10-Q 1 quarter3.txt THIRD QUARTER FISCAL YEAR 2002 10 Q -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q -------------------------------------------------------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number 1-9114 MYLAN LABORATORIES INC. (Exact Name of registrant as specified in its charter) Pennsylvania 25-1211621 (State of incorporation) (I.R.S. Employer Identification No.) 130 Seventh Street 1030 Century Building Pittsburgh, Pennsylvania 15222 (Address of principal executive offices) (412) 232-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date Outstanding at Class of Common Stock January 28, 2002 --------------------- ---------------- $.50 par value 125,861,404 MYLAN LABORATORIES INC. AND SUBSIDIARIES FORM 10-Q For the Quarterly Period Ended December 31, 2001 INDEX Page Number ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Earnings - Three and Nine Months EndedDecember 31, 2001, and 2000 2 Consolidated Balance Sheets - December 31, 2001, and March 31, 2001 3 Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2001, and 2000 4 Notes to Consolidated Financial Statements 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 23 ITEM 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 29 MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2001, AND 2000 (unaudited; in thousands, except per share amounts) Three Months Ended Nine Months Ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- Net revenues $ 297,191 $ 223,238 $ 821,452 $ 598,048 Cost of sales 119,819 120,970 358,444 328,031 --------- --------- --------- --------- Gross profit 177,372 102,268 463,008 270,017 Operating expenses: Research and development 13,441 15,816 46,687 49,614 Selling and marketing 15,279 14,852 44,675 43,737 General and administrative 28,705 22,926 88,122 67,761 Tentative litigation settlement -- -- -- 147,000 --------- --------- --------- --------- Earnings (loss) from operations 119,947 48,674 283,524 (38,095) Equity in (loss) earnings of Somerset (1,714) 1,255 (3,490) (751) Other income, net 4,879 8,892 22,900 31,136 --------- --------- --------- --------- Earnings (loss) before income taxes 123,112 58,821 302,934 (7,710) Provision for income taxes 44,936 21,176 109,974 (2,775) --------- --------- --------- --------- Net earnings (loss) $ 78,176 $ 37,645 $ 192,960 $ (4,935) ========= ========= ========= ========== Earnings (loss) per common share: Basic $ 0.62 $ 0.30 $ 1.54 $ (0.04) ========= ========= ========= ========== Diluted $ 0.61 $ 0.30 $ 1.52 $ (0.04) ========= ========= ========= ========== Weighted average common shares: Basic 125,592 124,809 125,332 126,077 ========= ========= ========= ========== Diluted 127,891 126,004 127,153 127,117 ========= ========= ========= ========== Cash dividends declared per common share: $ 0.04 $ 0.04 $ 0.12 $ 0.12 ========= ========= ========= ==========
See Notes to Consolidated Financial Statements 2 MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, March 31, 2001 2001 Assets (unaudited) Current assets: Cash and cash equivalents $ 153,423 $ 229,183 Marketable securities 432,038 55,715 Accounts receivable, net 165,443 232,599 Inventories 196,777 161,810 Deferred income tax benefit 81,184 59,474 Deposit - tentative litigation settlement 135,000 135,000 Other current assets 7,516 5,443 ---------- ---------- Total current assets 1,171,381 879,224 Property, plant and equipment, net 163,460 168,396 Intangible assets, net 280,616 296,181 Investment in and advances to Somerset 23,950 27,621 Other assets 97,267 94,551 ---------- ---------- Total assets $1,736,674 $1,465,973 ========== ========== Liabilities and shareholders' equity Liabilities: Current liabilities: Trade accounts payable $ 38,307 $ 48,928 Income taxes payable 89,501 34,348 Current portion of long-term obligations 2,028 5,245 Cash dividends payable 5,036 5,007 Tentative litigation settlement 147,000 147,000 Other current liabilities 81,015 50,659 ---------- ---------- Total current liabilities 362,887 291,187 Long-term obligations 25,239 23,345 Deferred income tax liability 21,665 18,905 ---------- ---------- Total liabilities 409,791 333,437 ---------- ---------- Shareholders' equity: Preferred stock - par value $.50 per share Shares authorized: 5,000,000 Shares issued: none -- -- Common stock - par value $.50 per share Shares authorized: 300,000,000 Shares issued: 131,448,878 at December 31, 2001, and 130,689,762 at March 31, 2001 65,724 65,345 Additional paid-in capital 338,084 322,987 Retained earnings 1,018,651 840,741 Accumulated other comprehensive income 6,660 2,983 ---------- ---------- 1,429,119 1,232,056 Less treasury stock - at cost Shares: 5,813,033 at December 31, 2001, and 5,731,913 at March 31, 2001 102,236 99,520 ---------- ---------- Total shareholders' equity 1,326,883 1,132,536 ---------- ---------- Total liabilities and shareholders' equity $1,736,674 $1,465,973 ========== ========== See Notes to Consolidated Financial Statements 3 MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2001, AND 2000 (unaudited; in thousands) 2001 2000 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 192,960 $ (4,935) Adjustments to reconcile net earnings (loss) to net ca provided from operating activities: Depreciation and amortization 34,906 30,965 (Gain) loss on disposal or sale of fixed assets (711) 363 Income tax benefit (20,930) (25,848) Equity in loss of Somerset 3,490 751 Cash received from Somerset 181 308 Change in allowances for accounts receivable 79,055 22,704 Write-off of investments and intangibles to net realizable value 2,482 8,270 Deposit - tentative litigation settlement -- (100,000) Tentative litigation settlement -- 147,000 Other noncash items (12,670) (14,492) Changes in operating assets and liabilities: Increase in accounts receivable (11,899) (32,118) Increase in inventories (34,102) (32,574) (Decrease) increase in trade accounts payable (10,620) 20,074 Increase in income taxes 55,153 12,767 Other, net 27,638 (174) ---------- ---------- Net cash provided from operating activities 304,933 33,061 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,980) (19,865) Proceeds from sale of fixed assets 4,848 82 Proceeds from sale of intangible and other assets 4,882 37,568 Proceeds from sale of marketable securities 251,239 117,360 Purchase of marketable securities (621,922) (55,755) ---------- ---------- Net cash (used in) provided from investing activities (374,933) 79,390 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term obligations (3,342) (1,390) Cash dividends paid (15,021) (15,151) Purchase of common stock for treasury -- (91,456) Proceeds from exercise of stock options 12,603 4,450 ---------- ---------- Net cash used in financing activities (5,760) (103,547) ---------- ---------- Net (decrease) increase in cash (75,760) 8,904 Cash - beginning of period 229,183 203,493 ---------- ---------- Cash - end of period $ 153,423 $ 212,397 ========== ========== Cash paid during the period for: Interest $ 150 $ 198 ========== ========== Income taxes $ 72,036 $ 10,306 ========== ========== See Notes to Consolidated Financial Statements 4 MYLAN LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1. General In the opinion of management, the accompanying unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes or other financial information required by generally accepted accounting principles and included in audited financial statements have been condensed or omitted. The accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly our consolidated results of operations, financial position and cash flows for the periods presented. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended March 31, 2001. The consolidated results of operations for the three and nine months ended December 31, 2001, are not necessarily indicative of the results to be expected for the full fiscal year. 2. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on reported net earnings, earnings per share or shareholders' equity. 