e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2004
Commission File No. 1-10269
Allergan, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State of Incorporation) |
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95-1622442
(I.R.S. Employer Identification No.) |
2525 Dupont Drive
Irvine, California
(Address of principal executive offices) |
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92612
(Zip Code) |
(714) 246-4500
(Registrants telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on |
Title of each class |
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which each class registered |
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Common Stock, $0.01 par value
Preferred Share Purchase Rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such
filing requirements for the past
90 days. Yes þ No o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes þ No o.
The aggregate market value of the registrants common
equity held by non-affiliates was approximately
$11,819 million on June 25, 2004, based upon the
closing price on the New York Stock Exchange on such date.
Common Stock outstanding as of February 25,
2005 134,254,772 shares (including
2,649,633 shares held in treasury).
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from
the registrants proxy statement for the annual meeting of
stockholders to be held on April 26, 2005, which proxy
statement will be filed no later than 120 days after the
close of the registrants fiscal year ended
December 31, 2004.
TABLE OF CONTENTS
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PART I
General Development of Our Business
Allergan, Inc. is a technology-driven, global health care
company that develops and commercializes specialty
pharmaceutical products for the ophthalmic, neurological,
dermatological and other specialty markets. We are a pioneer in
specialty pharmaceutical research, targeting products and
technologies related to specific disease areas such as glaucoma,
retinal disease, dry eye, psoriasis, acne and movement
disorders. Additionally, we develop and market aesthetic-related
pharmaceuticals and over-the-counter products. Within these
areas, we are an innovative leader in therapeutic and other
prescription products, and to a limited degree, over-the-counter
products that are sold in more than 100 countries around the
world. We are also focusing research and development efforts on
new therapeutic areas, including gastroenterology, neuropathic
pain and genitourinary diseases.
We were originally incorporated in California in 1948 and became
known as Allergan Corporation in 1950. In 1977, we
reincorporated in Delaware. In 1980, we were acquired by
SmithKline Beecham plc (then known as SmithKline Corporation).
From 1980 through 1989, we operated as a wholly-owned subsidiary
of SmithKline and in 1989 we again became a stand-alone public
company through a spin-off distribution by SmithKline.
Our Internet website address is www.allergan.com. We make
our periodic and current reports, together with amendments to
these reports, available on our Internet website, free of
charge, as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and
Exchange Commission. The information on our Internet website is
not incorporated by reference in this Annual Report on
Form 10-K.
In June 2002, we completed the spin-off of our optical medical
device business to our stockholders. The optical medical device
business consisted of two businesses: our ophthalmic surgical
products business and our contact lens care products business.
The spin-off was effected by contributing our optical medical
device business to a newly formed subsidiary, Advanced Medical
Optics, Inc., or AMO, and issuing a dividend of AMOs
common stock to our stockholders. Our consolidated financial
statements and related notes reflect the financial position,
results of operations and cash flows of the optical medical
device business as a discontinued operation.
In October 2004, our board of directors approved certain
restructuring activities related to the scheduled termination of
our manufacturing and supply agreement with AMO. Under the
manufacturing and supply agreement, which was entered into in
connection with the AMO spin-off, we agreed to manufacture
certain products for AMO for a period of up to three years
ending in June 2005. As part of the termination of the
manufacturing and supply agreement, we will eliminate certain
manufacturing positions at our Westport, Ireland; Waco, Texas;
and Guarulhos, Brazil manufacturing facilities. We anticipate
that the pre-tax restructuring charges to be incurred in
connection with the termination of the manufacturing and supply
agreement will total between $24 million and
$28 million and that there will be a reduction in our
workforce of approximately 350 individuals.
In January 2005, our board of directors approved the initiation
and implementation of a restructuring of certain activities
related to our European operations. The restructuring seeks to
optimize operations, improve resource allocation and create a
scalable, lower cost and more efficient operating model for our
European research and development and commercial activities.
Specifically, the restructuring anticipates moving key European
research and development and select commercial functions from
our Mougins, France and other European locations to our Irvine,
California, High Wycombe, U.K. and Dublin, Ireland facilities
and streamlining our European commercial back office functions.
Under applicable law, the proposed restructuring requires
consultations and, in certain cases, negotiations with European
and national works councils, other management/ labor
organizations and local authorities. The restructuring steps to
be implemented and their ultimate cost will depend in part on
the outcome of such consultations and negotiations. We anticipate
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incurring restructuring charges and charges relating to
severance, relocation and one-time termination benefits,
payments to public employment and training programs,
implementation, transition, capital and other asset-related
expenses, duplicate operating expenses and contract termination
costs in connection with the restructuring. We currently
estimate that the pre-tax charges and capital expenditures
resulting from the restructuring will be between
$50 million and $60 million. We also estimate that the
restructuring will yield annual operating cost reductions of
between $6 million and $9 million.
Our Business
The following table sets forth, for the periods indicated, net
sales from continuing operations for each of our specialty
pharmaceutical product lines, earnings (loss) from continuing
operations, domestic and international sales as a percentage of
total net sales and domestic and international long-lived assets:
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Year Ended December 31, |
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2004 |
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2003 |
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2002 |
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(in millions) |
Net Sales by Product Line
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Eye Care Pharmaceuticals
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$ |
1,137.1 |
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$ |
999.5 |
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$ |
827.3 |
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Botox®/ Neuromodulator
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705.1 |
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563.9 |
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439.7 |
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Skin Care Products
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103.4 |
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109.3 |
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90.2 |
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Other(1)
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100.0 |
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82.7 |
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27.8 |
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Total
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$ |
2,045.6 |
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$ |
1,755.4 |
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$ |
1,385.0 |
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Earnings (loss) from continuing operations
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$ |
377.1 |
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$ |
(52.5 |
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$ |
64.0 |
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Sales
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Domestic
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69.1 |
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70.4 |
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70.6 |
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International
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30.9 |
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29.6 |
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29.4 |
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Long-Lived Assets
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Domestic
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$ |
593.9 |
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$ |
573.8 |
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$ |
381.2 |
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International
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$ |
287.1 |
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$ |
252.9 |
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$ |
225.2 |
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(1) |
Other sales primarily consist of sales to AMO pursuant to a
manufacturing and supply agreement entered into as part of the
AMO spin-off that is scheduled to terminate in June 2005. |
See Note 15, Business Segment Information, in
the notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for further
information concerning our foreign and domestic operations.
Eye Care Pharmaceutical Product Line
We develop, manufacture and market a broad range of prescription
and non-prescription products designed to treat diseases and
disorders of the eye, including glaucoma, dry eye, inflammation,
infection and allergy.
Glaucoma. The largest segment of the market for
ophthalmic prescription drugs is for the treatment of glaucoma,
a sight-threatening disease typically characterized by elevated
intraocular pressure leading to optic nerve damage. Glaucoma is
currently the worlds second leading cause of blindness,
and we estimate that over 60 million people worldwide have
glaucoma. According to IMS Health Inc., an independent research
firm, our products for the treatment of glaucoma, including
Alphagan®, Alphagan® P and
Lumigan®, captured approximately 17% of the
worldwide glaucoma market for the first nine months of 2004.
Our largest selling eye care pharmaceutical products are the
ophthalmic solutions Alphagan® (brimonidine tartrate
ophthalmic solution) 0.2% and Alphagan® P
(brimonidine tartrate ophthalmic solution)
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0.15%, preserved with Purite®. Alphagan®
and Alphagan® P lower intraocular pressure by
reducing aqueous humor production and increasing uveoscleral
outflow. Alphagan® P is an improved
reformulation of Alphagan® containing brimonidine,
Alphagan®s active ingredient, preserved with
Purite®. We currently market Alphagan®
and Alphagan® P in over 70 countries
worldwide.
Alphagan® and Alphagan® P
combined were the third best selling glaucoma products in
the world for the first nine months of 2004, according to IMS
Health Inc. Combined sales of Alphagan® and
Alphagan® P represented approximately 13% of
our total consolidated sales in 2004, 16% of our total
consolidated sales in 2003 and 18% of our total consolidated
sales in 2002. In July 2002, based on the acceptance of
Alphagan® P, we discontinued the
U.S. distribution of Alphagan®. In May 2004, we
entered into an exclusive licensing agreement with Kyorin
Pharmaceutical Co., Ltd., under which Kyorin agreed to be
responsible for the development and commercialization of
Alphagan® and Alphagan® P in
Japans ophthalmic specialty area. Kyorin agreed to incur
associated costs and provided us with an up-front payment.
Kyorin also agreed to make development and commercialization
milestone payments to us, as well as royalty-based payments on
product sales. We agreed to work collaboratively with Kyorin on
overall product strategy and management. Kyorin subsequently
sub-licensed its rights under the agreement to Senju
Pharmaceutical Co., Ltd. The marketing exclusivity period for
Alphagan® P expired in the U.S. in
September 2004, although we have a number of patents covering
the Alphagan® P technology that extend to
2021 in the U.S. and 2009 in Europe, with corresponding patents
pending in Europe. In May 2003, the first generic form of
Alphagan® was approved by the U.S. Food and
Drug Administration, or FDA. Additionally, a generic form of
Alphagan® is sold in a limited number of other
countries, including Canada, Mexico, India, Brazil, Colombia and
Argentina. See Item 3 of Part I of this report,
Legal Proceedings and Note 13,
Commitments and Contingencies, in the notes to the
consolidated financial statements listed under Item 15(a)
of Part IV of this report for further information regarding
litigation involving Alphagan®. Falcon
Pharmaceuticals, Ltd., an affiliate of Alcon Laboratories, Inc.,
is attempting to obtain FDA approval for and to launch a
brimonidine product to compete with our Alphagan®
P product. In May 2004, we filed a New Drug Application
with the FDA for a new formulation of Alphagan®
P. This New Drug Application remains pending.
Lumigan® (bimatoprost ophthalmic solution) 0.03% is
a topical treatment indicated for the reduction of elevated
intraocular pressure in patients with glaucoma or ocular
hypertension who are either intolerant or insufficiently
responsive when treated with other intraocular pressure-lowering
medications. Sales of Lumigan® represented
approximately 11% of our total consolidated sales in 2004, 10%
of our total consolidated sales in 2003 and 9% of our total
consolidated sales in 2002. In March 2002, the European
Commission approved Lumigan® through its centralized
procedure. In January 2004, the European Unions Committee
for Proprietary Medicinal Products approved Lumigan®
as a first-line therapy for the reduction of elevated
intraocular pressure in chronic open-angle glaucoma and ocular
hypertension. We currently sell Lumigan® in over 40
countries worldwide. In May 2004, we entered into an exclusive
licensing agreement with Senju Pharmaceutical Co., Ltd., under
which Senju is responsible for the development and
commercialization of Lumigan® in Japans
ophthalmic specialty area. Senju will incur associated costs and
provided us with an up-front payment. Senju will also make
development and commercialization milestone payments to us, as
well as royalty-based payments on product sales. We will work
collaboratively with Senju on overall product strategy and
management.
In September 2001, we filed a New Drug Application with the FDA
for a brimonidine and timolol combination designed to treat
glaucoma. This New Drug Application remains pending. During the
fourth quarter of 2003, we received approval from Health Canada
for our brimonidine and timolol combination, which is marketed
as
Combigantm.
In December 2004, we received our first European approval of
Combigantm
in Switzerland. In November 2003, we filed a New Drug
Application with the FDA for a Lumigan® and timolol
combination designed to treat glaucoma or ocular hypertension.
In August 2004, we announced that the FDA issued an approvable
letter regarding the Lumigan® and timolol
combination, setting out the conditions, including additional
clinical investigation, that we must meet in order to obtain
final FDA approval.
Ocular Surface Disease. In December 2002, the FDA
approved Restasis® (cyclosporine ophthalmic
emulsion) 0.05%, the first and currently the only prescription
therapy for the treatment of chronic dry eye
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disease. We launched Restasis® in the United States
in April 2003. Dry eye disease is a painful and irritating
condition involving abnormalities and deficiencies in the tear
film initiated by a variety of causes. The incidence of dry eye
disease increases markedly with age, after menopause in women
and in people with systemic diseases such as Sjogrens
syndrome and rheumatoid arthritis. Until the approval of
Restasis®, physicians used lubricating tears as a
temporary measure to provide palliative relief of the
debilitating symptoms of dry eye disease. In June 2001, we
entered into a licensing, development and marketing agreement
with Inspire Pharmaceuticals, Inc. under which we obtained an
exclusive license to develop and commercialize Inspires
INS365 Ophthalmic in exchange for royalty payments to Inspire on
sales of both Restasis® and, ultimately, INS365.
INS365 completed Phase III clinical trials investigating
its ability to relieve the signs and symptoms of dry eye disease
by rehydrating conjunctival mucosa and increasing non-lacrimal
tear component production. In December 2003, the FDA issued an
approvable letter for INS365 and also requested additional
clinical data. In February 2005, Inspire announced that INS365
failed to demonstrate statistically significant improvement as
compared to a placebo for the primary endpoint of the incidence
of corneal clearing. Inspire also announced that INS365 achieved
improvement compared to a placebo for a number of secondary
endpoints, and that Inspire intends to file a New Drug
Application amendment with the FDA by the end of the second
quarter of 2005.
Ophthalmic Inflammation. Our leading ophthalmic
anti-inflammatory product is Acular® (ketorolac
ophthalmic solution) 0.5%. Acular® is a registered
trademark of and is licensed from its developer, Syntex (U.S.A.)
Inc., a business unit of Hoffmann-LaRoche Inc.
Acular® is indicated for the temporary relief of
itch associated with seasonal allergic conjunctivitis, the
inflammation of the mucus membrane that lines the inner surface
of the eyelids, and for the treatment of post-operative
inflammation in patients who have undergone cataract extraction.
Acular PF® was the first, and currently remains the
only, unit-dose, preservative-free topical non-steroidal
anti-inflammatory drug in the United States. Acular
PF® is indicated for the reduction of ocular pain and
photophobia following incisional refractive surgery.
Acular® is the number one prescribed non-steroidal
anti-inflammatory in the United States. See Item 3 of
Part I of this report, Legal Proceedings and
Note 13, Commitments and Contingencies, in the
notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for information
regarding our successful patent infringement lawsuit against
Apotex, Inc., et al. confirming the validity and
enforceability of our intellectual property covering
Acular®. Apotex, Inc. subsequently appealed that
judgment and we are currently awaiting the United States Court
of Appeals for the Federal Circuits ruling on the appeal.
In June 2003, we received FDA approval of Acular
LS®, a reformulated ketorolac 0.4% concentration, for
the reduction of ocular pain, burning and stinging following
corneal refractive surgery. We launched
Acular LS® in the United States in August 2003.
Our product Pred Forte® remains a leading topical
steroid worldwide based on 2004 sales. Pred Forte®
has no patent protection or marketing exclusivity and faces
generic competition.
Ophthalmic Infection. A leading product in the ophthalmic
anti-infective market is our Ocuflox®/
Oflox®/ Exocin® ophthalmic
solution. Ocuflox® has no patent protection or
marketing exclusivity and faces generic competition.
In March 2003, we received FDA approval of Zymar®
(gatifloxacin ophthalmic solution) 0.3%. Zymar® is
the first fourth-generation fluoroquinilone to enter the market
for the treatment of bacterial conjunctivitis. Laboratory
studies have shown that Zymar® kills the most common
bacteria that cause eye infections as well as specific resistant
bacteria. We launched Zymar® in the United States in
April 2003. According to Verispan, an independent research firm,
Zymar® was the number one ocular anti-infective
prescribed by ophthalmologists in the United States in 2004.
Allergy. The allergy market is, by its nature, a seasonal
market, peaking during the spring months. We market
Alocril® ophthalmic solution for the treatment of
itch associated with allergic conjunctivitis. Additionally, in
October 2003, we received FDA approval of
Elestattm
(epinastine ophthalmic solution) 0.05%, for the prevention of
itching associated with allergic conjunctivitis. In December
2003, we announced the execution of an agreement with Inspire
Pharmaceuticals for the co-promotion of
Elestattm
in the United States within the ophthalmic specialty area and to
allergists. Under the terms of the agreement, Inspire
4
provided us with an up-front payment and we make payments to
Inspire based on
Elestattm
net sales. In addition, the agreement reduced our existing
royalty payment to Inspire for Restasis®. Inspire
has primary responsibility for selling and marketing activities
in the United States related to
Elestattm.
We have retained all international marketing and selling rights.
We launched
Elestattm
in Europe under the brand names Relestat® and
Purivist® during 2004, and Inspire launched
Elestattm
in the United States during 2004.
Neuromodulator
Our neuromodulator product, Botox® (Botulinum Toxin
Type A), is used for a wide variety of treatments which continue
to expand. Botox® is accepted in many global regions
as the standard therapy for indications ranging from therapeutic
neuromuscular disorders and related pain to cosmetic facial
aesthetics. There are currently in excess of 100 therapeutic and
cosmetic uses for Botox® reported in medical
literature. The versatility of Botox® is based on
its localized treatment effect and approximately 16 years
of safety experience in large patient groups. Marketed as
Botox®, Botox® Cosmetic,
Vistabel® or Vistabex®, depending on the
indication and country of approval, the product is currently
approved in over 70 countries for a broad range of indications.
Sales of Botox® represented approximately 34%, 32%
and 32% of our total consolidated sales in 2004, 2003 and 2002,
respectively.
Botox®. Botox® is used therapeutically
for the treatment of certain neuromuscular disorders which are
characterized by involuntary muscle contractions or spasms. The
approved therapeutic indications for Botox® in the
United States are as follows:
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blepharospasm, the uncontrollable contraction of the eyelid
muscles which can force the eye closed and result in functional
blindness; |
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strabismus, or misalignment of the eyes, in people 12 years
of age and over; |
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cervical dystonia, or sustained contractions or spasms of
muscles in the shoulders or neck in adults, along with the
associated pain; and |
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severe primary axillary hyperhidrosis (underarm sweating) that
is inadequately managed with topical agents. |
In many countries outside of the United States and Japan,
Botox® is also approved for treating blepharospasm,
strabismus, cervical dystonia, hemifacial spasm, pediatric
cerebral palsy, hyperhidrosis and post-stroke focal spasticity.
We are currently pursuing new indication approvals for
Botox® in the United States, Japan and Europe,
including headache, post-stroke focal spasticity and overactive
bladder.
Botox® Cosmetic. The FDA approved
Botox® in April 2002 for the temporary improvement
in the appearance of moderate to severe glabellar lines in adult
men and women age 65 or younger. Referred to as
Botox®, Botox® Cosmetic,
Vistabel® or Vistabex®, depending on the
country of approval, this product is designed to relax
wrinkle-causing muscles to smooth the deep, persistent,
glabellar lines between the brow that often develop during the
aging process. Health Canada approved Botox®
Cosmetic for similar use in Canada in April 2001. In 2004, we
continued our previously launched direct-to-consumer marketing
campaigns in Canada and the United States. These campaigns
included television commercials and print advertising aimed at
consumers and aesthetic specialty physicians. Currently, over 30
countries have approved the glabellar line indication for
Botox®, Botox® Cosmetic,
Vistabel® or Vistabex®, including
Australia, Brazil, Canada, Denmark, France, Israel, Italy,
Mexico, Norway, Poland, Portugal, Spain, Sweden, and
Switzerland. In January 2005, we received a positive opinion
from the European Union by way of the Mutual Recognition Process
for Vistabel®. The positive opinion was received in
all twelve concerned member states in which we filed, including,
among others, Austria, Hungary, Greece, Belgium and Finland. We
now sponsor training of aesthetic specialty physicians in
approved countries to further expand the base of qualified
physicians using Botox®, Botox®
Cosmetic, Vistabel® or Vistabex®.
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Skin Care Product Line
Our skin care product line focuses on the high growth, high
margin segments of the acne and psoriasis markets, particularly
in the United States and Canada.
Tazarotene Products. We market Tazorac® gel
in the United States for the treatment of plaque psoriasis, a
chronic skin disease characterized by dry red patches, and acne.
We also market the cream formulation of Tazorac® in
the United States for the treatment of psoriasis and the topical
treatment of acne. Under a co-promotion agreement for
Tazorac® in the United States, PediaMed
Pharmaceuticals, Inc. markets Tazorac® to the
pediatric medical community and Proctor & Gamble
markets Tazorac® to general practitioners. We market
Tazorac® to dermatologists with our in-house sales
force. We have also engaged Pierre Fabre Dermatologie as our
promotion partner for Zorac® in certain parts of
Europe, the Middle East and Africa.
In October 2002, we received FDA approval of Avage®.
Avage® is a tazarotene cream indicated for the
treatment of facial fine wrinkling, mottled hypo- and
hyperpigmentation (blotchy skin discoloration) and benign facial
lentigines (flat patches of skin discoloration) in patients
using a comprehensive skin care and sunlight avoidance program.
We launched Avage® in the United States in January
2003.
In November 2003, we filed a New Drug Application with the FDA
for oral tazarotene for the treatment of moderate to very severe
psoriasis. In July 2004, the FDA Joint Dermatologic &
Opthalmic Drugs and Drug Safety & Risk Management
Advisory Committee recommended against approval of this New Drug
Application, and in September 2004, the FDA issued a
non-approvable letter. The FDA listed three non-approvability
issues for oral tazarotene for the treatment of moderate to very
severe psoriasis: (1) the development of an acceptable risk
management program; (2) completion of a non-inferiority
study in severe psoriasis; and (3) satisfaction of an FDA
deficiency letter regarding the manufacture of the oral
tazarotene capsules. We intend to continue working with the FDA
toward our goal of bringing oral tazarotene to patients
suffering from psoriasis.
In May 2004, we transferred certain rights to our pre-clinical
programs and broad research portfolio in retinoid and rexinoid
nuclear receptor compounds to Concurrent Pharmaceuticals, Inc.,
a privately held biopharmaceutical company. The clinical assets
and compounds subject to the transaction included near-clinical
compounds and were primarily derived from our retinoid program.
The transaction was designed to provide Concurrent with a
portfolio of development compounds and near-clinical candidates
that would comprise a discovery engine with the potential to
create a pipeline of product leads and follow-on programs. Under
the terms of the transaction, we received equity in Concurrent,
the right to designate one person to serve on Concurrents
board of directors, as well as the right to receive future
milestone and royalty payments. As part of the transaction, our
retinoid receptor research team joined Concurrent.
In January 2005, we launched
Prevagetm
antioxidant cream, the first and only clinically tested
antioxidant that not only reduces the appearance of fine lines
and wrinkles, but also provides protection against environmental
factors including sun damage, air pollution and cigarette smoke.
Representing the next generation of antioxidants,
Prevagetm
is a novel cosmeceutical containing 1% idebenone a
revolutionary, potent and effective new antioxidant.
Prevagetm
is marketed to physicians.
Azelex®. Azelex® cream is approved by
the FDA for the topical treatment of mild to moderate
inflammatory acne vulgaris. We market Azelex® cream
primarily in the United States.
M.D. Forte®. We also develop and market glycolic
acid-based skin care products. Our M.D. Forte® line
of alpha hydroxy acid products are marketed to physicians.
Finacea®. In 2003 we entered into a collaboration
with Intendis, Inc. (formerly known as Berlex, Inc.) to jointly
promote Intendis topical rosacea treatment,
Finacea® (azelaic acid gel 15%).
Finacea® is the first new therapeutic class option
to be approved by the FDA for the treatment of rosacea in more
than a decade and has rapidly gained a leading position in the
market.
6
Employee Relations
At December 31, 2004, we employed approximately 5,030
persons throughout the world, including approximately 2,490 in
the United States. None of our U.S.-based employees are
represented by unions. We believe that our relations with our
employees are generally good.
International Operations
Our international sales of specialty pharmaceutical products
have represented 30.9%, 29.6% and 29.4% of total sales for the
years ended December 31, 2004, 2003 and 2002, respectively.
Our products are sold in over 100 countries. Marketing
activities are coordinated on a worldwide basis, and resident
management teams provide leadership and infrastructure for
customer-focused, rapid introduction of new products in the
local markets.
Sales and Marketing
We maintain a global marketing team, as well as regional sales
and marketing organizations. We also engage contract sales
organizations to promote certain products. Our sales efforts and
promotional activities are primarily aimed at eye care
professionals, neurologists, plastic surgeons and dermatologists
who use, prescribe and recommend our products. We advertise in
professional journals and have an extensive direct mail program
of descriptive product literature and scientific information
that we provide to specialists in the ophthalmic, dermatological
and movement disorder fields. We have developed training modules
and seminars to update physicians regarding evolving technology
in our products. In 2004, we also utilized direct-to-consumer
advertising for our Botox® Cosmetic and
Restasis® products.
Our products are sold to drug wholesalers, independent and chain
drug stores, pharmacies, commercial optical chains, opticians,
mass merchandisers, food stores, hospitals, ambulatory surgery
centers and medical practitioners, including ophthalmologists,
neurologists, dermatologists, pediatricians and plastic
surgeons. As of December 31, 2004, we employed
approximately 1,400 sales representatives throughout the world.
We also utilize distributors for our products in smaller
international markets.
U.S. sales, including manufacturing operations, represented
69.1%, 70.4% and 70.6% of our consolidated product net sales in
2004, 2003 and 2002, respectively. Sales to Cardinal Healthcare
for the years ended December 31, 2004, 2003 and 2002 were
14.1%, 14.0% and 14.8%, respectively, of our total consolidated
product net sales. Sales to McKesson Drug Company for the years
ended December 31, 2004, 2003 and 2002 were 13.0%, 14.2%
and 13.3%, respectively, of our total consolidated product net
sales. No other country, or single customer, generates over 10%
of our total product net sales.
Research and Development
Our global research and development efforts currently focus on
eye care, skin care, neuromodulators, and neurology. We also
have development programs in genitourinary diseases and
gastroenterology. We have a fully integrated pharmaceutical
research and development organization with in-house discovery
programs, including medicinal chemistry, high throughput
screening, and biological sciences. We supplement our own
research and development activities with our commitment to
identify and obtain new technologies through in-licensing,
research collaborations, joint ventures and acquisitions.
As of December 31, 2004, we had approximately 1,030
employees involved in our research and development efforts. Our
research and development expenditures for 2004, 2003 and 2002
were approximately $345.6 million, $763.5 million and
$233.1 million, respectively, including expenditures on
in-process research and development in connection with our 2003
acquisitions of Bardeen Sciences Company, LLC and Oculex
Pharmaceuticals, Inc. Excluding in-process research and
development expenditures, we have increased our annual
investment in research and development by over $200 million
in the past five years, dedicating approximately 20% of our
investment in research and development to the discovery of new
compounds. In 2004, we completed construction of a new
$75 million research and development facility in Irvine,
California, which will provide us with approximately
175,000 square feet of additional laboratory space. In
2004, we began
7
construction on a new biologics facility on our Irvine,
California campus. We expect that this facility will be
completed in 2005 at an aggregate cost of approximately
$50 million.
Our strategy is to develop innovative products to address unmet
medical needs. Our top priorities include furthering our
leadership in the field of neuromodulators, identifying new
potential compounds for sight-threatening diseases such as
glaucoma, age-related macular degeneration and macular edema,
and developing novel therapies for pain, gastroenterology, and
genitourinary diseases. We plan to continue to build on our
strong market positions in therapeutic dry eye products and
dermatology products for acne and psoriasis, and to explore new
therapeutic areas that are consistent with our specialty
pharmaceutical focus.
