2004, excluding the effects of foreign exchange, consisted of the following: - Increase in accounts receivable of $130.3 million primarily due to increases in Pharmaceuticals sales; - Decrease in accounts payable and accrued expenses of $144.2 million, excluding the diet drug provision, related, in part, to the timing of payments associated with accounts payable and decreases in accrued restructuring and accrued debt extinguishment costs as a result of current year payments offset, in part, by increased accrued rebates; and - Decrease in accrued taxes of $145.3 million as a result of current year tax payments offset by the current year provision for income taxes. The change in working capital, which provided $458.7 million of cash as of December 31, 2003, excluding the effects of foreign exchange, consisted primarily of the following: - Increase in inventory of $245.5 million primarily related to improved manufacturing output for products, which had supply constraints throughout 2003; - Increase in accounts payable and accrued expenses of $469.7 million, excluding the diet drug provision, primarily related to timing of payments and increased employee benefit accruals; and - Increase in accrued taxes of $116.0 million as a result of the current year provision exceeding current year tax payments. 78 Wyeth Total debt: At December 31, 2004, the Company had outstanding $8,123.0 million in total debt, which consisted of notes payable and other debt. The Company had no commercial paper outstanding as of December 31, 2004. Current debt at December 31, 2004, classified as Loans payable, consisted of $330.7 million of notes payable and other debt that are due within one year. The Company was in compliance with all debt covenants as of December 31, 2004. As of December 31, 2004, the Company had net debt of $693.7 million that was calculated as total debt of $8,123.0 million reduced by liquid assets totaling $7,429.3 million, which consisted of cash and cash equivalents, marketable securities and the security fund deposits primarily included in Other assets including deferred taxes. On October 24, 2003, Fitch Ratings (Fitch) downgraded the Company's long-term rating to A- from A and its short-term rating to F-2 from F-1. As a result of the short-term credit rating downgrade by Fitch, the Company's commercial paper, which previously traded in the Tier 1 commercial paper market, would trade in the Tier 2 commercial paper market. Subsequently, on December 4, 2003, Fitch affirmed the Company's new ratings. In addition, on December 4, 2003, Moody's Investor Services (Moody's) affirmed the Company's P-2 short-term rating and downgraded the Company's long-term rating to Baa1. Finally, on December 8, 2003, Standard & Poor's (S&P) affirmed the Company's A-1 short-term and A long-term ratings. As a result of Moody's long-term credit rating downgrade, the Company incurred incremental annual interest expense of $8.5 million in 2004 on $3,800.0 million of Notes. The following represents the Company's credit ratings as of the latest rating update:
MOODY'S S&P FITCH ---------------- ---------------- ---------------- Short-term debt P-2 A-1 F-2 Long-term debt Baa1 A A- Outlook Developing Negative Negative Last rating update February 8, 2005 December 8, 2003 January 31, 2005
Additional Liquidity, Financial Condition and Capital Resource Information At December 31, 2004, the carrying value of cash equivalents approximated fair value due to the short-term, highly liquid nature of cash equivalents, which have maturities of three months or less when purchased. Interest rate fluctuations would not have a significant effect on the fair value of cash equivalents held by the Company. In March 2003, the Company replaced its $3,000.0 million, 364-day facility with credit facilities totaling $2,700.0 million. These credit facilities were composed of a $1,350.0 million, 364-day facility and a $1,350.0 million, three-year facility. In February 2004, the Company replaced its $1,350.0 million, 364-day credit facility with a $1,747.5 million, five-year facility. The new facility contains substantially identical financial and other covenants, representations, warranties, conditions and default provisions as the replaced facility. In December 2003, the Company completed the redemption of $691.1 million of its $1,000.0 million aggregate principal amount of 7.90% Notes due 2005, resulting in $308.9 million in remaining Notes due 2005 outstanding at December 31, 2004, which were classified as Loans payable. In addition, the Company exercised a make-whole call option on its $1,000.0 million aggregate principal amount of 6.25% Notes due 2006. The redemption period for the make-whole call option ended on January 12, 2004, and, as a result, as of December 31, 2003, the $1,000.0 million aggregate principal amount of 6.25% Notes due 2006 were classified as Loans payable. On January 12, 2004, the $1,000.0 million 6.25% Notes due 2006 were redeemed in full. In connection with the Note repurchases, the Company incurred early debt extinguishment costs of $152.0 million, which primarily relate to the excess of prepayment premiums and principal over the carrying value of the debt retired and the related write-off of debt issuance costs. In order to fund the Note repurchases, and for other general purposes, the Company issued $3,000.0 million of Notes in December 2003 as follows: - $1,750.0 million 5.50% Notes due February 1, 2014 - $500.0 million 6.45% Notes due February 1, 2024 - $750.0 million 6.50% Notes due February 1, 2034 Concurrent with the offering of Notes described above, on December 16, 2003, the Company completed the private placement of $1,020.0 million aggregate principal amount of Convertible Senior Debentures due January 15, 2024 through an offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. During February 2003, the Company issued $1,800.0 million of Notes. The issuance consisted of two tranches of Notes as follows: - $300.0 million 4.125% Notes due March 1, 2008 - $1,500.0 million 5.25% Notes due March 15, 2013 The Company entered into each of the above transactions to allow for greater financial flexibility by obtaining lower interest rates and moving debt maturities out generally 10 or more years. As such, the Company expects to be less reliant on the commercial paper markets in the near term. The interest rate payable on each series of Notes described