3. Revenue Recognition We recognize revenue for product sales upon shipments to customers when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks, promotional and other potential adjustments, are determinable. Accounts receivable are presented net of allowances relating to these provisions, which were $197,432,000 and $118,377,000 at December 31, 2001, and March 31, 2001. During the quarter ended December 31, 2001, we did not recognize revenue on certain shipments of one of our products due to a unique event surrounding this particular product. The uniqueness of this event has caused significant uncertainties associated with the marketing of this product and the ultimate date competitors will be approved by the FDA for entry into the market and, thus, has resulted in our inability to reasonably estimate the related price adjustments that may occur. See Part I, Item 2, 5 Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information. 4. Recent Accounting Pronouncements In April 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, issued by the Financial Accounting Standards Board (FASB) in June 1998. SFAS No. 133 requires an entity to recognize all derivative instruments as either assets or liabilities on the balance sheet at fair value and those changes in fair value to be recognized currently in earnings, unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 had no material impact on our results of operations or financial position. In June 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. SFAS No. 142 provides that intangible assets with indefinite lives and goodwill will no longer be amortized, but will be subject to at least annual impairment tests. Intangible assets with finite lives will continue to be amortized over their useful lives. We will adopt the provisions of SFAS No. 142 effective April 1, 2002. We are currently evaluating the impact this adoption will have on our consolidated financial position and results of operations. The amortization expense for goodwill and certain other intangible assets, as defined in SFAS No. 142, was $1,641,000 and $1,766,000 for the three months ended December 31, 2001, and 2000, and $4,931,000 and $5,298,000 for the nine months ended December 31, 2001, and 2000. Also in June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets. This statement is effective for fiscal years beginning after June 15, 2002. We are currently evaluating the impact, if any, the adoption of this statement will have on our financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment and disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. We are currently evaluating the impact the adoption of this statement will have on our financial position and results of operations. 6 5. Marketable Securities Marketable securities consist of the following (in thousands): Gross Gross Amortized Unrealized Unrealized Market December 31, 2001 Cost Gains Losses Value ----------------- ---- ----- ------ ----- Debt securities $413,354 $ 631 $ 376 $413,609 Equity securities 8,462 10,841 874 18,429 -------- -------- -------- -------- $421,816 $ 11,472 $ 1,250 $432,038 ======== ======== ======== ======== March 31, 2001 Debt securities $ 45,371 $ 698 $ 50 $ 46,019 Equity securities 5,762 4,684 750 9,696 -------- -------- -------- -------- $ 51,133 $ 5,382 $ 800 $ 55,715 ======== ======== ======== ======== Maturities of debt securities at market value as of December 31, 2001, are as follows (in thousands): Mature within one year $394,943 Mature in one to five years 2,836 Mature in five years and later 15,830 -------- $413,609 ======== 6. Balance Sheet Components Selected balance sheet components consist of the following (in thousands): December 31, March 31, 2001 2001 ---- ---- Inventories: Raw materials $ 76,553 $ 57,825 Work in process 25,730 23,752 Finished goods 94,494 80,233 -------- -------- $196,777 $161,810 ======== ======== Other current liabilities: Payroll and employee benefit plans $ 31,753 $ 12,542 Other 49,262 38,117 -------- -------- $ 81,015 $ 50,659 ======== ======== 7 7. Long-Term Obligations Long-term obligations consist of the following (in thousands): December 31, March 31, 2001 2001 ---- ---- Deferred compensation $22,201 $16,512 Deferred revenue 2,923 5,845 Other 115 988 ------- ------- $25,239 $23,345 ======= ======= 8. Earnings Per Common Share (EPS) Basic EPS is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period adjusted for the dilutive effect of options granted under our stock option plans. The effect of dilutive stock options on the weighted average number of common shares outstanding was 2,299,000 and 1,195,000 for the three months ended December 31, 2001, and 2000, and 1,821,000 and 1,040,000 for the nine months ended December 31, 2001, and 2000. 9. Comprehensive Income Total comprehensive income is as follows (in thousands): Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net earnings (loss) $ 78,176 $ 37,645 $ 192,960 $ (4,935) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on marketable securities 1,540 (1,653) 3,887 (1,895) Adjustment for (gains) losses included in net earnings (loss) (10) 44 (210) (704) ---------- ---------- ---------- ---------- Comprehensive income (loss) $ 79,706 $ 36,036 $ 196,637 $ (7,534) ========== ========== ========== ==========
Accumulated other comprehensive income, as reflected on the balance sheets, is comprised solely of the net unrealized gains on marketable securities, net of deferred income taxes. 8 10. Segment Reporting The following table presents comparative operating results for our operating segments (in thousands): Three Months Ended Nine Months Ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- Generic: Net revenues $ 261,334 $ 174,214 $ 723,973 $ 475,596 Segment profit 139,229 49,057 356,485 125,511 Brand: Net revenues $ 35,857 $ 49,024 $ 97,479 $ 122,452 Segment profit (loss) 106 8,113 (16,508) 19,635 Corporate/Other, net $ (16,223) $ 1,651 $ (37,043) $(152,856) Consolidated: Net revenues $ 297,191 $ 223,238 $ 821,452 $ 598,048 Pretax earnings (loss) 123,112 58,821 302,934 (7,710) Segment net revenues represent revenues from unrelated third parties. Segment profit represents segment gross profit less direct research and development, sales and marketing and general and administrative expenses. Corporate includes legal costs, goodwill amortization, other corporate administrative expenses and other income and expense. For the nine months ended December 31, 2000, Corporate includes the expense of $147,000,000 for the tentative FTC settlement (see Note 11). Effective April 1, 2001, the decision was made that the Brand Segment would assume responsibility for the sales and marketing of EX phenytoin 100mg, which were previously included and evaluated in the operating results of the Generic Segment. Accordingly, the operating results of the Brand Segment for the three and nine months ended December 31, 2000, have been revised to include the net revenues of $7,644,000 and $18,279,000 and the corresponding costs of sales of $1,398,000 and $3,558,000, respectively, for EX phenytoin 100mg previously included in the Generic Segment. The following table presents comparative total assets by operating segment, which includes a revision to the March 31, 2001, amounts to reflect EX phenytoin 100mg in the Brand Segment (in thousands): December 31, March 31, 2001 2001 ---- ---- Generic $ 607,641 $ 625,926 Brand 214,216 250,977 Corporate/Other 914,817 589,070 ---------- ---------- Consolidated $1,736,674 $1,465,973 ========== ========== 9 11. Contingencies Product Litigation Paclitaxel NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc. (Abbott) filed suit against the Company in United States Federal District Court for the Western District of Pennsylvania. Plaintiffs allege the Company's manufacture, use and sale of paclitaxel infringes certain patents owned by NAPRO and allegedly licensed to Abbott. The Company began