10-Q 1 quarter3.txt FISCAL 2003 THIRD QUARTER 10Q 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, 2002 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) (Zip Code) (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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 February 5, 2003 ---------------------- ---------------- $ 0.50 par value 183,792,386 MYLAN LABORATORIES INC. AND SUBSIDIARIES FORM 10-Q For the Quarterly Period Ended December 31, 2002 INDEX ------- PART I. FINANCIAL INFORMATION Item 1: Financial Statements Condensed Consolidated Statements of Earnings - Three and Nine Months Ended December 31, 2002 and 2001 2 Condensed Consolidated Balance Sheets - December 31, 2002, and March 31, 2002 3 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2002 and 2001 4 Notes to Condensed Consolidated Financial Statements 5 Item 2: Management's Discussion and Analysis of Results of Operations and Financial Condition 17 Item 3: Quantitative and Qualitative Disclosures About Market Risk 38 Item 4: Controls and Procedures 39 PART II. OTHER INFORMATION Item 1: Legal Proceedings 39 Item 6: Exhibits and Reports on Form 8-K 43 SIGNATURES 44 CERTIFICATIONS MYLAN LABORATORIES INC. AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (unaudited; in thousands, except per share amounts) Three Months Nine Months Period Ended December 31, 2002 2001 2002 2001 ------------------------ ------------------------ Net Renues $320,494 $297,191 $915,506 $821,452 Cost of sales 150,918 119,819 431,596 358,444 --------- --------- --------- --------- Gross profit 169,576 177,372 483,910 463,008 --------- --------- --------- --------- Operating expenses: Research & development 22,941 13,441 59,953 46,687 Selling & marketing 15,173 15,279 48,598 44,675 General & administrative 28,769 28,705 73,020 88,122 --------- --------- --------- --------- Total operating expenses 66,883 57,425 181,571 179,484 --------- --------- --------- --------- Earnings from operations 102,693 119,947 302,339 283,524 Other income, net 3,734 3,165 7,335 19,410 --------- --------- --------- --------- Earnings before income taxes 106,427 123,112 309,674 302,934 Provision for income taxes 37,995 44,936 111,164 109,974 --------- --------- --------- --------- Net earnings $ 68,432 $ 78,176 $198,510 $192,960 ========= ========= ========= ========= Earnings per common share: Basic $ 0.37 $ 0.41 $ 1.06 $ 1.03 ========= ========= ========= ========= Diluted $ 0.37 $ 0.41 $ 1.05 $ 1.01 ========= ========= ========= ========= Weighted average common shares: Basic 184,348 188,388 187,107 187,998 ========= ========= ========= ========= Diluted 186,594 191,836 189,064 190,801 ========= ========= ========= ========= Cash dividend declared per common share $ 0.03 $ 0.03 $ 0.09 $ 0.08 ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements 2 MYLAN LABORATORIES INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited; in thousands) December 31, March 31, 2002 2002 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 253,462 $160,790 Marketable securities 454,500 456,266 Accounts receivable, net 183,821 150,054 Inventories 214,574 195,074 Deferred income tax benefit 106,199 92,642 Other current assets 12,718 11,819 ------------ ------------ Total current assets 1,225,274 1,066,645 Property, plant and equipment, net 173,385 166,531 Intangible assets, net 155,050 169,315 Goodwill, net 103,196 103,196 Investment in and advances to Somerset 18,248 22,720 Other assets 79,275 92,866 ------------ ------------ Total assets $ 1,754,428 $ 1,621,273 ============ ============ Liabilities and shareholders' equity Liabilities: Current liabilities: Trade accounts payable $ 54,918 $ 36,534 Income taxes payable 98,507 63,826 Other current liabilities 109,310 77,321 ------------ ------------ Total current liabilities 262,735 177,681 Long-term obligations 20,858 23,883 Deferred income tax liability 18,331 17,470 ------------ ------------ Total liabilities 301,924 219,034 ------------ ------------ Shareholders' equity Common stock 99,826 99,150 Additional paid-in capital 340,584 316,669 Retained earnings 1,262,951 1,080,736 Accumulated other comprehensive earnings 6,952 7,920 ------------ ------------ 1,710,313 1,504,475 Less: treasury stock at cost 257,809 102,236 ------------ ------------ Total shareholders' equity 1,452,504 1,402,239 ------------ ------------ Total liabilities and shareholders' equity $ 1,754,428 $ 1,621,273 ============ ============ See Notes to Condensed Consolidated Financial Statements 3 MYLAN LABORATORIES INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (unaudited; in thousands) Nine Months Ended December 31, 2002 2001 ---- ---- Cash flows from operating activities: Net earnings $198,510 $192,960 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and amortization 30,130 35,599 Realized gain on sale of marketable securities (5,246) (324) Deferred income tax benefit (14,439) (20,930) Equity in loss of and cash received from Somerset 3,770 2,978 Loss(earnings)from limited liability partnerships 2,955 (14,723) Adjustments to estimated sales allowances 55,608 70,180 Other noncash items 1,904 6,190 Changes in operating assets and liabilities: Accounts receivable (82,210) 5,795 Inventories (21,264) (34,102) Trade accounts payable 18,384 (10,620) Income taxes 45,118 55,153 Other operating assets and liabilities, net 20,784 17,049 ----------- ----------- Net cash provided from operating activities 254,004 305,205 ----------- ----------- Cash flows from investing activities: Capital expenditures (22,154) (13,980) Proceeds from the sale of fixed assets 22 4,137 Purchase of marketable securities (604,284) (621,922) Sale and maturity of marketable securities 621,482 251,563 Other items, net (1,892) 4,882 ----------- ----------- Net cash used in investing activities (6,826) (375,320) ----------- ----------- Cash flows from financing activities: Payments on long-term obligations - (3,227) Cash dividends paid (15,073) (15,021) Purchase of common stock (155,573) - Proceeds from exercise of stock options 16,140 12,603 ----------- ----------- Net cash used in financing activities (154,506) (5,645) ----------- ----------- Net increase (decrease) in cash and cash equivalents 92,672 (75,760) Cash and cash equivalents - beginning of period 160,790 229,183 ----------- ----------- Cash and cash equivalents - end of period $253,462 $153,423 =========== =========== Additional disclosures: Cash paid for interest $ - $ 150 =========== =========== Cash paid for income taxes $ 80,486 $ 72,036 =========== ===========
See Notes to Condensed Consolidated Financial Statements 4 MYLAN LABORATORIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited; in thousands, except share and per share amounts) 1. General In the opinion of management, the accompanying unaudited condensed consolidated financial statements (interim financial statements) of Mylan Laboratories Inc. and Subsidiaries ("Mylan" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes or other financial information included in audited financial statements have been condensed or omitted. The accompanying interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. Certain prior year amounts were reclassified to conform to the current year presentation. Such reclassifications had no impact on reported net earnings, earnings per share or shareholders' equity. The interim results of operations for the three and nine months ended December 31, 2002, and the interim cash flows for the nine months ended December 31, 2002, are not necessarily indicative of the results to be expected for the full fiscal year or any other future period. On January 27, 2003, the Company effected a three-for-two split of its common stock. Pursuant to the split, all shareholders of record as of January 17, 2003 received one additional share of common stock for every two shares held on that date. Fractional share amounts resulting from the split were paid to shareholders in cash. All share and per share amounts contained in the interim financial statements, and in these notes, were adjusted for all periods to reflect the stock split. 5 2. Revenue Recognition and Accounts Receivable Revenue is recognized for product sales upon shipment when title and risk of loss transfer to our customers and when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks and other promotional adjustments are reasonably determinable. Accounts receivable are presented net of allowances relating to these provisions. Such allowances were $258,606 and $210,074 as of December 31, 2002, and March 31, 2002, respectively. Other current liabilities include $33,216 and $26,140 at December 31, 2002, and March 31, 2002, respectively, for certain rebates and other adjustments that are payable to indirect customers. 3. Recent Accounting Pronouncements Effective April 1, 2002, Mylan adopted Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets. Goodwill and other indefinite lived intangible assets are no longer amortized. Intangible assets determined to have indefinite lives were tested for potential impairment, and no impairments were indicated. The transitional assessment of goodwill for impairment, as of April 1, 2002, was completed during the quarter ended September 30, 2002, with no indication of impairment. An independent valuation specialist assisted in the determination of the fair values used to test for impairment. Assuming the adoption of SFAS 142 had occurred on April 1, 2001, and goodwill and other indefinite lived assets were no longer amortized, net earnings for the three and nine months ended December 31, 2001, would have increased by $1,801 and $5,403 and earnings per basic and diluted share would have increased by $.01 per share and $.03 per share, respectively. SFAS 143, Accounting for Asset Retirement Obligations, establishes standards of accounting for obligations associated with the retirement of tangible long-lived assets. The statement is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact, if any, that the adoption of this statement will have on its financial position and results of operations. Effective April 1, 2002, Mylan adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. The impact of the adoption of this statement had no material effect on the Company's financial position or results of operations. 6 SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a commitment to an exit plan is made. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this statement will have a material effect on its financial position or results of operations. In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure an amendment of FASB Statement No. 123, which amends SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 provides alternatives for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the existing disclosure requirements for all companies with stock-based compensation plans and establishes disclosure requirements for interim periods. In accordance with SFAS 123, Mylan will continue to account for its stock option plan using the intrinsic-value-based method as defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, but will adopt the disclosure provisions of SFAS 148 in its Annual Report on Form 10-K for the year ended March 31, 2003. The Company does not believe that the adoption of this statement will have a material effect on its financial position or results of operations. The FASB also issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. This interpretation requires disclosure of guarantees and indemnification agreements made by a company and requires the recognition of a liability for the fair value of guarantees or indemnifications initiated after December 31, 2002. The Company is currently assessing the impact that this interpretation will have on its financial statements. 