above, including the Notes issued in March 2001 (see Note 6 to the consolidated financial statements), is subject to a 0.25 percentage-point increase per level of downgrade in the Company's credit rating by Moody's or S&P. There is no adjustment to the interest rate payable on each series of Notes for the first single-level downgrade in the Company's credit rating by S&P. The Company would incur a total of approximately $15.8 million of additional annual interest expense for every 0.25 percentage-point increase in the interest rate. If Moody's or S&P subsequently were to increase the Company's credit rating, the interest rate payable on each series of Notes would be subject to a 0.25 percentage-point decrease for each level of credit rating increase. The interest rate payable for these Notes cannot be reduced below the original coupon rate of the Notes, and the interest rate in effect on March 15, 2006 for these Notes will, thereafter, become the effective interest rate until maturity. The Company has a common stock repurchase program under which the Company is authorized to repurchase common shares. The Company made no repurchases during 2004 and 2003 but did repurchase 2,000,000 shares in 2002. At December Wyeth 79 31, 2004, the Company was authorized to repurchase 4,492,460 common shares in the future. In light of the circumstances discussed in Note 14 to the consolidated financial statements, it is not possible to predict the ultimate liability of the Company in connection with its diet drug legal proceedings. It, therefore, is not possible to predict whether, and if so when, such proceedings will have a material adverse effect on the Company's financial condition, results of operations and/or cash flows and whether cash flows from operating activities and existing and prospective financing resources will be adequate to fund the Company's operations, pay all liabilities related to the diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on its outstanding obligations without the disposition of significant strategic core assets and/or reductions in certain cash outflows. The following table sets forth contractual obligations at December 31, 2004:
PAYMENTS DUE BY PERIOD --------------------------------------------------- (In millions) 2006 2008 CONTRACTUAL OBLIGATIONS TOTAL 2005 AND 2007 AND 2009 THEREAFTER - --------------------------------------------------------------------------------------------------------- Total debt obligations $ 8,123.0 $ 330.7 $ 13.7 $ 315.2 $ 7,463.4 Purchase obligations(1) 1,457.2 770.8 426.8 173.9 85.7 Retirement-related obligations(2) 1,837.2 302.5 664.2 761.3 109.2 Equity purchase obligation(3) 403.4 91.6 311.8 -- -- Capital commitments(4) 1,281.8 701.2 580.6 -- -- Operating lease obligations 455.0 97.9 144.5 92.0 120.6 ------------------------------------------------------------------ Total $13,557.6 $ 2,294.7 $ 2,141.6 $ 1,342.4 $ 7,778.9 ==================================================================
(1) Purchase obligations consist of agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These include obligations for minimum inventory purchase contracts, clinical data management, research and development, co-development and media/market research contracts. (2) This category includes pension and postretirement contributions through 2009. The Company believes that external factors, including, but not limited to, investment performance of pension plan assets, interest rates, increases in medical care costs and Medicare subsidies, preclude reasonable estimates beyond 2009. The category also includes deferred compensation principal payments for retirees and certain active employees who have elected payment before retirement as of December 31, 2004 and guaranteed interest to be paid to those individuals through December 2005. All other active employees as of December 31, 2004 are excluded for years subsequent to 2005 since the Company does not believe it can predict factors such as employee retirement date and elected payout period. (3) The equity purchase obligation represents an agreement by the Company to buy out the 40% minority interest of an affiliate in Japan presently held by Takeda Chemical Industrial Co., Ltd. The buyout calls for 10% to be purchased in 2005, another 10% in 2006 and the final 20% in 2007. The purchase price of each buyout is based on a multiple of the entity's net sales in each of the buyout periods. (4) Capital commitments represent Wyeth management's commitment for capital spending. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates that could impact its financial position, results of operations and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage the Company's exposure to non-performance on such instruments. Foreign Currency Risk Management: The Company generates a portion of Net revenue from sales to customers located outside the United States, principally in Europe. International sales are generated mostly from international subsidiaries in the local countries with the sales typically denominated in the local currency of the respective country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, most international subsidiaries use the local currency as their functional currency. International business, by its nature, is subject to risks, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, future results could be adversely impacted by changes in these or other factors. The Company has established programs to protect against adverse changes in exchange rates due to foreign currency volatility. By hedging intercompany sales, the Company believes that the foreign currency risks to which it is exposed are not reasonably likely to have a material adverse effect on the Company's financial position, results of operations or cash flows due to the high concentration of sales in the United States. The Company currently operates in 11 of the member countries of the European Union, which have adopted the euro as their local currency. Collectively, these countries accounted for 15% of 2004, 14% of 2003 and 11% of 2002 worldwide Net revenue. Additionally, the British pound sterling accounted for 6% of 2004 and 5% of both 2003 and 2002 worldwide Net revenue. Interest Rate Risk Management: The fair value of the Company's fixed-rate long-term debt is sensitive to changes in interest rates. Interest rate changes result in gains/losses in the market value of this debt due to differences between the market interest rates and rates at the inception of the debt obligation. The Company manages a portion of this exposure to interest rate changes primarily through the use of fair value interest rate swaps. 80 Wyeth At December 31, 2004, the notional/contract amounts, carrying values and fair values of the Company's financial instruments were as follows:
(In millions) NOTIONAL/ CARRYING VALUE FAIR VALUE ------------------------------ DESCRIPTION CONTRACT AMOUNT Assets (Liabilities) - ------------------------------------------------------------------------------------------------ Forward contracts(1) $ 1,835.5 $ (4.4) $ (4.4) Option contracts(1) 1,965.5 (28.5) (28.5) Interest rate swaps 5,300.0 144.6 144.6 Outstanding debt(2) 7,978.4 (8,123.0) (8,430.2)
(1) If the value of the U.S. dollar were to strengthen or weaken by 10%, in relation to all hedged foreign currencies, the net payable on the forward and option contracts would collectively decrease or increase by approximately $192.4. (2) If interest rates were to increase or decrease by one percentage point, the fair value of the outstanding debt would decrease or increase by approximately $671.1. The estimated fair values approximate amounts at which these financial instruments could be exchanged in a current transaction between willing parties. Therefore, fair values are based on estimates using present value and other valuation techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. The fair value of forward contracts, currency option contracts and interest rate swaps reflects the present value of the contracts at December 31, 2004; and the fair value of outstanding debt instruments reflects a current yield valuation based on observed market prices as of December 31, 2004. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS PREMPRO/PREMARIN - HT Studies - ----------------------------- In July 2002, the hormone therapy (HT) subset of the WHI study, involving women who received a combination of conjugated estrogens and medroxyprogesterone acetate (PREMPRO), was stopped early (after the patients were followed in the study for an average of 5.2 years) because, according to the predefined stopping rule, certain increased risks exceeded the specified long-term benefits. Additional analyses of data from the HT subset of the WHI study were released during 2003, and further analyses of WHI data may be released in the future. In early March 2004, the NIH announced preliminary findings from the estrogen-only arm of the WHI study and stated that it had decided to stop the study because it believed that the results would not likely change during the period until completion of the study in 2005 and that the increased risk of stroke seen in the treatment arm could not be justified by what could be learned in an additional year of treatment. NIH concluded that estrogen alone does not appear to affect (either increase or decrease) coronary heart disease and did not increase the risk of breast cancer. In addition, NIH found an association with a decrease in the risk of hip fracture. This increased risk of stroke was similar to the increase seen in the HT subset of the WHI study. NIH also stated that analysis of preliminary data from the separate Women's Health Initiative Memory Study (WHIMS) showed an increased risk of probable dementia and/or mild cognitive impairment in women age 65 and older when data from both the PREMARIN and PREMPRO arms were pooled. The study also reported a trend toward increased risk of possible dementia in women treated with PREMARIN alone. WHIMS data published in The Journal of the American Medical Association (JAMA) in June 2004 and in a separate report published in JAMA at the same time indicated that HT did not improve cognitive impairment and may adversely affect it in some women. The Company is working with the FDA to update the labeling for its HT products to include the latest data. Set forth below are individual product operating results for PREMPRO/PREMPHASE and PREMARIN for the years ended December 31, 2004 and 2003:
PREMPRO/PREMPHASE PREMARIN ------------------------- -------------------------- (In millions) 2004 2003 2004 2003 - ----------------------------------------------------------------------------------------------------- Net revenue $ 221.4 $ 291.6 $ 658.8 $ 983.7 Gross profit* 174.3 203.2 547.9 850.8
* The Company recorded a $60.0 reserve in the 2003 second quarter for anticipated returns in connection with a projected shift in prescriptions toward the approved lower-dosage forms of PREMPRO. This $60.0 reserve was calculated by reviewing wholesalers' inventory levels as of June 30, 2003, after deducting projected PREMPRO sales by wholesalers using the first-in, first-out (FIFO) method and excluding "out of date" inventory (it is the Company's policy to accept returns of product with expiration dates of six months or less). Due to higher-than-anticipated sales of the original formulations of PREMPRO, a portion of the inventory previously reserved was sold by wholesalers. Based on current demand forecasts, wholesalers' inventory levels and expiration dating of the remaining inventory held by the wholesalers, the Company reduced the reserve by $20.0 in the 2004 second quarter. The remaining reserve is considered adequate to cover expected returns for the PREMARIN family of products. Competition - ----------- The Company operates in the highly competitive pharmaceutical and consumer health care industries. PREMARIN, the Company's principal conjugated estrogens product manufactured from pregnant mare's urine, and related products PREMPRO and PREMPHASE (which are single tablet combinations of the conjugated estrogens in PREMARIN and the progestin medroxyprogesterone acetate) are the leaders in their categories and contribute significantly to net revenue and results of operations. PREMARIN's natural composition is not subject to patent protection (although PREMPRO has patent protection). PREMARIN, PREMPRO and PREMPHASE are indicated for the treatment of certain menopausal symptoms. They also are approved for the prevention of osteoporosis, a condition involving a loss of bone mass in postmenopausal women. Their use for that purpose in women without symptoms should be limited to cases where non-hormonal treatments have been seriously considered and rejected. Estrogen-containing products manufactured