Eye Care Research and Development. Our research and
development efforts for the ophthalmic pharmaceuticals business
focus primarily on new therapeutic products for retinal disease,
glaucoma, and dry eye. As part of our focus on diseases of the
retina, we acquired Oculex Pharmaceuticals, Inc. in 2003. With
this acquisition, we obtained a novel drug delivery technology
for use with compounds to treat diseases, including macular
edema and age-related macular degeneration. We have subsequently
begun Phase III studies for macular edema associated with
diabetes and retinal vein occlusion. In April 2004, we announced
that we were also selected as a partner to supply our novel
ophthalmic formulation of triamcinolone for two National Eye
Institute-sponsored clinical trials on macular edema associated
with diabetic retinopathy and retinal vein occlusion. Under the
terms of the clinical trial agreement, we are responsible for
all costs associated with drug development, manufacturing,
pharmacokinetic studies, and regulatory aspects of the trials.
In addition, we will pay a fee to the study coordinating centers
for the conduct of the trials.
Neuromodulator Research and Development. We continue to
invest heavily in the research and development of
neuromodulators, primarily Botox®. We are focused on
both expanding the approved indications for Botox®
and pursuing new neuromodulator-based therapeutics. This
includes expanding the approved uses for Botox® to
include treatment for spasticity, headache, brow furrow and
urologic conditions including overactive bladder. In
collaboration with the United Kingdoms Health Protection
Agency, formerly known as the Centre for Applied
Microbiology & Research, we are focused on engineering
neuromodulators for the treatment of severe pain. We are also
continuing our investment in the areas of biologic process
development and manufacturing.
Skin Care Research and Development. Our research and
development team for our skin care business is working on
expanding indications and formulations for tazarotene. As
mentioned above, we filed a New Drug Application with the FDA in
November 2003 for oral tazarotene for the treatment of moderate
to very severe psoriasis. In July 2004, the FDA Joint
Dermatologic & Opthalmic Drugs and Drug
Safety & Risk Management Advisory Committee recommended
against approval of this New Drug Application, and in September
2004, the FDA issued a non-approvable letter. The FDA listed
three non-approvability issues for oral tazarotene for the
treatment of moderate to very severe psoriasis: (1) the
development of an acceptable risk management program;
(2) completion of a non-inferiority study in severe
psoriasis; and (3) satisfaction of an FDA deficiency letter
regarding the manufacture of the oral tazarotene capsules. We
intend to continue working with the FDA toward our goal of
bringing oral tazarotene to patients suffering from psoriasis.
In November 2002, we entered into a research collaboration and
license agreement with Peplin Biotech Ltd. for the right to
develop and commercialize PEP005 for the topical treatment of
non-melanoma skin cancer and actinic keratosis. In June 2004, we
filed Investigational New Drug Applications with the FDA for a
topical formulation of PEP005 for the treatment of actinic
keratosis, a pre-cancerous skin condition, and for basal cell
carcinoma, the most common form of non-melanoma skin cancer. In
October 2004, we mutually agreed with Peplin to discontinue our
collaboration.
Other Areas of Research and Development. We are also
working to leverage our technologies in therapeutic areas
outside of our current specialties, such as the use of alpha
agonists for the treatment of neuropathic pain. Additionally, we
are developing a novel proton pump inhibitor designed to reduce
excess stomach acid secretion. In support of these two programs,
we filed Investigational New Drug Applications with the FDA for
a proton pump inhibitor pro drug for the treatment of
gastrointestinal disease in June 2004 and for an alpha
adrenergic agonist for the treatment of neuropathic pain in
September 2004. These Investigational New Drug Applications
remain pending.
8
In December 2002, we entered into a strategic research
collaboration and license agreement with ExonHit Therapeutics.
The goals of this collaboration are to identify new molecular
targets based on ExonHit Therapeutics gene profiling
DATAStm
technology and to work collaboratively developing unique
compounds and commercial products based on these targets. Our
strategic alliance with ExonHit Therapeutics provides us with
the rights to compounds developed in the fields of
neurodegenerative disease, pain and ophthalmology.
The continuing introduction of new products supplied by our
research and development efforts and in-licensing opportunities
are critical to our success. There are intrinsic uncertainties
associated with research and development efforts and the
regulatory process. We cannot assure you that any of the
research projects or pending drug marketing approval
applications will result in new products that we can
commercialize. Delays or failures in one or more significant
research projects and pending drug marketing approval
applications could have a material adverse affect on our future
operations.
Manufacturing
We manufacture the majority of our commercial products in our
own plants located in Waco, Texas; Westport, Ireland; and Sao
Paulo, Brazil. We maintain sufficient manufacturing capacity at
these facilities to support forecasted demand as well as a
modest safety margin of additional capacity to meet peaks of
demand and sales growth in excess of expectations. We increase
our capacity as required in anticipation of future sales
increases. In the event of a very large or very rapid unforeseen
increase in market demand for a specific product or technology,
supply of that product or technology could be negatively
impacted until additional capacity is brought on line. Third
parties manufacture a small number of commercial products for
us. However, the revenues from these products are not material
to our operating results.
We are vertically integrated into the production of plastic
parts and produce our own bottles, tips and caps for use in the
manufacture of our ophthalmic solutions. Additionally, we
ferment, purify and characterize the botulinum toxin used in our
product Botox®. With these two exceptions, we
purchase all other raw materials from qualified domestic and
international sources. These raw materials consist of active
pharmaceutical ingredients, pharmaceutical excipients, and
packaging components. Where practical, we maintain more than one
supplier for each material, and we have an ongoing alternate
sourcing endeavor that identifies additional sources of key raw
materials. In some cases, however, most notably with active
pharmaceutical ingredients, we are a niche purchaser of
specialty chemicals, which are sole sourced. These sources are
identified in filings with regulatory agencies, including the
FDA, and cannot be changed without prior regulatory approval. In
these cases, we maintain inventories of the raw material itself
and precursor intermediates to mitigate the risk of interrupted
supply. A lengthy interruption of the supply of one of these
materials could adversely affect our ability to manufacture and
supply commercial product. A small number of the raw materials
required to manufacture certain of our products are derived from
biological sources which could be subject to contamination and
recall by their suppliers. We use multiple lots of these raw
materials at any one time in order to mitigate such risks.
However, a shortage, contamination or recall of these products
could disrupt our ability to maintain an uninterrupted
commercial supply of our finished goods.
Competition
We face significant competition in all of our markets worldwide.
Numerous companies are engaged in the development, manufacture
and marketing of health care products competitive with those
that we manufacture. Our major eye care competitors include
Alcon Laboratories, Inc., Bausch & Lomb, Pfizer,
Novartis Ophthalmics and Merck & Co., Inc. These
competitors have equivalent or, in most cases, greater resources
than us. This enables them, among other things, to spread their
research and development costs, as well as their marketing and
promotion costs, over a broader revenue base. Our competitors
may also have more experience and expertise in obtaining
marketing approvals from the FDA and other regulatory agencies.
Our skin care business competes against a number of companies,
including among others, Dermik, a division of Sanofi-Aventis,
Galderma, a joint venture between Nestle and LOreal,
Medicis, Bristol-Myers Squibb, Schering-Plough Corporation and
Johnson & Johnson, most of which have greater resources
than us. With respect to neuromodulators, until December 2000,
Botox® was the only neuromodulator approved by the
FDA. At that time, the FDA approved Myobloc®, a
neuromodulator formerly marketed by Elan Pharmaceuti-
9
cals and now marketed by Solstice Neurosciences Inc. We believe
that Beaufour Ipsen Ltd. intends to seek FDA approval of its
Dysport® neuromodulator for certain therapeutic
indications, and that Beaufour Ipsens marketing partner,
Inamed Corporation, intends to seek FDA approval of
Dysport®/Reloxin® for cosmetic
indications. Beaufour Ipsen has marketed Dysport® in
Europe since 1991, prior to our European commercialization of
Botox® in 1992. Also, Mentor Corporation has
announced its intention to develop and seek regulatory approval
to market a competing neuromodulator in the United States. In
addition, we are aware of competing neuromodulators currently
being developed and commercialized in Asia, Europe, South
America and other markets. A Chinese entity received approval to
market a botulinum toxin in China in 1997, and we believe that
it has launched or is planning to launch its botulinum toxin
product in other lightly regulated markets in Asia, South
America and Central America. These lightly regulated markets may
not require adherence to the FDAs current good
manufacturing practices, or cGMPs, the European Medical
Evaluation Agency or other regulatory agencies in countries that
are members of the Organization for Economic Cooperation and
Development, and companies operating in these markets may be
able to produce products at a lower cost than we can. In
addition, Merz Pharmaceuticals is seeking German regulatory
approval for a botulinum toxin currently expected to be launched
during the second half of 2005, and a Korean company is
developing a botulinum toxin that received exportation approval
from Korean authorities in early 2005 and that is expected to be
launched in Korea during 2005.
In addition, competition from generic drug manufacturers is a
major challenge in the United States and is growing
internationally. In marketing our products to health care
professionals, pharmacy benefits management companies, health
care maintenance organizations, and various other national and
regional health care providers and managed care entities, we
compete primarily on the basis of product quality, product
technology, price, reputation and access to technical
information. We believe that we compete favorably in our product
markets.
Government Regulation
Cosmetics, drugs and biologics are subject to regulation by the
FDA, state agencies and, in varying degrees, by foreign health
agencies. Pharmaceutical products and biologics are subject to
extensive pre- and post-market regulation by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising and
promotion of the products under the Federal Food, Drug, and
Cosmetic Act with respect to drugs and the Public Health
Services Act with respect to biologics, and by comparable
agencies in a number of foreign countries. Failure to comply
with applicable FDA or other requirements may result in civil or
criminal penalties, recall or seizure of products, partial or
total suspension of production or withdrawal of a product from
the market.
The process required by the FDA before a new drug or biologic
may be marketed in the United States generally involves the
following: completion of preclinical laboratory and animal
testing; submission of an Investigational New Drug Application,
which must become effective before clinical trials may begin;
and performance of adequate and well controlled human clinical
trials to establish the safety and efficacy of the proposed drug
or biologic for its intended use. Clinical trials are typically
conducted in three sequential phases, which may overlap, and
must satisfy extensive Good Clinical Practice regulations and
regulations for informed consent. Approval by the FDA of a New
Drug Application, or NDA, is required prior to marketing a new
drug, and approval of a Biologics License Application, or BLA,
is required before a biologic may be legally marketed in the
United States. To satisfy the criteria for approval, an NDA or
BLA must demonstrate the safety and effectiveness of the product
based on results of product development, preclinical studies and
the three phases of clinical trials. Both NDAs and BLAs must
also contain extensive manufacturing information, and the
applicant must pass an FDA pre-approval inspection of the
manufacturing facilities at which the drug or biologic is
produced to assess compliance with the FDAs current good
manufacturing practices, or cGMPs, prior to commercialization.
Satisfaction of FDA pre-market approval requirements typically
takes several years and the actual time required may vary
substantially based on the type, complexity and novelty of the
product, and we cannot be certain that any approvals for our
products will be granted on a timely basis, or at all.
10
Once approved, the FDA may withdraw product approval if
compliance with pre- and post-market regulatory standards is not
maintained or if safety problems occur after the product reaches
the marketplace. In addition, the FDA may require post-marketing
clinical studies and surveillance programs to monitor the effect
of approved products. The FDA may limit further marketing of the
product based on the results of these post-market studies and
programs. Drugs and biologics may be marketed only for the
approved indications and in accordance with the provisions of
the approved label. Further, any modifications to the drug or
biologic, including changes in indications, labeling, or
manufacturing processes or facilities, may require the
submission of a new or supplemental NDA or BLA, which may
require that we develop additional data or conduct additional
preclinical studies and clinical trials.
Any products manufactured or distributed by us or our
collaborators pursuant to FDA approvals are also subject to
continuing regulation by the FDA, including recordkeeping
requirements and reporting of adverse experiences associated
with the drug. Drug and biologic manufacturers and their
subcontractors are required to register their establishments
with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state
agencies for compliance with ongoing regulatory requirements,
including cGMPs, which regulate all aspects of the manufacturing
process and impose certain procedural and documentation
requirements. Failure to comply with the statutory and legal
requirements can subject a manufacturer to possible legal or
regulatory action, including fines and civil penalties,
suspension or delay in the issuance of approvals, seizure or
recall of products, and withdrawal of approvals, any one or more
of which could have a material adverse effect upon us.
The FDA imposes a number of complex regulatory requirements on
entities that advertise and promote pharmaceuticals and
biologics, including, but not limited to, standards and
regulations for direct-to-consumer advertising, off-label
promotion, industry sponsored scientific and educational
activities, and promotional activities involving the Internet. A
manufacturer can make only those claims relating to safety and
efficacy that are approved by the FDA. The FDA has very broad
enforcement authority under the Federal Food, Drug, and Cosmetic
Act, and failure to abide by these regulations can result in
penalties, including the issuance of a warning letter directing
us to correct deviations from FDA standards, a requirement that
future advertising and promotional materials be pre-cleared by
the FDA, and state and federal civil and criminal investigations
and prosecutions. Physicians may prescribe legally available
drugs and biologics for uses that are not described in the
products labeling and that differ from those tested by us
and approved by the FDA. Such off-label uses are common across
medical specialties. Physicians may believe that such off-label
uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however,
impose stringent restrictions on manufacturers
communications regarding off-label use.
We are also subject to various laws and regulations regarding
laboratory practices, the experimental use of animals, and the
use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these
areas, as above, the FDA has broad regulatory and enforcement
powers, including the ability to levy fines and civil penalties,
suspend or delay the issuance of approvals, seize or recall
products, and withdraw approvals, any one or more of which could
have a material adverse effect upon us.
Internationally, the regulation of drugs is also complex. In
Europe, our products are subject to extensive regulatory
requirements. As in the United States, the marketing of
medicinal products has for many years been subject to the
granting of marketing authorizations by medicine agencies.
Particular emphasis is also being placed on more sophisticated
and faster procedures for reporting adverse events to the
competent authorities. The European Union procedures for the
authorization of medicinal products were amended in May 2004 and
are due to be implemented by October 2005. The new procedures
are intended to improve the efficiency of operation of both the
mutual recognition and centralized procedures. Additionally, new
rules have been introduced or are under discussion in several
areas, including the harmonization of clinical research laws and
the law relating to orphan drugs and orphan indications. Outside
the United States, reimbursement pricing is typically regulated
by government agencies.
Among other countries, we currently sell Botox® in
Japan, where the regulatory process is at least as equally
complex as in the U.S. Pre-marketing approval and clinical
studies are required, as is negotiated
11
governmental pricing for pharmaceuticals. The regulatory regime
for pharmaceuticals in Japan has historically been lengthy and
costly, primarily because Japan required the repetition of all
relevant clinical studies in Japan. Japan is in the process of
implementing changes to comply with the International Conference
on Harmonization, an agreement among Japan, the United States
and the European Union to facilitate the registration of drugs
utilizing data collected outside of the country. The timeline
for completion of these changes and the rules during this
transitional period are not certain. During this transitional
period, registration of pharmaceutical products will remain
unpredictable.
The total cost of providing health care services has been and
will continue to be subject to review by governmental agencies
and legislative bodies in the major world markets, including the
United States, which are faced with significant pressure to
lower health care costs. The Medicare Prescription Drug
Modernization Act of 2003 imposed certain reimbursement
restrictions on our products in the United States. These
reimbursement restrictions or other price reductions or controls
could materially and adversely affect our revenues and financial
condition. Additionally, price reductions and rebates have
recently been mandated in several European countries,
principally Germany, Italy, Spain and the United Kingdom.
Certain products are also no longer eligible for reimbursement
in France, Italy and Germany. Reference pricing is used in
several markets around the world to reduce prices. Furthermore,
parallel trade within the European Union, whereby products flow
from relatively low-priced to high-priced markets, has been
increasing.
We cannot predict the likelihood or pace of any significant
regulatory or legislative action in these areas, nor can we
predict whether or in what form health care legislation being
formulated by various governments will be passed. Medicare
reimbursement rates are subject to change at any time. We also
cannot predict with precision what effect such governmental
measures would have if they were ultimately enacted into law.
However, in general, we believe that such legislative activity
will likely continue. If adopted, such measures can be expected
to have an impact on our business.
Patents, Trademarks and Licenses
We own, or are licensed under, numerous U.S. and foreign patents
relating to our products, product uses and manufacturing
processes. We believe that our patents and licenses are
important to our business, but that with the exception of the
U.S. and European patents relating to Lumigan®,
Acular® and Alphagan® P, no one
patent or license is currently of material importance in
relation to our overall sales. The U.S. compound and
ophthalmic use patents covering Lumigan® currently
expire in 2012. An application is pending with the
U.S. Patent and Trademark Office for a patent term
extension for Lumigan®. The European patent covering
Lumigan® expires in various countries between 2013
and 2017. The U.S. patent covering the commercial
formulation of Acular® expires in 2009; and in 2008
in Europe. The U.S. patents covering the commercial
formulation of Alphagan® P expire in 2012 and
2021; and in 2009 in Europe, with corresponding patents pending.
Our success with our products will depend, in part, on our
ability to obtain, and successfully defend if challenged, patent
or other proprietary protection. However, the issuance of a
patent is not conclusive as to its validity or as to the
enforceable scope of the claims of the patent. Accordingly, our
patents may not prevent other companies from developing similar
or functionally equivalent products or from successfully
challenging the validity of our patents. Hence, if our patent
applications are not approved or, even if approved, such patents
are circumvented or not upheld in a legal proceeding, our
ability to competitively exploit our patented products and
technologies may be significantly reduced. Also, such patents
may or may not provide competitive advantages for their
respective products or they may be challenged or circumvented by
competitors, in which case our ability to commercially exploit
these products may be diminished.
From time to time, we may need to obtain licenses to patents and
other proprietary rights held by third parties to develop,
manufacture and market our products. If we are unable to timely
obtain these licenses on commercially reasonable terms, our
ability to commercially exploit such products may be inhibited
or prevented. See Certain Factors and Trends Affecting
Allergan and its Businesses We may be subject to
intellectual property litigation and infringement claims, which
could cause us to incur significant expenses and losses or
prevent us from selling our products.
12
We also rely on trade secrets and proprietary know-how that we
seek to protect, in part, through confidentiality agreements
with our partners, customers, employees and consultants. It is
possible that these agreements will be breached or will not be
enforceable in every instance, and that we will not have
adequate remedies for any such breach. It is also possible that
our trade secrets will otherwise become known or independently
developed by competitors.
We may find it necessary to initiate litigation to enforce our
patent rights, to protect our trade secrets or know-how or to
determine the scope and validity of the proprietary rights of
others. Litigation involving patents, trademarks, copyrights and
proprietary technologies can often be protracted and expensive
and, as with litigation generally, the outcome is inherently
uncertain. See Item 3 of Part I of this report,
Legal Proceedings and Note 13,
Commitments and Contingencies, in the notes to the
consolidated financial statements listed under Item 15(a)
of Part IV of this report for information concerning our
current intellectual property litigation.
We market our products under various trademarks, for which we
have both registered and unregistered trademark protection in
the United States and certain countries outside the United
States. We consider these trademarks to be valuable because of
their contribution to the market identification of our products.
Environmental Matters
We are subject to federal, state, local and foreign
environmental laws and regulations. We believe that our
operations comply in all material respects with applicable
environmental laws and regulations in each country where we have
a business presence. Although we continue to make capital
expenditures for environmental protection, we do not anticipate
any significant expenditures in order to comply with such laws
and regulations that would have a material impact on our
earnings or competitive position. We are not aware of any
pending litigation or significant financial obligations arising
from current or past environmental practices that are likely to
have a material adverse effect on our financial position. We
cannot assure you, however, that environmental problems relating
to properties owned or operated by us will not develop in the
future, and we cannot predict whether any such problems, if they
were to develop, could require significant expenditures on our
part. In addition, we are unable to predict what legislation or
regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal.
Seasonality
Our business, taken as a whole, is not materially affected by
seasonal factors, although we have noticed an historical trend
with respect to sales of our Botox® product.
Specifically, sales of Botox® have tended to be
lowest during the first fiscal quarter, with sales during the
second and third fiscal quarters being comparable and marginally
higher than sales during the first fiscal quarter.
Botox® sales during the fourth fiscal quarter have
tended to be the highest due to patients obtaining their final
therapeutic treatment at the end of the year, presumably to
fully utilize deductibles and to receive additional cosmetic
treatments prior to the holiday season.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS
BUSINESSES
Statements made by us in this report and in other reports and
statements released by us that are not historical facts
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933,
Section 21 of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements are necessarily estimates reflecting
the best judgment of senior management and include comments that
express our opinions about trends and factors that may impact
future operating results. Disclosures that use words such as we
believe, anticipate,
estimate, intend, could,
plan, expect and similar expressions are
intended to identify forward-looking statements. Such statements
rely on a number of assumptions concerning future events, many
of which are outside of our control, and involve risks and
uncertainties that could cause actual results to differ
materially from opinions and expectations. Any such
forward-looking statements, whether made in this report or
elsewhere, should be considered in context of the various
disclosures made by us about our businesses including, without
limitation,
13
the risk factors discussed below. We do not plan to update any
such forward-looking statements and expressly disclaim any duty
to update the information contained in this filing except as
required by law.
We operate in a rapidly changing environment that involves a
number of risks. The following discussion highlights some of
these risks and others are discussed elsewhere in this report.
These and other risks could materially and adversely affect our
business, financial condition, prospects, operating results or
cash flows.
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We operate in a highly competitive business. |
The pharmaceutical industry is highly competitive. This
competitive environment requires an ongoing, extensive search
for technological innovation. It also requires, among other
things, the ability to effectively develop, test, and obtain
regulatory approvals for products, as well as the ability to
effectively commercialize, market and promote approved products,
including communicating the effectiveness, safety and value of
products to actual and prospective customers and medical
professionals. Many of our competitors have greater resources
than we have. This enables them, among other things, to spread
their research and development costs, as well as their marketing
and promotion costs, over a broader revenue base. Our
competitors may also have more experience and expertise in
obtaining marketing approvals from the FDA and other regulatory
authorities. In addition to product development, testing,
approval and promotion, other competitive factors in the
pharmaceutical industry include industry consolidation, product
quality and price, reputation, customer service and access to
technical information. It is possible that developments by our
competitors could make our products or technologies less
competitive or obsolete. In addition, competition from generic
drug manufacturers is a major challenge in the United States and
is growing internationally. For instance, Falcon
Pharmaceuticals, Ltd., an affiliate of Alcon Laboratories, Inc.,
is currently attempting to obtain FDA approval for and to launch
a brimonidine product to compete with our Alphagan®
P product.
Until December 2000, Botox® was the only
neuromodulator approved by the FDA. At that time, the FDA
approved Myobloc®, a neuromodulator formerly
marketed by Elan Pharmaceuticals and now marketed by Solstice
Neurosciences Inc. We believe that Beaufour Ipsen Ltd. intends
to seek FDA approval of its Dysport® neuromodulator
for certain therapeutic indications, and that Beaufour
Ipsens marketing partner, Inamed Corporation, intends to
seek FDA approval of Dysport®/Reloxin®
for cosmetic indications. Beaufour Ipsen has marketed
Dysport® in Europe since 1991, prior to our European
commercialization of Botox® in 1992. Also, Mentor
Corporation has announced its intention to develop and seek
regulatory approval to market a competing neuromodulator in the
United States. In addition, we are aware of competing
neuromodulators currently being developed and commercialized in
Asia, Europe, South America and other markets. A Chinese entity
received approval to market a botulinum toxin in China in 1997,
and we believe that it has launched or is planning to launch its
botulinum toxin product in other lightly regulated markets in
Asia, South America and Central America. These lightly regulated
markets may not require adherence to the FDAs current Good
Manufacturing Practices, or cGMPs, the European Medical
Evaluation Agency or other regulatory agencies in countries that
are members of the Organization for Economic Cooperation and
Development, and companies operating in these markets may be
able to produce products at a lower cost than we can. In
addition, Merz Pharmaceuticals is seeking German regulatory
approval for a botulinum toxin currently expected to be launched
during the second half of 2005, and a Korean company is
developing a botulinum toxin that received exportation approval
from Korean authorities in early 2005 and that is expected to be
launched in Korea during 2005. Our sales of Botox®
could be materially and negatively impacted by this competition
or competition from other companies that might obtain FDA
approval or approval from other regulatory authorities to market
a neuromodulator.
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Botox® Cosmetic is a consumer product;
trends may change and applicable laws may affect sales or
product margins of Botox® or
Botox® Cosmetic. |
Botox® Cosmetic is a consumer product. If we fail to
anticipate, identify or to react to competitive products or if
consumer preferences in the cosmetic marketplace shift to other
treatments for the temporary improvement in the appearance of
moderate to severe glabellar lines, we may experience a decline
in demand for Botox® Cosmetic. In addition, the
popular media has at times in the past produced, and may
continue in the future to produce, negative reports and
entertainment regarding the efficacy, safety or side effects of
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Botox® Cosmetic. Consumer perceptions of
Botox® Cosmetic may be negatively impacted by these
reports and other reasons, including the use of unapproved
botulinum toxins that result in injury, which may cause demand
to decline.
Demand for Botox® Cosmetic may be materially
adversely affected by changing economic conditions. Generally,
the costs of cosmetic procedures are borne by individuals
without reimbursement from their medical insurance providers or
government programs. Individuals may be less willing to incur
the costs of these procedures in weak or uncertain economic
environments, and demand for Botox® Cosmetic could
be adversely affected.
Because Botox® and Botox® Cosmetic are
pharmaceutical products, we generally do not collect or pay
sales tax on sales of Botox® or Botox®
Cosmetic. We could be required to collect and pay sales tax
associated with prior, current or future years on sales of
Botox® or Botox® Cosmetic. In addition
to any retroactive taxes and corresponding interest and
penalties that could be assessed, if we were required to collect
or pay sales tax associated with current or future years on
sales of Botox® or Botox® Cosmetic, our
sales of, or our product margins on, Botox® or
Botox® Cosmetic could be adversely affected due to
the increased cost associated with those products.
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We could experience difficulties creating the raw material
needed to produce Botox®. |
The manufacturing process to create the raw material necessary
to produce Botox® is technically complex and
requires significant lead-time. Any failure by us to forecast
demand for, or to maintain an adequate supply of, the raw
material and finished product could result in an interruption in
the supply of Botox® and a resulting decrease in
sales of the product.
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Our future success depends upon our ability to develop new
products, and new indications for existing products, that
achieve market acceptance. |
Our future performance will be affected by the market acceptance
of products such as Lumigan®, Alphagan®
P, Restasis®, Zymar® and
Botox®, as well as FDA approval of new indications
for Botox®, and new products such as
Combigantm,
our Lumigan®/Timolol combination,
Posurdex® and the oral formulation of tazarotene. We
have allocated substantial resources to the development and
introduction of new products and indications. For our business
model to be successful, new products must be continually
developed, tested and manufactured and, in addition, must meet
regulatory standards and receive requisite regulatory approvals
in a timely manner. For instance, to obtain approval of new
indications or products in the United States, we must submit,
among other information, the results of preclinical and clinical
studies on the new indication or product candidate to the FDA.