selling paclitaxel on July 25, 2001. Abbott has filed an ANDA seeking approval to sell paclitaxel. The regulatory review status of the Abbott application is unknown to the Company. While this suit is in its early stages, the Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend its position. An adverse outcome in this suit could have a material adverse effect on the Company's results of operations and financial position. Verapamil ER Biovail Laboratories Inc. (Biovail Inc.) has filed a demand for arbitration against the Company with the American Arbitration Association. The dispute relates to a supply agreement under which the Company supplied extended-release verapamil to Biovail Inc. The Company terminated the agreement in March 2001. Biovail Inc.'s allegations include breach of contract, breach of implied covenant of good faith and fair dealing, and unfair competition. While this matter is in its early stages, the Company believes it has meritorious defenses to the claims asserted by Biovail Inc. and intends to vigorously defend its position. The arbitration hearing is scheduled to be held in September 2002. An adverse outcome could have a material adverse effect on the Company's results of operations and financial position. Zagam(R) The Company filed suit against Aventis Pharmaceuticals, Inc., successor in interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.; Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.; Rhone-Poulenc Rorer, S.A., and their affiliates in United States Federal District Court for the Western District of Pennsylvania on May 23, 2001. The complaint sets forth claims of breach of contract, recision, breach of implied covenant of good faith and fair dealing and unjust enrichment. The facts substantiating the claims arise from agreements entered into by the parties relating to the 10 manufacture, distribution and sale of Zagam(R). The defendants' answer includes a counterclaim which alleges nonpayment of royalties and failure to mitigate. Nifedipine In February 2001, Biovail Corporation and Biovail Laboratories Inc. (Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United States District Court for the Eastern District of Virginia alleging anti-trust violations with respect to agreements entered into between the Company and Pfizer regarding nifedipine. The Company filed a motion to transfer the case to United States Federal District Court for the Northern District of West Virginia, which was granted. While this suit is in its early stages, the Company believes it has meritorious defenses to the claims asserted by Biovail and intends to vigorously defend its position. An adverse outcome could have a material adverse effect on the Company's results of operations and financial position. The Company has been named as a defendant in five other suits alleging anti-trust claims based on the settlement entered into by the Company with Bayer AG, Bayer Corporation and Pfizer regarding nifedipine. The Company believes it has meritorious defenses to these claims and intends to vigorously defend its position. An adverse outcome in any of these suits could have a material adverse effect on the Company's results of operations and financial position. Buspirone The Company filed an Abbreviated New Drug Application (ANDA) seeking approval to market buspirone, a generic equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company had filed the appropriate certifications relating to the patents for this product then listed in the U.S. Food and Drug Administration (FDA) publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the Orange Book. On November 21, 2000, a new patent claiming the administration of a metabolite of buspirone (which BMS claims also covers the administration of buspirone itself) was issued to BMS. The subsequent listing of this patent in the Orange Book prevented the FDA from granting final approval for the Company's buspirone ANDA. On November 30, 2000, the Company filed suit against the FDA and BMS in the United States District Court for the District of Columbia. The complaint asked the court to order the FDA to immediately grant final approval of the Company's ANDA for the 15mg buspirone product and require BMS to request withdrawal of the patent from the Orange Book. Upon the Company's posting a bond in the amount of $25,000,000, the court entered an order granting the Company's motion for a preliminary injunction. Following a 11 brief stay by the United States Court of Appeals for the Federal Circuit, the FDA granted approval of the Company's ANDA with respect to the 15mg strength. Upon receiving FDA approval, the Company began marketing and selling the product in March 2001. The Company has also been selling the 30mg buspirone product since August 2001. BMS appealed the preliminary injunction order to both the United States Court of Appeals for the Federal Circuit and the United States Court of Appeals for the District of Columbia Circuit. The District of Columbia Court of Appeals denied BMS' application and stayed the Company's motion to dismiss pending the decision of the Federal Circuit Court of Appeals. The Federal Circuit heard oral arguments on July 12, 2001. On October 12, 2001, the Federal Circuit overturned the lower court ruling and held that the Company did not have a cognizable claim against BMS under the Declaratory Judgment Act to challenge the listing of BMS' patent, which the Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug and Cosmetic Act. The Federal Circuit did not address the lower court's determination that the BMS patent does not claim buspirone or a method of administration of the drug. The Company filed a petition with the Federal Circuit asking that the court reconsider its holding. The petition was denied on January 9, 2002. On January 16, 2002, the Company filed a motion in U.S. District Court for the District of Columbia seeking a preliminary injunction which, if granted, would require that the FDA refuse to list the BMS patent should BMS submit it for re-listing in the Orange Book. The Company is involved in three other suits related to buspirone. In November 2000, the Company filed suit against BMS in the United States District Court for the Northern District of West Virginia. The suit seeks a declaratory judgement of non-infringement and/or invalidity of the BMS patent listed in November 2000. In January 2001, BMS sued the Company for patent infringement in the United States District Court for the District of Vermont and also in the United States District Court for the Southern District of New York. In each of these cases, BMS asserts that the Company infringes BMS' patent and seeks to rescind FDA approval of the Company's 15mg and 30mg strengths and to block approval of the 5mg and 10mg strengths. It is expected that BMS will seek to recover damages equal to the profits it has lost as a result of the Company's sales of this product. The Company subsequently filed motions to dismiss the Vermont case and to dismiss and transfer the New York case to the United States District Court for the Northern District of West Virginia. The Judicial Panel on Multi-District Litigation ordered these cases, along with another patent case and 12 numerous anti-trust suits filed against BMS, be consolidated in the United States District Court for the Southern District of New York. BMS has filed a motion to dismiss the Company's anti-trust counterclaims and the Company has filed a motion for summary judgment of non-infringement, or in the alternative, invalidity. The FTC filed a brief in support of the Company's opposition to BMS' motion to dismiss the anti-trust counterclaims. While these suits are in the early stages, the Company believes it has meritorious defenses to the claims and intends to vigorously defend its position. Denial of the Company's motion for preliminary injunction against the FDA, or adverse resolution of any of the three cases involving the