by other companies have been marketed for many years for the treatment of menopausal symptoms. During the past several years, other manufacturers have introduced products for the treatment and/or prevention of osteoporosis. New products containing different estrogens and/or different progestins from those found in PREMPRO and PREMPHASE, utilizing various forms of delivery and having many forms of the same indications, have been introduced. Some companies also have attempted to obtain approval for generic versions of PREMARIN. These products, if approved, would be routinely substitutable for PREMARIN and related products under many state laws and third-party insurance payer plans. In May 1997, the FDA announced that it would not approve certain synthetic estrogen products as generic equivalents of PREMARIN given Wyeth 81 known compositional differences between the active ingredient of these products and PREMARIN. Although the FDA has not approved any generic equivalent to PREMARIN to date, PREMARIN will continue to be subject to competition from existing and new competing estrogen and other products for its approved indications and may be subject to generic competition from either synthetic or natural conjugated estrogens products in the future. One other company has announced that it has applied for FDA approval of a generic version of PREMARIN derived from the same natural source. Following a bench trial in November 2002, a federal court found, in an order issued on October 2, 2003, that the company which had developed the estrogens to be used in this product, Natural Biologics, Inc., had misappropriated certain of the Company's trade secrets relating to the manufacture of PREMARIN. The court has entered a permanent injunction that, inter alia, bars Natural Biologics, Inc. from using the misappropriated trade secrets and from engaging in the research, development, production or manufacture of estrogens from urine. Wyeth v. Natural Biologics, Inc., et al., No. 98-2469 (JNE/JGL), U.S.D.C., D. Minn. Natural Biologics, Inc.'s appeal from the court's injunction has been denied, and the company that had applied for FDA approval of a generic version of PREMARIN based on Natural Biologics, Inc.'s material has announced that it has withdrawn the application. The Company cannot predict the timing or outcome of any other efforts to seek FDA approval for generic versions of PREMARIN. Two of the Company's largest products, EFFEXOR XR and PROTONIX, are the subject of pending patent litigation involving potential generic competition. In the case of EFFEXOR XR, the Company has patent protection in the United States until at least June 2008, when the patent covering the active ingredient in EFFEXOR, venlafaxine, will expire. The pending litigation involves the infringement by a potential generic competitor of the Company's patents relating to extended-release venlafaxine that expire in 2017. In the event that the Company is not successful in this action, EFFEXOR XR may face generic competition as early as June 2008. In the case of PROTONIX, the Company and its partner, Altana AG, have patent protection until at least July 2010, when the patent covering the active ingredient in PROTONIX, pantoprazole, will expire. That patent is being asserted against a potential generic competitor. In the event the Company is not successful in this action, PROTONIX may face generic competition prior to July 2010. Although the Company believes that its patents are valid, there can be no assurance as to the outcome of these matters, which could materially affect future results of operations. These matters are described in more detail in the Company's 2004 Annual Report on Form 10-K. Eli Lilly has received approval in the United States and in the European Union for its new antidepressant, CYMBALTA, which, like EFFEXOR XR, inhibits the uptake of serotonin and norepinephrine in the brain. In addition, growth in overall usage of antidepressants in the United States appears to be slowing for a variety of reasons. The FDA has recommended new class labeling for antidepressants that will, among other things, more prominently highlight the already labeled risk of suicide in children and adolescents in a "black box" warning. The Company already has implemented the labeling change for EFFEXOR. The FDA also has requested that data regarding suicidality from clinical trials in adults be re-examined using the same approach developed for evaluating the pediatric data. The Company will respond to the FDA's request. In addition, the regulatory authority in the United Kingdom recently has completed a review of the safety and efficacy of the selective serotonin reuptake inhibitor class of antidepressants as well as EFFEXOR. New class labeling for antidepressants as well as restrictions on the use of EFFEXOR in the United Kingdom have been implemented. The Company is appealing this decision. The Company expects further regulatory scrutiny of the drugs in this therapeutic area, including EFFEXOR. The Company cannot predict the level of impact these issues may have on future global usage of EFFEXOR. The proton pump inhibitor category is highly competitive. PROTONIX is subject to discounting demands by managed care and state organizations and price competition from generic omeprazole and other branded proton pump inhibitor products. This pricing pressure may have an effect on future net sales. Product Supply - -------------- PREVNAR Supply As a result of delays in product availability of PREVNAR due to a late 2003 shutdown of the filling lines at the Company's Pearl River, New York, facility as well as other manufacturing and testing issues, product availability was constrained in all markets through the first half of 2004. During the first quarter of 2004, the Centers for Disease Control and Prevention (CDC) issued interim recommendations to defer administration of the third and fourth doses for healthy children. Due to increased product availability, the CDC revised these recommendations in early July 2004 and again in September 2004 to recommend that health care providers return to the four-dose schedule for healthy children and initiate efforts to vaccinate those children who had the doses deferred. In March of 2004, the European Agency for the Evaluation of Medicinal Products issued interim dosing recommendations to reduce usage. In September 2004, these recommendations