The number of preclinical and clinical studies that will be
required for FDA approval varies depending on the new indication
or product candidate, the disease or condition for which the new
indication or product candidate is in development and the
regulations applicable to that new indication or product
candidate. For example, in July 2004 an FDA advisory panel voted
against approval for the oral formulation of tazarotene, and in
September 2004 we received a non-approvable letter from the FDA
for that product. If the FDA delays or does not approve of new
indications for our products or drug candidates, the price per
share of our common stock may be impacted upon the announcement
of such delays or non-approvals. We are also required to pass
pre-approval reviews and plant inspections of our and our
suppliers facilities to demonstrate our compliance with
the FDAs cGMP regulations. Products that we are currently
developing or other future product candidates may or may not
receive the regulatory approvals necessary for marketing.
Furthermore, the development, regulatory review and approval,
and commercialization processes are time consuming, costly and
subject to numerous factors that may delay or prevent the
development and
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commercialization of new products, including legal actions
brought by our competitors. The FDA can delay, limit or deny
approval of a new indication or product candidate for many
reasons, including:
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a determination that the new indication or product candidate is
not safe and effective; |
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the FDA may interpret our preclinical and clinical data in
different ways than we do; |
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the FDA may not approve our manufacturing processes or
facilities; or |
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the FDA may change its approval policies or adopt new
regulations. |
In connection with our 2003 acquisitions of Bardeen Sciences
Company, LLC and Oculex Pharmaceuticals, Inc., we acquired the
right to continue researching and developing certain compounds
and products, respectively, for commercialization. We cannot
assure you that these or any other compounds or products that we
are developing for commercialization will be able to be
commercialized on terms that will be profitable, or at all. If
any of our products cannot be successfully or timely
commercialized, our operating results could be materially
adversely affected. Delays or unanticipated costs in any part of
the process or our inability to obtain timely regulatory
approval for our products, including those attributable to,
among other things, our failure to maintain manufacturing
facilities in compliance with all applicable regulatory
requirements, could cause our operating results to suffer and
our stock price to decrease. We cannot assure you that new
products or indications will be successfully developed, will
receive regulatory approval or will achieve market acceptance.
Further, even if we receive FDA and other regulatory approvals
for a new indication or product, the product may later exhibit
adverse effects that limit or prevent its widespread use or that
force us to withdraw the product from the market or to revise
our labeling to limit the indications for which the product may
be prescribed.
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If we are unable to obtain and maintain adequate patent
protection for the technologies incorporated into our products,
our business and results of operations could suffer. |
Patent protection is generally important in the pharmaceutical
industry. Upon the expiration or loss of patent protection for a
product, we can lose a significant portion of sales of that
product in a very short period of time as other companies
manufacture generic forms of our previously protected product at
lower cost, without having had to incur significant research and
development costs in formulating the product. Therefore, our
future financial success may depend in part on obtaining patent
protection for technologies incorporated into our products. We
cannot assure you that such patents will be issued, or that any
existing or future patents will be of commercial benefit. In
addition, it is impossible to anticipate the breadth or degree
of protection that any such patents will afford, and we cannot
assure you that any such patents will not be successfully
challenged in the future. If we are unsuccessful in obtaining or
preserving patent protection, or if any of our products rely on
unpatented proprietary technology, we cannot assure you that
others will not commercialize products substantially identical
to those products. Generic drug manufacturers are currently
challenging the patents covering certain of our products and we
expect that they will continue to do so in the future. Our
business also relies on trade secrets and proprietary know-how
that we seek to protect, in part, through confidentiality
agreements with third parties, including our partners,
customers, employees and consultants. It is possible that these
agreements will be breached or that they will not be enforceable
in every instance, and that we will not have adequate remedies
for any such breach. It is also possible that our trade secrets
will become known or independently developed by our competitors.
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Interruptions in the supply of raw materials could disrupt
our manufacturing and cause our sales and profitability to
decline. |
We obtain the specialty chemicals that are the active
pharmaceutical ingredients in certain of our products from
single sources, who must maintain compliance with the FDAs
cGMP regulations. If we experience difficulties acquiring
sufficient quantities of these materials from our existing
suppliers, or if our suppliers are found to be non-compliant
with the cGMPs, obtaining the required regulatory approvals,
including from the FDA, to use alternative suppliers may be a
lengthy and uncertain process. A lengthy interruption of the
supply of one or more of these materials could adversely affect
our ability to manufacture and supply products, which could
cause our sales and profitability to decline.
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Importation of products from Canada and other countries
into the United States may lower the prices we receive for our
products. |
In the United States, our products are subject to competition
from lower priced versions of our products and competing
products from Canada, Mexico, and other countries where
government price controls or other market dynamics result in
lower prices. Our products that require a prescription in the
United States are often available to consumers in these markets
without a prescription, which may cause consumers to further
seek out our products in these lower priced markets. The ability
of patients and other customers to obtain these lower priced
imports has grown significantly as a result of the Internet, an
expansion of pharmacies in Canada and elsewhere targeted to
American purchasers, the increase in U.S.-based businesses
affiliated with Canadian pharmacies marketing to American
purchasers, and other factors. Most of these foreign imports are
illegal under current U.S. law. However, the volume of
imports continues to rise due to the limited enforcement
resources of the FDA and the U.S. Customs Service, and
there is increased political pressure to permit the imports as a
mechanism for expanding access to lower priced medicines.
In December 2003, Congress enacted the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. This law
contains provisions that may change U.S. import laws and
expand consumers ability to import lower priced versions
of our and competing products from Canada, where there are
government price controls. These changes to U.S. import
laws will not take effect unless and until the Secretary of
Health and Human Services certifies that the changes will lead
to substantial savings for consumers and will not create a
public health safety issue. The former Secretary of Health and
Human Services did not make such a certification. However, it is
possible that the current Secretary or a subsequent Secretary
could make the certification in the future. As directed by
Congress, a task force on drug importation recently conducted a
comprehensive study regarding the circumstances under which drug
importation could be safely conducted and the consequences of
importation on the health, medical costs and development of new
medicines for U.S. consumers. The task force issued its
report in December 2004, finding that there are significant
safety and economic issues that must be addressed before
importation of prescription drugs is permitted, and the current
Secretary has not yet announced any plans to make the required
certification. In addition, federal legislative proposals have
been made to implement the changes to the U.S. import laws
without any certification, and to broaden permissible imports in
other ways. Even if the changes to the U.S. import laws do
not take effect, and other changes are not enacted, imports from
Canada and elsewhere may continue to increase due to market and
political forces, and the limited enforcement resources of the
FDA, the U.S. Customs Service and other government
agencies. For example, state and local governments have
suggested that they may import drugs from Canada for employees
covered by state health plans or others, and some already have
implemented such plans.
The importation of foreign products adversely affects our
profitability in the United States. This impact could become
more significant in the future, and the impact could be even
greater if there is a further change in the law or if state or
local governments take further steps to import products from
abroad.
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Our business will continue to expose us to risks of
environmental liabilities. |
Our product development programs and manufacturing processes
involve the controlled use of hazardous materials, chemicals and
toxic compounds. These programs and processes expose us to risks
that an accidental contamination could lead to noncompliance
with environmental laws, regulatory enforcement actions and
claims for personal injury and property damage. If an accident
occurs, or if we discover contamination caused by prior
operations, including by prior owners and operators of
properties we acquire, we could be liable for cleanup
obligations, damages and fines. The substantial unexpected costs
we may incur could have a significant and adverse effect on our
business and results of operations.
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We may experience losses due to product liability claims,
product recalls or corrections. |
The design, development, manufacture and sale of our products
involve an inherent risk of product liability claims by
consumers and other third parties. We have in the past been, and
continue to be, subject to various product liability claims and
lawsuits. In addition, we have in the past and may in the future
recall or
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issue field corrections related to our products due to
manufacturing deficiencies, labeling errors or other safety or
regulatory reasons. We cannot assure you that we will not
experience material losses due to product liability claims,
lawsuits, product recalls or corrections.
Additionally, our products may cause, or may appear to cause,
serious adverse side effects or potentially dangerous drug
interactions if misused or improperly prescribed. These events,
among others, could result in additional regulatory controls,
such as the performance of costly post-approval clinical studies
or revisions to our approved labeling, which could limit the
indications or patient population for our products or could even
lead to the withdrawal of a product from the market.
Furthermore, any adverse publicity associated with such an event
could cause consumers to seek alternatives to our products,
which may cause our sales to decline, even if our products are
ultimately determined not to have been the primary cause of the
event.
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Health care initiatives and other cost-containment
pressures could cause us to sell our products at lower prices,
resulting in less revenue to us. |
Some of our products are purchased or reimbursed by state and
federal government authorities, private health insurers and
other organizations, such as health maintenance organizations,
or HMOs, and managed care organizations, or MCOs. Third party
payors increasingly challenge pharmaceutical product pricing.
The trend toward managed healthcare in the United States, the
growth of organizations such as HMOs and MCOs, and various
legislative proposals and enactments to reform healthcare and
government insurance programs, including the Medicare
Prescription Drug Modernization Act of 2003, could significantly
influence the manner in which pharmaceutical products are
prescribed and purchased, which could result in lower prices
and/or a reduction in demand for our products. Such cost
containment measures and healthcare reforms could adversely
affect our ability to sell our products. Furthermore, individual
states have become increasingly aggressive in passing
legislation and implementing regulations designed to control
pharmaceutical product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain
product access, importation from other countries and bulk
purchasing. Legally mandated price controls on payment amounts
by third party payors or other restrictions could negatively and
materially impact our revenues and financial condition. We
encounter similar regulatory and legislative issues in most
countries outside the United States.
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We are subject to risks arising from currency exchange
rates, which could increase our costs and may cause our
profitability to decline. |
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar.
Therefore, fluctuations in foreign currency exchange rates
affect our operating results. We cannot assure you that future
exchange rate movements, inflation or other related factors will
not have a material adverse effect on our sales, gross profit or
operating expenses.
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We are subject to risks associated with doing business
internationally. |
Our business is subject to certain risks inherent in
international business, many of which are beyond our control.
These risks include, among other things:
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adverse changes in tariff and trade protection measures; |
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unexpected changes in foreign regulatory requirements; |
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potentially negative consequences from changes in or
interpretations of tax laws; |
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differing labor regulations; |
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changing economic conditions in countries where our products are
sold or manufactured or in other countries; |
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differing local product preferences and product requirements; |
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exchange rate risks; |
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restrictions on the repatriation of funds; |
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political unrest and hostilities; |
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differing degrees of protection for intellectual
property; and |
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difficulties in coordinating and managing foreign operations. |
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Any of these factors, or any other international factors, could
have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that
we can successfully manage these risks or avoid their effects.
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We may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant
expenses and losses or prevent us from selling our
products. |
Although we have a corporate policy not to infringe the valid
and enforceable patents of others, we cannot assure you that our
products will not infringe patents held by third parties. In the
event we discover that we may be infringing third party patents,
licenses from those third parties may not be available on
commercially attractive terms or at all. We may have to defend,
and have recently defended, against charges that we violated
patents or the proprietary rights of third parties. Litigation
is costly and time-consuming, and diverts the attention of our
management and technical personnel. In addition, if we infringe
the intellectual property rights of others, we could lose our
right to develop, manufacture or sell products or could be
required to pay monetary damages or royalties to license
proprietary rights from third parties. An adverse determination
in a judicial or administrative proceeding or a failure to
obtain necessary licenses could prevent us from manufacturing or
selling our products, which could harm our business, financial
condition, prospects, results of operations and cash flows. See
Item 3 of Part I of this report, Legal
Proceedings and Note 13, Commitments and
Contingencies, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report for information concerning our current intellectual
property litigation.
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The consolidation of drug wholesalers could increase
competitive and pricing pressures on pharmaceutical
manufacturers, including us. |
We sell our pharmaceutical products primarily through
wholesalers. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United
States. This distribution network is continuing to undergo
significant consolidation marked by mergers and acquisitions. As
a result, a smaller number of large wholesale distributors
control a significant share of the market. We expect that
consolidation of drug wholesalers will increase competitive and
pricing pressures on pharmaceutical manufacturers, including us.
In addition, wholesalers may apply pricing pressure through the
implementation of fee-for-service arrangements, and their
purchases may exceed customer demand, resulting in reduced
wholesaler purchases in later quarters. We cannot assure you
that we can manage these pressures or that wholesaler purchases
will not decrease as a result of this potential excess buying.
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We may acquire companies in the future and these
acquisitions could disrupt our business. |
As part of our business strategy, we regularly consider and, as
appropriate, make acquisitions of technologies, products and
businesses that we believe are complementary to our business.
Acquisitions typically entail many risks and could result in
difficulties in integrating the operations, personnel,
technologies and products of the companies acquired, some of
which may result in significant charges to earnings. If we are
unable to successfully integrate our acquisitions with our
existing business, we may not obtain the advantages that the
acquisitions were intended to create, which may materially
adversely affect our business, results of operations, financial
condition and cash flows, our ability to develop and introduce
new products and the market price of our stock. In connection
with acquisitions, we could experience disruption in our
business or employee base, or key employees of companies that we
acquire may seek employment elsewhere, including with our
competitors. Furthermore, the products of companies we acquire
may overlap with our products or those of our customers,
creating conflicts with existing relationships or with other
commitments that are detrimental to the integrated businesses.
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Compliance with the extensive government regulations to
which we are subject is expensive and time consuming, and may
result in the delay or cancellation of product sales,
introductions or modifications. |
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our
product development and manufacturing capabilities. All
pharmaceutical companies, including
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Allergan, are subject to extensive, complex, costly and evolving
regulation by federal governmental authorities, principally by
the FDA and the U.S. Drug Enforcement Administration, or
DEA, and similar foreign and state government agencies. Failure
to comply with the regulatory requirements of the FDA, DEA and
other U.S. and foreign regulatory requirements may subject a
company to administrative or judicially imposed sanctions,
including, among others, a refusal to approve a pending
application to market a new product or a new indication for an
existing product. The Federal Food, Drug, and Cosmetic Act, the
Controlled Substances Act and other domestic and foreign
statutes and regulations govern or influence the research,
testing, manufacturing, packing, labeling, storing, record
keeping, safety, effectiveness, approval, advertising,
promotion, sale and distribution of our products. Under certain
of these regulations, we are subject to periodic inspection of
our facilities, production processes and control operations
and/or the testing of our products by the FDA, the DEA and other
authorities, to confirm that we are in compliance with all
applicable regulations, including the FDAs cGMP
regulations. The FDA conducts pre-approval and post-approval
reviews and plant inspections of us and our suppliers to
determine whether our record keeping, production processes and
controls, personnel and quality control are in compliance with
the cGMPs and other FDA regulations. We also need to perform
extensive audits of our vendors, contract laboratories and
suppliers to ensure that they are compliant with these
requirements. In addition, in order to commercialize our
products or new indications for an existing product, we must
demonstrate that the product or new indication is safe and
effective, and that our and our suppliers manufacturing
facilities are compliant with applicable regulations, to the
satisfaction of the FDA and other regulatory agencies.
The process for obtaining governmental approval to manufacture
pharmaceutical products is rigorous, typically takes many years
and is costly, and we cannot predict the extent to which we may
be affected by legislative and regulatory developments. We are
dependent on receiving FDA and other governmental approvals
prior to manufacturing, marketing and shipping our products. We
may fail to obtain approval from FDA or other governmental
authorities for our product candidates, or experience delays in
obtaining such approvals, due to varying interpretations of data
or failure to satisfy rigorous efficacy, safety and
manufacturing quality standards. Consequently, there is always a
risk that the FDA or other applicable governmental authorities
will not approve our products, or will take post-approval action
limiting or revoking our ability to sell our products, or that
the rate, timing and cost of such approvals will adversely
affect our product introduction plans, results of operations and
stock price. Despite the time and expense exerted, regulatory
approval is never guaranteed.
Even after we obtain regulatory approval for a product candidate
or new indication, we are subject to extensive regulation,
including ongoing compliance with the FDAs cGMP
regulations, post-marketing clinical studies mandated by the
FDA, adverse event reporting, labeling, advertising, marketing
and promotion. If we or any third party that we involve in the
testing, packing, manufacture, labeling, marketing and
distribution of our products fail to comply with any such
regulations, we may be subject to, among other things, warning
letters, product seizures, recalls, fines or other civil
penalties, injunctions, suspension or revocation of approvals,
operating restrictions and criminal prosecution. Physicians may
prescribe pharmaceutical or biologic products for uses that are
not described in a products labeling or differ from those
tested by us and approved by the FDA. While such
off-label uses are common and the FDA does not
regulate a physicians choice of treatment, the FDA does
restrict a manufacturers communications on the subject of
off-label use. Companies cannot actively
promote FDA-approved pharmaceutical or biologic products
for off-label uses, but they may disseminate to physicians
articles published in peer-reviewed journals. To the extent
allowed by law, we disseminate peer-reviewed articles on our
products to targeted physicians. If, however, our promotional
activities fail to comply with the FDAs regulations or
guidelines, we may be subject to warnings from, or enforcement
action by, the FDA or another enforcement agency.
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If we market products in a manner that violates health
care fraud and abuse laws, we may be subject to civil or
criminal penalties. |
Federal health care program anti-kickback statutes prohibit,
among other things, knowingly and willfully offering, paying,
soliciting, or receiving remuneration to induce or in return for
purchasing, leasing, ordering, or arranging for the purchase,
lease or order of any health care item or service reimbursable
under Medicare,
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Medicaid, or other federally financed health care programs. This
statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on one hand and prescribers,
purchasers, and formulary managers on the other. Although there
are a number of statutory exemptions and regulatory safe harbors
protecting certain common activities from prosecution, the
exemptions and safe harbors are drawn narrowly, and practices
that involve remuneration intended to induce prescribing,
purchases, or recommendations may be subject to scrutiny if they
do not qualify for an exemption or safe harbor. Although we
believe that we are in compliance, our practices may be
determined to fail to meet all of the criteria for safe harbor
protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Pharmaceutical companies have been prosecuted under these laws
for a variety of alleged promotional and marketing activities,
such as allegedly providing free product to customers with the
expectation that the customers would bill federal programs for
the product; reporting to pricing services inflated average
wholesale prices that were then used by federal programs to set
reimbursement rates; engaging in off-label promotion that caused
claims to be submitted to Medicaid for non-covered off-label
uses; and submitting inflated best price information to the
Medicaid Rebate Program. The majority of states also have
statutes or regulations similar to the federal anti-kickback law
and false claims laws, which apply to items and services
reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. Sanctions under
these federal and state laws may include civil monetary
penalties, exclusion of a manufacturers products from
reimbursement under government programs, criminal fines, and
imprisonment. Because of the breadth of these laws and the
narrowness of the safe harbors, it is possible that some of our
business activities could be subject to challenge under one or
more of such laws. For example, we and several other
pharmaceutical companies are currently subject to suits by
governmental entities in several jurisdictions, including
Massachusetts, New York and Alabama alleging that we and these
other companies, through promotional, discounting, and pricing
practices reported false and inflated average wholesale prices
or wholesale acquisition costs and failed to report best prices
as required by federal and state rebate statutes, resulting in
the plaintiffs overpaying for certain medications.
Our operations are conducted in owned and leased facilities
located throughout the world. We believe our present facilities
are adequate for our current needs. Our headquarters and primary
administrative and research facilities, which we own, are
located in Irvine, California. We have two additional facilities
located in California. One such facility is leased to provide
raw material support and the other facility is leased to provide
administrative support. We own one facility in Texas for
manufacturing and warehousing.
Outside of the United States, we own and operate two facilities
for manufacturing and warehousing. One such facility is located
in Brazil and the other facility is located in Ireland. Other
material facilities include leased facilities for
administration, warehousing and research and development in
Japan; leased facilities for administration in Australia,
Brazil, Canada, Germany, Hong Kong, Ireland, Italy, Spain and
the United Kingdom; and owned facilities for administration and
research and development in France.
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Item 3. |
Legal Proceedings |
We are involved in various lawsuits and claims arising in the
ordinary course of business.
On June 6, 2001, after receiving paragraph 4
invalidity and noninfringement Hatch-Waxman Act certifications
from Apotex indicating that Apotex had filed an Abbreviated New
Drug Application with the FDA for a generic form of
Acular®, we and Syntex, the holder of the
Acular® patent, filed a lawsuit entitled
Syntex (U.S.A.) LLC and Allergan, Inc. v. Apotex,
Inc., et al. in the United States District Court for
the Northern District of California. On December 29, 2003,
after a trial in June 2003, the court entered Findings of Fact
and Conclusions of Law in our favor, thereby holding that the
patent at issue is valid, enforceable and infringed by
Apotexs proposed generic drug. On January 27, 2004,
the court entered final judgment in our favor. On
February 17, 2004, Apotex filed a Notice of Appeal with the
United States Court of Appeals for the
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Federal Circuit. Oral argument on the appeal took place on
November 1, 2004 and we are currently awaiting the Court of
Appeals ruling on that appeal. If the court reversed the
judgment in our favor, Acular® could face immediate
generic competition. On June 29, 2001, we filed a separate
lawsuit in Canada against Apotex similarly relating to a generic
version of Acular®. A mediation in the Canadian
lawsuit was held on January 4, 2005 and a settlement
conference has been scheduled for April 6, 2005.
On January 23, 2003, a complaint entitled Irena
Medavoy and Morris Mike Medavoy v. Arnold W.
Klein, M.D., et al. and Allergan, Inc. was filed
in the Superior Court of the State of California for the County
of Los Angeles. The complaint contained, among other things,
allegations against us of negligence, unfair business practices,
product liability, intentional misconduct, fraud, negligent
misrepresentation, strict liability in tort, improper off-label
promotion and loss of consortium. The complaint also contained
separate allegations against the other defendants. On
April 10, 2003, Morris Mike Medavoy voluntarily served on
us a Request for Dismissal Without Prejudice for the only two
causes of action he asserted in the complaint. The causes of
action asserted by Irena Medavoy against us were not affected by
this Request for Dismissal. On July 8, 2003, Irena Medavoy
filed a First Amended Complaint, adding allegations against us
of false and/or misleading advertising and unjust enrichment, as
well as false and/or misleading advertising and unfair
competition. A jury trial in the matter began on August 31,
2004. On October 8, 2004, the jury ruled in favor of us and
Dr. Klein. Also on October 8, 2004, the court
dismissed the unfair business practices claims against us and
Dr. Klein. On November 29, 2004, Irena Medavoy filed a
Motion for New Trial. On December 16, 2004, the court
denied Irena Medavoys Motion for a New Trial. On
January 13, 2005, Irena Medavoy filed a Notice of Appeal
with the Clerk of Court of the Superior Court of the State of
California for the County of Los Angeles.
On June 2, 2003, a complaint entitled Klein-Becker
usa, LLC v. Allergan, Inc. was filed in the United
Stated District Court for the District of Utah
Central Division. The complaint, as later amended, contained
claims against us for declaratory relief, intentional
interference with contractual and economic relations, unfair
competition under federal and Utah law, and injunctive relief,
based on allegations that we interfered with Klein-Beckers
contractual and economic relations by dissuading certain
magazines from running Klein-Beckers advertisements for
its anti-wrinkle cream. On July 30, 2003, we filed a reply
and counterclaims against Klein-Becker, asserting, as later
amended, claims for false advertising, unfair competition under
federal and Utah law, trade libel, declaratory relief, and
trademark infringement and dilution, and alleging that
Klein-Beckers advertisements for its anti-wrinkle cream
that use the heading Better than BOTOX®? are
false and misleading. On July 31, 2003, the court denied
Klein-Beckers application for a temporary restraining
order to restrain us from, among other things, contacting
magazines regarding Klein-Beckers advertisements. On
October 7, 2003, the court granted in part and denied in
part our motion to dismiss Klein-Beckers complaint,
dismissing Klein-Beckers claims for unfair competition
under federal and Utah law and injunctive relief. On
August 14, 2004, the court denied in its entirety
Klein-Beckers motion to dismiss our claims. From July 2004
through December 2004, the case was voluntarily stayed while the
parties explored settlement through mediation. The voluntary
stay ended December 29, 2004, without the parties reaching
settlement. Trial is scheduled for August 1, 2005.
On October 31, 2003, we filed a complaint entitled
Allergan, Inc. v. Mark B. McClellan,
et al. in the United States District Court for the
District of Columbia. The complaint for declaratory judgment and
injunctive relief alleges that the FDA improperly classified our
drug Restasis® as an antibiotic. On
December 29, 2003, we filed a Motion for Summary Judgment.
On January 19, 2005, the court issued a Memorandum Opinion
dismissing our complaint on the grounds that the FDA properly
interpreted and applied the statutory definition of an
antibiotic drug in determining that Restasis® is an
antibiotic.
On July 13, 2004, we received a paragraph 4
Hatch-Waxman Act certification from Alcon, Inc. indicating that
Alcon had filed a New Drug Application, or NDA, under
section 505(b)(2) of the Federal Food, Drug, and Cosmetic
Act for a drug containing brimonidine tartrate ophthalmic
solution in a 0.15% concentration. In the certification, Alcon
contends that U.S. Patent Nos. 5,424,078; 6,562,873;
6,627,210; 6,641,834; and 6,673,337, all of which are assigned
to us or our wholly-owned subsidiary, Allergan Sales, LLC, and
are listed in the Orange Book under Alphagan®
P, are invalid and/or not infringed by the proposed Alcon
product. On August 24, 2004, we filed a complaint against
Alcon for patent infringement in the United States District
Court for the District of Delaware. On September 3, 2004,
Alcon filed an answer to the complaint and
22
a counterclaim against us. On September 23, 2004, we filed
a reply to Alcons counterclaim. A claim construction
hearing is scheduled for June 7, 2005. Trial is scheduled
for March 6, 2006. Pursuant to the Hatch-Waxman Act,
approval of Alcons generic NDA is stayed until the earlier
of (1) 30 months from the date of the paragraph 4
certification, or (2) a ruling in the patent infringement
litigation in Alcons favor.
On August 26, 2004, a complaint entitled Clayworth,
et al. v. Allergan, Inc., et al. was filed
in the Superior Court of the State of California for the County
of Alameda. The complaint, which names us and 12 other
defendants, alleges unfair business practices based upon a price
fixing conspiracy in connection with the reimportation of
pharmaceuticals from Canada. On September 3, 2004, the
plaintiffs filed a first amended complaint, making various
modifications to the original complaint. On November 22,
2004, the pharmaceutical defendants jointly filed a demurrer to
the first amended complaint. The hearing on the demurrer was
held on January 27, 2005. On February 4, 2005, the
court issued an order sustaining the pharmaceutical defendants
demurrer and granting plaintiffs leave to further amend the
first amended complaint.
We are involved in various other lawsuits and claims arising in
the ordinary course of business, including suits we have
previously reported, such as Utility Consumers Action
Network v. Allergan, Inc., et al., William Fisk
Bothwell v. Allergan, Inc., et al. and The City of
New York v. Allergan, Inc., et al. These and other matters
are, in the opinion of our management, immaterial both
individually and in the aggregate with respect to our
consolidated financial position, liquidity or results of
operations.