7 4. Balance Sheet Components Selected balance sheet components consist of the following: December 31, March 31, 2002 2002 ---- ---- Inventories: Raw materials $100,825 $ 74,782 Work in process 31,954 31,056 Finished goods 81,795 89,236 -------- -------- $214,574 $195,074 ======== ======== Other current liabilities: Rebates $ 33,216 $ 26,140 Payroll and related 28,579 18,936 Royalties and product license fees 18,161 12,363 Cash dividends payable 6,289 5,067 Other 23,065 14,815 -------- -------- $109,310 $ 77,321 ======== ======== 5. Earnings per Common Share Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period adjusted for the dilutive effect of stock options outstanding. The effect of dilutive stock options on the weighted average number of common shares outstanding was 2,246,000 and 3,448,000 for the three months ended December 31, 2002 and 2001, respectively, and 1,957,000 and 2,803,000 for the nine months ended December 31, 2002 and 2001, respectively. Antidilutive stock options of 254,000 and 90,000 were excluded from the diluted earnings per common share calculation for the three months ended December 31, 2002 and 2001, respectively, and 611,000 and 381,000 were excluded for the nine months ended December 31, 2002 and 2001, respectively. 8 6. Goodwill and Intangible Assets Goodwill by operating segment as of December 31, 2002, and April 1, 2002 is as follows: Generic $ 20,100 Brand 83,096 --------- Total $ 103,196 ========= Intangible assets, excluding goodwill, consist of the following components: Weighted Average Life Original Accumulated Net Book (years) Cost Amortization Value --------- ---- ------------- ----- December 31, 2002 ----------------- Amortized intangible assets: Patents and technologies 19 $117,435 $34,582 $ 82,853 Product rights and licenses 12 107,273 45,305 61,968 Other 20 13,875 4,898 8,977 -------- ------- -------- $238,583 $84,785 153,798 ======== ======= Intangible assets no longer subject to amortization: Trademarks 1,252 -------- $155,050 ======== March 31, 2002 -------------- Amortized intangible assets: Patents and technologies $119,663 $32,056 $ 87,607 Product rights and licenses 107,907 36,950 70,957 Other 24,380 14,881 9,499 -------- ------- -------- 251,950 83,887 168,063 Trademarks 1,800 548 1,252 -------- ------- -------- $253,750 $84,435 $169,315 ======== ======= ========
As of June 30, 2002, the Company removed from the balance sheet certain intangible assets with an original cost of $13,368. Such assets were fully amortized at March 31, 2002 and have no ongoing benefit to current operations. Amortization expense for the three and nine month periods ended December 31, 2002 and 2001 was $4,714 and $14,145, respectively, and is expected to be $18,578 for the fiscal year. Expected amortization expense for fiscal years 2004 through 2008 is $18,369, $16,904, $13,355, $13,143 and $13,066, respectively. 9 7. Comprehensive Earnings Comprehensive earnings consist of the following: Three Months Nine Months ------------ ----------- Period Ended December 31, 2002 2001 2002 2001 ---- ---- ---- ---- Net earnings $ 68,432 $ 78,176 $198,510 $192,960 Other comprehensive earnings (loss) net of tax: Net unrealized gain on marketable securities 710 1,540 2,442 3,887 Reclassification for gains included in net earnings (244) (10) (3,410) (210) --------- -------- -------- -------- 466 1,530 (968) 3,677 --------- -------- -------- -------- Comprehensive earnings $ 68,898 $ 79,706 $197,542 $196,637 ========= ======== ======== ======== Accumulated other comprehensive earnings, as reflected on the balance sheet, is comprised solely of the net unrealized gain on marketable securities, net of deferred income taxes. 8. Common Stock As of December 31, 2002 and March 31, 2002, there were 300,000,000 shares of common stock authorized with 199,652,748 and 198,300,792 shares issued, respectively. Treasury shares held as of December 31, 2002 and March 31, 2002 were 16,234,761 and 8,719,549, respectively. In May 2002, the Board of Directors approved a stock purchase program to purchase shares of the Company's outstanding common stock. During the nine months ended December 31, 2002, the Company purchased 7,500,000 shares for approximately $155.5 million. At December 31, 2002, 7,500,000 additional shares are available for purchase under the stock purchase program. Subsequent to December 31, 2002, and through February 5, 2003, 2,544,300 additional shares were purchased. 9. Stock Option Plan In July 2002, Mylan shareholders approved the proposal to amend and restate the Mylan Laboratories Inc. 1997 Incentive Stock Option Plan ("the Plan") to add an additional 7,500,000 shares for which options may be granted and to authorize the grant of options to non-employee directors. Under the Plan, as amended, up to 22,500,000 shares of the Company's common stock may be granted to officers, employees, non-employee directors and non-employee consultants and agents as either incentive stock options or nonqualified stock options. As of December 31, 2002, 8,164,705 shares were available for future grants. 10 10. Segment Reporting Segment net revenues represent revenues from unrelated third parties. For the Generic and Brand Segments, segment profit (loss) represents segment gross profit less direct research and development, selling and marketing and general and administrative expenses. Corporate/Other includes legal costs, administrative expenses and other income and expense. The following table presents the results of operations for each of the Company's operating segments: Three Months Nine Months -------------- -------------- Period Ended December 31, 2002 2001 (1) 2002 2001 (1) ---- ---- ---- ---- Consolidated: Net revenues $320,494 $297,191 $915,506 $821,452 Pretax earnings 106,427 123,112 309,674 302,934 Generic: Net revenues 253,888 261,334 763,814 723,973 Segment profit 112,649 139,229 339,719 356,485 Brand: Net revenues 66,606 35,857 151,692 97,479 Segment profit (loss) 10,742 106 11,455 (16,509) Corporate/Other: Segment loss (16,964) (16,223) (41,500) (37,042) (1) Includes amortization of goodwill and certain other intangible assets not amortized in the current fiscal year due to the adoption of SFAS 142. Quarterly amortization recorded in fiscal 2001 for these intangibles, including goodwill, was $1,599 in Corporate/Other, $167 in Generic and $35 in Brand. 11. Related Parties A consulting agreement dated July 2000 with a firm, which was previously owned by a director of the Company, was terminated in its entirety through mutual consent upon the director becoming an employee of the Company in July 2002. 11 12. Contingencies Legal Proceedings While it is not possible to determine with any degree of certainty the ultimate outcome of the following legal proceedings, the Company believes that it has meritorious defenses with respect to the claims asserted against it and intends to vigorously defend its position. AN ADVERSE OUTCOME IN ANY OF THESE PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL POSITION AND RESULTS OF OPERATIONS. Paclitaxel In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc. ("Abbott") filed suit against the Company in the United States (US) District Court for the Western District of Pennsylvania. Plaintiffs allege that the Company's manufacture, use and sale of its paclitaxel product infringes certain patents owned by NAPRO and allegedly licensed to Abbott. Plaintiffs seek unspecified damages plus interest, a finding of willful infringement which could result in treble damages, injunctive relief, attorneys' fees, costs of litigation and such equitable and other relief as the court deems just and proper. The Company began selling its paclitaxel product in July 2001. Verapamil ER In July 2001, Biovail Laboratories Inc. ("Biovail") filed a demand for arbitration against the Company with the American Arbitration Association. In response to such demand, the Company filed its answer and counterclaims. The dispute relates to a supply agreement under which the Company supplied extended- release verapamil to Biovail. The Company terminated the agreement in March 2001. Biovail's allegations include breach of contract, breach of implied covenant of good faith and fair dealing and unfair competition. Biovail is seeking damages plus interest, to be determined at trial, but in an amount of not less than $10.0 million, plus unspecified punitive damages, attorneys' fees and costs of litigation and such other relief as the panel may deem just and proper. The Company's allegations as set forth in its counterclaims include breach of obligations of good faith and fair dealing, fraud and unjust enrichment. 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 the US Federal District Court for the Western District of Pennsylvania in May 2001. The 12 complaint sets forth claims of breach of contract, rescission, breach of implied covenant of good faith and fair dealing and unjust enrichment. The defendants' answer includes a counterclaim, which alleges nonpayment of royalties and failure to mitigate. The defendants are seeking royalties allegedly owed by the Company, attorneys' fees and costs of litigation and such other relief as may be demonstrated at trial. Nifedipine In February 2001, Biovail filed suit against the Company and Pfizer Inc. ("Pfizer") in the US District Court for the Eastern District of Virginia alleging antitrust violations with respect to agreements entered into between the Company and Pfizer regarding nifedipine. The Company filed a motion to transfer the case to the US District Court for the Northern District of West Virginia, which was granted. The Company's motion to dismiss Biovail's complaint was denied. The Company has been named as a defendant in five other putative class action suits alleging antitrust claims based on the settlement entered into by the Company with Pfizer regarding nifedipine. Two of the class actions have been dismissed in their entirety and the remaining actions have been dismissed in part. The plaintiffs in the remaining actions, as well as Biovail, are seeking unspecified compensatory and treble damages, attorneys' fees, costs of litigation, restitution, disgorgement and declaratory and injunctive relief. Buspirone The Company filed an ANDA seeking approval to market buspirone, a generic equivalent to Bristol-Myers Squibb's ("BMS") BuSpar(R). The Company filed the appropriate certifications relating to the patents for this product that were then listed in the US Food and Drug Administration ("FDA") publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." In November 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. In November 2000, the Company filed suit against the FDA and BMS in the US 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 of a bond in the amount of $25.0 million, the court entered an order granting the Company's motion for a preliminary injunction. Following a brief stay by the US Court of Appeals for the Federal Circuit ("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 15mg tablet in March 2001. The 13 Company has also been selling the 30mg tablet since August 2001 and the 5mg and 10mg tablets since March 2002. BMS appealed the preliminary injunction order to both the Federal Circuit and the US 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. In October 