non-infringement, validity, and enforceability of BMS' patents could prevent the Company from continuing its sales of buspirone and could result in forfeiture of its bond (in the case on appeal) or other damages, any of which could have a material adverse effect on the Company's results of operations and financial position. Lorazepam and clorazepate In December 1998, the Federal Trade Commission (FTC) filed suit in U.S. District Court for the District of Columbia against the Company. The FTC's complaint alleges the Company engaged in restraint of trade, monopolization, attempted monopolization and conspiracy to monopolize arising out of certain agreements involving the supply of raw materials used to manufacture two products, lorazepam and clorazepate. The FTC also sued in the same case the foreign supplier of the raw materials, the supplier's parent company and its United States distributor. Under the terms of the agreements related to these raw materials, the Company had agreed to indemnify these parties. The Company is a party to other suits filed in the same court involving the Attorneys General from all states and the District of Columbia (States Attorneys General) and more than 25 putative class actions that allege the same conduct alleged in the FTC suit, as well as alleged violations of state antitrust and consumer protection laws. The relief sought by the FTC includes an injunction barring the Company from engaging in the challenged conduct, recision of certain agreements and disgorgement in excess of $120,000,000. The states and private parties seek similar relief, treble damages and attorneys' fees. The Company's motions to dismiss several of the private actions were granted. 13 In July 2000, the Company reached a tentative agreement to settle the actions brought by the FTC and the States Attorneys General regarding raw material contracts for lorazepam and clorazepate. The Company has agreed to pay $100,000,000 plus up to $8,000,000 in attorneys' fees incurred by the States Attorneys General. Based on the FTC commissioners' approval of the tentative settlement with the FTC and States Attorneys General, in December 2000, the Company placed into escrow $100,000,000. Settlement papers have been executed and filed by the parties. The court has preliminarily approved the tentative settlement. A hearing with respect to final approval was held on November 29, 2001. To date, no decision has been issued by the court. In July 2000, the Company also reached a tentative agreement to settle private class action lawsuits filed on behalf of consumers and third-party reimbursers related to the same facts and circumstances at issue in the FTC and States Attorneys General cases. The Company has agreed to pay $35,000,000 to settle the third party reimburser actions, plus up to $4,000,000 in attorneys' fees incurred by counsel in the consumer actions. The tentative settlement has been preliminarily approved by the court, pursuant to which the Company placed into escrow $35,000,000 in March 2001. Members of the settlement class, with respect to third party reimbursers, had until August 31, 2001, to exercise their right to exclude themselves from the settlement. Seventeen such parties exercised this right and four have filed a separate lawsuit alleging violations of Illinois, Minnesota and Massachusetts law. A hearing with respect to final approval of the settlement was held on November 29, 2001. To date, no decision has been issued by the court. In total, the Company has agreed to pay up to $147,000,000 to settle these actions brought by the FTC, States Attorneys General, and certain private parties (Tentative Settlement). The Tentative Settlement also includes three companies indemnified by the Company - Cambrex Corporation, Profarmaco S.r.l. and Gyma Laboratories, Inc. Lawsuits not included in this Tentative Settlement principally involve alleged direct purchasers such as wholesalers and distributors. In July 2001, the United States District Court for the District of Columbia certified a litigation class consisting of these direct purchasers. The Company filed a petition with the United States Court of Appeals for the District of Columbia Circuit seeking appellate review of the district court's order. The appellate court has ordered that the issues raised in the Company's petition be fully briefed and argued before the court. Members of the class certified by the district court had until November 1, 2001, to exercise their right to exclude themselves from this litigation. 14 The Company believes that it has meritorious defenses with respect to the claims asserted in those anti-trust suits which are not part of the Tentative Settlement and those suits filed by those parties who excluded themselves from the Tentative Settlement and will vigorously defend its position. However, an adverse result in the remaining cases, or, if the Tentative Settlement is not given final approval by the court, the outcome of continued litigation of these cases could have a material adverse effect on the Company's financial position and results of operations. Other Litigation We are involved in various other legal proceedings that are considered normal to our business. While it is not feasible to predict the ultimate outcome of such other proceedings, it is the opinion of management that the ultimate outcome of such other proceedings will not have a material adverse effect on our results of operations or financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- The following discussion and analysis should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2001, and the unaudited interim consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q. 15 The following table presents comparative results of operations for our operating segments (in millions): Three Months Ended Nine Months Ended December 31, December 31, ------------ ------------ 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Consolidated: Net revenues $ 297.2 $ 223.2 33.2% $ 821.5 $ 598.0 37.4% Gross profit 177.4 102.3 73.4% 463.0 270.0 71.5% Research and development 13.4 15.8 -15.2% 46.7 49.6 -5.8% Selling and marketing 15.3 14.9 2.7% 44.7 43.7 2.3% General and administrative 28.7 22.9 25.3% 88.1 67.8 29.9% Pretax earnings (loss) 123.1 58.8 302.9 (7.7) Generic: Net revenues $ 261.3 $ 174.2 50.0% $ 724.0 $ 475.6 52.2% Gross profit 155.9 71.1 119.3% 410.1 191.7 113.9% Research and development 8.1 12.0 -32.5% 24.8 38.6 -35.8% Selling and marketing 3.2 3.4 -5.9% 9.5 10.2 -6.9% General and administrative 5.4 6.7 -19.4% 19.4 17.4 11.5% Segment profit 139.2 49.1 356.4 125.5 Brand: Net revenues $ 35.9 $ 49.0 -26.7% $ 97.5 $ 122.4 -20.3% Gross profit 21.5 31.2 -31.1% 52.9 78.3 -32.4% Research and development 5.3 3.8 39.5% 21.9 11.0 99.1% Selling and marketing 12.1 11.5 5.2% 35.2 33.5 5.1% General and administrative 4.0 7.7 -48.1% 12.3 14.1 -12.8% Segment profit (loss) 0.1 8.1 (16.5) 19.6 Corporate/Other $ (16.2) $ 1.6 $ (37.0) $ (152.8)