Because of the uncertainties related to the incurrence, amount
and range of loss on any pending litigation, investigation or
claim, management is currently unable to predict the ultimate
outcome of any litigation, investigation or claim, determine
whether a liability has been incurred or make an estimate of the
reasonably possible liability that could result from an
unfavorable outcome. We believe, however, that the liability, if
any, resulting from the aggregate amount of uninsured damages
for any outstanding litigation, investigation or claim will not
have a material adverse effect on our consolidated financial
position, liquidity or results of operations. However, an
adverse ruling in a patent infringement lawsuit involving us
could materially affect our ability to sell one or more of our
products or could result in additional competition. In view of
the unpredictable nature of such matters, we cannot provide any
assurances regarding the outcome of any litigation,
investigation or claim to which we are a party or the impact on
us of an adverse ruling in such matters.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
We did not submit any matter during the fourth quarter of the
fiscal year covered by this report to a vote of security
holders, through the solicitation of proxies or otherwise.
PART II
|
|
Item 5. |
Market For Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The following table shows the quarterly price range of our
common stock and the cash dividends declared per share of common
stock during the periods listed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
Calendar Quarter |
|
Low |
|
High |
|
Div. |
|
Low |
|
High |
|
Div. |
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
75.65 |
|
|
$ |
90.21 |
|
|
$ |
0.09 |
|
|
$ |
56.60 |
|
|
$ |
71.53 |
|
|
$ |
0.09 |
|
Second
|
|
|
83.13 |
|
|
|
92.61 |
|
|
|
0.09 |
|
|
|
66.81 |
|
|
|
81.55 |
|
|
|
0.09 |
|
Third
|
|
|
69.05 |
|
|
|
90.36 |
|
|
|
0.09 |
|
|
|
75.82 |
|
|
|
81.80 |
|
|
|
0.09 |
|
Fourth
|
|
|
66.78 |
|
|
|
82.10 |
|
|
|
0.09 |
|
|
|
71.65 |
|
|
|
81.48 |
|
|
|
0.09 |
|
Our common stock is listed on the New York Stock Exchange and is
traded under the symbol AGN. In newspapers, stock
information is frequently listed as Alergn.
The approximate number of stockholders of record was 6,200 as of
February 8, 2005.
23
On January 25, 2005, our board of directors declared a cash
dividend of $0.10 per share, payable March 10, 2005 to
stockholders of record on February 14, 2005.
Securities Authorized for Issuance Under Equity Compensation
Plans
The information included under Item 12 of Part III of
this report is hereby incorporated by reference into this
Item 5 of Part II of this report.
Issuer Purchases of Equity Securities
The following table discloses the purchases of our equity
securities during the fourth fiscal quarter of 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number (or |
|
|
|
|
|
|
Shares Purchased |
|
Approximate Dollar |
|
|
Total Number |
|
|
|
as Part of Publicly |
|
Value) of Shares that may |
|
|
of Shares |
|
Average Price |
|
Announced Plans |
|
yet be Purchased Under |
Period |
|
Purchased(1) |
|
Paid per Share |
|
or Programs |
|
the Plans or Programs(2) |
|
|
|
|
|
|
|
|
|
September 25, 2004 to October 31, 2004
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
6,239,993 |
|
November 1, 2004 to November 30, 2004
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
6,301,659 |
|
December 1, 2004 to December 31, 2004
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
6,362,495 |
|
Total
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
N/A |
|
|
|
(1) |
The Company maintains an evergreen stock repurchase program,
which was first announced on September 28, 1993. Under the
stock repurchase program, the Company may maintain up to
9.2 million repurchased shares in its treasury account at
any one time. As of December 31, 2004, the Company held
approximately 2.8 million treasury shares under this
program. |
|
(2) |
The following share numbers reflect the maximum number of shares
that may be purchased under the Companys stock repurchase
program and are as of the end of each of the respective periods. |
24
|
|
Item 6. |
Selected Financial Data |
SELECTED CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
|
$ |
1,385.0 |
|
|
$ |
1,142.1 |
|
|
$ |
992.1 |
|
Research service revenues (primarily from a related party
through April 16, 2001)
|
|
|
|
|
|
|
16.0 |
|
|
|
40.3 |
|
|
|
60.3 |
|
|
|
62.9 |
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
386.7 |
|
|
|
320.3 |
|
|
|
221.7 |
|
|
|
198.1 |
|
|
|
197.7 |
|
|
Cost of research services
|
|
|
|
|
|
|
14.5 |
|
|
|
36.6 |
|
|
|
56.1 |
|
|
|
59.4 |
|
|
Selling, general and administrative
|
|
|
778.9 |
|
|
|
697.2 |
|
|
|
623.8 |
|
|
|
481.0 |
|
|
|
410.3 |
|
|
Research and development
|
|
|
345.6 |
|
|
|
763.5 |
|
|
|
233.1 |
|
|
|
227.5 |
|
|
|
165.7 |
|
|
Technology fees from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
(3.1 |
) |
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
118.7 |
|
|
|
|
|
|
|
|
|
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
|
62.4 |
|
|
|
(1.7 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
527.4 |
|
|
|
(23.7 |
) |
|
|
129.0 |
|
|
|
242.1 |
|
|
|
224.8 |
|
Non-operating income (loss)
|
|
|
4.7 |
|
|
|
(5.8 |
) |
|
|
(39.2 |
) |
|
|
18.2 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
and minority interest
|
|
|
532.1 |
|
|
|
(29.5 |
) |
|
|
89.8 |
|
|
|
260.3 |
|
|
|
235.6 |
|
Earnings (loss) from continuing operations
|
|
|
377.1 |
|
|
|
(52.5 |
) |
|
|
64.0 |
|
|
|
171.2 |
|
|
|
165.9 |
|
Earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
|
|
54.9 |
|
|
|
49.2 |
|
Net earnings (loss)
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
$ |
75.2 |
|
|
$ |
224.9 |
|
|
$ |
215.1 |
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
$ |
1.30 |
|
|
$ |
1.27 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.09 |
|
|
|
0.42 |
|
|
|
0.38 |
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
$ |
1.29 |
|
|
$ |
1.24 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.08 |
|
|
|
0.40 |
|
|
|
0.37 |
|
|
Cash dividends per share
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.32 |
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
1,376.0 |
|
|
$ |
928.2 |
|
|
$ |
1,200.2 |
|
|
$ |
1,114.8 |
|
|
$ |
1,097.4 |
|
Working capital
|
|
|
916.4 |
|
|
|
544.8 |
|
|
|
796.6 |
|
|
|
710.4 |
|
|
|
752.1 |
|
Total assets
|
|
|
2,257.0 |
|
|
|
1,754.9 |
|
|
|
1,806.6 |
|
|
|
2,046.2 |
|
|
|
1,971.0 |
|
Long-term debt
|
|
|
570.1 |
|
|
|
573.3 |
|
|
|
526.4 |
|
|
|
444.8 |
|
|
|
484.3 |
|
Total stockholders equity
|
|
|
1,116.2 |
|
|
|
718.6 |
|
|
|
808.3 |
|
|
|
977.4 |
|
|
|
873.8 |
|
The financial data above has been recast to reflect the results
of operations and financial positions of our ophthalmic surgical
and contact lens care businesses as a discontinued operation.
The results of operations for our discontinued operations
include allocations of certain Allergan expenses to those
operations. These amounts have been allocated on the basis that
is considered by management to reflect most fairly or reasonably
the utilization of the services provided to, or the benefit
obtained by, those operations.
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
This financial review presents our operating results for each of
the three years in the period ended December 31, 2004, and
our financial condition at December 31, 2004. Except for
the historical information contained herein, the following
discussion contains forward-looking statements which are subject
to known and unknown risks, uncertainties and other factors that
may cause our actual results to differ materially from those
expressed or implied by such forward-looking statements. We
discuss such risks, uncertainties and other factors throughout
this report and specifically under the caption Certain
Factors and Trends Affecting Allergan and its Businesses
in Item 1 of Part I of this report. In addition, the
following review should be read
25
in connection with the information presented in our consolidated
financial statements and the related notes to our consolidated
financial statements.
Critical Accounting Policies
We believe that the estimates, assumptions and judgments
involved in the accounting policies described below have the
greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters,
actual results could differ from the estimates we use in
applying the critical accounting policies.
We recognize revenue from product sales when goods are shipped
and title and risk of loss transfer to the customer. We have a
policy to attempt to maintain average U.S. wholesaler
inventory levels of our products at an amount between one to two
months of our net sales. We generally offer cash discounts to
customers for the early payment of receivables. Those discounts
are recorded as a reduction of revenue and accounts receivable
in the same period that the related sale is recorded. The
amounts reserved for cash discounts were $1.3 million and
$1.2 million at December 31, 2004 and 2003,
respectively. Provisions for cash discounts deducted from
consolidated sales in 2004, 2003 and 2002, were
$22.5 million, $20.0 million and $16.8 million,
respectively. We permit returns of product from any product line
by any class of customer if such product is returned in a timely
manner, in good condition and from the normal channels of
distribution. Return policies in certain international markets
provide for more stringent guidelines in accordance with the
terms of contractual agreements with customers. Allowances for
returns are provided for based upon an analysis of our
historical patterns of returns matched against the sales from
which they originated. The amount of allowances for sales
returns reserved at December 31, 2004 and 2003 were
$5.8 million and $6.5 million, respectively.
Provisions for sales returns deducted from consolidated sales
were $25.4 million, $28.2 million and
$18.9 million in 2004, 2003 and 2002, respectively.
Historical allowances for cash discounts and product returns
have been within the amounts reserved or accrued, respectively.
Additionally, we participate in various managed care sales
rebate and other incentive programs, the largest of which
relates to Medicaid. Sales rebates and other incentive programs
also include chargebacks, which are contractual discounts given
primarily to federal government agencies and group purchasing
organizations. Sales rebates and incentive accruals reduce
revenue in the same period that the related sale is recorded and
are included in Other accrued expenses in our
consolidated balance sheets. The amounts accrued for sales
rebates and other incentive programs at December 31, 2004
and 2003 were $61.4 million and $51.6 million,
respectively. The $9.8 million increase in the amount
accrued for sales rebates and other incentive programs is
primarily due to a difference in the timing of when payments
were made against accrued amounts at December 31, 2004
compared to December 31, 2003 and an increase in the ratio
of U.S. pharmaceutical product sales, principally eye care
pharmaceutical products, subject to such rebates and incentive
programs. Provisions for sales rebates and other incentive
programs deducted from consolidated sales were
$144.7 million, $123.5 million and $105.4 million
in 2004, 2003 and 2002, respectively. Our procedures for
estimating amounts accrued for sales rebates and other incentive
programs at the end of any period are based on available
quantitative data and are supplemented by managements
judgment with respect to many factors including, but not limited
to, current market place dynamics, changes in contract terms,
changes in sales trends, an evaluation of current laws and
regulations and product pricing. Quantitatively, we use
historical sales, product utilization and rebate data and apply
forecasting techniques in order to estimate our liability
amounts. Qualitatively, managements judgment is applied to
these items to modify, if appropriate, the estimated liability
amounts. There are inherent risks in this process. For example,
customers may not achieve assumed utilization levels; customers
may misreport their utilization to us; and actual movements of
the U.S. Consumer Price Index Urban (CPI-U),
which affect our rebate programs with U.S. federal and
state government agencies, may differ from those estimated. On a
quarterly basis, adjustments to our estimated liabilities for
sales rebates and other incentive programs related to sales made
in prior periods have not been material and have generally been
less than 0.5% of consolidated net sales. An adjustment to our
estimated liabilities of 0.5% of consolidated net sales on a
quarterly basis would result in an increase or
26
decrease to net sales and earnings before income taxes of
approximately $2 million to $3 million. The
sensitivity of our estimates can vary by program and type of
customer. Additionally, there is a significant time lag between
the date we determine the estimated liability and when we
actually pay the liability. Due to this time lag, we record
adjustments to our estimated liabilities over several periods,
which can result in a net increase to earnings or a net decrease
to earnings in those periods. Material differences may result in
the amount of revenue we recognize from product sales if the
actual amount of rebates and incentives differ materially from
the amounts estimated by management.
We recognize as other income, license fees based upon the facts
and circumstances of each licensing agreement. In general, we
recognize income upon the signing of a license agreement that
grants rights to products or technology to a third party if we
have no further obligation to provide products or services to
the third party after granting the license. We defer income
under license agreements when we have further obligations that
indicate that a separate earnings process has not culminated.
We sponsor various pension plans in the U.S. and abroad in
accordance with local laws and regulations. Our pension plans in
the U.S. account for a large majority of our pension
plans net periodic benefit costs and projected benefit
obligations. In connection with these plans, we use certain
actuarial assumptions to determine the plans net periodic
benefit costs and projected benefit obligations, the most
significant of which are the expected long-term rate of return
on assets and the discount rate.
Our assumption for the expected long-term rate of return on
assets in our U.S. pension plan to determine the net
periodic benefit cost is 8.25% for 2004, which is the same rate
used for 2003 and 1.25 percentage points lower than our
2002 expected rate of return of 9.50%. We determine, based upon
recommendations from our pension plans investment
advisors, the expected rate of return using a building block
approach that considers diversification and rebalancing for a
long-term portfolio of invested assets. Our investment advisors
study historical market returns and preserve long-term
historical relationships between equities and fixed income in a
manner consistent with the widely-accepted capital market
principle that assets with higher volatility generate a greater
return over the long run. They also evaluate market factors such
as inflation and interest rates before long-term capital market
assumptions are determined. The expected rate of return is
applied to the market-related value of plan assets. As a
sensitivity measure, the effect of a 0.25% decline in the return
on assets assumption would increase our expected 2005
U.S. pre-tax pension benefit cost by approximately
$0.7 million.
The discount rate used to calculate our U.S. pension
benefit obligations at December 31, 2004 is 5.95%, which
represents a 0.15 percentage point decline from our
December 31, 2003 rate of 6.10%. We determine the discount
rate largely based upon an index of high-quality fixed income
investments (U.S. Moodys Aa Corporate Long Bond Yield
Average) at the plans measurement date. As a sensitivity
measure, the effect of a 0.25% decline in the discount rate
assumption would increase our expected 2005 U.S. pre-tax
pension benefit costs by approximately $1.6 million and
increase our U.S. pension plans projected benefit
obligations at December 31, 2004 by approximately
$13.1 million.
Income taxes are determined using an estimated annual effective
tax rate, which is generally less than the U.S. Federal
statutory rate, primarily because of lower tax rates in certain
non-U.S. jurisdictions and research and development, or
R&D, tax credits available in the United States. Our
effective tax rate may be subject to fluctuations during the
fiscal year as new information is obtained, which may affect the
assumptions we use to estimate our annual effective tax rate,
including factors such as our mix of pre-tax earnings in the
various tax jurisdictions in which we operate, valuation
allowances against deferred tax assets, reserves for tax
contingencies, utilization of R&D tax credits and changes in
or interpretation of tax laws in jurisdictions where we conduct
operations. We recognize deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of our assets and liabilities, along with net
operating loss and credit carryforwards. We record a valuation
allowance against our deferred tax assets to reduce the net
carrying value
27
to an amount that we believe is more likely than not to be
realized. When we establish or reduce the valuation allowance
against our deferred tax assets, our income tax expense will
increase or decrease, respectively, in the period such
determination is made.
Valuation allowances against our deferred tax assets were
$51.9 million and $74.1 million at December 31,
2004 and 2003, respectively. The decrease in the amount of
valuation allowances at December 31, 2004 compared to
December 31, 2003 is primarily due to a change in the
estimated amount of R&D tax credit carryforwards that we
believe will be realized during the current year. This change in
estimate occurred due to improved clarity regarding the
calculation of these credits provided by the completion of
recent statutory audits and our improved domestic profitability,
which we expect will allow a greater amount of R&D tax
credit carryforwards to be realized than previously estimated.
Material differences in the estimated amount of valuation
allowances may result in an increase or decrease in the
provision for income taxes if the actual amounts for valuation
allowances required against deferred tax assets differ from the
amounts estimated by us.
We have not provided for withholding and U.S. taxes for the
unremitted earnings of certain non-U.S. subsidiaries
because we have currently reinvested these earnings permanently
in such operations. At December 31, 2004, we had
approximately $1,011 million in unremitted earnings outside
the United States for which withholding and U.S. taxes were
not provided. Tax expense would be incurred if these funds were
remitted to the United States. It is not practicable to estimate
the amount of the deferred tax liability on such unremitted
earnings. Upon remittance, certain foreign countries impose
withholding taxes that are then available, subject to certain
limitations, for use as credits against our U.S. tax
liability, if any.
On October 22, 2004, the American Jobs Creation Act of
2004, or the Act, was enacted in the United States. We are
currently evaluating the impact of the Act on our operations and
our effective tax rate. In particular, we are evaluating the
Acts provisions relating to incentives to reinvest foreign
earnings in the United States, which require a domestic
reinvestment plan to be created and approved by our board of
directors before executing any repatriation activities. At this
time, we have not completed our evaluation. We expect to
complete our evaluation by the end of our third fiscal quarter
2005. The range of reasonably possible amounts of unremitted
foreign earnings that may be considered for repatriation is
currently between zero and $674 million. The related range
of income tax effects of such repatriation cannot be reasonably
estimated at this time. We are also evaluating allowable
deductions, beginning in 2005, for income attributable to United
States production activities. At this time, we are unable to
determine the effect of this new deduction on our future
provision for income taxes, but we do not believe that it will
have a material effect on our 2005 consolidated financial
statements.
|
|
|
Purchase Price Allocation |
The allocation of purchase price for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the identifiable tangible and intangible
assets acquired, including in-process research and development,
and liabilities assumed based on their respective fair values.
Additionally, we must determine whether an acquired entity is
considered to be a business or a set of net assets, because a
portion of the purchase price can only be allocated to goodwill
in a business combination.
During 2003, we acquired Oculex Pharmaceuticals, Inc., or
Oculex, and Bardeen Sciences Company, LLC, or Bardeen, for
aggregate purchase prices of approximately $223.8 million
and $264.6 million, respectively. The prices were allocated
to identified assets acquired and liabilities assumed based on
their estimated fair values as of the respective transaction
dates. The Oculex transaction was determined to be a business
combination, while the Bardeen transaction was considered to be
an asset acquisition and not a business combination.
Accordingly, we have provided pro forma financial
information in our financial statements to reflect the effect of
the Oculex transaction on our historical operating results, but
have not done so for the Bardeen transaction. See Note 4,
Acquisitions, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report.
We determined that the assets acquired from Oculex and Bardeen
consisted principally of incomplete in-process research and
development and that these projects had no alternative future
uses in their current state. We reached this conclusion based on
discussions with our business development and research and
develop-
28
ment personnel, our review of long-range product plans and our
review of a valuation report prepared by an independent
valuation specialist. The valuation specialists report
reached a conclusion with regard to the fair value of the
in-process research and development assets in a manner
consistent with principles prescribed in the AICPA practice aid,
Assets Acquired in a Business Combination to Be Used in
Research and Development Activities: A Focus on Software,
Electronic Devices and Pharmaceutical Industries. In
connection with the acquisition of Oculex, we determined that
the assets acquired also included a proprietary technology drug
delivery platform which was separately valued and capitalized as
core technology. We reached this conclusion based on our
determination that the acquired technology had alternative
future uses in its current state. We believe the fair values
assigned to the assets acquired and liabilities assumed are
based on reasonable assumptions.
Discontinued Operations
In June 2002, we completed the spin-off of our optical medical
device business to our stockholders. The optical medical device
business consisted of two businesses: our ophthalmic surgical
products business and our contact lens care product business.
The spin-off was effected by contributing our optical medical
device business to a newly formed subsidiary, AMO, and issuing a
dividend of AMOs common stock to our stockholders. Our
consolidated financial statements and related notes contained
herein have been recast to reflect the financial position,
results of operations and cash flows of AMO as a discontinued
operation.
We did not account for our ophthalmic surgical and contact lens
care businesses as a separate legal entity. Therefore, the
following selected financial data for our discontinued
operations is presented for informational purposes only and does
not necessarily reflect what the net sales or earnings would
have been had the businesses operated as a stand-alone entity.
The financial information for our discontinued operations
includes allocations of certain of our expenses to those
operations. These amounts have been allocated to our
discontinued operations on the basis that is considered by
management to reflect most fairly or reasonably the utilization
of the services provided to, or the benefit obtained by, those
operations. See Note 2, Discontinued
Operations, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report.
Effective with the third quarter of our 2002 fiscal year, we no
longer include the results of operations and cash flows of our
discontinued optical medical device business in our consolidated
financial statements.
The following table sets forth selected financial data of our
discontinued operations.
Selected Financial Data for Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
(in millions) |
Net sales
|
|
$ |
|
|
|
$ |
|
|
|
$ |
251.7 |
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
Through the end of 2002, actual costs incurred by us related to
the AMO spin-off, including restructuring and duplicate
operating expenses, were approximately $104.7 million,
including $4.4 million of costs incurred prior to 2002.
This amount excludes $14.3 million in costs incurred in
2002 that were allocated to discontinued operations. During 2004
and 2003, we reversed approximately $0.1 million and
$0.4 million, respectively, of our restructuring charge
related to the AMO spin-off due to adjustments to certain
estimated amounts and also paid $18.7 million for various
taxes, net of amounts associated with a tax sharing agreement
with AMO, related to intercompany purchases of assets by AMO
prior to the spin-off that were deferred and charged to retained
earnings as part of the dividend of AMO stock to our
stockholders.
Additionally, we believe we have incurred approximately
$15 million to $20 million of additional annual net
costs associated with dissynergies, contract manufacturing
arrangements and changes to cost and debt capital structure as a
result of the separation of AMO from us. We began to incur these
additional costs during
29
the second half of 2002, and they are not reflected in our
results of continuing operations for the first half of 2002.
Our manufacturing and supply agreement with AMO is scheduled to
terminate in June 2005. We currently estimate that we will incur
between $24 million and $28 million of additional
restructuring costs associated with the termination of that
agreement and related exit activities. We began to incur these
costs in the fourth quarter of 2004, and we recorded a
restructuring charge of $7.1 million in 2004. We expect to
complete the additional restructuring activities associated with
the AMO spin-off by the end of the fourth quarter of 2005. See
Note 3, Restructuring Charges and Asset Write-offs
and Duplicate Operating Expenses, in the notes to the
consolidated financial statements listed under Item 15(a)
of Part IV of this report for a discussion of the
termination of the manufacturing and supply agreement with AMO.
Continuing Operations
Headquartered in Irvine, California, we are a technology-driven,
global health care company that develops and commercializes
specialty pharmaceutical products for the ophthalmic,
neurological, dermatological and other specialty markets. We
employ approximately 5,030 persons around the world. We are an
innovative leader in therapeutic and over-the-counter products
that are sold in more than 100 countries. Our principal markets
are the United States, Europe, Latin America and Asia Pacific.
Results of Continuing Operations
We operate our business on the basis of a single reportable
segment specialty pharmaceuticals. We currently
produce a broad range of ophthalmic products for glaucoma
therapy, ocular inflammation, infection, allergy and dry eye;
skin care products for acne, psoriasis and other prescription
and over-the-counter dermatological products; and
Botox® for certain therapeutic and cosmetic
indications. We provide global marketing strategy teams to
ensure development and execution of a consistent marketing
strategy for our products in all geographic regions that share
similar distribution channels and customers. The following
discussion reflects our results of continuing operations, unless
otherwise indicated.
Management evaluates its various product portfolios on a revenue
basis, which is presented below. We also report sales
performance using the non-GAAP financial measure of constant
currency sales. Constant currency sales represent current period
reported sales, adjusted for the translation effect of changes
in average foreign exchange rates between the current period and
the corresponding period in the prior year. We calculate the
currency effect by comparing adjusted current period reported
amounts, calculated using the monthly average foreign exchange
rates for the corresponding period in the prior year, to the
actual current period reported amounts. We routinely evaluate
our net sales performance at constant currency so that sales
results can be viewed without the impact of changing foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of our sales. Generally, when the U.S. dollar
either strengthens or weakens against other currencies, the
growth at constant currency rates will be higher or lower,
respectively, than growth reported at actual exchange rates.