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 in January 2002. A petition for review by the US Supreme Court was denied in October 2002. In January 2002, the Company filed a motion in the US 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 District of Columbia Court has entered an order staying further proceedings in this case pending appeal of the order entered in the US District Court for the Southern District of New York granting the Company's motion for summary judgment of non-infringement. The Company is involved in three other suits related to buspirone. In November 2000, the Company filed suit against BMS in the US District Court for the Northern District of West Virginia. The suit seeks a declaratory judgment 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 US District Court for the District of Vermont and also in the US 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 approval of the Company's ANDA. BMS seeks to recover damages equal to lost profits plus interest, a finding of willful infringement, which could result in treble damages, injunctive relief, attorneys' fees, costs of litigation and such other relief as the court deems just and proper. The Company subsequently filed motions to dismiss the Vermont case and dismiss and transfer the New York case to the US 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 antitrust suits filed against BMS, be consolidated for pre-trial purposes in the US District 14 Court for the Southern District of New York. The New York Court has granted the Company's motion for summary judgment that the BMS patent is not infringed or, alternatively, is invalid. BMS has appealed this decision to the Court of Appeals for the Federal Circuit. The New York Court also denied the BMS motion to dismiss the Company's antitrust counterclaims. On January 7, 2003, the Company announced that it had reached an agreement in principle with BMS, which would resolve all disputes between the companies related to buspirone and paclitaxel, BMS' Buspar(R) and Taxol(R), respectively, when finalized. As part of the agreement in principle, the Company would receive a one-time payment of approximately $35.0 million, and non-exclusive, paid-up, royalty free, irrevocable licenses under any applicable BMS patents to manufacture, market and sell buspirone and paclitaxel. Lorazepam and Clorazepate In January 1999, four companies who claim to have purchased lorazepam and/or clorazepate from the Company filed suit alleging that the Company engaged in restraint of trade, monopolization, attempted monopolization, conspiracy to monopolize, and price-fixing arising out of certain agreements and proposed agreements involving the supply of raw materials used to manufacture those two products. In July 2001, the US Court for the District of Columbia certified a litigation class consisting of direct purchasers. The plaintiffs seek to recover treble damages equal to three times the overcharge they claim to have paid, plus injunctive relief, attorneys' fees, costs of litigation and such other relief as the court deems proper. In December 2001, four third-party reimbursers filed separate actions against the Company. These actions are pending in the US District Court for the District of Columbia. The Company is also defending a civil action in the State of California that was brought under state law on behalf of independent retail pharmacies who purchased lorazepam and/or clorazepate. The California action has not been certified as a class action. The plaintiffs in each of these actions seek unspecified monetary damages, equitable relief, attorneys' fees and costs of litigation. Average Wholesale Price Litigation The Company, along with a number of other pharmaceutical manufacturers, has been named as a defendant in four lawsuits filed in the state courts of California in which the plaintiffs allege the defendants unlawfully, unfairly and fraudulently manipulated the reported average wholesale price of various products, allegedly to increase third party reimbursements to others for their products. None of these four cases has been certified as a class action, 15 although all four cases seek class action and representative status. Plaintiffs seek equitable relief in the form of disgorgement and restitution, attorneys' fees and costs of litigation. Other Litigation The Company is involved in various other legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such other proceedings, the Company believes that the ultimate outcome of such other proceedings will not have a material adverse effect on its financial position or results of operations. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion addresses material changes in the Company's results of operations and financial condition for the periods presented. This 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 Results of Operations and Financial Condition included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002 and the unaudited interim condensed consolidated financial statements and related notes included in Item 1 of this Report on Form 10-Q. On January 27, 2003, the Company effected a three-for-two split of its common stock. Pursuant to the split, all shareholders of record as of January 17, 2003 received one additional share of common stock for every two shares held on that date. All share and per share amounts were adjusted for all periods to reflect the stock split. Results of Operations Mylan's third quarter was highlighted by record net revenues of $320.5 million, an increase of 8% or $23.3 million compared to the third quarter of the prior year. The Brand Segment also reported record net revenues of $66.6 million, an increase of 86% over the same prior year period. For the nine months ended December 31, 2002, revenues increased 11% or $94.1 million to $915.5 million from $821.5 million for the nine months ended December 31, 2001. This increase was realized despite the loss of exclusivity on buspirone, from which prior year net revenues benefited significantly. For the quarter, primarily as a result of the loss of exclusivity on buspirone, net earnings decreased 12% or $9.7 million to $68.4 million, and earnings per diluted share decreased 10% to $.37 per share from $.41 per share in the same period last year. For the nine months ended December 31, 2002, net earnings increased 3% or $5.6 million to $198.5 million, and earnings per diluted share increased 4% or $.04 per share to $1.05 per share. The following table illustrates the financial results for the consolidated company and by operating segment. 17 Segment Results (in thousands) Three Months Nine Months ------------ ----------- Period Ended December 31, 2002 2001(1) 2002 2001(1) ---- ------ ---- ------- Consolidated: Net revenues $320,494 $297,191 $915,506 $821,452 Gross profit 169,576 177,372 483,910 463,008 Research and development 22,941 13,441 59,953 46,687 Selling and marketing 15,173 15,279 48,598 44,675 General and administrative 28,769 28,705 73,020 88,122 Other income, net 3,734 3,165 7,335 19,410 Pretax earnings 106,427 123,112 309,674 302,934 Generic Segment: Net revenues 253,888 261,334 763,814 723,973 Gross profit 131,724 155,878 396,079 410,114 Research and development 11,073 8,090 31,960 24,772 Selling and marketing 2,779 3,197 8,078 9,499 General and administrative 5,223 5,362 16,322 19,358 Segment profit 112,649 139,229 339,719 356,485 Brand Segment: Net revenues 66,606 35,857 151,692 97,479 Gross profit 37,852 21,494 87,831 52,894 Research and development 11,868 5,351 27,993 21,915 Selling and marketing 12,394 12,082 40,520 35,176 General and administrative 2,848 3,955 7,863 12,312 Segment profit (loss) 10,742 106 11,455 (16,509) Corporate/Other: Segment loss (16,964) (16,223) (41,500) (37,042) Segment net revenues represent revenues from unrelated third parties. For the Generic and Brand segments, segment profit (loss) represents segment gross profit less direct research and development, selling and marketing and general and administrative expenses. Corporate/Other includes legal costs, administrative expenses and other income and expense. (1) Includes amortization of goodwill and certain other intangible assets not amortized in the current fiscal year due to the adoption of SFAS 142. Quarterly amortization recorded in fiscal 2001 for these intangibles, including goodwill, was $1,599 in Corporate/Other, $167 in Generic and $35 in Brand.
Quarter Ended December 31, 2002, compared to Quarter Ended December 31, 2001 Net Revenues and Gross Profit Net revenues for the current quarter increased 8% or $23.3 million to $320.5 million, compared to $297.2 million in the prior year quarter. The increase was largely driven by the Brand Segment, which recorded record net revenues of $66.6 million, an increase of 86% or $30.7 million over the prior year quarter. The Generic Segment recorded net revenues of $253.9 million, a decrease of 3% or $7.4 million from the same quarter in the prior year. The decrease in net revenues is primarily the result of the loss of exclusivity on buspirone in February 2002. Following the entrance into the market of other generic competition, both price and volume erosion are considered normal in the generic pharmaceuticals industry. 18 Excluding revenue from buspirone, Generic net revenues for the quarter ended December 31, 2002 increased by $40.4 million or 19% over the same prior year quarter. Of this increase, $38.0 million was driven by new products launched subsequent to December 31, 2001, with the remainder of the increase attributable to volume increases on existing products. In total, Generic volume shipped, excluding unit dose, was approximately 2.8 billion doses in the current quarter, compared to 2.7 billion in the same prior year period. Brand Segment net revenues increased 86% or $30.7 million for the current quarter to $66.6 million from $35.9 million in the same prior year period. During the quarter, Bertek Pharmaceuticals Inc. ("Bertek"), a wholly-owned subsidiary, launched Amnesteem(TM) which accounted for approximately half of the increase in net revenues. Amnesteem (isotretinoin soft-gelatin capsules), for which Bertek acquired marketing rights as part of a three-way licensing agreement, is prescribed for the treatment of severe recalcitrant nodular acne. Following its launch, Amnesteem captured a market share of 31%. However, it is expected that other generic competition will enter the market in the fourth quarter of fiscal 2003, which could negatively impact the revenue and earnings from Amnesteem. In addition to the growth in net revenues from sales of Amnesteem, Brand net revenues increased as a result of growth experienced by several major products in the existing product portfolio including Digitek(R), Phenytoin and Acticin(R). The Company's gross profit decreased 4% or $7.8 million to $169.6 million from $177.4 million. Generic gross profit decreased 15% or $24.2 million to $131.7 million from $155.9 million, and gross margin decreased to 52% from 60%. These decreases were primarily due to decreased gross profit on buspirone sales, partially offset by favorable contributions from core products. Brand gross profit increased 76% or $16.4 million to $37.9 million from $21.5 million, primarily due to increased volume, as well as favorable product mix. Brand gross margin decreased to 57% from 60%, primarily due to royalties paid under the supply and distribution agreement for sales of Amnesteem. Operating Expenses Research and development (R&D) expenses for the current quarter increased 71% or $9.5 million to $22.9 million from $13.4 million. The increase was primarily related to the timing and number of studies being conducted, mainly in the Brand Segment, and primarily for nebivolol, a beta-blocker for which Bertek has obtained the exclusive US and Canadian rights. The Company expects R&D expenses to continue to increase for both the Generic and Brand Segments throughout the remainder of fiscal 2003 as activities related to current projects progress. 