Segment net revenues represent revenues from unrelated third parties. Segment profit represents segment gross profit less direct research and development, sales and marketing and general and administrative expenses. Corporate includes legal costs, goodwill amortization, other corporate administrative expenses and other income and expense. For the nine months ended December 31, 2000, Corporate includes the expense of $147.0 million for the tentative FTC settlement (see Note 11 to the Consolidated Financial Statements). Effective April 1, 2001, the decision was made that the Brand Segment would assume responsibility for the sales and marketing of EX phenytoin 100mg, which were previously included and evaluated in the operating results of the Generic Segment. Accordingly, the operating results of the Brand Segment for the three and nine months ended December 31, 2000, have been revised to include the net revenues of $7.6 million and $18.3 million and the corresponding costs of sales of $1.4 million and $3.6 million, respectively, for EX phenytoin 100mg previously included in the Generic Segment. Results of Operations ---------------------- Three months ended December 31, 2001, compared to three months ended December 31, 2000 Net earnings for the quarter ended December 31, 2001, increased $40.6 million or $0.31 per diluted share to $78.2 million or $0.61 per diluted share from $37.6 million or $0.30 per diluted share for the same prior year quarter. 16 Net Revenues and Gross Profit Net revenues for the current quarter were $297.2 million compared to $223.2 million for the prior year quarter, a $74.0 million or 33.2% increase. Gross profit for the current quarter increased 73.4% to $177.4 million from $102.3 million for the prior year quarter. Generic net revenues increased 50.0% or $87.1 million to $261.3 million for the current quarter from $174.2 million for the prior year quarter. This increase in generic net revenues, as well as the increase in generic gross profit, is primarily attributed to new products launched subsequent to December 31, 2000, as well as an overall increase in our base generic product line. Buspirone HCl 15mg and 30mg contributed net revenues of $50.9 million for the current quarter. Our 180-day market exclusivity periods for buspirone HCl 15mg and 30mg expired in late September 2001 and late January 2002, respectively. Upon the expiration of the exclusivity periods, we expected to experience pricing and volume pressures due to competition. However, due to pediatric labeling issues surrounding the brand product Buspar(R), the U.S. Food and Drug Administration (FDA) has withheld additional approvals for generics. Legislation signed into law in January 2002 provided the FDA with further clarity and direction relating to these issues. Even with such legislation, the FDA has continued to withhold additional approvals, possibly due to the significant number of legal suits surrounding the product. Upon the approval of additional generics, we expect to experience the pricing and volume pressures mentioned above. See Note 11 to the Consolidated Financial Statements regarding the current litigation of certain issues relating to our buspirone ANDAs. Because of the significant uncertainties regarding the amount of potential price adjustments that may ultimately occur in connection with these unique market conditions for our buspirone HCl 15mg product, we are unable to reasonably estimate the amount of such adjustments and have not recognized revenue on certain product shipments. Generic volume shipped, excluding unit dose, increased 25.4% to 2.776 billion doses from 2.214 billion for the prior year quarter. Base generics were the primary contributor to the quarter-over-quarter increase in volume shipped. Brand net revenues decreased 26.7% or $13.1 million to $35.9 million for the current quarter from $49.0 million for the prior year quarter. The decrease in brand net revenues, as well as gross profit, is primarily attributed to customer buying patterns and the curtailment of end of quarter promotional programs. 17 Operating Expenses Research and development expenses (R&D) decreased 15.2% or $2.4 million to $13.4 million (4.5% of net revenues) for the current quarter from $15.8 million (7.1% of net revenues) for the prior year quarter. The $3.9 million decrease in generic R&D is primarily due to product license fees recognized in the prior year quarter, as well as the timing of projects currently in development. The increase of $1.5 million in brand R&D is primarily attributed to the timing of clinical studies and related expenses. Selling and marketing expenses were relatively unchanged quarter-over-quarter at $15.3 million (5.1% of net revenues) for the current quarter compared to $14.9 million (6.7% of net revenues) for the prior year quarter. General and administrative expenses (G&A) were $28.7 million (9.7% of net revenues) compared to $22.9 million (10.3% of net revenues) for the prior year quarter, a 25.3% or $5.8 million increase. The decreases in brand, primarily attributed to a $3.6 million write-down of Zagam intangibles in the prior year quarter, and generic G&A were offset by an increase in corporate expenses. The increase in corporate G&A is primarily attributed to increased payroll related expenses, principally associated with retirement benefits for executives and management employees, and increased legal expenses. Other Income Other income, net of nonoperating expenses, decreased 44.9% or $4.0 million to $4.9 million for the current quarter from $8.9 million for the prior year quarter. This decrease is primarily attributed to a favorable $9.2 million litigation settlement recognized in the prior year quarter partially offset by an increase in income for the current quarter of $5.7 million related to our investment in certain limited partnerships. Nine months ended December 31, 2001, compared to nine months ended December 31, 2000 Net earnings for the nine months ended December 31, 2001, were $193.0 million or $1.52 per diluted share compared to a net loss of $4.9 million or $0.04 per diluted share. Excluding the impact of the tentative FTC settlement, net earnings for the prior year's nine months were $89.1 million or $0.70 per diluted share, representing an increase of 116.6% or $103.9 million year-over-year. See Note 11 to the Consolidated Financial Statements regarding the tentative FTC settlement. 18 Net Revenues and Gross Profit Net revenues for the current nine months increased 37.4% or $223.5 million to $821.5 million from $598.0 million for the prior year's nine months. Gross profit for the current nine months was $463.0 million (56.4% of net revenues) compared to $270.0 million (45.2% of net revenues) for the prior year's nine months, a 71.5% or $193.0 million increase. Generic net revenues increased 52.2% or $248.4 million to $724.0 million for the current nine months from $475.6 million for the prior year's nine months. This increase in generic net revenues, as well as the increase in generic gross profit, is primarily attributed to new products launched subsequent to December 31, 2000, as well as an overall increase in our base generic product line. Buspirone HCl 15mg and 30mg contributed net revenues of $121.4 million for the current nine months. Brand net revenues decreased 20.3% or $24.9 million to $97.5 million for the current nine months from $122.4 million for the prior year's nine months. The decrease in brand net revenues, as well as gross profit, is primarily attributed to customer buying patterns and the curtailment of end of quarter promotional programs. Operating Expenses Research and development expenses (R&D) for the current nine months were $46.7 million (5.7% of net revenues) compared to $49.6 million (8.3% of net revenues) for the prior year's nine months. The $13.8 million decrease in generic R&D, primarily attributed to decreased product license fees and studies and related expenses, was partially offset by the $10.9 million increase in brand R&D, primarily attributed to nebivolol. Selling and marketing expenses increased slightly to $44.7 million (5.4% of net revenues) for the current nine months from $43.7 million (7.3% of net revenues) for the prior year's nine months. General and administrative expenses for the current nine months increased 29.9% or $20.3 million to $88.1 million (10.7% of net revenues) from $67.8 million (11.3% of net revenues) for the prior year's nine months. This increase is primarily attributed to increases in payroll related expenses, principally associated with retirement benefits for executives and management employees, and legal expenses. 