30
The following tables compare net sales by product line and
certain selected products for the years ended December 31,
2004, 2003 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
Change in Net Sales |
|
Percent Change in Net Sales |
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
Total |
|
Performance |
|
Currency |
|
Total |
|
Performance |
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$ |
1,137.1 |
|
|
$ |
999.5 |
|
|
$ |
137.6 |
|
|
$ |
111.1 |
|
|
$ |
26.5 |
|
|
|
13.8 |
% |
|
|
11.1 |
% |
|
|
2.7 |
% |
Botox/ Neuromodulator
|
|
|
705.1 |
|
|
|
563.9 |
|
|
|
141.2 |
|
|
|
126.2 |
|
|
|
15.0 |
|
|
|
25.0 |
% |
|
|
22.4 |
% |
|
|
2.7 |
% |
Skin Care
|
|
|
103.4 |
|
|
|
109.3 |
|
|
|
(5.9 |
) |
|
|
(6.0 |
) |
|
|
0.1 |
|
|
|
(5.4 |
)% |
|
|
(5.5 |
)% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,945.6 |
|
|
|
1,672.7 |
|
|
|
272.9 |
|
|
|
231.3 |
|
|
|
41.6 |
|
|
|
16.3 |
% |
|
|
13.8 |
% |
|
|
2.5 |
% |
Other*
|
|
|
100.0 |
|
|
|
82.7 |
|
|
|
17.3 |
|
|
|
17.0 |
|
|
|
0.3 |
|
|
|
20.9 |
% |
|
|
20.6 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
|
$ |
290.2 |
|
|
$ |
248.3 |
|
|
$ |
41.9 |
|
|
|
16.5 |
% |
|
|
14.1 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
69.1 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
30.9 |
% |
|
|
29.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$ |
268.9 |
|
|
$ |
286.8 |
|
|
$ |
(17.9 |
) |
|
$ |
(23.2 |
) |
|
$ |
5.3 |
|
|
|
(6.2 |
)% |
|
|
(8.1 |
)% |
|
|
1.8 |
% |
Lumigan
|
|
|
232.9 |
|
|
|
181.3 |
|
|
|
51.6 |
|
|
|
45.7 |
|
|
|
5.9 |
|
|
|
28.5 |
% |
|
|
25.2 |
% |
|
|
3.3 |
% |
Other Glaucoma
|
|
|
19.1 |
|
|
|
22.7 |
|
|
|
(3.6 |
) |
|
|
(4.8 |
) |
|
|
1.2 |
|
|
|
(15.9 |
)% |
|
|
(21.1 |
)% |
|
|
5.3 |
% |
Restasis
|
|
|
99.8 |
|
|
|
38.3 |
|
|
|
61.5 |
|
|
|
61.5 |
|
|
|
|
|
|
|
160.6 |
% |
|
|
160.6 |
% |
|
|
n/a |
|
Tazorac, Zorac and Avage
|
|
|
75.1 |
|
|
|
80.3 |
|
|
|
(5.2 |
) |
|
|
(5.3 |
) |
|
|
0.1 |
|
|
|
(6.5 |
)% |
|
|
(6.6 |
)% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
Change in Net Sales |
|
Percent Change in Net Sales |
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
Total |
|
Performance |
|
Currency |
|
Total |
|
Performance |
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$ |
999.5 |
|
|
$ |
827.3 |
|
|
$ |
172.2 |
|
|
$ |
142.1 |
|
|
$ |
30.1 |
|
|
|
20.8 |
% |
|
|
17.2 |
% |
|
|
3.6 |
% |
Botox/ Neuromodulator
|
|
|
563.9 |
|
|
|
439.7 |
|
|
|
124.2 |
|
|
|
108.8 |
|
|
|
15.4 |
|
|
|
28.2 |
% |
|
|
24.7 |
% |
|
|
3.5 |
% |
Skin Care
|
|
|
109.3 |
|
|
|
90.2 |
|
|
|
19.1 |
|
|
|
18.8 |
|
|
|
0.3 |
|
|
|
21.2 |
% |
|
|
20.8 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,672.7 |
|
|
|
1,357.2 |
|
|
|
315.5 |
|
|
|
269.7 |
|
|
|
45.8 |
|
|
|
23.2 |
% |
|
|
19.9 |
% |
|
|
3.3 |
% |
Other*
|
|
|
82.7 |
|
|
|
27.8 |
|
|
|
54.9 |
|
|
|
54.8 |
|
|
|
0.1 |
|
|
|
197.5 |
% |
|
|
197.1 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
1,755.4 |
|
|
$ |
1,385.0 |
|
|
$ |
370.4 |
|
|
$ |
324.5 |
|
|
$ |
45.9 |
|
|
|
26.7 |
% |
|
|
23.4 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
70.4 |
% |
|
|
70.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
29.6 |
% |
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$ |
286.8 |
|
|
$ |
248.5 |
|
|
$ |
38.3 |
|
|
$ |
30.4 |
|
|
$ |
7.9 |
|
|
|
15.4 |
% |
|
|
12.2 |
% |
|
|
3.2 |
% |
Lumigan
|
|
|
181.3 |
|
|
|
123.0 |
|
|
|
58.3 |
|
|
|
51.8 |
|
|
|
6.5 |
|
|
|
47.4 |
% |
|
|
42.1 |
% |
|
|
5.3 |
% |
Other Glaucoma
|
|
|
22.7 |
|
|
|
24.6 |
|
|
|
(1.9 |
) |
|
|
(3.6 |
) |
|
|
1.7 |
|
|
|
(7.7 |
)% |
|
|
(14.6 |
)% |
|
|
6.9 |
% |
Restasis
|
|
|
38.3 |
|
|
|
|
|
|
|
38.3 |
|
|
|
38.3 |
|
|
|
|
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Tazorac, Zorac and Avage
|
|
|
80.3 |
|
|
|
62.1 |
|
|
|
18.2 |
|
|
|
18.1 |
|
|
|
0.1 |
|
|
|
29.3 |
% |
|
|
29.1 |
% |
|
|
0.2 |
% |
|
|
* |
Other sales primarily consist of sales to AMO pursuant to a
manufacturing and supply agreement entered into as part of the
AMO spin-off that is scheduled to terminate in June 2005. |
The $41.9 million increase in net sales from the impact of
foreign currency changes in 2004 compared to 2003 was due
primarily to the strengthening of the euro, Japanese yen,
Australian dollar, British pound, Canadian dollar and Brazilian
real compared to the U.S. dollar. The $45.9 million
increase in net sales from
31
the impact of foreign currency changes in 2003 compared to 2002
was due primarily to the strengthening of the euro, Canadian
dollar, Australian dollar and Japanese yen, partially offset by
weakness in the Brazilian real and other Latin American
currencies compared to the U.S. dollar.
The $290.2 million increase in net sales in 2004 compared
to 2003 was primarily the result of an increase in sales of our
eye care pharmaceuticals and Botox® product lines
and an increase in other non-pharmaceutical sales, partially
offset by a decline in sales of our skin care products. Eye care
pharmaceuticals sales increased in 2004 compared to 2003
primarily because of strong growth in sales of our glaucoma
drug, Lumigan®, especially in the U.S. and Europe,
growth in sales of Restasis®, our drug for the
treatment of chronic dry eye disease, growth in sales of eye
drop products, primarily Refresh®, an increase in
sales of Zymar®, a newer anti-infective, new product
sales generated from
Elestattm,
our topical antihistamine used for the prevention of itching
associated with allergic conjunctivitis that was launched in the
United States in the first quarter of 2004 by our co-promotion
partner, Inspire Pharmaceuticals, Inc., and an increase in sales
of Acular LS®, our newer generation
non-steroidal anti-inflammatory. This increase in sales was
partially offset by a decrease in sales of Ocuflox®,
our older generation anti-infective that is experiencing generic
competition in the United States, and Acular®, our
older generation anti-inflammatory. Our Alphagan®
franchise sales also decreased in 2004 compared to 2003 due to a
general decline in U.S. wholesaler demand for
Alphagan® P, market share erosion from
generic Alphagan® competition and an increase in the
ratio of Alphagan® P sales subject to
Medicaid rebates in the United States. We continue to believe
that generic formulations of Alphagan® will have a
negative impact on future net sales of our Alphagan®
franchise. The first generic formulation of
Alphagan® was approved by the FDA in the second
quarter of 2003 and the second generic formulation of
Alphagan® was approved by the FDA in the third
quarter of 2003. We estimate the majority of the change in our
eye care pharmaceutical sales was due to mix and volume changes;
however, we increased the published list prices for certain eye
care pharmaceutical products in the United States, ranging from
zero to nine percent, effective January 10, 2004. We
increased the published U.S. list price for
Lumigan® by five percent, and we left the price of
Restasis® unchanged as of the same effective date.
On May 29, 2004, we increased the published U.S. list
price for Restasis® by five percent. This increase
in prices had a subsequent positive net effect on our
U.S. sales, but the actual net effect is difficult to
determine due to the various managed care sales rebate and other
incentive programs in which we participate. Wholesaler buying
patterns and the change in dollar value of prescription product
mix also affected our reported net sales dollars. We have a
policy to attempt to maintain average U.S. wholesaler
inventory levels of our products at an amount between one to two
months of our net sales. At December 31, 2004, based on
available external and internal information, we believe the
amount of average U.S. wholesaler inventories of our
products was below our stated policy levels. We expect the
wholesaler inventory levels of our products to return to our
normal policy levels during the first six months of 2005, which
may create above average U.S. wholesaler demand for our
products in the first six months of 2005 compared to demand
experienced in the first six months of 2004.
Botox® sales increased in 2004 compared to 2003
primarily as a result of strong growth in demand in the United
States and international markets for both therapeutic and
cosmetic uses. Based on internal information, we estimate that
in 2004 Botox® therapeutic sales accounted for
approximately 58% of total consolidated Botox® net
sales and cosmetic sales accounted for approximately 42% of
total consolidated Botox® net sales. Therapeutic and
cosmetic net sales grew approximately 20% and 30%, respectively,
in 2004 compared to 2003. Effective December 22, 2003, we
increased the published list price for Botox® and
Botox® Cosmetic in the United States by
approximately seven percent, which we believe had a
corresponding positive effect on our U.S. sales growth in
2004. International Botox® sales also benefited from
strong sales growth in Europe, especially in France, Spain and
Italy, as a result of the March 2003 launch in France of
Vistabel® and the second quarter 2004 launches of
Vistabel® in Spain and certain Scandinavian
countries and
Vistabextm
in Italy, as well as an increase in sales of Botox®
in smaller distributor markets serviced by our European export
sales group. Vistabel® and
Vistabextm
are the trade names for Botox® Cosmetic in Europe
and Italy, respectively. We believe our worldwide market share
for neuromodulators, including Botox®, is over 85%.
Skin care sales declined in 2004 compared to 2003 primarily due
to a decrease in sales of Tazorac® in the United
States, where it is FDA approved to treat both psoriasis and
acne, and lower sales of Avage®, which we launched
in the U.S. in the first quarter of 2003.
Tazorac® sales declined primarily due to excess
in-channel
32
inventory at the end of 2003, which we believe was principally
at the retail pharmacy level. This type of excess in-channel
inventory is difficult to detect from all sources of available
market data. We increased the published U.S. list price for
Tazorac® and Avage® by nine percent
effective January 10, 2004 and by an additional five
percent effective July 31, 2004.
The $370.4 million increase in net sales in 2003 compared
to 2002 was the result of increases in sales in all three
product lines, and an increase in other non-pharmaceutical
product sales, which consist primarily of contract manufacturing
sales to AMO. Eye care pharmaceutical net sales increased in
2003 compared to net sales in 2002 primarily because of strong
growth in sales of our glaucoma drug Lumigan®, our
Alphagan® ophthalmic solutions product line for
glaucoma, which includes both Alphagan® P and
Alphagan®, new product sales of $38.3 million
generated from the second quarter 2003 initial launch of
Restasis®, growth in sales of eye drop products,
primarily Refresh®, and a net increase in sales of
other eye care pharmaceutical products. We estimate the majority
of the change in our eye care pharmaceutical sales was due to
mix and volume changes; however, we increased the published
prices for certain of our eye care pharmaceutical products in
the U.S. effective April 5, 2003. This increase in
prices had a subsequent positive net effect on our
U.S. sales, but the actual net effect is difficult to
determine due to the various managed care sales rebate and other
incentive programs in which we participate. Wholesaler buying
patterns and the change in dollar value of prescription product
mix also affected our reported net sales dollars. We have a
policy to attempt to maintain average U.S. wholesaler
inventory levels of our products at an amount between one to two
months of our net sales. During 2003, U.S. sales of
Ocuflox®, an older anti-infective, began to decline
in the third quarter as sales of Zymar®, a newer
anti-infective, grew substantially. In future periods, we expect
sales of Ocuflox® to continue to decline as sales of
Zymar® continue to increase and as generic
competition increases for Ocuflox® in the United
States.
Botox® sales increased in 2003 compared to 2002 as a
result of strong growth in both the United States and
international markets. In 2003, therapeutic sales accounted for
approximately 60% of total Botox® net sales, and
cosmetic sales accounted for approximately 40% of total
Botox® net sales. Both therapeutic and cosmetic net
sales grew approximately 25% in constant currency in 2003
compared to 2002. International Botox® sales growth
in 2003 compared to 2002 benefited from the March 2003 launch in
France of Vistabel®, the European trade name for
Botox® Cosmetic. Effective December 1, 2002, we
increased the published list price for Botox® and
Botox® Cosmetic in the U.S. by approximately six
percent, which had a corresponding positive effect on our
U.S. sales growth in 2003. We believe our worldwide market
share as of December 31, 2003 was over 85% for
neuromodulators, including Botox®.
Skin care net sales increased in 2003 compared to 2002 primarily
due to strong sales of Tazorac® in the United
States, where it is FDA approved to treat both psoriasis
and acne, and the launch in the first quarter of 2003 of
Avage®.
The percentage of U.S. sales in 2004 as a percentage of
total product net sales declined 1.3 percentage points to
69.1% compared to U.S. sales of 70.4% in 2003, due
primarily to an increase in international eye care
pharmaceuticals, principally in Europe and Asia Pacific, as a
percentage of total product net sales, and a decrease in
U.S. sales of skin care products, partially offset by an
increase in U.S. sales of Botox® as a
percentage of total product net sales. The percentage of
U.S. sales in 2003 as a percentage of total product net
sales declined 0.2 percentage points to 70.4% compared to
U.S. sales of 70.6% in 2002, due primarily to a decrease in
U.S. eye care pharmaceutical sales as a percentage of total
product net sales in 2003 compared to 2002 resulting from strong
sales growth rates in Europe, partially offset by an increase in
the percentage of U.S. other contract manufacturing sales
due to the growth in sales to AMO.
33
The following table sets forth the relationship to sales of
various income statement items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Product net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
18.9 |
|
|
|
18.2 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
|
81.1 |
|
|
|
81.8 |
|
|
|
84.0 |
|
Research services margin
|
|
|
|
|
|
|
0.1 |
|
|
|
0.3 |
|
Other operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
38.1 |
|
|
|
39.7 |
|
|
|
45.1 |
|
|
Research and development
|
|
|
16.9 |
|
|
|
43.5 |
|
|
|
16.8 |
|
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
8.6 |
|
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
0.3 |
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
25.8 |
|
|
|
(1.3 |
) |
|
|
9.3 |
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
|
|
|
|
(2.2 |
) |
Unrealized loss on derivative instruments, net
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Other, net
|
|
|
0.2 |
|
|
|
(0.4 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
and minority interest
|
|
|
26.0 |
% |
|
|
(1.7 |
)% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
|
18.4 |
% |
|
|
(3.0 |
)% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross margin percentage decreased by 0.7 percentage
points from 81.8% in 2003 to 81.1% in 2004 and decreased by
2.2 percentage points to 81.8% in 2003 from 84.0% in 2002.
Our gross margin percentage decreased in 2004 compared to 2003
primarily as a result of a decrease in gross margin percentage
for eye care pharmaceuticals, the Botox® product
line and skin care products, partially offset by an increase in
gross margin percentage for contract manufacturing sales to AMO
and an increase in the mix of Botox® sales. Net
sales of Botox®, which generally have a higher gross
margin percentage than our other pharmaceutical product lines,
represented a greater percentage of 2004 net sales compared
to 2003. The gross margin percentage for eye care
pharmaceuticals declined in 2004 compared to 2003 due to an
increase in the percentage of net sales derived from
international sales, which generally have a lower gross margin
percentage than U.S. sales, a higher ratio of
U.S. sales subject to sales rebates and other incentive
programs, especially Medicaid, and products with higher royalty
rates payable to third parties. The gross margin percentage for
our Botox® product line experienced a small decline
in 2004 compared to 2003 due primarily to lower gross margins in
Latin America resulting from less favorable foreign exchange
transactions that affected cost of sales in 2004 compared to
2003. The gross margin percentage for contract manufacturing
sales improved primarily due to an increase in U.S. dollar
denominated pricing allowed under the manufacturing and supply
agreement with AMO at the beginning of our 2004 fiscal year and
certain annual contract manufacturing cost recoveries allowed
under the manufacturing and supply agreement with AMO.
Our gross margin percentage decreased in 2003 compared to 2002
primarily as a result of the higher amount of low margin
contract manufacturing sales to AMO, which had a negative impact
on our total product mix, and a decrease in gross margin
percentage for eye care pharmaceuticals, partially offset by a
small increase in gross margin percentage for the
Botox® product line and skin care products. The
gross margin percentage for eye care pharmaceuticals declined in
2003 compared to 2002 due to an increase in the mix of
international sales and products with higher royalty rates
payable to third parties. Gross margin in dollars increased in
2004 compared to 2003 by $223.8 million, or 15.6%, as a
result of the 16.5% increase in net sales, partially offset by
the 0.7 percentage point decrease in gross margin
percentage. Gross margin in dollars
34
increased in 2003 compared to 2002 by $271.8 million, or
23.4%, as a result of the 26.7% increase in net sales, partially
offset by the 2.2 percentage point decrease in gross margin
percentage.
We have historically recognized research service revenues and
costs associated with various contract research and development
arrangements. Research service revenues and costs declined in
2004 compared to 2003 and 2002 as a result of our acquisition of
Bardeen in 2003. Prior to the Bardeen acquisition, we performed
research and development services on compounds owned by Bardeen
pursuant to a research and development services agreement
between us and Bardeen. Since May 16, 2003, we have not
been a party to any contract research and development
arrangements similar to those previously reported. See
Note 4, Acquisitions, in the notes to the
consolidated financial statements listed under Item 15(a)
of Part IV of this report for further disclosure regarding
research service revenues and related research costs associated
with our research and development services agreements with
Bardeen.
|
|
|
Selling, General and Administrative |
Selling, general and administrative, or SG&A, expenses
increased 11.7% in 2004 to $778.9 million, or 38.1% of net
sales, compared to $697.2 million, or 39.7% of net sales,
in 2003 and by 11.8% in 2003 to $697.2 million, or 39.7% of
net sales, compared to $623.8 million, or 45.1% of net
sales, in 2002. SG&A expenses increased $81.7 million
in 2004 compared to 2003, but declined as a percentage of net
sales in 2004 to 38.1% compared to 39.7% in 2003. The increase
in SG&A expenses in dollars in 2004 compared to 2003 was
primarily a result of higher selling and marketing expenses,
principally personnel costs, supporting the increase in
consolidated sales, especially for Botox®,
Restasis®, Lumigan® and
Zymar® in the United States and Botox®,
Vistabel®,
Vistabextm
and Lumigan® sales in Europe, an increase in
promotion costs primarily associated with direct-to-consumer
advertising for Restasis® in the United States, an
increase in co-promotion costs related to sales of
Elestattm,
and higher general and administrative expenses, primarily
corporate insurance, Sarbanes-Oxley compliance, personnel and
facilities costs. These increases were partially offset by a
favorable $2.4 million settlement during the first quarter
of 2004 relating to a patent dispute covering the use of
botulinum toxin type B for cervical dystonia and higher
miscellaneous co-promotion and royalty income. SG&A expenses
in 2004 were also negatively impacted by an increase in the
translated U.S. dollar value of foreign currency
denominated expenses, especially in Europe, compared to the same
periods in 2003.
Included in SG&A expenses in 2002 were approximately
$39.2 million of duplicate operating expenses associated
with the AMO spin-off. No duplicate operating expenses were
incurred in 2004 and 2003. Duplicate operating expenses included
advisory fees, product and regulatory transition costs, and
salary and recruiting costs associated with the AMO spin-off.
Excluding duplicate operating expenses in 2002, SG&A
expenses increased $112.6 million in 2003 compared to 2002,
but declined as a percentage of net sales in 2003 to 39.7%
compared to 42.2% in 2002. The increase in SG&A expenses in
dollars in 2003 compared to 2002, excluding duplicate operating
expenses, was a result of higher promotion, selling and
marketing expenses supporting the corresponding increase in
sales, especially for Lumigan®,
Alphagan® P and Botox® in
the United States and Lumigan®, Botox®
and Refresh® in Europe, and higher selling and
marketing expenses supporting the product launches of
Vistabel®, Restasis®, Zymar®
and Avage®.
As a percentage of net sales, SG&A expenses declined in 2004
compared to 2003, due primarily to lower promotion, product
samples and marketing expenses, as a percentage of net sales,
despite the aggregate increase in expense dollars. General and
administrative expenses and selling expenses as a percentage of
net sales were approximately the same in 2004 compared to 2003.
Excluding duplicate operating expenses in 2002, the decline in
SG&A expenses as a percentage of net sales in 2003 compared
to 2002 was primarily the result of a decrease in promotion,
selling, marketing and general and administrative expenses as a
percentage of net sales. This decrease resulted primarily from
the relatively high amount of expenses incurred in 2002 for
promotion, selling and marketing activities related to the
promotion of Alphagan® P in the United
States and to the product launch of Lumigan® in
Europe and other international markets. The decrease also
resulted from cost reduction efforts in 2003 affecting European
administrative functions.
35
Research and development expenses decreased in 2004 by
$417.9 million to $345.6 million, or 16.9% of net
sales, compared to $763.5 million, or 43.5% of net sales,
in 2003. Research and development expenses increased in 2003 by
$530.4 million to $763.5 million, or 43.5% of net
sales, compared to $233.1 million, or 16.8% of net sales,
in 2002. Research and development expenses do not include
research and development spending performed under contract with
Bardeen in 2003 and 2002. See Note 4,
Acquisitions, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report. Research and development expenses
in 2003 include charges totaling $458.0 million related to
acquired in-process research and development assets associated
with the 2003 purchases of Bardeen and Oculex, which we
determined were not yet complete and had no alternative future
uses in their current state. A further discussion of the
acquisitions of Bardeen and Oculex is provided under Liquidity
and Capital Resources Bardeen Sciences Company, LLC
and Oculex Pharmaceuticals, Inc. and Note 4,
Acquisitions, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report. Research and development expenses
in 2002 included $0.7 million of duplicate operating
expenses, primarily salaries and records duplication costs,
related to the AMO spin-off. Excluding the effect of the
$458.0 million in-process research and development charges
in 2003 and the $0.7 million of duplicate operating
expenses in 2002, research and development spending increased in
2004 by $40.1 million to $345.6 million, or 16.9% of
net sales, compared to $305.5 million, or 17.4% of net
sales, in 2003, and by $73.1 million in 2003 compared to
$232.4 million, or 16.8% of net sales, in 2002. Research
and development spending increased in 2004 compared to 2003,
primarily as a result of higher rates of investment in our eye
care pharmaceuticals and Botox® product lines and
new technologies, partially offset by a decline in spending for
our skin care product line. Research and development spending in
2004 compared to 2003 increased most significantly in eye care
pharmaceuticals due to increased spending for technologies not
currently commercialized by us, including technologies acquired
in 2003 from the acquisitions of Oculex and Bardeen. Research
and development spending, excluding the effect of the in-process
research and development charges in 2003, increased in 2003
compared to 2002 primarily as a result of higher rates of
investment across all pharmaceutical product lines, especially
in eye care pharmaceuticals due to increased spending for
technologies not currently commercialized by us which were
acquired in the Bardeen acquisition, and to a lesser degree, the
Oculex acquisition.
|
|
|
Settlement; Restructuring Charges and Asset Write-offs;
Duplicate Operating Expenses |
In October 2004, our board of directors approved certain
restructuring activities related to the scheduled termination of
our manufacturing and supply agreement with AMO. Under the
manufacturing and supply agreement, which was entered into in
connection with the AMO spin-off, we agreed to manufacture
certain contact lens care products and VITRAX for AMO for a
period of up to three years ending in June 2005. As part of the
termination of the manufacturing and supply agreement, we plan
to eliminate certain manufacturing positions at our Westport,
Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing
facilities.
We anticipate that the pre-tax restructuring charges to be
incurred in connection with the termination of the manufacturing
and supply agreement, which are expected to total between
$24 million and $28 million, will be recorded
beginning in the fourth quarter of 2004 and continue up through
and including the fourth quarter of 2005. The pre-tax charges
are net of expected tax credits available under qualifying
government-sponsored employment programs. Approximately
$24 million of the restructuring charges are expected to be
cash charges. The additional restructuring charges are expected
to include approximately $20 million to $22 million
associated with the reduction in our workforce of approximately
350 individuals. The workforce reduction will impact
personnel in Europe, the United States and Latin America. The
workforce reduction began in the fourth quarter of 2004 and is
expected to be completed by the end of the second quarter 2005.
The restructuring costs are also expected to include
approximately $4 million to $6 million of other costs
associated with the termination of the manufacturing and supply
agreement.
During the fourth quarter of 2004, we recorded pre-tax
restructuring charges of $7.1 million related to the
termination of the manufacturing and supply agreement. These
charges primarily include accruals for net statutory severance
costs and the ratable recognition of termination benefits to be
earned by employees who are required to render service until
they are terminated in order to receive the termination benefits.
36
The following table presents the cumulative restructuring
activities through December 31, 2004 resulting from the
scheduled termination of the manufacturing and supply agreement
in June 2005:
|
|
|
|
|
|
|
Charges for Employees |
|
|
Involuntarily and |
|
|
Voluntarily Terminated |
|
|
|
|
|
(in millions) |
Net charge during 2004
|
|
$ |
7.1 |
|
Spending
|
|
|
(0.1 |
) |
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
7.0 |
|
|
|
|
|
|
The remaining balance at December 31, 2004 is comprised of
accrued statutory severance and one-time termination benefits of
$10.2 million, less expected employment program tax credits
of $3.2 million.
In the third quarter of 2002, we recorded a pre-tax charge of
$118.7 million related to a global settlement with
Pharmacia Corporation and Columbia University resolving all
intellectual property disputes regarding Lumigan®,
covering two separate patent infringement lawsuits in the United
States and a number of lawsuits and patent oppositions in
Europe. The charge provides for the settlement of all litigation
and potential past damages.
We recorded a $63.5 million pre-tax charge for
restructuring costs and asset write-offs for the year ended
December 31, 2002, associated with the AMO spin-off,
as more fully described in Note 2, Discontinued
Operations, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report. This restructuring charge consisted primarily of
employee severance, facility closure and consolidation costs,
asset write-offs and other costs, all substantially related to
the AMO spin-off. The assets written-off consisted
primarily of manufacturing machinery and equipment, a building
and various building improvements that were impaired or
demolished in connection with the AMO spin-off. The full
year 2002 restructuring charge also included asset write-offs of
$1.9 million unrelated to the AMO spin-off. Included
in other costs within the net charge during 2002 is
$1.1 million of inventory write-offs that have been
recorded as a component of Cost of sales in the
consolidated statements of operations. During 2004 and 2003, we
adjusted our restructuring charge estimates, resulting in
certain reclassifications between restructuring activities and a
net restructuring charge reversal of $0.1 million in 2004
and $0.4 million in 2003.
The AMO restructuring and spin-off activities included a
workforce reduction of 263 positions, consisting of
106 manufacturing, 17 research and development, and
140 selling, general and administrative positions over a
one year period. As of December 31, 2004, severance
payments totaling $12.6 million have been made to
237 terminated employees since January 2002. A total of 18
and 8 manufacturing positions during the year ended
December 31, 2002 and 2003, respectively, included in the
original 263 position reduction did not require severance
payments as certain employees terminated their employment prior
to the date they would have qualified for severance or
transferred to unfilled positions in other areas.
37
The following table presents the cumulative restructuring
activities through December 31, 2004 resulting from the
2002 restructuring charge and asset write-offs:
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|
Charges for |
|
Facility |
|
|
|
|
|
|
|
|
Employees |
|
Closure and |
|
|
|
|
|
|
|
|
Involuntarily |
|
Consolidation |
|
Asset |
|
Other |
|
|
|
|
Terminated |
|
Costs |
|
Write-offs |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2002
|
|
$ |
13.5 |
|
|
$ |
3.5 |
|
|
$ |
40.4 |
|
|
$ |
6.1 |
|
|
$ |
63.5 |
|
Adjustments to net charge during 2003
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
1.2 |
|
|
|
(0.4 |
) |
Assets written off
|
|
|
|
|
|
|
(1.9 |
) |
|
|
(40.4 |
) |
|
|
|
|
|
|
(42.3 |
) |
Spending
|
|
|
(12.5 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
(4.4 |
) |
|
|
(17.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
3.1 |
|
Adjustments to net charge during 2004
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.0 |
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2004 for other costs
of $3.0 million is comprised of accrued expenses for
present obligations related to exit liabilities associated with
the scheduled termination of the manufacturing and supply
agreement with AMO, which we expect to settle in 2005.
During 2002, we incurred $42.5 million of duplicate
operating expenses associated with the AMO spin-off. Duplicate
operating expenses included advisory fees, salary and recruiting
costs, product and regulatory transition costs, equipment and
personnel relocation costs and other business transition
expenses. Duplicate operating expenses have been included in the
normal operating expense classifications to which they relate on
the consolidated statements of operations.