19 Selling and marketing expenses for the current quarter have remained consistent at $15.2 million. A slight increase in selling and marketing expenses in the Brand Segment resulted from the launch of Amnesteem, and the promotion of existing products. This increase was offset by a decrease in Generic selling and marketing expense. General and administrative ("G&A") expenses for the quarter have also remained consistent at $28.8 million. Lower G&A expenses in the Generic and Brand Segments were offset by increased Corporate expenses. The increase in Corporate expenses was driven by higher payroll and legal expenses, partially offset by less amortization as a result of the adoption of SFAS 142 on April 1, 2002. Other Income, net Other income, net of non-operating expenses, increased 18% or $0.6 million over the prior year quarter. The increase was primarily due to an increase in interest income as a result of higher cash balances, which was partially offset by a net $1.9 million decrease in income from investments which are accounted for under the equity method. Provision for Income Taxes The effective tax rate for the quarter ended December 31, 2002 was 35.7% compared to 36.5% in the prior year quarter. The decrease in the effective tax rate was the result of the favorable tax impact related to the adoption of SFAS 142. Nine months Ended December 31, 2002, compared to Nine months Ended December 31, 2001 Net Revenues and Gross Profit Net revenues for the current nine months increased 11% or $94.1 million to $915.5 million compared to $821.5 million during the same prior year period. The Brand Segment accounted for 58% or $54.2 million of the total increase in net revenues, while the Generic Segment accounted for the remaining 42%, or $39.8 million. The increase in Generic net revenues of $39.8 million was realized despite the loss of exclusivity on buspirone in February 2002. Excluding sales of buspirone, Generic net revenues increased $145.4 million or 24% to $747.1 million from $601.7 million. New products launched subsequent to December 31, 2001 accounted for $62.2 million or approximately 43% of this increase. The remaining increase was due to both increased volume and favorable product mix from the Company's existing portfolio. Overall, Generic volume shipped, excluding unit dose, was 8.5 billion and 7.7 billion for the nine months ended December 31, 2002 and December 31, 2001, respectively. 20 The Brand Segment reported net revenues of $151.7 million, an increase of 56% or $54.2 million over the same prior year period. This increase was the result of growth in its core products, primarily Digitek(R), Phenytoin and Acticin(R), as well as the launch of Amnesteem. The Company's gross profit for the current nine months increased 5% or $20.9 million to $483.9 million from $463.0 million. Brand gross profit increased 66% or $34.9 million to $87.8 million from $52.9 million. Brand Segment gross margins increased to 58% from 54% on the strength of the increase in net revenues. Generic gross profit decreased 3% or $14.0 million to $396.1 million from $410.1 million, and gross margin decreased to 52% from 57%, primarily due to the loss of exclusivity on buspirone. Operating Expenses R&D expenses for the current nine months increased 28% or $13.3 million to $60.0 million from $46.7 million in the same prior year period. The increase was primarily the result of the timing and number of clinical studies being performed in both the Generic and Brand Segments. Selling and marketing expenses increased 9% or $3.9 million to $48.6 million from $44.7 million. Selling and marketing expense for the Brand Segment increased by $5.3 million, while Generic selling and marketing expenses decreased by $1.4 million. The increase in Brand Segment selling and marketing expense is the result of increased promotions on existing products, such as Digitek and Phenytek(R), as well as costs associated with the launch of Amnesteem. G&A expenses for the current nine months decreased 17% or $15.1 million to $73.0 million from $88.1 million. The decrease in G&A expenses was primarily the result of less amortization due to the adoption of SFAS 142. Additionally, the nine months ended December 31, 2001, included a one-time charge related to deferred compensation for certain executives and costs associated with Bertek's move to Raleigh, North Carolina. Other Income, net The $12.1 million decrease in other income, net of non-operating expenses, for the current nine months was primarily attributable to decreased earnings from equity investees of $17.7 million, which were partially offset by realized gains of $5.2 million on the sale of certain marketable securities. 21 Provision for Income Taxes The effective tax rate for the nine months ended December 31, 2002 was 35.9% compared to 36.3% in the prior year. The decrease in the effective tax rate is the result of the favorable tax impact related to the adoption of SFAS 142. Liquidity and Capital Resources The Company's primary source of liquidity continues to be cash flow from operating activities, which was $254.0 million for the nine months ended December 31, 2002. Working capital as of December 31, 2002, was $962.5 million, an increase of $73.5 million from March 31, 2002. Cash used in investing activities for the nine months ended December 31, 2002, was $6.8 million. Of the Company's $1.8 billion of total assets at December 31, 2002, 40% or $708.0 million was held in cash, cash equivalents and marketable securities. Investments in marketable securities consist primarily of high-quality government and commercial paper that generally mature within one year. These investments are highly liquid and are available for operating needs. As these instruments mature, the funds are generally reinvested in instruments with similar characteristics. Capital expenditures during the nine months ended December 31, 2002, were $22.2 million. These expenditures were primarily for machinery and equipment used in the Company's manufacturing facilities. The Company expects such expenditures to continue at the current year levels. In the fourth quarter of fiscal 2003, the Company received $4.4 million in the form of marketable securities as a distribution from an investment held in a pooled asset account. Cash used in financing activities was $154.5 million for the nine months ended December 31, 2002, consisting primarily of cash paid to purchase the Company's common stock. In May 2002, the Board of Directors (Board) approved a stock purchase program that authorized the purchase of up to 15.0 million shares of the Company's outstanding common stock. Through December 31, 2002, the Company had purchased 7.5 million shares for $155.5 million. There are an additional 7,500,000 shares at December 31, 2002 that may be purchased under the stock purchase program. Through February 5, 2003, an additional 2.5 million shares were purchased for $67.2 million. Mylan had historically paid a quarterly cash dividend of 2.67 cents per common share. However, the Board approved an increase in the quarterly cash dividend to 3.33 cents per share beginning with the dividend declared for the third quarter of fiscal 2003, which resulted in total dividends of $16.3 million for the nine months then ended. It is expected that this increase in the quarterly cash dividend will result in an increase in annual dividends of approximately $5.0 million. 22 The Company maintains commercial insurance to protect against and manage the risks involved in conducting its business. The cost to obtain insurance coverage for such risks has significantly increased due to the environment within the commercial insurance industry. The recent renewals of our policies resulted in increased deductibles and changes in the levels of coverage. The Company has evaluated and will continue to evaluate the types and levels of insurance coverage purchased. To the extent that a loss occurs, it could have a material adverse effect on the Company's financial position and results of operations depending on the nature of the loss and the level of insurance coverage maintained. In response to the rising cost of commercial insurance, during the current quarter, Mylan insured a portion of its product liability risk through a wholly-owned insurance subsidiary. The coverage provides for losses up to $10 million per occurrence. The Company is involved in various legal proceedings that are considered normal to its business (see Note 12 to Condensed Consolidated Financial Statements). While it is not feasible to predict the outcome of such proceedings, an adverse outcome in any of these proceedings could materially affect the Company's financial position and results of operations. On January 7, 2003 Mylan announced that it had reached an agreement in principle with Bristol-Myers Squibb ("BMS"), which would result in a one-time payment of $35 million from BMS. The Company is actively pursuing, and is currently involved in, joint development projects related to marketing both generic and brand products. Many of these arrangements provide for payments by the Company upon the attainment of specified milestones. While these arrangements help to reduce the financial risk for unsuccessful projects, fulfillment of specified milestones or the occurrence of other obligations may result in fluctuations in cash flows from operating activities. To provide additional operating leverage, if necessary, the Company maintains a revolving line of credit of up to $50.0 million with a commercial bank. As of December 31, 2002, no funds have been advanced under this line of credit, which expires in March 2003. Additionally, the Company is continuously evaluating the potential acquisition of products, as well as companies, as a strategic part of its future growth. Consequently, the Company may utilize current cash reserves or incur additional indebtedness to finance any such acquisitions, which could impact future liquidity. Recent Accounting Pronouncements Effective April 1, 2002, Mylan adopted SFAS 142, Goodwill and Other Intangible Assets. Goodwill and other indefinite lived intangible assets are no longer amortized. Intangible assets determined to have indefinite lives were tested for potential impairment, and no impairments were indicated. The transitional assessment of goodwill 23 for impairment as of April 1, 2002, was completed during the quarter ended September 30, 2002, with no indication of impairment. An independent valuation specialist assisted in the determination of the fair values used to test for impairment. Assuming the adoption of SFAS 142 had occurred on April 1, 2001, and goodwill and other indefinite lived assets were no longer amortized, net earnings for the three and nine months ended December 31, 2001, would have increased by $1.8 million and $5.4 million, and earnings per basic and diluted share would have increased by $.01 per share and $.03 per share, respectively. SFAS 143, Accounting for Asset Retirement Obligations, establishes standards of accounting for obligations associated with the retirement of tangible long-lived assets. The statement is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the impact, if any, that the adoption of this statement will have on its financial position and results of operations. Effective April 1, 2002, Mylan adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. The impact of the adoption of this statement had no material effect on the Company's financial position or results of operations. SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, requires a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a commitment to an exit plan is made. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of this statement will not have a material effect on its financial position or results of operations. In December 2002, the FASB issued SFAS 148, Accounting for Stock- Based Compensation--Transition and Disclosure an amendment of FASB Statement No. 123, which amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternatives for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements for all companies with stock-based compensation plans. In accordance with SFAS 123, Mylan will continue to account for its stock option plan using the intrinsic-value-based method as defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, but will adopt the disclosure provisions of SFAS 148 in its Annual Report on Form 10-K for the year ended March 31, 2003. The Company does not believe that the adoption of this statement will have a material effect on its financial position or results of operations. 24 The FASB also issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others. This interpretation requires disclosure of guarantees and indemnification agreements made by a company and requires the recognition of a liability for the fair value of guarantees or indemnifications initiated after December 31, 2002. The Company is currently assessing the impact that this interpretation will have on the financial statements. Critical Accounting Policies The following discussion of critical accounting policies was condensed for presentation in this Report on Form 10-Q and should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. Mylan's critical accounting policies include the determination of revenue provisions, useful lives and impairment of intangibles and the impact of existing legal matters. These critical accounting policies affect each of the operating segments. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. The Company is currently not aware of any reasonably likely event or circumstance that would result in different amounts being reported and that would have a material impact on its condensed consolidated financial statements. Revenue Provisions Revenue is recognized for product sales upon shipment when title and risk of loss have transferred to the customer and when provisions for estimates, including discounts, rebates, price adjustments, returns, chargebacks and other promotional adjustments, are reasonably determinable. These provisions are recognized as reductions to gross revenues, with the corresponding allowances recognized as reductions to accounts receivable or as components of other current liabilities. Accounts receivable are presented net of such allowances, which totaled $258.6 million and $210.1 million at December 31, 2002, and March 31, 2002, respectively. Other accrued liabilities include $33.2 million and $26.1 million at December 31, 2002, and March 31, 2002, respectively, for certain rebates and other adjustments that are paid to indirect customers. The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company is a party to arrangements with other parties establishing prices for products for which they independently select a wholesaler from which to purchase. Such parties are referred to as indirect customers. A chargeback represents the difference between the Company's invoice price to the wholesaler and the indirect customer's contract price. The provision for estimated chargebacks is calculated primarily using historical chargeback experience and estimated wholesaler inventory levels. The Company continually monitors 25 its assumptions, giving consideration to wholesaler buying patterns and current pricing trends and makes necessary adjustments when it is determined that the actual chargeback credits may differ from those estimated. Chargebacks accounted for $152.9 million and $120.9 million of the total allowance at December 31, 2002 and March 31, 2002, respectively. Useful Lives and Impairment of Intangibles As of December 31, 2002, and March 31, 2002, recorded goodwill, net of accumulated amortization, was $103.2 million. In addition to an annual impairment review, goodwill is reviewed for impairment when events or other changes in circumstances may indicate that the carrying amount of the goodwill may not be recoverable. SFAS 142 states that a potential impairment will be identified when the fair value, determined at least annually, of a reporting unit is less than the carrying value of its net assets. The determination of fair value in accordance with SFAS 142 generally requires the evaluation of the reporting unit's projected sales volumes, pricing structure and anticipated cost environment, which includes the reporting unit's product pipeline. During the quarter ended September 30, 2002, the Company performed this assessment, assisted by an independent valuation specialist, and determined there was no indication of goodwill impairment. If the key assumptions and projections utilized in the fair value determinations, primarily the Company's ability to receive new product approvals from the US Food and Drug Administration ("FDA"), do not properly reflect future activity, future valuations could be adversely impacted. The result could cause an impairment, which could materially affect the Company's financial position and results of operations. No events occurred during the quarter ended December 31, 2002 which the Company believes would indicate the need to test again for impairment. As of December 31, 2002, and March 31, 2002, recorded intangible assets, excluding goodwill, net of accumulated amortization, were $155.1 million and $169.3 million. These intangible assets consist of both purchased and acquired product rights, as well as internally developed patents and technologies. Intangible assets are reviewed for impairment when certain events or other changes in circumstances may indicate that the carrying amount of the asset or asset group may not be recoverable. Impairment is determined when the undiscounted future cash flows, based on estimated sales volume, anticipated pricing and estimated product costs, are less than the carrying value of the intangible asset. If these estimates do not properly reflect future activity, the Company's financial position and results of operations could be negatively impacted. 26 Legal Matters The Company is involved in various legal proceedings, some of which involve claims for substantial amounts. An accrual for a loss contingency relating to any of these legal proceedings is made if it is probable that a liability was incurred at the date of the financial statements, and the amount of loss can be reasonably estimated. After review, it was determined, at December 31, 2002, and March 31, 2002, that for each of the various legal proceedings in which the Company is involved, the conditions mentioned above were not met. However, if any of these legal proceedings would result in an adverse outcome for the Company, the impact could have a material adverse effect on its financial position and results of operations. Risk Factors The following risk factors could have a material adverse effect on our business, financial position or results of operations. These risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results or cause the market price of our common stock to fluctuate or decline. Please refer to our other periodic reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2002. OUR FUTURE REVENUE GROWTH AND PROFITABILITY ARE DEPENDENT UPON OUR ABILITY TO DEVELOP AND LICENSE OR OTHERWISE ACQUIRE AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS IN RELATION TO OUR COMPETITORS' PRODUCT INTRODUCTIONS, AND OUR FAILURE TO DO SO SUCCESSFULLY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Our future revenues and profitability will depend, to a significant extent, upon our ability to successfully develop and license or otherwise acquire and commercialize new generic and patent or statutorily protected (usually brand) pharmaceutical products in a timely manner. Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established, and the market is not yet proven. The development process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. We may not be successful in commercializing any of the products that we are developing on a timely basis, if at all, which could adversely affect our product introduction plans, financial position and results of operations and could cause the market value of our common stock to decline. 27 FDA approval is required before any drug product, including generic drug products, can be marketed. The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time-consuming, costly and largely unpredictable. We may be unable to obtain requisite FDA approvals on a timely basis for new generic or brand products that we may develop, license or otherwise acquire. The timing and cost of obtaining FDA approvals could adversely affect our product introduction plans, financial position and results of operations and could cause the market value of our common stock to decline. The Abbreviated New Drug Application (ANDA) process, through which we obtain FDA approval for our generic drugs, often results in the FDA granting final approval to a number of ANDAs for a given product at the time a patent claim for a corresponding brand product or other market exclusivity expires. This often forces us to face immediate competition when we introduce a generic product into the market. Additionally, the Waxman-Hatch Act provides for a period of 180 days of generic marketing exclusivity for each ANDA applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to a reference drug product. A reference drug product refers to a drug product, usually brand, included in the FDA Publication entitled "Approved Drug Products with Therapeutic Equivalence Evaluations" and known in the industry as the "Orange Book." If the patent challenge of the first such ANDA applicant is successful, it generally results in higher market share, net revenues and gross margin for that applicant. Even if we obtain FDA approval for our generic drug products, if we are not the first ANDA applicant to challenge a listed patent for such a product, we may lose significant advantages to a competitor who filed its ANDA containing such a challenge. Such a situation could have a material adverse effect on our ability to market that product profitably, our financial position and results of operations, and the market value of our common stock could decline. OUR APPROVED PRODUCTS MAY NOT ACHIEVE EXPECTED LEVELS OF MARKET ACCEPTANCE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DELCINE. Even if we are able to obtain regulatory approvals for our new pharmaceutical products, generic or brand, the success of those products is dependent upon market acceptance. Levels of market acceptance for our new products could be impacted by several factors, including: o the availability of alternative products from our competitors; o the price of our products relative to that of our competitors; o the timing of our market entry; o the ability of our customers to market our products effectively to the retail level; and o the acceptance of our products by government and private formularies. 