19 In the quarter ended June 30, 2000, we recorded a tentative settlement with the FTC, States Attorneys General and certain private parties with regard to lawsuits filed against the Company relating to pricing issues and raw material contracts on two of our products (see Note 11 to the Consolidated Financial Statements). Other Income Other income, net of nonoperating expenses, decreased 26.4% or $8.2 million to $22.9 million for the current nine months from $31.1 million for the prior year's nine months. This decrease is primarily attributed to the recognition of a favorable $9.2 million litigation settlement in the prior year's nine months. Liquidity, Capital Resources and Financial Condition ---------------------------------------------------- Our cash and cash equivalents and working capital were $153.4 million and $808.5 million at December 31, 2001, compared to $229.2 million and $588.0 million at March 31, 2001. The primary source of operating capital used to grow our business continues to be generated through our product sales. Cash flows from our operating activities for the first nine months of fiscal 2002 were $304.9 million compared to $33.1 million for the same prior year period. Our investments in marketable securities increased $376.3 million to $432.0 million at December 31, 2001, from $55.7 million at March 31, 2001. This increase is primarily attributed to our purchases of investments with maturities greater than 90 days compared to investments with maturity terms of less than 90 days, which are classified as cash and cash equivalents. Such investments increased $365.7 million to $391.6 million at December 31, 2001, compared to $25.9 million at March 31, 2001. We liquidated $9.5 million of our investment in a limited partnership during the first nine months of fiscal 2002 and $45.8 million during the first nine months of fiscal 2001. We plan to continue to liquidate this investment in fiscal 2003. Capital expenditures continue to be principally funded by our operating activities. Capital expenditures for the nine months ended December 31, 2001, were $14.0 million compared to $19.9 million for the prior year's nine months. The prior year period included payments for constructing a sales and administration building in Morgantown, West Virginia, and an addition to one of our generic manufacturing facilities in Puerto Rico. During the quarter ended June 30, 2001, we sold an administration building in Sugar Land, Texas. Also, during the quarter ended December 31, 2001, we completed the sale of our liquid pharmaceutical manufacturing facility and warehouse in Largo, Florida. 20 We made payments on long-term obligations of $3.3 million during the nine months ended December 31, 2001, compared to $1.4 million during the same time period of fiscal 2001. A final payment of $2.0 million related to a product license agreement was made in January 2002. We continue to pay quarterly cash dividends of $.04 per common share. Dividend payments totaled $15.0 million during the first nine months of fiscal 2002. We received $12.6 million from the exercise of stock options in our stock option plans for the nine months ended December 31, 2001, compared to $4.5 million for the same period ended December 31, 2000. We believe that operating activities from the sale of our pharmaceutical products will be our principal source of cash. However, to provide us with additional operating leverage if necessary, we have entered into an agreement with a commercial bank to establish a revolving line of credit up to $50.0 million. As of December 31, 2001, we did not have any outstanding borrowings under this line of credit. Additionally, we believe that the acquisition of new products, as well as other companies, will play a strategic role in our growth. Consequently, we may incur additional indebtedness to finance these acquisitions which would impact future liquidity. We agreed to pay up to $147.0 million relating to the tentative FTC settlement (see Part I, Item 1, Contingencies, of this report). This obligation was recorded in June 2000, and to date, we have deposited into escrow a total of $135.0 million. Payment is pending for the remaining $12.0 million obligation. If the tentative settlement is not given final court approval, the outcome of continued litigation of these cases could have a material adverse effect on our financial position and results of operations. Our payments for state and federal income taxes increased $61.7 million during the nine months ended December 31, 2001, to $72.0 million compared to $10.3 million for the nine months ended December 31, 2000. Payments during the first nine months of fiscal 2001 were lower as a result of lower taxable income resulting from the tentative FTC settlement. Recent Accounting Pronouncements --------------------------------- In April 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, issued by the Financial Accounting Standards Board (FASB) in June 1998. SFAS No. 133 requires an entity to recognize all derivative instruments as either assets or liabilities on the balance sheet at fair value and those changes in fair value to be recognized currently in earnings, unless specific hedge accounting criteria 21 are met. The adoption of SFAS No. 133 had no material impact on our results of operations or financial position. In June 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. SFAS No. 142 provides that intangible assets with indefinite lives and goodwill will no longer be amortized, but will be subject to at least annual impairment tests. Intangible assets with finite lives will continue to be amortized over their useful lives. We will adopt the provisions of SFAS No. 142 effective April 1, 2002. We are currently evaluating the impact this adoption will have on our consolidated financial position and results of operations. The amortization expense for goodwill and certain other intangible assets, as defined in SFAS No. 142, was $1,641,000 and $1,766,000 for the three months ended December 31, 2001, and 2000, and $4,931,000 and $5,298,000 for the nine months ended December 31, 2001, and 2000. Also in June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets. This statement is effective for fiscal years beginning after June 15, 2002. We are currently evaluating the impact, if any, the adoption of this statement will have on our financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment and disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. We are currently evaluating the impact the adoption of this statement will have on our financial position and results of operations. Forward-Looking Statements -------------------------- The statements set forth in this Report concerning the manner in which we intend to conduct our future operations, potential trends that may impact future results of operations, and our beliefs or expectations about future operations are forward-looking statements. We may be unable to realize our plans and objectives due to various important factors, including, but not limited to, an acceleration in the erosion of prices of our generic pharmaceutical products, the inability to obtain timely FDA approval for new generic or brand products, the failure to find acceptance of our brand products in the marketplace, the continued litigiousness by brand manufacturers designed to delay the introduction of our generic products, the failure to receive court approval of the Tentative Settlement, the 22 failure to favorably litigate or resolve the remaining cases that are not a part of the Tentative Settlement and with the parties that have elected not to participate in the elective settlement, the failure to favorably litigate or resolve the buspirone cases or the other cases described in Note 11 in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Report on Form 10-Q, and the factors described under "Forward Looking Statements" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------ The information required by Item 3 has been disclosed in Item 7A of the Company's Annual Report on Form 10-K for the year ended March 31, 2001. There has been no material change in the disclosure regarding market risk, except as described below. At December 31, 2001, the fair market