Our operating income was $527.4 million, or 25.8% of
product net sales in 2004, compared to an operating loss of
$23.7 million, or (1.3)% of product net sales in 2003, and
operating income of $129.0 million, or 9.3% of product net
sales in 2002. The $551.1 million increase in operating
income in 2004 compared to 2003 was due primarily to the
$223.8 million increase in gross margin and the
$417.9 million decrease in research and development
expenses, partially offset by the increase in SG&A expenses
of $81.7 million and an increase in restructuring charges
of $7.4 million. The decrease in operating income of
$152.7 million in 2003 compared to 2002 was primarily due
to the increase in research and development expenses of
$530.4 million, which includes $458.0 million of
pre-tax charges for in-process research and development
associated with the acquisitions in 2003 of Bardeen and Oculex.
The decrease in operating income also resulted from the increase
in SG&A expenses of $73.4 million, partially offset by
the $271.8 million increase in gross margin, the absence of
the Lumigan® legal settlement charge of
$118.7 million in 2002 and a decrease in the restructuring
charge and asset write-offs of $62.8 million.
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|
|
Non-Operating Income and Expenses |
Total net non-operating income in 2004 was $4.7 million
compared to net non-operating expenses of $5.8 million in
2003 and net non-operating expenses of $39.2 million in
2002. Interest income in 2004 was $14.1 million compared to
interest income of $13.0 million in 2003. Interest income
in 2003 was $13.0 million, a decrease of $2.8 million
compared to interest income of $15.8 million in 2002. The
increase in interest income in 2004 was primarily due to higher
average cash equivalent balances earning interest of
approximately $246 million in 2004 compared to 2003,
partially offset by lower average interest rates earned on all
cash equivalent balances earning interest of approximately
0.42%. Interest income also increased in 2004 compared to 2003
due to statutory interest income accrued in 2004 related to a
refund claim for previously paid state income taxes. The decline
in interest income in 2003 compared to 2002 was due to a decline
in average interest rates earned on all cash equivalent balances
earning interest, of approximately 0.2%, partially offset by
higher average cash equivalent balances of approximately
$18 million in 2003 compared to 2002. Interest
38
expense increased $2.5 million to $18.1 million in
2004 compared to $15.6 million in 2003, primarily due to an
increase in the amortization of deferred debt issuance costs
related to our outstanding zero coupon convertible senior notes
due 2022, or Senior Notes, partially offset by lower other
statutory interest expense. During the third quarter of 2004, we
accelerated our amortization of debt issuance costs to a more
conservative view, electing to amortize such costs related to
our Senior Notes over the five year period from date of issuance
in November 2002 to the first noteholder put date in November
2007 instead of over the 20 year life of the Senior Notes.
As a result, we recorded an adjustment for the cumulative
difference in amortized debt issuance costs as of the beginning
of the third quarter of 2004 of $3.1 million. The impact of
this adjustment is immaterial to our consolidated financial
statements for the year ended December 31, 2004. Interest
expense declined $1.8 million to $15.6 million in 2003
compared to $17.4 million in 2002, primarily due to lower
interest expense related to the net effect of the November 2002
issuance of our Senior Notes at an annual effective rate of
1.25% combined with the December 2002 redemption of a
substantial portion of our zero coupon convertible subordinated
notes due 2020, which accrued interest at 2.5% annually,
partially offset by an increase in other statutory interest
expense. Loss on investments in 2002 were $30.2 million,
representing the other than temporary impairment of certain
third party investments and related collaborations. At
December 31, 2004, we had a carrying amount of
$9.0 million (with a cost basis of $5.8 million) in
third party equity investments with public and privately held
companies. These investments are subject to review for other
than temporary declines in fair value on a quarterly basis.
During 2004, we recorded net unrealized losses on derivative
instruments of $0.4 million compared to net unrealized
losses of $0.3 million during 2003 and net unrealized
losses of $1.7 million in 2002. Other net income was
$8.8 million in 2004 compared to other net expenses of
$2.9 million in 2003 and other net expenses of
$5.7 million in 2002. In 2004, Other, net includes a
realized gain of $6.5 million related to an agreement with
ISTA Pharmaceuticals, Inc. to revise their previous
Vitrase® product collaboration agreement and a
realized gain of $5.0 million for the receipt of a
technology transfer fee related to the assignment of a third
party patent licensing arrangement covering the use of botulinum
toxin type B for cervical dystonia. In 2003, Other, net
primarily includes $1.8 million of expenses related to
accruals for the settlement of non-income foreign tax compliance
matters in Latin America and Europe, and $0.9 million of
expenses related to the write-off of unamortized debt
origination fees associated with the retirement of the remaining
balance of our zero coupon convertible subordinated notes due
2020 in the fourth quarter of 2003, which were not previously
redeemed in December 2002. Other, net in 2002 primarily includes
expenses of $11.7 million related to the early redemption
in December 2002 of a substantial portion of our zero coupon
convertible subordinated notes due 2020, offset by a
$5.0 million benefit resulting from the settlement of a
collaboration relationship.
Our effective tax rate in 2004 was 28.9% compared to the
effective tax rate of 75.3% in 2003. Included in our operating
income in 2004 are pre-tax restructuring charges of
$7.0 million primarily associated with the scheduled
termination of our manufacturing and supply agreement with AMO.
We recorded an income tax benefit of $0.8 million related
to these pre-tax restructuring charges. Included in our
provision for income taxes in 2004 is an estimated
$6.1 million income tax benefit for previously paid state
income taxes, which became recoverable due to a favorable state
court decision that became final during the second quarter of
2004. Excluding the impact of the $7.0 million pre-tax
restructuring charges and related tax benefit of
$0.8 million, and the $6.1 million income tax benefit
from the state court decision, our adjusted effective tax rate
for 2004 was 29.8%. Included in our operating loss in 2003 are
pre-tax charges of $278.8 million and $179.2 million
for in-process research and development associated with our
acquisitions of Bardeen and Oculex, respectively. We recorded an
income tax benefit of $100.8 million related to the Bardeen
charge because the acquisition was considered to be an asset
acquisition for tax purposes whereas no income tax benefit was
recorded for the Oculex charge because the acquisition was
considered to be an acquisition of stock for tax purposes.
Excluding the impact of the total $458.0 million of
in-process research and development charges and related tax
benefit of $100.8 million, our adjusted effective tax rate
for 2003 was 28.7%. The increase in the adjusted effective tax
rate to 29.8% in 2004 compared to the adjusted effective tax
rate in 2003 of 28.7% was primarily attributable to the fact
that our 2003 rate reflected the benefit of reserves
39
for tax audit settlements, which were released in 2003,
partially offset by a positive tax rate effect from changes in
the mix of our earnings during 2004 compared to 2003.
Our effective tax rate in 2003 was 75.3% compared to the
effective tax rate of 28.0% in 2002. Included in our operating
loss in 2003 are pre-tax charges of $278.8 million and
$179.2 million for in-process research and development
associated with our acquisitions of Bardeen and Oculex,
respectively. We recorded an income tax benefit of
$100.8 million related to the Bardeen charge because the
acquisition was considered to be an asset acquisition for tax
purposes whereas no income tax benefit was recorded for the
Oculex charge because the acquisition was considered to be an
acquisition of stock for tax purposes. Excluding the impact of
the total $458.0 million of in-process research and
development charges and related tax benefit of
$100.8 million, our adjusted effective tax rate for 2003
was 28.7%. The increase in the adjusted effective tax rate to
28.7% in 2003 compared to the effective tax rate of 28.0% in
2002 was primarily attributable to the change in mix of pre-tax
earnings in the various tax jurisdictions in which we operate
and an increase in the U.S. tax effect on foreign earnings
and foreign dividends, partially offset by decreases in the
valuation allowance against our deferred tax assets of
$7.5 million and estimated reserves for tax audit
settlements of $4.1 million and an increase in the benefit
from research and development tax credits.
Earnings from continuing operations were $377.1 million in
2004 compared to a loss from continuing operations of
$52.5 million in 2003. The increase of $429.6 million
in earnings from continuing operations was primarily the result
of the $551.1 million increase in operating income and a
$10.5 million increase in total net non-operating income,
partially offset by an increase in the provision for income
taxes of $131.8 million.
Our loss from continuing operations in 2003 was
$52.5 million compared to earnings from continuing
operations of $64.0 million in 2002. The
$116.5 million decrease in earnings from continuing
operations was primarily the result of the $152.7 million
decrease in operating income, partially offset by a decrease in
total net non-operating expenses of $33.4 million and a
decrease in the provision for income taxes of $2.9 million.
Liquidity and Capital Resources
Management assesses our liquidity by our ability to generate
cash to fund our operations. Significant factors in the
management of liquidity are: funds generated by operations;
levels of accounts receivable, inventories, accounts payable and
capital expenditures; the extent of our stock repurchase
program; funds required for acquisitions; adequate credit
facilities; and financial flexibility to attract long-term
capital on satisfactory terms.
Historically, we have generated cash from operations in excess
of working capital requirements. The net cash provided by
continuing operations was $548.5 million in 2004 compared
to $435.3 million in 2003 and $47.6 million in 2002.
Operating cash flow from continuing operations increased in 2004
compared to 2003, primarily as a result of the increase in
earnings from continuing operations, including the effect of
adjusting for non-cash items, an increase in other accrued
expenses, other liabilities and income taxes payable, partially
offset by an increase in cash required to fund trade
receivables, principally in North America, and growth in
inventories, primarily finished goods for eye care
pharmaceuticals and Botox®, and higher income taxes
paid. We paid pension contributions of $16.9 million in
2004 compared to $14.7 million in 2003. In 2005, we expect
to pay pension contributions of between approximately
$14.3 million and $16.3 million.
At December 31, 2004, we disclosed consolidated
unrecognized net actuarial losses of $166.3 million which
were included in our reported net prepaid benefit cost. The
unrecognized net actuarial losses resulted primarily from lower
than expected investment returns on plan assets in 2002 and 2001
and decreases in the discount rates used to measure projected
benefit obligations that occurred over the past four years.
Assuming constant actuarial assumptions estimated as of our
pension plans measurement date of September 30, 2004,
we expect the amortization of these unrecognized net actuarial
losses to increase our total pension costs by approximately
$3.0 million in 2005 compared to the amortization of
approximately $6.7 million of unrecognized net actuarial
losses included in pension costs expensed in 2004. The
amortization of unrecognized net actuarial losses included in
pension costs in 2003 and 2002 was $3.1 million and
$0.8 million, respectively. The
40
future amortization of the unrecognized net actuarial losses is
not expected to materially affect future pension contribution
requirements.
Operating cash flow from continuing operations increased in 2003
compared to 2002, primarily as a result of the increase in
earnings from continuing operations, including the effect of
adjusting for non-cash items, which were positively affected by
the absence in 2003 of the Lumigan® legal settlement
charge and duplicate operating expenses related to the
AMO spin-off, both of which were incurred in 2002, a
decrease in cash required to fund trade receivables and
inventory growth, an increase in accrued expenses and other
liabilities, a decrease in income taxes paid, and a decrease in
pension contributions which primarily affected the prepaid
benefit cost for pensions included in other non-current assets,
partially offset by an increase in other non-current assets,
including intangibles. We paid pension contributions of
$14.7 million in 2003 compared to $86.7 million in
2002. The higher amount of pension contributions in 2002
compared to 2003 was due to our desire to maintain the fair
value of certain pension plans assets at an amount greater
than their respective accumulated benefit obligations.
Net cash used in investing activities was $106.8 million in
2004, compared to $594.9 million in 2003 and
$79.6 million in 2002. Excluding net cash paid of
$469.5 million for the acquisitions of Bardeen and Oculex
in 2003, cash used in investing activities would have been
$125.4 million in 2003. We invested $96.4 million in
new facilities and equipment during 2004 compared to
$109.6 million in 2003 and $78.8 million in 2002.
During 2004, the additions to property, plant and equipment
included costs to construct an expansion of Botox®
manufacturing facilities in Ireland and a new biologics facility
in Irvine, California, which we expect to complete in 2005.
During 2003 and 2002, the additions to property, plant and
equipment included costs to construct a new research and
development facility in Irvine, California, which we completed
in 2004. Capital expenditures in 2003 also included initial
construction costs for expansion of Botox®
manufacturing facilities in Ireland. Net cash used in investing
activities includes $10.4 million, $12.3 million and
$6.7 million to acquire software in 2004, 2003 and 2002,
respectively. We expect to invest approximately $55 million
to $60 million in expenditures for manufacturing and
laboratory facilities and other property, plant and equipment in
2005.
Net cash used in financing activities was $51.9 million in
2004, composed primarily of $65.2 million for purchases of
treasury stock, $47.3 million for payment of dividends and
$23.0 million for net repayments of debt, partially offset
by $83.6 million of cash provided by the sale of stock to
employees. On January 25, 2005, our Board of Directors
declared a quarterly cash dividend of $0.10 per share,
payable on March 10, 2005 to stockholders of record on
February 14, 2005. Net cash used in financing activities
was $116.8 million in 2003, composed primarily of
$90.6 million for purchases of treasury stock,
$46.9 million for payment of dividends and
$46.7 million for repayments of convertible borrowings and
long-term debt. Cash was provided by the sale of stock to
employees of $47.0 million and an increase in notes payable
and commercial paper borrowings of $20.4 million. Net cash
used in financing activities was $129.1 million in 2002,
composed primarily of repayments of convertible borrowings of
$376.5 million, $46.7 million for payments of
dividends, $180.8 million for purchases of treasury stock,
$37.4 million in net repayments of notes payable and
long-term debt and $12.1 million for the payment of debt
issuance costs related to the issuance of convertible
borrowings. Cash was provided by proceeds from the issuance of
zero coupon convertible senior notes of $500.0 million and
$24.4 million from the sale of stock to employees. We
maintain an evergreen stock repurchase program. Our evergreen
stock repurchase program authorizes us to repurchase our common
stock for the primary purpose of funding our stock-based benefit
plans. Under the stock repurchase program, we may maintain up to
9.2 million repurchased shares in our treasury account at
any one time. As of December 31, 2004, we held
approximately 2.8 million treasury shares under this
program. We are uncertain as to the level of stock repurchases,
if any, to be made in the future.
Net cash provided by discontinued operations was
$172.0 million in 2002. The 2002 amount includes one-time
cash receipts from AMO resulting from the sale of certain assets
to AMO in connection with its formation and restructuring and a
capital distribution received by us just prior to the spin-off
of AMO.
At December 31, 2004, we had a committed domestic long-term
credit facility, a committed foreign line of credit in Japan, a
commercial paper program, a medium term note program, an unused
debt shelf
41
registration statement that we may use for a new medium term
note program and other issuances of debt securities, and various
foreign bank facilities. The committed domestic credit facility
allows for borrowings of up to $400 million through May
2009. The committed foreign line of credit allows for borrowings
of up to three billion Japanese yen (approximately
$29.2 million) through 2006. The commercial paper program
also provides for up to $300 million in borrowings. We do
not currently intend to have combined borrowings under our
committed credit facilities and our commercial paper program
that would exceed $300 million in the aggregate. The
current medium term note program allows us to issue up to an
additional $8.5 million in registered notes on a
non-revolving basis. The debt shelf registration statement
provides for up to $350 million in additional debt
securities. Borrowings under the domestic credit facility and
medium-term note program are subject to certain financial and
operating covenants that include, among other provisions,
maintaining minimum debt to capitalization ratios and minimum
consolidated net worth. Certain covenants also limit subsidiary
debt and restrict dividend payments. We were in compliance with
these covenants at December 31, 2004 and had approximately
$549.7 million available for dividends at December 31,
2004. As of December 31, 2004, we had no borrowings under
our domestic committed credit facility or commercial paper
program, $6.9 million in borrowings outstanding under our
committed foreign line of credit, $6.2 million in
borrowings under various foreign bank loans and
$56.5 million in borrowings outstanding under the medium
term note program.
On November 6, 2002, we issued zero coupon convertible
senior notes due 2022, or Senior Notes, in a private placement
with an aggregate principal amount at maturity of
$641.5 million. The Senior Notes, which were issued at a
discount of $141.5 million, are unsecured, accrue interest
at 1.25% annually and mature on November 6, 2022. The
Senior Notes are convertible into 11.41 shares of our
common stock for each $1,000 principal amount at maturity if the
closing price of our common stock exceeds certain levels, the
credit ratings assigned to the Senior Notes are reduced below
specified levels, or we call the Senior Notes for redemption,
make specified distributions to our stockholders or become a
party to certain consolidation, merger or binding share exchange
agreements. On July 28, 2004, we, together with Wells Fargo
Bank, as trustee, executed a supplemental indenture to the
indenture governing the Senior Notes. The supplemental indenture
amends the indentures redemption and conversion provisions
to restrict our ability to issue common stock in lieu of cash to
holders of the Senior Notes upon any redemption or conversion.
Upon any redemption, we are now required to pay the entire
redemption amount in cash. In addition, upon any conversion, we
will pay cash up to the accreted value of the Senior Notes
converted and will have the option to pay any amounts due in
excess of the accreted value in either cash or common stock. The
rights of the holders of the Senior Notes were not affected or
limited by the supplemental indenture. As of December 31,
2004, the conversion criteria had not been met. See Note 8,
Convertible Notes, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report for a description of the conversion
features. As a sensitivity measure, the incremental dilutive
effect to be used in the computation of diluted earnings per
share from the assumed conversion of the Senior Notes would have
been an increase of approximately 0.6 million shares of
common stock to the total number of diluted shares used to
compute diluted earnings per share for the year ended
December 31, 2004, if the closing price of our common stock
during the specified conversion periods averaged $90.01 per
share (the minimum price allowed for conversion during the
periods) and any amounts above the accreted value were settled
in common stock.
Holders of the Senior Notes may require us to purchase the
Senior Notes on any of the following dates at the following
prices: $829.51 per Senior Note on November 6, 2007;
$882.84 per Senior Note on November 6, 2012; and
$939.60 per Senior Note on November 6, 2017. Pursuant
to the supplemental indenture, we are required to pay cash for
any Senior Notes purchased by us on any of these three dates. We
may not redeem the Senior Notes before November 6, 2005,
and prior to November 6, 2007 we may redeem all or a
portion of Senior Notes for cash in an amount equal to their
accreted value only if the price of our common stock reaches
certain thresholds for a specified period of time. On or after
November 6, 2007, we may redeem all or a portion of the
Senior Notes for cash in an amount equal to their accreted value.
A substantial portion of our existing cash and equivalents are
held by non-U.S. subsidiaries. We currently plan to use
these funds in our operations outside the United States.
Withholdings of U.S. taxes have not been provided for
unremitted earnings of certain non-U.S. subsidiaries
because we have reinvested these earnings
42
permanently in such operations. As of December 31, 2004, we
had approximately $1,011 million in unremitted earnings
outside the United States for which withholding and
U.S. taxes were not provided. Tax costs would be incurred
if these funds were remitted to the United States.
On October 22, 2004, the American Jobs Creation Act of
2004, or the Act, was enacted in the United States. We are
currently evaluating the impact of the Act on our operations and
our effective tax rate. In particular, we are evaluating the
Acts provisions relating to incentives to reinvest foreign
earnings in the United States, which require a domestic
reinvestment plan to be created and approved by our board of
directors before executing any repatriation activities. At this
time, we have not completed our evaluation. We expect to
complete our evaluation by the end of our third fiscal quarter
2005. The range of reasonably possible amounts of unremitted
foreign earnings that may be considered for repatriation is
currently between zero and $674 million. The related range
of income tax effects of such repatriation cannot be reasonably
estimated at this time. We are also evaluating allowable
deductions, beginning in 2005, for income attributable to United
States production activities. At this time, we are unable to
determine the effect of this new deduction on our future
provision for income taxes, but we do not believe that it will
have a material effect on our 2005 consolidated financial
statements.
Our manufacturing and supply agreement with AMO is scheduled to
terminate in June 2005. We currently estimate that we will incur
between $24 million and $28 million of total
restructuring costs associated with the termination of that
agreement and related exit activities. We expect approximately
$24 million of the restructuring charges to be cash
charges. We recorded $7.1 million of restructuring charges
in the fourth quarter of 2004 and expect to complete the
additional restructuring activities by the end of the fourth
quarter of 2005.
In January 2005, our Board of Directors approved the initiation
and implementation of a restructuring of certain activities
related to our European operations. The restructuring seeks to
optimize operations, improve resource allocation and create a
scalable, lower cost and more efficient operating model for our
European research and development, or R&D, and commercial
activities. Specifically, the restructuring anticipates moving
key European R&D and select commercial functions from our
Mougins, France and other European locations to our Irvine,
California, High Wycombe, U.K. and Dublin, Ireland facilities
and streamlining our European commercial back office functions.
Under applicable law, the proposed restructuring requires
consultations and, in certain cases, negotiations with European
and national works councils, other management/ labor
organizations and local authorities. The restructuring steps to
be implemented and their ultimate cost will depend in part on
the outcome of such consultations and negotiations.
We anticipate incurring restructuring charges and charges
relating to severance, relocation and one-time termination
benefits, payments to public employment and training programs,
implementation, transition, capital and other asset-related
expenses, duplicate operating expenses and contract termination
costs in connection with the restructuring. We currently
estimate that the pre-tax charges and capital expenditures
resulting from the restructuring will be between
$50 million and $60 million. This amount is expected
to be incurred beginning in the first quarter of 2005 and
continuing up through and including the second quarter of 2006.
Of this amount, approximately $50 million to
$58 million are expected to be cash expenditures. We also
estimate that the restructuring will yield annual operating cost
reductions of between $6 million and $9 million.
The foregoing estimates are based on assumptions relating to,
among other things, a reduction of R&D and general and
administrative positions in the affected European locations and
charges associated with the reduction. These workforce reduction
activities are currently expected to begin in the second quarter
of 2005 and to be completed by the close of the second quarter
of 2006. Charges associated with the workforce reduction are
currently expected to be recorded beginning in the first quarter
of 2005 and to be completed by the close of the second quarter
of 2006. As set forth above, the number of positions impacted
and the final costs incurred will depend in part on the outcome
of the above-referenced consultations and negotiations and
certain employees decisions with respect to transfer
opportunities. We are unable at this time to estimate the
ultimate cost of the workforce reduction.
43
Estimated restructuring charges also include approximately
$2 million to $7 million for contract and lease
termination costs and asset write-offs (primarily for leasehold
improvements in facilities to be exited). These costs are
currently expected to be recorded beginning in the second
quarter of 2005 and are expected to be completed by the close of
the second quarter of 2006.
Estimated implementation and transition related expenses
include, among other things, legal, consulting, recruiting,
information system implementation costs and taxes. These costs
are currently expected to total approximately $9 million to
$11 million, and are expected to be recorded beginning in
the first quarter of 2005 and continuing up through and
including the second quarter of 2006. We also expect to incur
duplicate operating expenses during the transition period to
ensure that job knowledge and skills are properly transferred to
new employees. These duplicate operating expenses are currently
expected to total between $1 million and $2 million,
and are expected to be recorded beginning in the second quarter
of 2005 and continuing up through and including the first
quarter of 2006.
We also expect to incur additional capital expenditures for
leasehold improvements (primarily at our High Wycombe, U.K.
facility or a new facility in the U.K. to accommodate increased
headcount). These capital expenditures are currently estimated
to be between $5 million and $7 million, and are
expected to be recorded beginning in the second quarter of 2005
and continuing up through and including the fourth quarter of
2005.
We believe that the net cash provided by operating activities,
supplemented as necessary with borrowings available under our
existing credit facilities and existing cash and equivalents,
will provide us with sufficient resources to meet our working
capital requirements, debt service and other cash needs over the
next year.
Although at reduced levels in recent years, inflation continues
to apply upward pressure on the cost of goods and services that
we use. The competitive and regulatory environments in many
markets substantially limit our ability to fully recover these
higher costs through increased selling prices. We continually
seek to mitigate the adverse effects of inflation through cost
containment and improved productivity and manufacturing
processes.
|
|
|
Foreign Currency Fluctuations |
Approximately 30.9% of our revenues in 2004 were derived from
operations outside the United States, and a portion of our
international cost structure is denominated in currencies other
than the U.S. dollar. As a result, we are subject to
fluctuations in sales and earnings reported in U.S. dollars
due to changing currency exchange rates. We routinely monitor
our transaction exposure to currency rates and implement certain
economic hedging strategies to limit such exposure, as
appropriate. The net impact of foreign currency fluctuations on
our sales was as follows: a $41.9 million increase in 2004,
a $45.9 million increase in 2003, and a $6.5 million
decrease in 2002. The 2004 sales increase included
$23.9 million related to the euro, $4.5 million
related to the British pound, $4.2 million related to the
Canadian dollar, $4.0 million related to the Australian
dollar, $2.0 million related to the Japanese yen and
$1.8 million related to the Brazilian real. The 2003 sales
increase included increases of $38.7 million related to the
euro, $5.4 million related to the Canadian dollar,
$4.6 million related to the Australian dollar and
$2.1 million related to the Japanese yen, partially offset
by decreases of $3.1 million related to the Mexican peso,
$1.7 million related to the Brazilian real and
$1.5 million related to other Latin American currencies.
The 2002 sales decrease included decreases of $8.0 million
related to the Brazilian real and $9.6 million related to
other Latin American currencies, partially offset by an
$11.3 million increase related to the euro. See
Note 1, Summary of Significant Accounting
Policies, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report for a description of our accounting policy on foreign
currency translation.
|
|
|
Oculex Pharmaceuticals, Inc. |
On November 20, 2003, we purchased all of the outstanding
equity interests of Oculex Pharmaceuticals, Inc., or Oculex, a
privately owned company, for an aggregate purchase price of
approximately $223.8 million,
44
net of cash acquired, including transaction costs of
$1.6 million and $6.1 million in other assets related
to Oculex. The acquisition was accounted for by the purchase
method of accounting and accordingly, the consolidated
statements of operations include the results of Oculex beginning
November 20, 2003. In conjunction with the acquisition, we
recorded a charge to research and development for in-process
research and development expense of $179.2 million during
2003 for an acquired in-process research and development asset
which we determined was not yet complete and had no alternative
future uses in its current state. This asset is Oculexs
lead investigational product, Posurdex®, which is a
proprietary, bioerodable, sustained release implant that
delivers dexamethasone to the targeted disease site at the back
of the eye. We have begun Phase 3 clinical trials for
macular edema associated with diabetes and vein occlusions.
Additionally, we determined that the assets acquired also
included a proprietary technology drug delivery platform which
had alternative future uses in its current state, which we
separately valued and capitalized as core technology. The core
technology is a versatile bioerodable polymer drug delivery
technology which can be used for sustained local delivery of
compounds to the eye. See Note 4, Acquisitions,
in the notes to the consolidated financial statements listed
under Item 15(a) of Part IV of this report for a
discussion of the acquisition of Oculex.