were revised to reinstate pre-shortage recommendations. Capacity was enhanced overall in 2004 due to internal improvements and the FDA approval of a third-party filling facility in the second quarter of 2004. The Company exceeded its 2004 production goal of 20 - 23 million doses. ENBREL Supply Market demand for ENBREL continued its strong growth in 2004. North American sales increased by more than 50% compared with 2003, while sales outside of North America more than doubled. During this strong growth in demand, worldwide manufacture for ENBREL improved, delivering unconstrained supply for the first full year. Improvements in the existing Rhode Island and Boehringer Ingelheim facilities' performance, combined with the FDA approval of a second Boehringer Ingelheim facility in June 2004 and the October 2004 FDA approval of a Genentech, Inc. facility, were key contributors to the enhanced manufacturing capacity in 2004. While continued process improvements and the inclusion of Genentech material once again will contribute to the supply of ENBREL in 2005, market demand has continued to grow, and additional manufacturing supply is expected to be required. 82 Wyeth The anticipated approval of two new manufacturing facilities in 2005 will help to ensure uninterrupted supply and support the continued growth of ENBREL. Wyeth's application for approval of its Grange Castle, Ireland, facility was filed with the European Medicines Agency in January 2005. Additionally, Amgen anticipates approval of a second facility in Rhode Island in 2005. As is typical for new biological manufacturing facilities, manufacturing throughput from these new facilities is not expected to be at optimal levels during at least the initial year of production. The per unit costs of ENBREL produced during at least the first year of production at these facilities will be substantially higher than current per unit costs, which is likely to reduce the Company's alliance revenue and margins. The timing and magnitude of this revenue and margin effect will depend on a number of factors, some of which are outside the Company's control. These factors include the timing of approval of these new facilities and the timing of sale of the resulting inventory. Supply Chain Management continually reviews the Company's supply chain structure with respect to utilization of production capacities as well as manufacturing efficiencies. Changes in product demand periodically create capacity imbalances within the manufacturing network. When such imbalances result in overcapacity, which management considers to be other than temporary, the network is restructured to gain optimal efficiency and to reduce production costs. As a result, additional restructuring charges may occur in future periods. The Company is in discussion with various regulatory authorities regarding manufacturing process issues at certain of the Company's European manufacturing sites. The Company is working with the authorities to resolve these issues but cannot predict the outcome of those discussions and what impact, if any, these issues will have on supply of the Company's products manufactured at these facilities. However, based on information currently available, the Company believes the impact, if any, on its consolidated statements of operations will not be material. Litigation and Contingent Liabilities - ------------------------------------- The Company is involved in various legal proceedings, including product liability and environmental matters that arise from time to time in the ordinary course of business, the most significant of which are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Reports on Form 10-Q for the quarter ended March 31, 2004, June 30, 2004 and September 30, 2004, as well as in the 2004 Annual Report on Form 10-K, which will be filed by March 15, 2005. These include allegations of injuries caused by drugs, vaccines and over-the-counter products, including PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as "fen-phen"), REDUX, the prior formulation of DIMETAPP, the prior formulations of ROBITUSSIN, PREMPRO, PREMARIN and EFFEXOR, among others. In addition, the Company has responsibility for environmental, safety and cleanup obligations under various local, state and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. The estimated costs that the Company expects to pay are accrued when the liability is considered probable and the amount can be reasonably estimated (see Note 14 to the consolidated financial statements for a discussion of the costs associated with the REDUX and PONDIMIN diet drug litigation). In many cases, future environmental-related expenditures cannot be quantified with a reasonable degree of accuracy. As investigations and cleanups proceed, environmental-related liabilities are reviewed and adjusted as additional information becomes available. Prior to November 2003, the Company was self-insured for product liability risks with excess coverage on a claims-made basis from various insurance carriers in excess of the self-insured amounts and subject to certain policy limits. Effective November 2003, the Company became completely self-insured for product liability risks. It is not possible to predict whether any potential liability that might exceed amounts already accrued will have a material adverse effect on the Company's financial condition, results of operations and/or cash flows. This is discussed in greater detail in Note 14 to the consolidated financial statements. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Annual Report, including management's discussion and analysis set forth herein, as well as our quarterly, current and special reports, proxy statements and other information filed with the Securities and Exchange Commission and other written or oral statements made by us or on our behalf may include forward-looking statements reflecting our current views at the time these statements were made with respect to future events and financial performance. All forward-looking statements address matters involving numerous assumptions, risks and uncertainties, which may cause actual results to differ materially from those expressed or implied by us in those statements. Accordingly, we caution the reader not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. Economic, competitive, governmental, technological, legal and other factors that may affect our business are discussed above and in Exhibit 99 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, as well as our quarterly reports on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. Wyeth 83 Directors and Officers Board of Directors Robert Essner 1 Chairman, President and Chief Executive Officer Clifford L. Alexander, Jr. 2,3,4 President, Alexander & Associates, Inc. Richard L. Carrion 2,3 Chairman, President and Chief Executive Officer, Popular, Inc., and Chair- man and Chief Executive Officer of Banco Popular de Puerto Rico John D. Feerick 2,4,5 Professor of Law, Fordham University School of Law Frances D. Fergusson, Ph.D. President, Vassar College Robert Langer, Sc.D. 4,5 Kenneth J. Germeshausen Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology John P. Mascotte 1,2,3,5,11 Retired President and Chief Executive Officer, Blue Cross and Blue Shield of Kansas City, Inc. Mary Lake Polan, M.D., Ph.D., M.P.H. 4,5 Professor and Chairman Department of Obstetrics and Gynecology, Stanford University School of Medicine Ivan G. Seidenberg 1,3,4 Chairman and Chief Executive Officer, Verizon Communications Inc. Walter V. Shipley 3,5 Retired Chairman of the Board, The Chase Manhattan Corporation John R. Torell III 2,4 Partner Core Capital Group Principal Corporate Officers Robert Essner 6,7,8,9,10 Chairman, President and Chief Executive Officer Kenneth J. Martin 6,7,8,9,10 Executive Vice President and Chief Financial Officer Bernard J. Poussot 6,7,8,9 Executive Vice President Thomas Hofstaetter, Ph.D. 6,8 Senior Vice President - Corporate Business Development Rene R. Lewin 6,7,8,9,10 Senior Vice President - Human Resources Joseph M. Mahady 6,8 Senior Vice President Marily H. Rhudy 6,8 Senior Vice President - Public Affairs Robert R. Ruffolo, Jr., Ph.D. 6,7,8,9 Senior Vice President Lawrence V. Stein 6,7,8,9,10 Senior Vice President and General Counsel Douglas A. Dworkin 7 Vice President and Deputy General Counsel Bruce Fadem Vice President - Corporate Information Services and Chief Information Officer Leo C. Jardot Vice President - Government Relations Paul J. Jones 7,8 Vice President and Controller John C. Kelly Vice President - Finance Operations Eileen M. Lach 7 Vice President, Corporate Secretary and Associate General Counsel David A. Manspeizer 7 Vice President - Intellectual Property and Associate General Counsel Jack M. O'Connor 9,10 Vice President and Treasurer James J. Pohlman Vice President - Corporate Strategic Initiatives Steven A. Tasher 7 Vice President - Environmental Affairs and Facilities Operations and Associate General Counsel Justin R. Victoria Vice President - Investor Relations Mary Katherine Wold 9,10 Vice President - Taxes Principal Division and Subsidiary Officers Fort Dodge Animal Health E. Thomas Corcoran 6,8,9 President Wyeth Consumer Healthcare Ulf Wiinberg 6,7,8,9 President Wyeth Consumer Healthcare U.S. Douglas A. Rogers 8 President Wyeth Pharmaceuticals Bernard J. Poussot 6,7,8,9 President Wyeth Pharmaceuticals - Europe/Middle East/Africa Mark M. Larsen 8 President Wyeth Pharmaceuticals - International Robert N. Power 6,8 President Wyeth Pharmaceuticals - North America and Global Businesses Joseph M. Mahady 6,8 President Wyeth Pharmaceuticals - Technical Operations and Product Supply Charles A. Portwood 6,7 President Wyeth Research Robert R. Ruffolo, Jr., Ph.D. 6,7,8,9 President 1 Executive Committee 2 Audit Committee 3 Compensation and Benefits Committee 4 Corporate Issues Committee 5 Nominating and Governance Committee 6 Management Committee 7 Law/Regulatory Review Committee 8 Operations Committee 9 Human Resources and Benefits Committee 10 Retirement Committee 11 Designated to be a "Financial Expert" as defined in applicable SEC rules 84 Wyeth Corporate Data Executive Offices Wyeth Five Giralda Farms Madison, NJ 07940 (973) 660-5000 Stock Trading Information Wyeth stock is listed on the New York Stock Exchange (ticker symbol: WYE). Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 400 Campus Drive Florham Park, NJ 07932 Annual Meeting The Annual Meeting of Stockholders will be held on Thursday, April 21, 2005 at the Headquarters Plaza Hotel in Morristown, New Jersey. Stockholder Account Information The Bank of New York is the transfer agent, registrar, dividend disbursing agent and dividend reinvestment agent for the Company. Stockholders of record with questions about lost certificates, lost or missing dividend checks, or notification of change of address should contact: The Bank of New York P.O. Box 11002 Church Street Station New York, NY 10286 (800) 565-2067 (Inside the United States and Canada) (610) 382-7833 (Outside the United States and Canada) For the hearing impaired: (888) 269-5221 (TDD) Via e-mail: shareowners@bankofny.com Internet address: www.stockbny.com BuyDIRECT Stock Purchase and Sale Plan The BuyDIRECT plan provides stockholders of record and new investors with a convenient way to make cash purchases of the Company's common stock and to automatically reinvest dividends. Inquiries should be directed to The Bank of New York. Reports Available A copy of the Company's Annual Report on Form 10-K may be obtained by any stockholder without charge through The Bank of New York. Additionally, a copy of this Annual Report and all Company filings with the Securities and Exchange Commission can be accessed on our website at www.wyeth.com. Equal Employment Opportunity Our established affirmative action and equal employment programs demonstrate our long-standing commitment to provide job and promotional opportunities for all qualified persons regardless of age, color, disability, national origin, race, religion, sex, sexual orientation, status as a Vietnam-era veteran or a special disabled veteran, or any military uniformed services obligation. Environmental, Health and Safety Policy Copies of the Company's "Environmental, Health and Safety Policy" and "2004 Environmental, Health and Safety Report" may be obtained upon written request to: Wyeth Department of Environment and Safety Five Giralda Farms Madison, NJ 07940 Wyeth on the Internet Wyeth's Internet address is: www.wyeth.com Trademarks Product designations appearing in differentiated type are trademarks. Design: Arnold Saks Associates Major Photography: Mark Tuschman Text: Max J. Friedman Printing: Sandy Alexander, Clifton, NJ EX-21 7 ex21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY --------------------------- DECEMBER 31, 2004 ----------------- State or Country Name of Incorporation - ------------------------------------------------- ---------------------- United States - ------------- A H Investments LTD. Delaware AC Acquisition Holding Company Delaware Ayerst-Wyeth Pharmaceuticals Incorporated Delaware CICL Corporation Delaware Genetics Institute, LLC Delaware Route 24 Holdings, Inc. Delaware Wyeth Pharmaceuticals, Inc. Delaware Wyeth Holdings Corporation Maine Wyeth-Ayerst International Inc. New York Wyeth-Ayerst Lederle, Inc. Puerto Rico Wyeth-Whitehall Pharmaceuticals, Inc. Puerto Rico Wyeth Pharmaceuticals Company, Inc. Puerto Rico Berdan Insurance Company Vermont International - ------------- Wyeth Australia Pty. Limited Australia Laboratorios Wyeth-Whitehall Ltda. Brazil Wyeth Canada (1) Canada Wyeth Consumer Healthcare Inc. Canada John Wyeth & Brother Limited England Wyeth Pharmaceuticals France France Wyeth-Pharma GmbH Germany Wyeth Hellas S.A. Greece AHP Finance Ireland Limited Ireland Wyeth Lederle S.p.A. Italy Wyeth KK Japan Wyeth S.A. de C.V. Mexico AHP Manufacturing B.V. Netherlands Wyeth Philippines, Inc. Philippines Wyeth Nutritionals (Singapore) Pte. Ltd. Singapore Wyeth Farma S.A. Spain Wyeth Lederle Nordiska A.B. Sweden Dimminaco AG Switzerland Wyeth Taiwan Corporation Taiwan (1) Wyeth Canada is a partnership between two affiliates of the Company. There have been omitted from the above list the names of the subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 8 ex23.txt PWC CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-45324, No. 33-57339, No. 333-108312, No. 333-111093 and No. 333-112450), and S-8 (No. 2-96127, No. 33-24068, No. 33-41434, No. 33-53733, No. 33-55449, No. 33-45970, No. 33-14458, No. 33-50149, No. 33-55456, No. 333-15509, No. 333-76939, No. 333-67008, No. 333-64154, No. 333-59668, No. 333-89318, No. 333-98619 and No. 333-98623) of Wyeth of our report dated March 3, 2005 relating to the financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Florham Park, NJ March 11, 2005 EX-31.1 9 ex31-1.txt ESSNER CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF DISCLOSURE AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert Essner, certify that: 1. I have reviewed this Annual Report on Form 10-K of Wyeth ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2005 By /s/ Robert Essner ------------------------------------- Robert Essner Chairman, President and Chief Executive Officer EX-31.2 10 ex31-2.txt MARTIN CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF DISCLOSURE AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kenneth J. Martin, certify that: 1. I have reviewed this Annual Report on Form 10-K of Wyeth ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2005 By /s/ Kenneth J. Martin ---------------------------------------- Kenneth J. Martin Executive Vice President and Chief Financial Officer EX-32.1 11 ex32-1.txt ESSNER CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Wyeth (the "Company") on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 11, 2005 (the "Report"), I, Robert Essner, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 11, 2005 By /s/ Robert Essner ---------------------------------- Robert Essner Chairman, President and Chief Executive Officer EX-32.2 12 ex32-2.txt MARTIN CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Wyeth (the "Company") on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 11, 2005 (the "Report"), I, Kenneth J. Martin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 11, 2005 By /s/ Kenneth J. Martin ------------------------------------- Kenneth J. Martin Executive Vice President and Chief Financial Officer EX-99 13 ex99.txt CAUTIONARY STATEMENTS EXHIBIT 99 Exhibit 99 to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2004 Cautionary Statements Regarding "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Forward-looking statements may appear in periodic reports filed with the Securities and Exchange Commission (including the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q), in press releases, in the Company's Annual Report to Stockholders and other reports to stockholders, and in other communications made by the Company. These forward-looking statements can be identified by their use of words such as "anticipates," "expects," "is confident," "plans," "could," "will," "believes," "estimates," "forecasts," "projects" and other words of similar meaning. These forward-looking statements address various matters including: o Our anticipated results of operations, liquidity position, financial condition and capital resources; o The benefits that we expect will result from our business activities and certain transactions we announced or completed, such as increased revenues, decreased expenses, and avoided expenses and expenditures; o Statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts; o The accuracy of our estimates and assumptions utilized in our critical accounting policies; o The timing and successfulness of research and development activities; o Trade buying patterns; o The impact of competitive or generic products; o Economic conditions, including interest rate and foreign currency exchange rate fluctuation; o Changes in generally accepted accounting principles; o Any changes in political or economic conditions due to the threat of terrorist activity worldwide and related U.S. military action internationally; o Costs related to product liability, patent protection, government investigations and other legal proceedings; o Our ability to protect our intellectual property, including patents; o The impact of legislation or regulation affecting pricing, reimbursement or access, both in the United States and internationally; o Impact of managed care or health care cost-containment; o Increased focus on privacy issues in countries around the world, including the United States and the European Union; o Governmental laws and regulations affecting our U.S. and international businesses, including tax obligations; o Environmental liabilities; o The future impact of presently known trends, including those with respect to product performance and competition; o Change in product mix; o Anticipated amounts of future contractual obligations and other commitments, including future minimum rental payments under non-cancelable operating leases and estimated future pension and other postretirement