value of our marketable securities, including those held indirectly through certain pooled asset funds and included as part of other assets on the balance sheet, were $466.2 million. The fair market value of our debt securities held at this date was $413.6 million, with the remaining $52.6 million invested in public common stock equities and mutual funds. Our investments in debt securities that mature within one year, which are generally less sensitive to interest rate fluctuations than is the case with longer-term debt instruments, were $394.9 million, or 84.7% of the total market value of marketable securities held at December 31, 2001. Collectively, our marketable securities represent 26.8% of our total assets and 75.2% of total marketable securities and cash and cash equivalents. Assuming an instantaneous 10.0% decrease in the market value of all of our marketable securities, the change in the fair market value of these securities would be $46.6 million. PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL PROCEEDINGS --------------------------- Product Litigation Paclitaxel NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc. (Abbott) filed suit against the Company in United States Federal District Court for the Western District of Pennsylvania. Plaintiffs allege the Company's manufacture, use and sale of paclitaxel infringes certain patents owned by NAPRO and allegedly licensed to Abbott. The Company began selling paclitaxel on July 25, 2001. 23 Abbott has filed an ANDA seeking approval to sell paclitaxel. The regulatory review status of the Abbott application is unknown to the Company. While this suit is in its early stages, the Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend its position. An adverse outcome in this suit could have a material adverse effect on the Company's results of operations and financial position. Verapamil ER Biovail Laboratories Inc. (Biovail Inc.) has filed a demand for arbitration against the Company with the American Arbitration Association. The dispute relates to a supply agreement under which the Company supplied extended-release verapamil to Biovail Inc. The Company terminated the agreement in March 2001. Biovail Inc.'s allegations include breach of contract, breach of implied covenant of good faith and fair dealing, and unfair competition. While this matter is in its early stages, the Company believes it has meritorious defenses to the claims asserted by Biovail Inc. and intends to vigorously defend its position. The arbitration hearing is scheduled to be held in September 2002. An adverse outcome could have a material adverse effect on the Company's results of operations and financial position. Zagam(R) The Company filed suit against Aventis Pharmaceuticals, Inc., successor in interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.; Rhone-Poulenc Rorer Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.; Rhone-Poulenc Rorer, S.A., and their affiliates in United States Federal District Court for the Western District of Pennsylvania on May 23, 2001. The complaint sets forth claims of breach of contract, recision, breach of implied covenant of good faith and fair dealing and unjust enrichment. The facts substantiating the claims arise from agreements entered into by the parties relating to the manufacture, distribution and sale of Zagam(R). The defendants' answer includes a counterclaim which alleges nonpayment of royalties and failure to mitigate. Nifedipine In February 2001, Biovail Corporation and Biovail Laboratories Inc. (Biovail) filed suit against the Company and Pfizer Inc. (Pfizer) in United States District Court for the Eastern District of Virginia alleging anti-trust violations with respect to agreements entered into between the Company and Pfizer regarding nifedipine. The Company filed a motion to transfer the case to United States Federal District Court for the Northern District of West Virginia, which was granted. While this suit is in its early stages, the Company believes it has meritorious defenses to the claims asserted by Biovail and intends to vigorously 24 defend its position. An adverse outcome could have a material adverse effect on the Company's results of operations and financial position. The Company has been named as a defendant in five other suits alleging anti-trust claims based on the settlement entered into by the Company with Bayer AG, Bayer Corporation and Pfizer regarding nifedipine. The Company believes it has meritorious defenses to these claims and intends to vigorously defend its position. An adverse outcome in any of these suits could have a material adverse effect on the Company's results of operations and financial position. Buspirone The Company filed an Abbreviated New Drug Application (ANDA) seeking approval to market buspirone, a generic equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company had filed the appropriate certifications relating to the patents for this product then listed in the U.S. Food and Drug Administration (FDA) publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the Orange Book. On November 21, 2000, a new patent claiming the administration of a metabolite of buspirone (which BMS claims also covers the administration of buspirone itself) was issued to BMS. The subsequent listing of this patent in the Orange Book prevented the FDA from granting final approval for the Company's buspirone ANDA. On November 30, 2000, the Company filed suit against the FDA and BMS in the United States District Court for the District of Columbia. The complaint asked the court to order the FDA to immediately grant final approval of the Company's ANDA for the 15mg buspirone product and require BMS to request withdrawal of the patent from the Orange Book. Upon the Company's posting a bond in the amount of $25,000,000, the court entered an order granting the Company's motion for a preliminary injunction. Following a brief stay by the United States Court of Appeals for the Federal Circuit, the FDA granted approval of the Company's ANDA with respect to the 15mg strength. Upon receiving FDA approval, the Company began marketing and selling the product in March 2001. The Company has also been selling the 30mg buspirone product since August 2001. BMS appealed the preliminary injunction order to both the United States Court of Appeals for the Federal Circuit and the United States Court of Appeals for the District of Columbia Circuit. The District of Columbia Court of Appeals denied BMS' application and stayed the Company's motion to dismiss pending the decision of the Federal Circuit Court of Appeals. The Federal Circuit heard oral arguments on July 12, 2001. On October 12, 2001, the Federal Circuit overturned the lower court ruling and held that the Company did not have a cognizable claim against BMS under the Declaratory Judgment Act to challenge the listing of BMS' patent, which the Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug and Cosmetic Act. The Federal Circuit did not address the lower court's 25 determination that the BMS patent does not claim buspirone or a method of administration of the drug. The Company filed a petition with the Federal Circuit asking that the court reconsider its holding. The petition was denied on January 9, 2002. On January 16, 2002, the Company filed a motion in U.S. District Court for the District of Columbia seeking a preliminary injunction which, if granted, would require that the FDA refuse to list the BMS patent should BMS submit it for re-listing in the Orange Book. The Company is involved in three other suits related to buspirone. In November 2000, the Company filed suit against BMS in the United States District Court for the Northern District of West Virginia. The suit seeks a declaratory judgement of non-infringement and/or invalidity of the BMS patent listed in November 2000. In January 2001, BMS sued the Company for patent infringement in the United States District Court for the District