28 Some of these factors are not within our control. Our new products may not achieve expected levels of market acceptance, which could have a material adverse effect on our profitability, financial position and results of operations, and the market value of our common stock could decline. A RELATIVELY SMALL GROUP OF PRODUCTS MAY REPRESENT A SIGNIFICANT PORTION OF OUR NET REVENUES OR NET EARNINGS FROM TIME TO TIME. IF THE VOLUME OR PRICING OF ANY OF THE PRODUCTS DECLINES, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Sales of a limited number of our products often represent a significant portion of our net revenues and net earnings. If the volume or pricing of our largest selling products decline in the future, our business, financial position and results of operations could be materially adversely affected, and the market value of our common stock could decline. WE FACE VIGOROUS COMPETITION FROM OTHER PHARMACEUTICAL MANUFACTURERS THAT THREATENS THE COMMERCIAL ACCEPTANCE AND PRICING OF OUR PRODUCTS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Our competitors vary depending upon therapeutic and product categories. Our primary competitors include major manufacturers of brand name and generic pharmaceuticals. Our competitors may be able to develop products and processes competitive with or superior to our own for many reasons, including that they may have: o proprietary processes or delivery systems; o larger research and development and marketing staffs; o larger production capabilities in a particular therapeutic area; o more experience in preclinical testing and human clinical trials; o more products; or o more experience in developing new drugs and financial resources, particularly with regards to brand manufacturers. Each of these factors and others could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. BECAUSE THE PHARMACEUTICAL INDUSTRY IS HEAVILY REGULATED, WE FACE SIGNIFICANT COSTS AND UNCERTAINTIES ASSOCIATED WITH OUR EFFORTS TO COMPLY WITH APPLICABLE REGULATIONS, AND SHOULD WE FAIL TO COMPLY WE COULD EXPERIENCE MATERIAL ADVERSE EFFECTS ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE. 29 The pharmaceutical industry is subject to regulation by various federal and state governmental authorities. For instance, we must comply with FDA requirements with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of FDA's review of New Drug Applications (NDAs), which are filed for products with active ingredients or combinations of such ingredients not previously approved by the FDA, or ANDAs, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although we have internal regulatory compliance programs and policies and have had a favorable compliance history, if these programs were not to meet regulatory agency standards in the future or if our compliance were deemed deficient in any significant way, it could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. In addition to the new drug approval process, the FDA also regulates the facilities and operational procedures that we use to manufacture our products. We must register our facilities with the FDA. All products manufactured in those facilities must be made in a manner consistent with "current good manufacturing practices." Failure to do so could result in an enforcement action brought by the FDA, which periodically inspects our manufacturing facilities for compliance. FDA approval to manufacture a drug is site-specific. If the FDA would cause one of our manufacturing facilities to cease or limit production, our business could be adversely affected. Delay and cost in obtaining FDA approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. We also are subject to various other federal, state and local environmental protection laws and regulations, including those governing the discharge of materials into the environment. Although we have not incurred significant costs associated with complying with such environmental provisions in the past, if changes to such environmental provisions are made in the future that require significant changes in our operations or if we engage in the development and manufacturing of new products requiring new or different environmental controls, we may be required to expend significant funds. Such changes could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. 30 WE EXPEND A SIGNIFICANT AMOUNT OF RESOURCES ON RESEARCH AND DEVELOPMENT EFFORTS THAT MAY NOT LEAD TO SUCCESSFUL PRODUCT INTRODUCTIONS. FAILURE TO SUCCESSFULLY INTRODUCE PRODUCTS INTO THE MARKET COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE. Much of our development effort is focused on technically difficult- to-formulate products and/or products that require advanced manufacturing technology. Research and development efforts are conducted primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations. Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDAs. As we continue to develop new products, our research expenses will likely increase. Because of the inherent risk associated with research and development efforts in our industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA approved new pharmaceutical products. Also, after submission, the FDA may request additional studies be conducted, and as a result, we may be unable to reasonably determine the total research and development costs to develop a particular product. To the extent that we expend significant resources on research and development efforts and are not able ultimately to introduce successful new products as a result of those efforts, our business, financial position and results of operations may be materially adversely affected, and the market value of our common stock could decline. A SIGNIFICANT PORTION OF OUR NET REVENUES ARE DERIVED FROM SALES TO A LIMITED NUMBER OF CUSTOMERS. ANY SIGNIFICANT REDUCTION OF BUSINESS WITH ANY OF THESE CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE. A significant portion of our net revenues are derived from sales to a limited number of customers. If we were to lose the business of, or experience a significant reduction in business with, any of these or our other major customers, or if any of them were to experience difficulty in paying us on a timely basis, our business, financial position and results of operations could be materially adversely affected, and the market value of our common stock could decline. THE USE OF LEGAL, REGULATORY AND LEGISLATIVE STRATEGIES BY COMPETITORS, BOTH BRAND AND GENERIC, MAY INCREASE OUR COSTS ASSOCIATED WITH THE INTRODUCTION OR MARKETING OF OUR GENERIC PRODUCTS OR COULD DELAY OR PREVENT SUCH INTRODUCTION. THESE FACTORS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. 31 Our competitors often pursue strategies to prevent or delay competition from generic alternatives to brand products. These strategies include, but are not limited to: o seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence; o initiating legislative efforts in various states to limit the substitution of generic versions of brand pharmaceuticals; o filing suits for patent infringement that automatically delay FDA approval of many generic products; o introducing "second generation" products prior to the expiration of market exclusivity for the reference product, which often materially reduces the demand for the first generic product for which we seek FDA approval; o obtaining extensions of market exclusivity by conducting trials of brand drugs in pediatric populations; o persuading the FDA to withdraw the approval of brand name drugs, for which the patents are about to expire, thus allowing the brand name company to obtain new patented products serving as substitutes for the products withdrawn; o seeking to obtain new patents on drugs for which patent protection is about to expire; and o filing a citizen petition with the FDA, which often results in delays of our approvals. Some companies have lobbied Congress for amendments to the Waxman- Hatch legislation that would give them additional advantages over generic competitors. For example, although the term of a company's drug patent can be extended to reflect a portion of the time an NDA is under regulatory review, some companies have proposed extending the patent term by a full year for each year spent in clinical trials, rather than the one-half year that is currently permitted. If proposals like these become effective, our entry into the market and our ability to generate revenues associated with these products may be delayed, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE DEPEND ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS FOR THE RAW MATERIALS, PARTICULARLY THE CHEMICAL COMPOUND(S) COMPRISING THE ACTIVE INGREDIENT, THAT WE USE TO MANUFACTURE OUR PRODUCTS AND COULD EXPERIENCE A PROLONGED INTERRUPTION IN THE SUPPLY OF SUCH MATERIALS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD DECLINE. 32 The active ingredient(s), i.e., the chemical compound(s) which produces the desired therapeutic effect, and other materials and supplies that we use in our pharmaceutical manufacturing operations are generally available and purchased from many different foreign and domestic suppliers. In some cases, however, we have listed only one supplier in our applications with the FDA. Although we maintain safety stocks in inventory, and in some cases have received FDA approval to use alternative suppliers should the need arise, a prolonged interruption in the supply of a single-sourced active ingredient could cause our financial position and results of operations to be materially adversely affected, and the market value of our common stock could decline. In addition, if any of our suppliers interrupt the supply of products that we use or experience quality deficiencies in products that they supply to us for a prolonged period, it could have a material adverse effect on our business, financial position and results of operations, and the market value of our common stock could decline. WE USE SEVERAL MANUFACTURING FACILITIES TO MANUFACTURE OUR PRODUCTS. HOWEVER, A SIGNIFICANT NUMBER OF OUR GENERIC PRODUCTS ARE PRODUCED AT ONE LOCATION. PRODUCTION AT THE FACILITY COULD BE INTERRUPTED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Although we have other facilities, a significant amount of our generic products are produced at our largest manufacturing facility. A significant disruption at that facility, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE MAY EXPERIENCE DECLINES IN THE SALES VOLUME AND PRICES OF OUR PRODUCTS AS THE RESULT OF THE CONTINUING TREND TOWARD CONSOLIDATION OF CERTAIN CUSTOMER GROUPS, SUCH AS THE WHOLESALE DRUG DISTRIBUTION AND RETAIL PHARMACY INDUSTRIES AND THE EMERGENCE OF LARGE BUYING GROUPS. ANY SUCH DECLINES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Drug wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business. The emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on our products. The result of these developments may have a 33 material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL AND OTHER PROPRIETARY PROPERTY IN AN EFFECTIVE MANNER, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. We own or license a number of patents in the US and in foreign countries covering certain products. We consider the overall protection of our patents, trademarks and license rights to be of material value and