We believe the fair values assigned to the assets acquired and
liabilities assumed are based on reasonable assumptions. A
summary of the net assets acquired follows:
|
|
|
|
|
|
|
(in millions) |
Current assets
|
|
$ |
0.6 |
|
Property, plant and equipment
|
|
|
1.0 |
|
Capitalized intangible core technology (straight-line
amortization over a 15 year useful life)
|
|
|
29.6 |
|
In-process research and development
|
|
|
179.2 |
|
Other non-current assets, primarily deferred tax assets
|
|
|
19.3 |
|
Accounts payable and accrued liabilities
|
|
|
(5.9 |
) |
|
|
|
|
|
|
|
$ |
223.8 |
|
|
|
|
|
|
During 2004, we adjusted the fair value of certain net assets
acquired by $0.6 million, which resulted in a decrease in
the amount of capitalized core technology and in-process
research and development of $0.1 million and
$0.5 million, respectively. The $0.5 million decrease
in in-process research and development was included in research
and development expenses in 2004.
|
|
|
Bardeen Sciences Company, LLC |
On May 16, 2003, we completed an acquisition of all of the
outstanding equity interests of Bardeen Sciences Company, LLC,
or Bardeen, from Farallon Pharma Investors, LLC, or Farallon,
for an aggregate purchase price of approximately
$264.6 million, including transaction costs of
$1.1 million and $12.8 million in certain intangible
contract-based product marketing and other rights, net of cash
acquired. We acquired all of Bardeens assets, which
consisted of the rights to certain pharmaceutical compounds
under development and research projects, including memantine,
androgen tears, tazarotene in oral form for the treatment of
acne, AGN 195795, AGN 196923, AGN 197075, a hypotensive
lipid/timolol combination, a photodynamic therapy project,
tyrosine kinase inhibitors for the treatment of ocular
neovascularization, a vision-sparing project and a retinal
disease project.
Bardeen was formed in April 2001 upon our contribution of a
portfolio of pharmaceutical compounds and research projects and
the commitment of a $250 million capital investment by
Farallon. In return for our contribution of the portfolio, we
received certain commercialization rights to market products
developed from the compounds comprising the portfolio. In
addition, we acquired an option to purchase rights to any one
product and a separate option to purchase all of the outstanding
equity interests of Bardeen at an option price based on the
amount of research and development funds expended by Bardeen on
the portfolio and the time elapsed since the effective date of
the option agreement. We acquired Bardeen upon the exercise of
our option to purchase all the outstanding equity interests of
Bardeen at the option price. Neither we nor any of our
45
officers or directors owned any interest in Bardeen or Farallon
prior to the acquisition of the outstanding interests.
We determined that the assets acquired consisted entirely of
incomplete in-process research and development assets and that
these assets had no alternative future uses in their current
state.
The estimated fair value of assets acquired and liabilities
assumed are as follows:
|
|
|
|
|
|
|
(in millions) |
Intangible assets In-process research and development
|
|
$ |
278.8 |
|
Accounts payable
|
|
|
(14.2 |
) |
|
|
|
|
|
|
|
$ |
264.6 |
|
|
|
|
|
|
From the time of Bardeens formation until the acquisition
date, we performed research and development on the compounds
comprising the portfolio on Bardeens behalf pursuant to a
research and development services agreement between us and
Bardeen under which all such activities were fully funded by
Bardeen and services were performed on a cost plus 10% basis.
Because the financial risk associated with the research and
development was transferred to Bardeen, we recognized revenues
and related costs as services were performed under such
agreements as required under SFAS No. 68, Research
and Development Arrangements. These amounts are included in
research service revenues in the accompanying consolidated
statements of operations. For the years ended December 31,
2003 and 2002, we recognized $16.0 million and
$40.3 million in research revenues, respectively, and
$14.5 million and $36.6 million in research costs,
respectively, under the research and development services
agreement with Bardeen.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
In the normal course of business, our operations are exposed to
risks associated with fluctuations in foreign currency exchange
rates. We address these risks through controlled risk management
that includes the use of derivative financial instruments to
economically hedge or reduce these exposures. We do not enter
into financial instruments for trading or speculative purposes.
See Note 12, Financial Instruments, in the
notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for activities
relating to foreign currency risk management.
To ensure the adequacy and effectiveness of our foreign exchange
hedge positions, we continually monitor our foreign exchange
forward and option positions both on a stand-alone basis and in
conjunction with our underlying foreign currency exposures, from
an accounting and economic perspective.
However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, we
cannot assure you that such programs will offset more than a
portion of the adverse financial impact resulting from
unfavorable movements in foreign exchange rates. In addition,
the timing of the accounting for recognition of gains and losses
related to mark-to-market instruments for any given period may
not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely
affect our consolidated operating results and financial
position. We have recorded current changes in the fair value of
open foreign currency option contracts as Unrealized
losses on derivative instruments, net, and we have
recorded the gains and losses realized from settled option
contracts in Other, net in the accompanying
consolidated statements of operations. We have recorded all
unrealized and realized gains and losses from foreign currency
forward contracts through Other, net in the
accompanying consolidated statements of operations.
Our interest income and expense is more sensitive to
fluctuations in the general level of U.S. interest rates
than to changes in rates in other markets. Changes in
U.S. interest rates affect the interest earned on our cash
and equivalents, interest expense on our debt as well as costs
associated with foreign currency contracts.
46
At December 31, 2004, we had $11.7 million of variable
rate debt. If the interest rates on the variable rate debt were
to increase or decrease by 1% for the year, annual interest
expense would increase or decrease by approximately
$0.1 million.
The table below presents information about certain of our
investment portfolio and our debt obligations at
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
Maturing in |
|
|
|
Fair |
|
|
|
|
|
|
Market |
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
|
Total |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates) |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$ |
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100.0 |
|
|
$ |
100.0 |
|
Weighted Average Interest Rate
|
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.37 |
% |
|
|
|
|
Commercial Paper
|
|
|
648.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648.9 |
|
|
|
648.9 |
|
Weighted Average Interest Rate
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.23 |
% |
|
|
|
|
Foreign Time Deposits
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0 |
|
|
|
26.0 |
|
Weighted Average Interest Rate
|
|
|
2.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
Other Cash Equivalents
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.9 |
|
|
|
54.9 |
|
Weighted Average Interest Rate
|
|
|
2.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.18 |
% |
|
|
|
|
Total Cash Equivalents
|
|
$ |
829.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
829.8 |
|
|
$ |
829.8 |
|
Weighted Average Interest Rate
|
|
|
2.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
|
LIABILITIES |
Debt Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
|
|
|
|
|
|
|
|
$ |
513.6 |
|
|
$ |
31.5 |
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
570.1 |
|
|
$ |
690.7 |
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
1.25 |
% |
|
|
3.56 |
% |
|
|
|
|
|
|
7.47 |
% |
|
|
1.65 |
% |
|
|
|
|
Other Fixed Rate (non-US$)
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
1.4 |
|
Weighted Average Interest Rate
|
|
|
13.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.32 |
% |
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7 |
|
|
|
11.7 |
|
Weighted Average Interest Rate
|
|
|
1.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.46 |
% |
|
|
|
|
Total Debt Obligations
|
|
$ |
13.1 |
|
|
|
|
|
|
$ |
513.6 |
|
|
$ |
31.5 |
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
583.2 |
|
|
$ |
703.8 |
|
Weighted Average Interest Rate
|
|
|
2.73 |
% |
|
|
|
|
|
|
1.25 |
% |
|
|
3.56 |
% |
|
|
|
|
|
|
7.47 |
% |
|
|
1.67 |
% |
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
|
|
|
Maturing in |
|
|
|
Fair |
|
|
|
|
|
|
Market |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
Thereafter |
|
Total |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates) |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$ |
150.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Weighted Average Interest Rate
|
|
|
1.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.18 |
% |
|
|
|
|
Commercial Paper
|
|
|
252.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252.8 |
|
|
|
252.8 |
|
Weighted Average Interest Rate
|
|
|
1.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.07 |
% |
|
|
|
|
Foreign Time Deposits
|
|
|
59.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.5 |
|
|
|
59.5 |
|
Weighted Average Interest Rate
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.23 |
% |
|
|
|
|
Total Cash Equivalents
|
|
$ |
462.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
462.3 |
|
|
$ |
462.3 |
|
Weighted Average Interest Rate
|
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.25 |
% |
|
|
|
|
|
LIABILITIES |
Debt Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30.6 |
|
|
$ |
532.3 |
|
|
$ |
562.9 |
|
|
$ |
674.7 |
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.56 |
% |
|
|
1.54 |
% |
|
|
1.65 |
% |
|
|
|
|
Other Fixed Rate (non-US$)
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
1.9 |
|
Weighted Average Interest Rate
|
|
|
11.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.89 |
% |
|
|
|
|
Variable Rate (US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10.4 |
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
|
|
10.4 |
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.05 |
% |
|
|
|
|
|
|
|
|
|
|
1.05 |
% |
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.5 |
|
|
|
22.5 |
|
Weighted Average Interest Rate
|
|
|
2.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.04 |
% |
|
|
|
|
Total Debt Obligations
|
|
$ |
24.4 |
|
|
|
|
|
|
|
|
|
|
$ |
10.4 |
|
|
$ |
30.6 |
|
|
$ |
532.3 |
|
|
$ |
597.7 |
|
|
$ |
709.5 |
|
Weighted Average Interest Rate
|
|
|
2.81 |
% |
|
|
|
|
|
|
|
|
|
|
1.05 |
% |
|
|
3.56 |
% |
|
|
1.54 |
% |
|
|
1.69 |
% |
|
|
|
|
|
|
|
Contractual Obligations and Commitments |
The table below presents information about our contractual
obligations and commitments at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
Less than |
|
|
|
More than |
|
|
|
|
One Year |
|
1-3 Years |
|
3-5 Years |
|
Five Years |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Long-term debt obligations
|
|
$ |
13.1 |
|
|
$ |
513.6 |
|
|
$ |
31.5 |
|
|
$ |
25.0 |
|
|
$ |
583.2 |
|
Operating lease obligations
|
|
|
23.2 |
|
|
|
24.2 |
|
|
|
6.3 |
|
|
|
12.2 |
|
|
|
65.9 |
|
Purchase obligations
|
|
|
78.1 |
|
|
|
20.0 |
|
|
|
9.9 |
|
|
|
2.8 |
|
|
|
110.8 |
|
Other long-term liabilities reflected on our balance sheet under
GAAP
|
|
|
|
|
|
|
7.3 |
|
|
|
7.2 |
|
|
|
94.1 |
|
|
|
108.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
114.4 |
|
|
$ |
565.1 |
|
|
$ |
54.9 |
|
|
$ |
134.1 |
|
|
$ |
868.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Certificate of Incorporation, as amended, provides that we
will indemnify, to the fullest extent permitted by the Delaware
General Corporation Law, each person that is involved in or is,
or is threatened to be, made a party to any action, suit or
proceeding by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director
or officer of Allergan or was serving at our request as a
director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise. We
have also entered into contractual indemnity agreements with
each of our directors and certain
48
officers pursuant to which we have agreed to indemnify such
directors and officers against any payments they are required to
make as a result of a claim brought against such officer or
director in such capacity, excluding claims (i) relating to
the action or inaction of a director or officer that resulted in
such director or officer gaining personal profit or advantage,
(ii) for an accounting of profits made from the purchase or
sale of our securities within the meaning of Section 16(b)
of the Securities Exchange Act of 1934 or similar provisions of
any state law or (iii) that are based upon or arise out of
such directors or officers knowingly fraudulent,
deliberately dishonest or willful misconduct. The maximum
potential amount of future payments that we could be required to
make under these indemnification provisions is unlimited.
However, we have purchased directors and officers
liability insurance policies intended to reduce our monetary
exposure and to enable us to recover a portion of any future
amounts paid. We have not previously paid any material amounts
to defend lawsuits or settle claims as a result of these
indemnification provisions. As a result, we believe the
estimated fair value of these indemnification arrangements is
minimal.
We customarily agree in the ordinary course of our business to
indemnification provisions in agreements with clinical trials
investigators in our drug development programs, in sponsored
research agreements with academic and not-for-profit
institutions, in various comparable agreements involving parties
performing services for us in the ordinary course of business,
and in our real estate leases. We also customarily agree to
certain indemnification provisions in our drug discovery and
development collaboration agreements. With respect to our
clinical trials and sponsored research agreements, these
indemnification provisions typically apply to any claim asserted
against the investigator or the investigators institution
relating to personal injury or property damage, violations of
law or certain breaches of our contractual obligations arising
out of the research or clinical testing of our compounds or drug
candidates. With respect to lease agreements, the
indemnification provisions typically apply to claims asserted
against the landlord relating to personal injury or property
damage caused by us, to violations of law by us or to certain
breaches of our contractual obligations. The indemnification
provisions appearing in our collaboration agreements are
similar, but in addition provide some limited indemnification
for the collaborator in the event of third party claims alleging
infringement of intellectual property rights. In each of the
above cases, the term of these indemnification provisions
generally survives the termination of the agreement. The maximum
potential amount of future payments that we could be required to
make under these provisions is generally unlimited. We have
purchased insurance policies covering personal injury, property
damage and general liability intended to reduce our exposure for
indemnification and to enable us to recover a portion of any
future amounts paid. We have not previously paid any material
amounts to defend lawsuits or settle claims as a result of these
indemnification provisions. As a result, we believe the
estimated fair value of these indemnification arrangements is
minimal.
Overall, we are a net recipient of currencies other than the
U.S. dollar and, as such, benefit from a weaker dollar and
are adversely affected by a stronger dollar relative to major
currencies worldwide. Accordingly, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may
negatively affect our consolidated sales, gross margins or
operating expenses as expressed in U.S. dollars.
From time to time, we enter into foreign currency option and
forward contracts to reduce earnings and cash flow volatility
associated with foreign exchange rate changes to allow
management to focus its attention on our core business issues
and challenges. Accordingly, we enter into contracts which
change in value as foreign exchange rates change to economically
offset the effect of changes in value of foreign currency assets
and liabilities, commitments and anticipated foreign currency
denominated sales and operating expenses. We enter into foreign
currency forward and option contracts in amounts between minimum
and maximum anticipated foreign exchange exposures, generally
for periods not to exceed one year.
We use foreign currency option contracts, which provide for the
sale of foreign currencies to offset foreign currency exposures
expected to arise in the normal course of our business. While
these instruments are subject to fluctuations in value, such
fluctuations are anticipated to offset changes in the value of
the underlying exposures. The principal currencies subject to
this process are the Canadian dollar, Mexican peso, Australian
dollar, Brazilian real, euro and the Japanese yen.
49
All of our outstanding foreign exchange forward contracts are
entered into to protect the value of intercompany receivables
denominated in currencies other than the lenders
functional currency. The realized and unrealized gains and
losses from foreign currency forward contracts and revaluation
of the foreign denominated intercompany receivables are recorded
through Other, net in the accompanying consolidated
statements of operations.
All of our outstanding foreign currency options are entered into
to reduce the volatility of earnings generated in currencies
other than the U.S. dollar, primarily earnings denominated
in the Canadian dollar, Mexican peso, Australian dollar,
Brazilian real, euro and the Japanese yen. Current changes in
the fair value of open foreign currency option contracts are
recorded through earnings as Unrealized losses on
derivative instruments, net while any realized gains
(losses) on settled contracts are recorded through earnings as
Other, net in the accompanying consolidated
statements of operations. The premium costs of purchased foreign
exchange option contracts are recorded in Other current
assets and amortized to Other, net over the
life of the options.
The following table provides information about our foreign
currency derivative financial instruments outstanding as of
December 31, 2004 and 2003. The information is provided in
U.S. dollars, as presented in our consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Average Contract |
|
|
|
Average Contract |
|
|
Notional |
|
Rate or Strike |
|
Notional |
|
Rate or Strike |
|
|
Amount |
|
Amount |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
(in millions) |
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Receive US$/Pay Foreign Currency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$ |
13.2 |
|
|
|
1.32 |
|
|
$ |
11.9 |
|
|
|
1.22 |
|
|
U.K. Pound
|
|
|
3.4 |
|
|
|
1.90 |
|
|
|
0.5 |
|
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16.6 |
|
|
|
|
|
|
$ |
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
(0.5 |
) |
|
|
|
|
|
$ |
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Average Contract |
|
|
|
Average Contract |
|
|
Notional |
|
Rate or Strike |
|
Notional |
|
Rate or Strike |
|
|
Amount |
|
Amount |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
(in millions) |
|
|
Foreign currency purchased put options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Dollar
|
|
$ |
22.0 |
|
|
|
1.22 |
|
|
$ |
16.4 |
|
|
|
1.36 |
|
|
Mexican Peso
|
|
|
10.1 |
|
|
|
11.75 |
|
|
|
10.5 |
|
|
|
11.54 |
|
|
Australian Dollar
|
|
|
11.0 |
|
|
|
0.74 |
|
|
|
10.9 |
|
|
|
0.67 |
|
|
Brazilian Real
|
|
|
6.6 |
|
|
|
3.06 |
|
|
|
5.8 |
|
|
|
3.36 |
|
|
Euro
|
|
|
22.4 |
|
|
|
1.32 |
|
|
|
3.6 |
|
|
|
1.21 |
|
|
Japanese Yen
|
|
|
7.4 |
|
|
|
102.21 |
|
|
|
3.3 |
|
|
|
106.65 |
|
|
U.K. Pound
|
|
|
2.9 |
|
|
|
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82.4 |
|
|
|
|
|
|
$ |
50.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
1.6 |
|
|
|
|
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sold call options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Pound
|
|
$ |
1.0 |
|
|
|
1.92 |
|
|
$ |
|
|
|
|
|
|
|
Euro
|
|
|
|
|
|
|
|
|
|
|
5.7 |
|
|
|
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.0 |
|
|
|
|
|
|
$ |
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
|
|
|
|
|
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Adopted Accounting Standards |
In December 2004, Financial Accounting Standards Board Position
109-2, or FASB Staff Position 109-2, was issued and is effective
upon issuance. FASB Staff Position 109-2 establishes standards
for how an issuer accounts for a special one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer pursuant to the American Jobs
Creation Act of 2004, or the Act. The Financial Accounting
Standards Board, or FASB, staff believes that the lack of
clarification of certain provisions within the Act and the
timing of the enactment necessitate a practical exception to the
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, or SFAS No. 109,
requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the
effect of the Act on its plan for reinvestment or repatriation
of foreign earnings for purposes of applying
SFAS No. 109. We currently have no plans to change our
policy regarding permanent reinvestment of unremitted earnings
in our foreign operations. However, we are evaluating the
Acts provisions relating to incentives to reinvest foreign
earnings in the United States, which require a domestic
reinvestment plan to be created and approved by our board of
directors before executing any repatriation activities. At this
time, we have not completed our evaluation. We expect to
complete our evaluation by the end of our third fiscal quarter
2005. The range of reasonably possible amounts of unremitted
foreign earnings that may be considered for repatriation is
currently between zero and $674 million. The related range
of income tax effects of such repatriation cannot be reasonably
estimated at this time.
In December 2004, Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets an amendment of
APB Opinion No. 29, or SFAS No. 153, was
issued and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
SFAS No. 153 requires nonmonetary exchanges to be
accounted for at fair value, recognizing any gain or loss, if
the transactions meet a commercial-substance criterion and fair
value is determinable. We adopted the provisions of
SFAS No. 153 in our fourth fiscal quarter of 2004. The
adoption did not have a material effect on our consolidated
financial statements.
51
In November 2004, Statement of Financial Accounting Standards
No. 151, Inventory Costs an amendment of ARB
No. 43, Chapter 4, or SFAS No. 151, was
issued and is effective for fiscal years beginning after the
date SFAS No. 151 was issued. SFAS No. 151
requires abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) to be
recognized as current-period charges, and the allocation of
fixed production overheads to the costs of conversion to be
based on the normal capacity of the production facilities. We
adopted the provisions of SFAS No. 151 in our fourth
fiscal quarter of 2004. The adoption did not have a material
effect on our consolidated financial statements.
In October 2004, FASB ratified the consensuses reached by the
Emerging Issues Task Force, or EITF, in EITF Issue
No. 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share (EITF 04-8),
which became effective for reporting periods ending after
December 15, 2004. EITF No. 04-8 requires all
instruments that have embedded conversion features, including
contingently convertible debt, that are contingent on market
conditions indexed to an issuers share price to be
included in diluted earnings per share computations, if
dilutive, regardless of whether the market conditions have been
met. We adopted the provisions of EITF No. 04-8 in our
fourth fiscal quarter of 2004 and restated all prior period
diluted earnings per share amounts to conform to the guidance in
EITF No. 04-8.
In May 2004, the Financial Accounting Standards Board released
Financial Accounting Standards Board Position 106-2 (FASB Staff
Position 106-2) to supercede FASB Staff Position 106-1 and to
provide guidance on accounting and disclosure requirements
related to the Medicare Act. FASB Staff Position 106-2 was
effective for financial reporting periods beginning after
June 15, 2004. We adopted FASB Staff Position 106-2
effective the beginning of our second fiscal quarter 2004 on a
retroactive application to date of enactment basis
as allowed by FASB Staff Position 106-2. In conjunction with the
implementation of FASB Staff Position 106-2, we will receive the
direct subsidy from the government. As a result of the adoption
of FASB Staff Position 106-2, our net periodic benefit cost was
reduced by $0.2 million for the year ended
December 31, 2004 and our accumulated projected benefit
obligation was reduced by $2.3 million. The reduction in
accumulated benefit obligation will be accounted for as an
actuarial experience gain as required by FASB Staff Position
106-2.
In April 2004, Financial Accounting Standards Board Position
129-1, or FASB Staff Position 129-1, was issued and was
effective upon issuance. FASB Staff Position 129-1 requires us
to provide certain quantitative and qualitative disclosures
regarding the conversion features of contingently convertible
securities, which would be helpful in understanding both the
nature of the contingency and the potential impact of
conversion. We adopted the provisions of FASB Staff Position
129-1 in our second fiscal quarter of 2004.
In December 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132
(revised 2003), Employers Disclosure about Pensions and
Other Postretirement Benefits, or SFAS No. 132
Revised, which revised employers disclosures about pension
plans and other postretirement benefit plans.
SFAS No. 132 Revised does not change the measurement
or recognition of those plans required by Financial Accounting
Standards Board Statements No. 87, Employers
Accounting for Pensions, No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and
No. 106, Employers Accounting for Postretirement
Benefits Other than Pensions. SFAS No. 132 Revised
retains the disclosure requirements contained in Financial
Accounting Standards Board Statement No. 132,
Employers Disclosures about Pensions and Other
Postretirement Benefits, which it replaces.
SFAS No. 132 Revised requires additional disclosures
to those in the original statement about the assets,
obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit
postretirement plans. The provisions of SFAS No. 132
Revised are effective for financial statements with fiscal years
ended after December 15, 2003, with the exception of
disclosure information regarding foreign pension plans and
estimated future benefit payments which provisions are effective
for fiscal years ended after June 15, 2004.
As required by SFAS No. 132 Revised, we have provided
the additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of our U.S. pension
plans and other postretirement benefit plan as of our fiscal
year ended December 31, 2003, and elected early adoption
and implemented the provisions regarding the disclosure
information for our foreign pension plans as of our fiscal year
ended
52
December 31, 2003. As required by SFAS No. 132
Revised, we began to provide disclosure information regarding
estimated future benefit payments effective with our fiscal year
ended December 31, 2004.
|
|
|
New Accounting Standards Not Yet Adopted |
In December 2004, Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, or
SFAS No. 123R, was issued and is effective for
entities that do not file as small business issuers as of the
beginning of the first interim reporting period that begins
after June 15, 2005, which is our third fiscal quarter of
2005. SFAS No. 123R requires companies to recognize in
the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees.
SFAS No. 123R sets accounting requirements for
measuring, recognizing and reporting share-based compensation,
including income tax considerations. In general,
SFAS No. 123R does not express a preference for a type
of valuation model for measuring the grant date fair value,
generally requires equity- and liability-classified awards to be
recognized in earnings over the requisite service period,
generally the vesting period for service condition awards,
allows for a one-time policy election regarding one of two
alternatives for recognizing compensation cost for grant awards
with graded vesting, and requires the use of the estimated
forfeitures method. Upon adoption of SFAS No. 123R, we
will begin recognizing the cost of stock options using the
modified prospective application method whereby the cost of new
awards and awards modified, repurchased or cancelled after the
required effective date and the portion of awards for which the
requisite service has not been rendered (unvested awards) that
are outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the
required effective date. Because we historically accounted for
share-based payment arrangements under the intrinsic value
method of accounting, we will continue to provide the
disclosures required by Statement of Financial Accounting
Standards No. 123 until the effective date of
SFAS No. 123R, regarding pro forma net earnings
and basic and diluted earnings per share, had compensation
expense for our stock options been recognized based upon the
fair value for awards granted.
In December 2004, Financial Accounting Standards Board Position
109-1, or FASB Staff Position 109-1, was issued and is effective
upon issuance. FASB Staff Position 109-1 requires us to treat
the effect of a newly enacted U.S. tax deduction, beginning
in 2005, for income attributable to United States production
activities as a special deduction, and not a tax rate reduction,
in accordance with SFAS No. 109. At this time, we are
unable to determine the effect of this new deduction on our
future provision for income taxes, but we do not believe that it
will have a material effect on our 2005 consolidated financial
statements.
|
|
Item 8. |
Financial Statements and Supplementary Data |
The information required by this Item is incorporated herein by
reference to the financial statements set forth in
Item 15(a) of Part IV of this report.
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
|
|
|
Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Principal Executive Officer and our Principal
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Our management, including our
Principal Executive Officer and our Principal Financial Officer,
does not expect that our disclosure controls or procedures will
prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all
53
control issues and instances of fraud, if any, within Allergan
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of
controls is also based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. Also, we
have investments in certain unconsolidated entities. As we do
not control or manage these entities, our disclosure controls
and procedures with respect to such entities are necessarily
substantially more limited than those we maintain with respect
to our consolidated subsidiaries.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Principal
Executive Officer and our Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2004, the end of
the annual period covered by this report. The evaluation of our
disclosure controls and procedures included a review of the
disclosure controls and procedures objectives,
design, implementation and the effect of the controls and
procedures on the information generated for use in this report.
In the course of our evaluation, we sought to identify data
errors, control problems or acts of fraud and to confirm the
appropriate corrective actions, including process improvements,
were being undertaken.
Based on the foregoing, our Principal Executive Officer and our
Principal Financial Officer concluded that, as of the period
covered by this report, our disclosure controls and procedures
were effective and were operating at the reasonable assurance
level.
There have been no significant changes in our internal controls
or in other factors that could significantly affect the internal
controls subsequent to the date we completed our evaluation.
Our management report on internal control over financial
reporting and the attestation report on managements
assessment of our internal control over financial reporting are
contained in Item 15(a)(1) of Part IV of this report.
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of Allergan, Inc. |
Our executive officers and their ages as of March 1, 2005
are as follows:
|
|
|
|
|
|
|
Name |
|
Age |
|
Principal Position with Allergan |
|
|
|
|
|
David E.I. Pyott
|
|
|
51 |
|
|
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer) |
F. Michael Ball
|
|
|
49 |
|
|
Executive Vice President and President, Pharmaceuticals |
James F. Barlow
|
|
|
46 |
|
|
Vice President, Corporate Controller (Principal Accounting
Officer) |
Eric K. Brandt
|
|
|
42 |
|
|
Executive Vice President, Finance, Strategy and Corporate
Development (Principal Financial Officer) |
Douglas S. Ingram, Esq.
|
|
|
42 |
|
|
Executive Vice President, General Counsel and Secretary |
Jacqueline Schiavo
|
|
|
56 |
|
|
Executive Vice President, Global Technical Operations |
Scott M. Whitcup, M.D.
|
|
|
45 |
|
|
Executive Vice President, Research & Development |
Roy J. Wilson
|
|
|
49 |
|
|
Executive Vice President, Human Resources |
Officers are appointed by and hold office at the pleasure of the
Board of Directors.