of Vermont and also in the United States District Court for the Southern District of New York. In each of these cases, BMS asserts that the Company infringes BMS' patent and seeks to rescind FDA approval of the Company's 15mg and 30mg strengths and to block approval of the 5mg and 10mg strengths. It is expected that BMS will seek to recover damages equal to the profits it has lost as a result of the Company's sales of this product. The Company subsequently filed motions to dismiss the Vermont case and to dismiss and transfer the New York case to the United States District Court for the Northern District of West Virginia. The Judicial Panel on Multi-District Litigation ordered these cases, along with another patent case and numerous anti-trust suits filed against BMS, be consolidated in the United States District Court for the Southern District of New York. BMS has filed a motion to dismiss the Company's anti-trust counterclaims and the Company has filed a motion for summary judgment of non-infringement, or in the alternative, invalidity. The FTC filed a brief in support of the Company's opposition to BMS' motion to dismiss the anti-trust counterclaims. While these suits are in the early stages, the Company believes it has meritorious defenses to the claims and intends to vigorously defend its position. Denial of the Company's motion for preliminary injunction against the FDA, or adverse resolution of any of the three cases involving the non-infringement, validity, and enforceability of BMS' patents could prevent the Company from continuing its sales of buspirone and could result in forfeiture of its bond (in the case on appeal) or other damages, any of which could have a material adverse effect on the Company's results of operations and financial position. 26 Lorazepam and clorazepate In December 1998, the Federal Trade Commission (FTC) filed suit in U.S. District Court for the District of Columbia against the Company. The FTC's complaint alleges the Company engaged in restraint of trade, monopolization, attempted monopolization and conspiracy to monopolize arising out of certain agreements involving the supply of raw materials used to manufacture two products, lorazepam and clorazepate. The FTC also sued in the same case the foreign supplier of the raw materials, the supplier's parent company and its United States distributor. Under the terms of the agreements related to these raw materials, the Company had agreed to indemnify these parties. The Company is a party to other suits filed in the same court involving the Attorneys General from all states and the District of Columbia (States Attorneys General) and more than 25 putative class actions that allege the same conduct alleged in the FTC suit, as well as alleged violations of state antitrust and consumer protection laws. The relief sought by the FTC includes an injunction barring the Company from engaging in the challenged conduct, recision of certain agreements and disgorgement in excess of $120,000,000. The states and private parties seek similar relief, treble damages and attorneys' fees. The Company's motions to dismiss several of the private actions were granted. In July 2000, the Company reached a tentative agreement to settle the actions brought by the FTC and the States Attorneys General regarding raw material contracts for lorazepam and clorazepate. The Company has agreed to pay $100,000,000 plus up to $8,000,000 in attorneys' fees incurred by the States Attorneys General. Based on the FTC commissioners' approval of the tentative settlement with the FTC and States Attorneys General, in December 2000, the Company placed into escrow $100,000,000. Settlement papers have been executed and filed by the parties. The court has preliminarily approved the tentative settlement. A hearing with respect to final approval was held on November 29, 2001. To date, no decision has been issued by the court. In July 2000, the Company also reached a tentative agreement to settle private class action lawsuits filed on behalf of consumers and third-party reimbursers related to the same facts and circumstances at issue in the FTC and States Attorneys General cases. The Company has agreed to pay $35,000,000 to settle the third party reimburser actions, plus up to $4,000,000 in attorneys' fees incurred by counsel in the consumer actions. The tentative settlement has been preliminarily approved by the court, pursuant to which the Company placed into escrow $35,000,000 in March 2001. Members of the settlement class, with respect to third party reimbursers, had until August 31, 2001, to exercise their right to 27 exclude themselves from the settlement. Seventeen such parties exercised this right and four have filed a separate lawsuit alleging violations of Illinois, Minnesota and Massachusetts law. A hearing with respect to final approval of the settlement was held on November 29, 2001. To date, no decision has been issued by the court. In total, the Company has agreed to pay up to $147,000,000 to settle these actions brought by the FTC, States Attorneys General, and certain private parties (Tentative Settlement). The Tentative Settlement also includes three companies indemnified by the Company - Cambrex Corporation, Profarmaco S.r.l. and Gyma Laboratories, Inc. Lawsuits not included in this Tentative Settlement principally involve alleged direct purchasers such as wholesalers and distributors. In July 2001, the United States District Court for the District of Columbia certified a litigation class consisting of these direct purchasers. The Company filed a petition with the United States Court of Appeals for the District of Columbia Circuit seeking appellate review of the district court's order. The appellate court has ordered that the issues raised in the Company's petition be fully briefed and argued before the court. Members of the class certified by the district court had until November 1, 2001, to exercise their right to exclude themselves from this litigation. The Company believes that it has meritorious defenses with respect to the claims asserted in those anti-trust suits which are not part of the Tentative Settlement and those suits filed by those parties who excluded themselves from the Tentative Settlement and will vigorously defend its position. However, an adverse result in the remaining cases, or, if the Tentative Settlement is not given final approval by the court, the outcome of continued litigation of these cases could have a material adverse effect on the Company's financial position and results of operations. Other Litigation We are involved in various other legal proceedings that are considered normal to our business. While it is not feasible to predict the ultimate outcome of such other proceedings, it is the opinion of management that the ultimate outcome of such other proceedings will not have a material adverse effect on our results of operations or financial position. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 10.1 Supplemental Health Insurance Program For Certain Officers of Mylan Laboratories Inc., effective December 15, 2001, filed herewith. 10.2 Amended and Restated Transition and Succession Agreement dated November 7, 2001, in the form entered into with Milan Puskar, Patricia Sunseri, C.B. Todd, Roderick P. Jackson, Louis J. DeBone and John P. O'Donnell, filed herewith. b. Reports on Form 8-K - None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report filed on Form 10-Q for the quarterly period ended December 31, 2001, to be signed on its behalf by the undersigned thereunto duly authorized. Mylan Laboratories Inc. (Registrant) DATE 2/1/2002 /s/ Milan Puskar ------------- ---------------------------- Milan Puskar Chairman of the Board and Chief Executive Officer DATE 2/1/2002 /s/ Gary E. Sphar ------------- ---------------------------- Gary E.Sphar Vice President, Finance Mylan Pharmaceuticals Inc. (Principal financial officer and chief accounting officer)