will act appropriately to prevent these rights from being infringed. Our patents on our brand products may not prevent other companies from developing functionally equivalent products or from challenging the validity or enforceability of our patents. If our patents are found to be non-infringed, invalid or not enforceable, we could experience an adverse affect on our ability to commercially promote patented products. We could be required to enforce our patent or other intellectual property rights through litigation, which can be protracted and involve significant expense and an inherently uncertain outcome. Any negative outcome could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. OUR COMPETITORS MAY ALLEGE THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, FORCING US TO EXPEND SUBSTANTIAL RESOURCES IN RESULTING LITIGATION, THE OUTCOME OF WHICH IS UNCERTAIN. ANY UNFAVORABLE OUTCOME OF SUCH LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Companies that produce brand pharmaceutical products routinely bring litigation against ANDA applicants who seek FDA approval to manufacture and market generic forms of their branded products. These companies allege patent infringement or other violations of intellectual property rights as the basis for filing suit against an ANDA applicant. Litigation often involves significant expense or can delay or prevent introduction of our generic products. There may also be situations where the Company uses its business judgment and decides to market and sell products, notwithstanding the fact that allegations of patent infringement(s) by our competitors have not been finally resolved by the courts. The risk involved in doing so can be substantial because the remedies available to the owner of a patent for infringement include, among other things, damages measured by the profits lost by the patent owner and not by the profits earned by the infringer. In the case of a willful infringement, the definition of which is unclear, such damages may be trebled. Moreover, because of the discount pricing typically involved with bioequivalent products, patented brand products generally realize a substantially higher profit margin than bioequivalent products. An adverse decision in a case such as this or in other similar litigation could have a 34 material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE MAY EXPERIENCE REDUCTIONS IN THE LEVELS OF REIMBURSEMENT FOR PHARMACEUTICAL PRODUCTS BY GOVERNMENTAL AUTHORITIES, HMOS OR OTHER THIRD- PARTY PAYERS. ANY SUCH REDUCTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Various governmental authorities and private health insurers and other organizations, such as HMOs, provide reimbursement to consumers for the cost of certain pharmaceutical products. Demand for our products depends in part on the extent to which such reimbursement is available. Third-party payers increasingly challenge the pricing of pharmaceutical products. This trend and other trends toward the growth of HMOs, managed healthcare and legislative healthcare reform create significant uncertainties regarding the future levels of reimbursement for pharmaceutical products. Further, any reimbursement may be reduced in the future, perhaps to the point that market demand for our products declines. Such a decline could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE ARE INVOLVED IN VARIOUS LEGAL PROCEEDINGS AND MAY EXPERIENCE UNFAVORABLE OUTCOMES OF SUCH PROCEEDINGS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. We are involved in various legal proceedings including, but not limited to, product liability, breach of contract and claims involving Medicaid and Medicare reimbursements, some of which are described in our periodic reports and involve claims for substantial amounts of money or for other relief. If any of these legal proceedings were to result in an adverse outcome, the impact could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. OUR ACQUISITION STRATEGIES INVOLVE A NUMBER OF INHERENT RISKS. THESE RISKS COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE A DECLINE IN THE MARKET VALUE OF OUR COMMON STOCK. We continually seek to expand our product line through complementary or strategic acquisitions of other companies, products and assets, through joint ventures, licensing agreements or other arrangements. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as assessing accurately the values, strengths, weaknesses, contingent and other liabilities, regulatory compliance and 35 potential profitability of acquisition or other transaction candidates. Other inherent risks include the potential loss of key personnel of an acquired business, our inability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions, and other transactions, could also be affected by export controls, exchange rate fluctuations, domestic and foreign political conditions and the deterioration in domestic and foreign economic conditions. We may be unable to realize synergies or other benefits expected to result from acquisitions, joint ventures and other transactions or investments we may undertake, or be unable to generate additional revenue to offset any unanticipated inability to realize these expected synergies or benefits. Realization of the anticipated benefits of acquisitions or other transactions could take longer than expected, and implementation difficulties, market factors and the deterioration in domestic and global economic conditions could alter the anticipated benefits of any such transactions. These factors could cause a material adverse effect on our business, financial position and results of operations and could cause a decline in the market value of our common stock. OUR FUTURE SUCCESS IS HIGHLY DEPENDENT ON OUR CONTINUED ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. ANY FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. Because our success is largely dependent on the scientific nature of our business, it is imperative that we attract and retain qualified personnel in order to develop new products and compete effectively. If we fail to attract and retain key scientific, technical or management personnel, our business could be affected adversely. While we have employment agreements with certain key employees, we may not succeed in retaining all of these persons, which could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. WE MAY MAINTAIN INVESTMENTS IN MARKETABLE DEBT AND/OR EQUITY SECURITIES, OTHER INVESTMENTS, BOTH PUBLICLY AND PRIVATELY HELD, AND MAY MAINTAIN DEPOSIT BALANCES AT BANKS IN EXCESS OF FEDERALLY INSURED AMOUNTS. WE MAY EXPERIENCE DECLINES IN THE MARKET VALUE OF THESE SECURITIES, AND/OR LOSSES OF PRINCIPAL INVESTED OR AN UNINSURED LOSS OF DEPOSITED FUNDS. SIGNIFICANT DECLINES OR LOSSES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. 36 To the extent that we maintain investments in marketable debt securities, marketable equity securities, and/or investments in other securities, both publicly and privately held, we are subject to many risks. Such risks include market risk associated with declines in the market values of such securities, interest rate risk and the risk of default. As a result of such risks, we could experience a substantial loss, or may even lose all, of the basis or principal we have invested in such securities. Any such declines or losses could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline. THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE WITH GAAP. ANY CHANGES IN ESTIMATES, JUDGMENTS AND ASSUMPTIONS USED COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO DECLINE. The consolidated and condensed consolidated financial statements included in the periodic reports we file with the Securities and Exchange Commission are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities, revenues, expenses and income. This includes, but is not limited to, estimates, judgments and assumptions used in the adoption of the provisions of SFAS 142, Goodwill and Other Intangible Assets and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations and could cause the market value of our common stock to decline. Forward-Looking Statements This Report on Form 10-Q may contain "forward-looking statements." Such forward-looking statements may include, without limitation, statements about our market opportunities, strategies, competition and expected activities and expenditures. These statements can be identified by the use of words such as "may," "will," "could," "should," "would," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "continue" and variations of these words or comparable words. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations expressed or implied by these forward-looking statements. Investors are cautioned that all forward-looking statements involve risks 37 and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, those factors described in this Report on Form 10-Q, as well as in other documents that we filed with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk primarily from changes in the market values of investments in marketable debt and equity securities, including marketable securities owned indirectly through certain pooled asset funds that are classified as other assets on the balance sheet. Additional investments are made in overnight deposits, money market funds and marketable securities with maturities of less than three months. These instruments are classified as cash equivalents for financial reporting purposes and have minimal or no interest rate risk due to their short-term nature. The majority of the Company's investments are managed by professional portfolio managers. The following table summarizes the investments which subject the Company to market risk: December 31, March 31, (in thousands) 2002 2002 ---- ---- Debt securities $422,400 $435,499 Equity securities 32,100 20,767 Pooled asset funds 11,603 26,144 -------- -------- $466,103 $482,410 ======== ======== Pooled Asset Funds Pooled asset funds consist of investments in limited liability partnerships. The assets of these funds are typically actively traded and are exposed to market fluctuations. Unlike investments in marketable debt and equity securities, the changes in the market values of these investments are recognized as other income or loss in the Consolidated Statements of Earnings. A 20% change in the market value of the pooled asset funds, based on the market value at December 31, 2002, would result in a $2.3 million change in other assets and a corresponding change to other income or expense. However, subsequent to December 31, 2002, approximately 40% of the balance in the pooled asset funds has been received by the Company in the form of a distribution. It is anticipated that the remaining pooled asset funds will be liquidated during fiscal 2004. 38 ITEM 4. CONTROLS AND PROCEDURES The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in this Report on Form 10-Q is recorded, processed, summarized and reported within the time period specified. The Company's management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act) within ninety days prior to the filing of this Report on Form 10-Q and has concluded that such disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated by management, including our Chief Executive Officer and Chief Financial Officer. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Legal Proceedings While it is not possible to determine with any degree of certainty the ultimate outcome of the following legal proceedings, the Company believes that it has meritorious defenses with respect to the claims asserted against it and intends to vigorously defend its position. AN ADVERSE OUTCOME IN ANY OF THESE PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL POSITION AND RESULTS OF OPERATIONS. Paclitaxel In June 2001, NAPRO Biotherapeutics Inc. ("NAPRO") and Abbott Laboratories Inc. (Abbott) filed suit against the Company in the United States ("US") District Court for the Western District of Pennsylvania. Plaintiffs allege that the Company's manufacture, use and sale of its paclitaxel product infringes certain patents owned by NAPRO and allegedly licensed to Abbott. Plaintiffs seek unspecified damages plus interest, a finding of willful infringement which could result in treble damages, injunctive relief, attorneys' fees, costs of litigation and such equitable and other relief as the court deems just and proper. The Company began selling its paclitaxel product in July 2001. 39 Verapamil ER In July 2001, Biovail Laboratories Inc. ("Biovail") filed a demand for arbitration against the Company with the American Arbitration Association. In response to such demand, the Company filed its answer and counterclaims. The dispute relates to a supply agreement under which the Company supplied extended-release verapamil to Biovail. The Company terminated the agreement in March 2001. Biovail's allegations include breach of contract, breach of implied covenant of good faith and fair dealing and unfair competition. Biovail is seeking damages plus interest, to be determined at trial, but in an amount of not less than $10.0 million, plus unspecified punitive damages, attorneys' fees and costs of litigation and such other relief as the panel may deem just and proper. The Company's allegations as set forth in its counterclaims, include breach of obligations of good faith and fair dealing, fraud and unjust enrichment. 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 the US Federal District Court for the Western District of Pennsylvania in May 2001. The complaint sets forth claims of breach of contract, rescission, breach of implied covenant of good faith and fair dealing and unjust enrichment. The defendants' answer includes a counterclaim, which alleges nonpayment of royalties and failure to mitigate. The defendants are seeking royalties allegedly owed by the Company, attorneys' fees and costs of litigation and such other relief as may be demonstrated at trial. Nifedipine In February 2001, Biovail filed suit against the Company and Pfizer Inc. ("Pfizer") in the US District Court for the Eastern District of Virginia alleging antitrust violations with respect to agreements entered into between the Company and Pfizer regarding nifedipine. The Company filed a motion to transfer the case to the US District Court for the Northern District of West Virginia, which was granted. The Company's motion to dismiss Biovail's complaint was denied. The Company has been named as a defendant in five other putative class action suits alleging antitrust claims based on the settlement entered into by the Company with Pfizer regarding nifedipine. Two of the class actions have been dismissed in their entirety and the remaining actions have been dismissed in part. The plaintiffs in the remaining actions, as well as Biovail, are seeking unspecified compensatory and treble damages, attorneys' fees, costs of litigation, restitution, disgorgement and declaratory and injunctive relief. 40 Buspirone The Company filed an ANDA seeking approval to market buspirone, a generic equivalent to Bristol-Myers Squibb's ("BMS") BuSpar(R). The Company filed the appropriate certifications relating to the patents for this product that were then listed in the US Food and Drug Administration ("FDA") publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." In November 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. In November 2000, the Company filed suit against the FDA and BMS in the US 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 of a bond in the amount of $25.0 million, the court entered an order granting the Company's motion for a preliminary injunction. Following a brief stay by the US Court of Appeals for the Federal Circuit ("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 15mg tablet in March 2001. The Company has also been selling the 30mg tablet since August 2001 and the 5mg and 10mg tablets since March 2002. BMS appealed the preliminary injunction order to both the Federal Circuit and the US 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. In October 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 in January 2002. A petition for review by the US Supreme Court was denied in October 2002. In January 2002, the Company filed a motion in the US 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 District of Columbia Court has entered an order staying further proceedings in this case pending appeal of the order entered in the US District Court for the Southern District of New York granting the Company's motion for summary judgment of non-infringement. 41 The Company is involved in three other suits related to buspirone. In November 2000, the Company filed suit against BMS in the US District Court for the Northern District of West Virginia. The suit seeks a declaratory judgment 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 US District Court for the District of Vermont and also in the US 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 approval of the Company's ANDA. BMS seeks to recover damages equal to lost profits plus interest, a finding of willful infringement, which could result in treble damages, injunctive relief, attorneys' fees, costs of litigation and such other relief as the court deems just and proper. The Company subsequently filed motions to dismiss the Vermont case and dismiss and transfer the New York case to the US 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 antitrust suits filed against BMS, be consolidated for pre- trial purposes in the US District Court for the Southern District of New York. The New York Court has granted the Company's motion for summary judgment that the BMS patent is not infringed or, alternatively, is invalid. BMS has appealed this decision to the Court of Appeals for the Federal Circuit. The New York Court also denied the BMS motion to dismiss the Company's antitrust counterclaims. On January 7, 2003, Mylan announced that it had reached an agreement in principle with BMS, which would resolve all disputes between the companies related to buspirone and paclitaxel, BMS's Buspar(R) and Taxol(R), respectively, when finalized. As part of the agreement in principle, Mylan would receive a one-time payment of $35 million, and non-exclusive, paid-up, royalty free, irrevocable licenses under any applicable BMS patents to manufacture, market and sell buspirone and paclitaxel. Lorazepam and Clorazepate In January 1999, four companies who claim to have purchased lorazepam and/or clorazepate from the Company filed suit alleging that the Company engaged in restraint of trade, monopolization, attempted monopolization, conspiracy to monopolize and price-fixing arising out of certain agreements and proposed agreements involving the supply of raw materials used to manufacture those two products. In July 2001, the US Court for the District of Columbia certified a litigation class consisting of direct purchasers. The plaintiffs seek to recover treble damages equal to three times the overcharge they claim to have paid, plus injunctive relief, attorneys' fees, costs of litigation and such other relief as the court deems proper. In December 2001, four third-party reimbursers filed separate actions against the Company. These actions are pending in the US District Court for the District of 42 Columbia. The Company is also defending a civil action in the State of California that was brought under state law on behalf of independent retail pharmacies who purchased lorazepam and/or clorazepate. The California action has not been certified as a class action. The plaintiffs in each of these actions seek unspecified monetary damages, equitable relief, attorneys' fees and costs of litigation. Average Wholesale Price Litigation The Company, along with a number of other pharmaceutical manufacturers, has been named as a defendant in four lawsuits filed in the state courts of California in which the plaintiffs allege the defendants unlawfully, unfairly and fraudulently manipulated the reported average wholesale price of various products, allegedly to increase third party reimbursements to others for their products. None of these four cases has been certified as a class action, although all four cases seek class action and representative status. Plaintiffs seek equitable relief in the form of disgorgement and restitution, attorneys' fees and costs of litigation. Other Litigation The Company is involved in various other legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such other proceedings, the Company believes that the ultimate outcome of such other proceedings will not have a material adverse effect on its results of operations or financial position. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 3.1 Amended and Restated Articles of Incorporation of the registrant, filed as Exhibit 4.2 to the Form S-8 on December 23, 1997, (registration number 333-43081) and incorporated herein by reference. 3.2 By-laws of the registrant, as amended to date, filed as Exhibit 3.2 to the Form 10-Q for the quarterly period ended September 30, 2002, and incorporated herein by reference. b. Reports on Form 8-K On January 15, 2003, the Company filed a Report on Form 8-K announcing a three-for-two stock split. 43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q for the quarterly period ended December 31, 2002, to be signed on its behalf by the undersigned thereunto duly authorized as of February 12, 2003. Mylan Laboratories Inc. (Registrant) /s/ Robert J. Coury ---------------------------- Robert J. Coury Vice-Chairman of the Board and Chief Executive Officer (Principal executive officer) /s/ Edward J. Borkowski ---------------------------- Edward J. Borkowski Chief Financial Officer (Principal financial officer) /s/ Gary E. Sphar ---------------------------- Gary E. Sphar Vice President, Corporate Controller (Principal accounting officer) 44 Sarbanes-Oxley Section 302 Certification I, Robert J. Coury, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mylan Laboratories Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period[s] presented in this quarterly 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2003 /s/ Robert J. Coury ---------------------- Robert J. Coury Chief Executive Officer, Mylan Laboratories Inc. Sarbanes-Oxley Section 302 Certification I, Edward J. Borkowski, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mylan Laboratories Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period[s] presented in this quarterly 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2003 /s/ Edward J. Borkowski ---------------------- Edward J. Borkowski Chief Financial Officer, Mylan Laboratories Inc. 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 Quarterly Report of Mylan Laboratories Inc. (the "Company") on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 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. Date: February 12, 2003 /s/ Robert J. Coury ------------------------------ Robert J. Coury Chief Executive Officer /s/ Edward J. Borkowski ------------------------------ Edward J. Borkowski Chief Financial Officer