benefit payments; o Anticipated developments relating to sales of PREMPRO/PREMARIN family of products, PROTONIX, EFFEXOR, ENBREL, and PREVNAR and ENBREL product supply; and o Expectations regarding the impact of potential litigation relating to PREMPRO, PREMARIN, ROBITUSSIN, DIMETAPP and EFFEXOR; the nationwide class action settlement relating to REDUX and PONDIMIN; and additional litigation charges related to REDUX and PONDIMIN. All forward-looking statements address matters involving numerous assumptions, risks and uncertainties, which may cause actual results to differ materially from those expressed or implied by us in those statements. Accordingly, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Additionally, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. As permitted by the Private Securities Litigation Reform Act of 1995, the Company is hereby filing the following cautionary statements identifying important factors, which among others, could cause the Company's actual results to differ materially from expected and historical results: Economic factors over which we have no control such as changes in business and economic conditions, including, but not limited to, inflation and fluctuations in interest rates, foreign currency exchange rates and market value of our equity investments and any impacts of war or terrorist acts; Interruptions of computer and communication systems including computer viruses, that could impair the Company's ability to conduct business and communicate internally with its customers; Increasing pricing pressures, both in and outside the United States, resulting from continued consolidation among health care providers, rules and practices of managed care groups and institutional and governmental purchasers, judicial decisions and governmental laws and regulations relating to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general; Competitive factors, such as (i) new products developed by our competitors that have lower prices or superior performance features or that are otherwise competitive with our current products; (ii) technological advances and patents attained by our competitors; (iii) changes in promotional regulations or practices; (iv) development of alternative therapies; (v) potential generic competition for PREMARIN and for other health care products as such products mature and patents or marketing exclusivity expire on such products; (vi) problems with licensors, suppliers and distributors; (vii) business combinations among our competitors and major customers; and (viii) ability to attract and retain management and other key employees; Government laws and regulations affecting U.S. and international operations, including (i) trade, monetary and fiscal policies and taxes; (ii) price controls, or reimbursement or access policies; (iii) drug importation legislation; (iv) changes in governments and legal systems; and (v) regulatory approval processes affecting approvals of products and licensing, including, without limitation, uncertainties of the FDA approval process that may delay or prevent the approval of new products and result in lost market opportunity; Difficulties and delays inherent in pharmaceutical research, product development, manufacturing and commercialization, such as, (i) failure of new product candidates to reach market due to efficacy or safety concerns, inability to obtain necessary regulatory approvals and the difficulty or excessive cost to manufacture; (ii) the inability to identify viable new chemical compounds; (iii) difficulties in successfully completing clinical trials; (iv) difficulties in manufacturing complex products, particularly biological products, on a commercial scale; (v) difficulty in gaining and maintaining market acceptance of approved products; (vi) seizure or recall of products; (vii) the failure to obtain, the imposition of limitations on the use of, or loss of patent and other intellectual property rights; (viii) failure to comply with current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to temporary manufacturing shutdowns, product shortages and delays in product manufacturing; and (ix) other manufacturing or distribution problems, including unexpected adverse events or developments at any of the manufacturing facilities involved in the production of one or more of the Company's principal products; Difficulties or delays in product manufacturing or marketing, including but not limited to, the inability to build up production capacity commensurate with demand, the inability of our suppliers to provide raw material, or the failure to predict market demand for or to gain market acceptance of approved products; Unexpected safety or efficacy concerns arising with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, regulatory action on the part of the FDA (or foreign counterparts) or declining sales; Growth in costs and expenses, changes in product mix, and the impact of any acquisitions or divestitures, restructuring and other unusual items that could result from evolving business strategies, evaluation of asset realization and organizational restructuring; Legal difficulties, any of which can preclude or delay commercialization of products or adversely affect profitability, such as (i) product liability litigation related to our products including, without limitation, litigation associated with DIMETAPP, ROBITUSSIN, PREMPRO, PREMARIN, EFFEXOR, and our former diet drug products, REDUX and PONDIMIN; (ii) claims asserting violations of antitrust, securities, or other laws; (iii) tax matters; (iv) intellectual property disputes or changes in intellectual property legal protections and remedies; (v) environmental matters, including obligations under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund; and (vi) complying with the consent decree with the FDA; Fluctuations in buying patterns of major distributors, retail chains and other trade buyers which may result from seasonality, pricing, wholesaler buying decisions or other factors; and Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Emerging Issues Task Force, the Securities and Exchange Commission, and the American Institute of Certified Public Accountants, which may require adjustments to our financial statements. This list should not be considered an exhaustive statement of all potential risks and uncertainties. -----END PRIVACY-ENHANCED MESSAGE-----