54
Mr. Pyott was appointed Chairman of the Board in April
2001, and has been the Companys President and Chief
Executive Officer since January 1998. Previously, he was head of
the Nutrition Division and a member of the executive committee
of Novartis AG from 1995 until December 1997. From 1992 to 1995
Mr. Pyott was President and Chief Executive Officer of
Sandoz Nutrition Corp., Minneapolis, Minnesota and General
Manager of Sandoz Nutrition, Barcelona, Spain from 1990 to 1992.
Prior to that Mr. Pyott held various positions within the
Sandoz Nutrition group from 1980. Mr. Pyott is a member of
the Board of Directors of Avery Dennison Corporation, Edwards
Lifesciences Corporation, Pacific Life Mutual Holding Company,
the ultimate parent company of Pacific Life, and Pacific
LifeCorp, the parent stockholding company of Pacific Life.
Mr. Pyott serves on the Board of Directors and the
Executive Committee of the California Healthcare Institute and
the Directors Board of the University of California
(Irvine) Graduate School of Management.
Mr. Ball has been Executive Vice President and President,
Pharmaceuticals since October 2003. Prior to that, Mr. Ball
was Corporate Vice President and President, North America Region
and Global Eye Rx Business since May 1998 and prior to that was
Corporate Vice President and President, North America Region
since April 1996. He joined the Company in 1995 as Senior Vice
President, U.S. Eye Care after 12 years with Syntex
Corporation, where he held a variety of positions including
President, Syntex Inc. Canada and Senior Vice President, Syntex
Laboratories. Mr. Ball serves on the Board of Directors of
SimpleTech, Inc.
Mr. Barlow joined the Company in January 2002 as Vice
President, Corporate Controller. Prior to joining Allergan,
Mr. Barlow served as Chief Financial Officer of Wynn Oil
Company, a division of Parker Hannifin Corporation. Prior to
Wynn Oil Company, Mr. Barlow was Treasurer and Controller
at Wynns International, Inc. from July 1990 to September
2000. Before working for Wynns International, Inc.,
Mr. Barlow was Vice President, Controller from 1986 to 1990
for Ford Equipment Leasing Company. From 1983 to 1985
Mr. Barlow worked for Deloitte, Haskins and Sells.
Mr. Brandt has been Executive Vice President, Finance,
Strategy and Corporate Development since October 2003. Prior to
that, Mr. Brandt was Corporate Vice President and Chief
Financial Officer since May 1999 and from January 2001 to
January 2002, he also assumed the duties of President, Global
Consumer Eye Care Business. Prior to joining the Company,
Mr. Brandt held various positions with the Boston
Consulting Group, or BCG, from 1989, culminating in Vice
President and Partner. Prior to his departure from BCG,
Mr. Brandt led BCGs operations practice in North
America and was a senior member of the BCG health care practice.
While at BCG, Mr. Brandt also led significant manufacturing
and supply chain assignments for several major pharmaceutical
companies and was involved in high level consulting engagements
with top global pharmaceutical, managed care and medical device
companies, focusing on corporate finance, shareholder value and
post-merger integration. In connection with
Ms. Schiavos April 2005 retirement from the Company,
the Companys Global Technical Operations function will
report to Mr. Brandt. Mr. Brandt joined Allergan in
1999. Mr. Brandt serves on the Board of Directors of Vertex
Pharmaceuticals Incorporated and Dentsply International Inc.,
and is a Trustee of the Pegasus School.
Mr. Ingram has been Executive Vice President, General
Counsel and Secretary, as well as our Chief Ethics Officer,
since October 2003 and currently manages the Global Legal
Affairs organization, the Regulatory Affairs organization,
Compliance and Internal Audit, Corporate Communications and
Global Trade Compliance. Prior to that, Mr. Ingram served
as Corporate Vice President, General Counsel and Secretary, as
well as our Companys Chief Ethics Officer, since July
2001. Prior thereto he was Senior Vice President and General
Counsel of the Company since January 2001, and its Assistant
Secretary since November 1998. Prior to that, Mr. Ingram
was the Companys Associate General Counsel from August
1998, its Assistant General Counsel from January 1998 and Senior
Attorney and Chief Litigation Counsel of Allergan from March
1996, when he first joined us. Prior to joining Allergan,
Mr. Ingram was, from August 1988 to March 1996, an attorney
with the law firm of Gibson, Dunn & Crutcher.
Mr. Ingram is a member of the Board of Directors of ECC
Capital Corporation, the parent company of Encore Credit
Corporation.
Ms. Schiavo has been Executive Vice President, Global
Technical Operations, since October 2003. Prior to that,
Ms. Schiavo was Corporate Vice President, Worldwide
Operations since 1992. She was Senior Vice
55
President, Operations from 1991 and Vice President, Operations
from 1989. On March 1, 2005, Ms. Schiavo formally
announced that she has chosen to retire from the Company,
effective as of April 29, 2005. Ms. Schiavo joined
Allergan in 1980.
Dr. Whitcup has been Executive Vice President, Research and
Development since July 2004. Dr. Whitcup joined Allergan in
January 2000 as Vice President, Development, Ophthalmology. In
January 2004, Dr. Whitcup became Allergans Senior
Vice President, Development, Ophthalmology. Dr. Whitcup was
instrumental in obtaining approval of both Lumigan®
and Restasis®, two of Allergans leading
ophthalmology products. From 1993 until 2000, Dr. Whitcup
served as the Clinical Director of the National Eye Institute,
or the NEI. At the NEI, Dr. Whitcups leadership was
vital in building the clinical research program and promoting
new ophthalmic therapeutic discoveries. Dr. Whitcup is a
faculty member at the Jules Stein Eye Institute/ David Geffen
School of Medicine at UCLA.
Mr. Wilson joined the Company in April 2004 as Executive
Vice President Human Resources. Prior to joining Allergan,
Mr. Wilson held positions with Texas Instruments,
Schlumberger Ltd. and Pearle Vision, where he served as the
Senior Vice President and Chief Administrative Officer, Compaq
Computer, as Vice President of Human Resources and Senior Vice
President of Human Resources and Administration at BMC Software.
Over the past three years, Mr. Wilson has successfully
managed a human capital consulting firm centered on executive
compensation and organization effectiveness. Mr. Wilson has
strong knowledge of human resources issues in the United States,
Europe and Asia as well as many post-acquisition merger
experiences. Mr. Wilson previously served on the Boards of
Texas A&M University Mays Business School,
TEXCHANGE, University of Houston, ReservationSource.com, Pearle
Vision and Voyagen.com.
The information in the sections entitled Election of
Directors and Information Regarding the Board of
Directors in the Proxy Statement to be filed by us with
the Securities and Exchange Commission no later than
120 days after the close of our fiscal year ended
December 31, 2004 (the Proxy Statement) is
incorporated herein by reference.
The information in the section entitled Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy
Statement is incorporated herein by reference.
The information in the section entitled Code of Business
Conduct and Ethics in the Proxy Statement is incorporated
herein by reference.
The Company has filed, as exhibits to this Annual Report on
Form 10-K for the year ended December 31, 2004, the
certifications of its Principal Executive Officer and Principal
Financial Officer required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
On May 3, 2004, the Company submitted to the New York Stock
Exchange the Annual CEO Certification required pursuant to
Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual.
|
|
Item 11. |
Executive Compensation |
The information to be included in the sections entitled
Executive Compensation and Director
Compensation in the Proxy Statement is incorporated herein
by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information to be included in the section entitled
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters in the Proxy
Statement is incorporated herein by reference.
56
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information to be included in the sections entitled
Certain Relationships and Related Transactions and
Compensation Committee Interlocks and Insider
Participation in the Proxy Statement is incorporated
herein by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information to be included in the section entitled
Independent Registered Public Accounting Firm Fees
in the Proxy Statement is incorporated herein by reference.
57
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) 1. Consolidated
Financial Statements and Supplementary Data:
|
|
|
The following financial statements are included herein under
Item 8: |
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
|
|
|
F-1 |
|
|
|
|
F-2 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
|
|
|
F-47 |
|
(a) 2. Financial Statement
Schedules:
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
F-48 |
|
All other schedules have been omitted for the reason that the
required information is presented in financial statements or
notes thereto, the amounts involved are not significant or the
schedules are not applicable.
(a) 3. Exhibits:
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3.1 |
|
|
Restated Certificate of Incorporation of the Company as filed
with the State of Delaware on May 22, 1989 (incorporated by
reference to Exhibit 3.1 to Registration Statement on
Form S-1 No. 33-28855, filed May 24, 1989) |
|
3.2 |
|
|
Certificate of Amendment of Certificate of Incorporation of
Allergan, Inc. (incorporated by reference to Exhibit 3 the
Companys Report on Form 10-Q for the Quarter ended
June 30, 2000) |
|
3.3 |
|
|
Bylaws of the Company (incorporated by reference to
Exhibit 3 to the Companys Report on Form 10-Q
for the Quarter ended June 30, 1995) |
|
3.4 |
|
|
First Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.1 to the Companys Report on
Form 10-Q for the Quarter ended September 24, 1999) |
|
3.5 |
|
|
Second Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.5 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002) |
|
3.6 |
|
|
Third Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.6 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2003) |
|
4.1 |
|
|
Certificate of Designations of Series A Junior
Participating Preferred Stock as filed with the State of
Delaware on February 1, 2000 (incorporated by reference to
Exhibit 4.1 to the Companys Report on Form 10-K
for the Fiscal Year ended December 31, 1999) |
58
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
4.2 |
|
|
Rights Agreement, dated January 25, 2000, between Allergan,
Inc. and First Chicago Trust Company of New York (Rights
Agreement) (incorporated by reference to Exhibit 4 to
the Companys Current Report on Form 8-K filed on
January 28, 2000) |
|
4.3 |
|
|
Amendment to Rights Agreement dated as of January 2, 2002
between First Chicago Trust Company of New York, the Company and
EquiServe Trust Company, N.A., as successor Rights Agent
(incorporated by reference to Exhibit 4.3 of the
Companys Annual Report on Form 10-K for the year
ended December 31, 2001) |
|
4.4 |
|
|
Second Amendment to Rights Agreement dated as of
January 30, 2003 between First Chicago Trust Company of New
York, the Company and EquiServe Trust Company, N.A., as
successor Rights Agent (incorporated by reference to
Exhibit 1 of the Companys amended Form 8-A filed
on February 14, 2003) |
|
4.5 |
|
|
Indenture between the Company and BankAmerica National Trust
Company (incorporated by reference to Exhibit 4 filed with
the Companys Registration Statement 33-69746) |
|
4.6 |
|
|
Indenture, dated as of November 1, 2000, between the
Company and U.S. Trust National Association (incorporated
by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K, filed on November 1, 2000) |
|
4.7 |
|
|
Registration Rights Agreement, dated November 1, 2000,
between the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce Fenner & Smith Incorporated (incorporated
by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K, filed on November 1, 2000) |
|
4.8 |
|
|
Amended and Restated Indenture, dated as of July 28, 2004,
between the Company and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 4.11 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 2004) |
|
4.9 |
|
|
Form of Zero Coupon Convertible Senior Note Due 2022
(incorporated by reference to Exhibit 4.2 (included in
Exhibit 4.1) of the Companys Registration Statement
on Form S-3 dated January 9, 2003, Registration
No. 333-102425) |
|
4.10 |
|
|
Registration Rights Agreement dated as of November 6, 2002,
by and between Allergan, Inc. and Banc of America Securities
LLC, Salomon Smith Barney Inc., J.P. Morgan Securities Inc.
and Banc One Capital Markets, Inc. (incorporated by reference to
Exhibit 4.3 of the Companys Registration Statement on
Form S-3 dated January 9, 2003, Registration
No. 333-102425) |
|
10.1 |
|
|
Form of director and executive officer Indemnity Agreement
(incorporated by reference to Exhibit 10.4 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 1992) |
|
10.2 |
|
|
Form of Allergan, Inc. change in control severance agreement
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
10.3 |
|
|
Allergan, Inc. 2003 Nonemployee Director Equity Incentive Plan
(incorporated by reference to Appendix A to the
Companys Proxy Statement filed on March 14, 2003)* |
|
10.4 |
|
|
Allergan, Inc. Deferred Directors Fee Program amended and
restated as of November 15, 1999 (incorporated by reference
to Exhibit 4 to the Companys Registration Statement
on Form S-8 dated January 6, 2000, Registration
No. 333-94155)* |
|
10.5 |
|
|
Allergan, Inc. 1989 Incentive Compensation Plan, as amended and
restated, November 2000 and as adjusted for 1999 split
(incorporated by reference to Exhibit 10.5 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2000) |
|
10.6 |
|
|
First Amendment to Allergan, Inc. 1989 Incentive Compensation
Plan (as amended and restated November 2000) (incorporated by
reference to Exhibit 10.51 to the Companys Report on
Form 10-Q for the Quarter ended September 26, 2003) |
|
10.7 |
|
|
Second Amendment to Allergan, Inc. 1989 Incentive Compensation
Plan (as amended and restated November 2000) |
|
10.8 |
|
|
Form of Certificate of Restricted Stock Award under the
Companys 1989 Incentive Compensation Plan (as amended and
restated November 2000) |
|
10.9 |
|
|
Form of Restricted Stock Units Terms and Conditions under the
Companys 1989 Incentive Compensation Plan (as amended and
restated November 2000) |
59
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10.10 |
|
|
Allergan, Inc. Employee Stock Ownership Plan (Restated 2003)
(incorporated by reference to Exhibit 10.6 the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002) |
|
10.11 |
|
|
First Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) (incorporated by reference to
Exhibit 10.52 to the Companys Report on
Form 10-Q for the Quarter ended September 26, 2003) |
|
10.12 |
|
|
Second Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) (incorporated by reference to
Exhibit 10.9 to the Companys Report on Form 10-K
for the Fiscal Year ended December 31, 2003) |
|
10.13 |
|
|
Third Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) |
|
10.14 |
|
|
Allergan, Inc. Employee Savings and Investment Plan (Restated
2003) (incorporated by reference to Exhibit 10.7 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002) |
|
10.15 |
|
|
First Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) (incorporated by reference to Exhibit 10.53
to the Companys Report on Form 10-Q for the Quarter
ended September 26, 2003) |
|
10.16 |
|
|
Second Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) (incorporated by reference to Exhibit 10.12
to the Companys Report on Form 10-K for the Fiscal
Year ended December 31, 2003) |
|
10.17 |
|
|
Third Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) |
|
10.18 |
|
|
Allergan, Inc. Pension Plan (Restated 2003) (incorporated by
reference to Exhibit 10.8 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002) |
|
10.19 |
|
|
First Amendment to Allergan, Inc. Pension Plan (Restated 2003)
(incorporated by reference to Exhibit 10.50 to the
Companys Report on Form 10-Q for the Quarter ended
September 26, 2003) |
|
10.20 |
|
|
Second Amendment to Allergan, Inc. Pension Plan (Restated 2003) |
|
10.21 |
|
|
Restated Allergan, Inc. Supplemental Retirement Income Plan
(incorporated by reference to Exhibit 10.5 to the
Companys Report on Form 10-Q for the Quarter ended
March 31, 1996)* |
|
10.22 |
|
|
First Amendment to Allergan, Inc. Supplemental Retirement Income
Plan (incorporated by reference to Exhibit 10.4 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 1999)* |
|
10.23 |
|
|
Second Amendment to Allergan, Inc. Supplemental Retirement
Income Plan (incorporated by reference to Exhibit 10.12 to
the Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
10.24 |
|
|
Third Amendment to Allergan, Inc. Supplemental Retirement Income
Plan (incorporated by reference to Exhibit 10.46 to the
Companys Report on Form 10-Q for the Quarter ended
June 28, 2002)* |
|
10.25 |
|
|
Fourth Amendment to Allergan, Inc. Supplemental Retirement
Income Plan (Restated 1996) (incorporated by reference to
Exhibit 10.13 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002)* |
|
10.26 |
|
|
Restated Allergan, Inc. Supplemental Executive Benefit Plan
(incorporated by reference to Exhibit 10.6 to the
Companys Report on Form 10-Q for the Quarter ended
March 31, 1996)* |
|
10.27 |
|
|
First Amendment to Allergan, Inc. Supplemental Executive Benefit
Plan (incorporated by reference to Exhibit 10.3 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 1999)* |
|
10.28 |
|
|
Second Amendment to Allergan, Inc. Supplemental Executive
Benefit Plan (incorporated by reference to Exhibit 10.11 to
the Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
10.29 |
|
|
Third Amendment to Allergan, Inc. Supplemental Executive Benefit
Plan (incorporated by reference to Exhibit 10.45 to the
Companys Report on Form 10-Q for the Quarter ended
June 28, 2002)* |
|
10.30 |
|
|
Fourth Amendment to Allergan, Inc. Supplemental Executive
Benefit Plan (incorporated by reference to Exhibit 10.18 to
the Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002)* |
60
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10.31 |
|
|
Allergan, Inc. Executive Bonus Plan (incorporated by reference
to Exhibit C to the Companys Proxy Statement dated
March 23, 1999, filed in definitive form on March 22,
1999)* |
|
10.32 |
|
|
First Amendment to Allergan, Inc. Executive Bonus Plan
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
10.33 |
|
|
Allergan, Inc. 2005 Management Bonus Plan* |
|
10.34 |
|
|
Allergan, Inc. Executive Deferred Compensation Plan (amended and
restated effective January 1, 2003) (incorporated by
reference to Exhibit 10.22 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002)* |
|
10.35 |
|
|
First Amendment to Allergan, Inc. Executive Deferred
Compensation Plan (amended and restated effective
January 1, 2003) (incorporated by reference to
Exhibit 10.29 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2003)* |
|
10.36 |
|
|
Allergan, Inc. Premium Priced Stock Option Plan (incorporated by
reference to Exhibit B to the Companys Proxy
Statement filed on March 23, 2001)* |
|
10.37 |
|
|
Distribution Agreement dated March 4, 1994 between
Allergan, Inc. and Merrill Lynch & Co. and
J.P. Morgan Securities Inc. (incorporated by reference to
Exhibit 10.14 to the Companys Report on
Form 10-K for the fiscal year ended December 31, 1993) |
|
10.38 |
|
|
Credit Agreement, dated as of October 11, 2002, among the
Company, as Borrower and Guarantor, the Eligible Subsidiaries
Referred to Therein, the Banks Listed Therein, JPMorgan Chase
Bank, as Administrative Agent, Citicorp USA Inc., as Syndication
Agent and Bank of America, N.A., as Documentation Agent
(incorporated by reference to Exhibit 10.47 to the
Companys Report on Form 10-Q for the Quarter ended
September 27, 2002) |
|
10.39 |
|
|
First Amendment to Credit Agreement, dated as of
October 30, 2002, among the Company, as Borrower and
Guarantor, the Eligible Subsidiaries Referred to Therein, the
Banks Listed Therein, JPMorgan Chase Bank, as Administrative
Agent, Citicorp USA Inc., as Syndication Agent and Bank of
America, N.A., as Documentation Agent (incorporated by reference
to Exhibit 10.48 to the Companys Report on
Form 10-Q for the Quarter ended September 27, 2002) |
|
10.40 |
|
|
Second Amendment to Credit Agreement, dated as of May 16,
2003, among the Company, as Borrower and Guarantor, the Banks
listed Therein, JPMorgan Chase Bank, as Administrative Agent,
Citicorp USA Inc., as Syndication Agent and Bank of America,
N.A., as Documentation Agent (incorporated by reference to
Exhibit 10.49 to the Companys Report on
Form 10-Q for the Quarter ended June 27, 2003) |
|
10.41 |
|
|
Third Amendment to Credit Agreement, dated as of
October 15, 2003, among the Company, as Borrower and
Guarantor, the Banks Listed Therein, JPMorgan Chase Bank, as
Administrative Agent, Citicorp USA Inc., as Syndication Agent
and Bank of America, N.A., as Documentation Agent (incorporated
by reference to Exhibit 10.54 to the Companys Report
on Form 10-Q for the Quarter ended September 26, 2003) |
|
10.42 |
|
|
Fourth Amendment to Credit Agreement, dated as of May 26,
2004, among the Company, as Borrower and Guarantor, the Banks
Listed Therein, JPMorgan Chase Bank, as Administrative Agent,
Citicorp USA Inc., as Syndication Agent and Bank of America,
N.A., as Document Agent (incorporated by reference to
Exhibit 10.56 to the Companys Report on
Form 10-Q for the Quarter ended June 25, 2004) |
|
10.43 |
|
|
Contribution and Distribution Agreement by and among Allergan,
Inc. and Advanced Medical Optics, Inc. (incorporated by
reference to Exhibit 10.35 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
10.44 |
|
|
Transitional Services Agreement between Allergan, Inc. and
Advanced Medical Optics, Inc. (incorporated by reference to
Exhibit 10.36 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
10.45 |
|
|
Employee Matters Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.37 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
61
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10.46 |
|
|
Tax Sharing Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.38 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
10.47 |
|
|
Manufacturing Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.39 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
10.48 |
|
|
LLC Interest Assignment Agreement dated as of March 16,
2003 among Farallon Pharma Investors, LLC, Bardeen Sciences
Company, LLC and Allergan, Inc. (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on May 28, 2003) |
|
10.49 |
|
|
Agreement and Plan of Merger by and among Allergan, Inc., Wilson
Acquisition, Inc. and Oculex Pharmaceuticals, Inc. dated as of
October 13, 2003 (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on November 21, 2003) |
|
10.50 |
|
|
Transition and General Release Agreement, by and between
Allergan, Inc. and Lester J. Kaplan (incorporated by reference
to Exhibit 10.55 to the Companys Report on
Form 10-Q for the Quarter ended March 26, 2004) |
|
21 |
|
|
List of Subsidiaries of Allergan, Inc. |
|
23 |
|
|
Report on schedule and consent of KPMG LLP, independent
registered public accounting firm, to the incorporation of their
reports herein to Registration Statements Nos. 33-29527,
33-29528, 33-44770, 33-48908, 33-66874, 333-09091, 333-04859,
333-25891, 33-55061, 33-69746, 333-64559, 333-70407, 333-94155,
333-94157, 333-43580, 333-43584, 333-50524, 333-65176,
333-99219, 333-102425, 333-117935, 333-117936, 333-117937, and
333-117939 |
|
31.1 |
|
|
Certification of Chief Executive Officer Required Under
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended |
|
31.2 |
|
|
Certification of Principal Financial Officer Required Under
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended |
|
32 |
|
|
Certification of Chief Executive Officer and Principal Financial
Officer Required Under Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350 |
|
|
* |
Management contract or compensatory plan or arrangement. |
|
|
|
Reference is hereby made to the Index of Exhibits under
Item 15(a)(3) of Part IV of this report. |
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
David E.I. Pyott |
|
Chairman of the Board, |
|
President and Chief Executive Officer |
Date: March 1, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
Date: March 1, 2005
|
|
By /s/ David E.I.
Pyott
David
E.I. Pyott
Chairman of the Board,
President and Chief Executive Officer |
|
Date: March 1, 2005 |
|
By /s/ Eric K.
Brandt
Eric
K. Brandt
Executive Vice President, Finance,
Strategy and Corporate Development
(Principal Financial Officer) |
|
Date: March 1, 2005 |
|
By /s/ James F.
Barlow
James
F. Barlow
Vice President, Corporate Controller
(Principal Accounting Officer) |
|
Date: March 1, 2005 |
|
By /s/ Herbert W.
Boyer
Herbert
W. Boyer, Ph.D.,
Vice Chairman of the Board |
|
Date: March 1, 2005 |
|
By /s/ Handel E.
Evans
Handel
E. Evans, Director |
|
Date: March 1, 2005 |
|
By /s/ Michael R.
Gallagher
Michael
R. Gallagher, Director |
|
Date: March 1, 2005 |
|
By /s/ Gavin S.
Herbert
Gavin
S. Herbert,
Director and Chairman Emeritus |
|
Date: March 1, 2005 |
|
By /s/ Robert A.
Ingram
Robert
A. Ingram, Director |
63
|
|
|
|
Date: March 1, 2005 |
|
By /s/ Trevor M.
Jones
Trevor
M. Jones, Director |
|
Date: March 1, 2005 |
|
By /s/ Karen R.
Osar
Karen
R. Osar, Director |
|
Date: March 1, 2005 |
|
By /s/ Russell T.
Ray
Russell
T. Ray, Director |
|
Date: March 1, 2005 |
|
By /s/ Louis T.
Rosso
Louis
T. Rosso, Director |
|
Date: March 1, 2005 |
|
By /s/ Stephen J.
Ryan
Stephen
J. Ryan, M.D., Director |
|
Date: March 1, 2005 |
|
By /s/ Leonard D.
Schaeffer
Leonard
D. Schaeffer, Director |
64
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Internal control over financial reporting refers to the process
designed by, or under the supervision of, our Principal
Executive Officer and Principal Financial Officer, and effected
by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles, and includes those policies and
procedures that:
|
|
|
(1) Pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; |
|
|
(2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and |
|
|
(3) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Companys assets that could have a material effect
on the financial statements. |
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk. Management is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company.
Management has used the framework set forth in the report
entitled Internal Control Integrated
Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the
effectiveness of the Companys internal control over
financial reporting. Management has concluded that the
Companys internal control over financial reporting was
effective as of the end of the most recent fiscal year.
David E.I. Pyott
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Eric K. Brandt
Executive Vice President, Finance, Strategy and
Corporate Development
(Principal Financial Officer)
March 4, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited managements assessment, included in the
accompanying Assessment of the Effectiveness of Internal Control
over Financial Reporting as of December 31, 2004,
that Allergan, Inc. (Allergan or the Company) maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Allergans management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Allergan
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also, in our opinion, Allergan maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Allergan, Inc. and subsidiaries
as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders equity
and cash flows for each of the years in the three-year period
ended December 31, 2004, and our report dated March 4,
2005 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Costa Mesa, California
March 4, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited the accompanying consolidated balance sheets of
Allergan, Inc. and subsidiaries (the Company) as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Allergan, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Emerging Issues Task Force
(EITF) No. 04-08, The Effect of Contingently
Convertible Instruments on Diluted Earnings Per Share, in
the fiscal fourth quarter of 2004 and restated all prior period
diluted earnings per share amounts. As discussed in Note 1
to the consolidated financial statements, the Company changed
its method of accounting for goodwill and intangible assets in
2002.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 4, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Costa Mesa, California
March 4, 2005
F-3
ALLERGAN, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(in millions, except |
|
|
share data) |
ASSETS |
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$ |
894.8 |
|
|
$ |
507.6 |
|
|
Trade receivables, net
|
|
|
243.5 |
|
|
|
220.1 |
|
|
Inventories
|
|
|
89.9 |
|
|
|
76.3 |
|
|
Other current assets
|
|
|
147.8 |
|
|
|
124.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,376.0 |
|
|
|
928.2 |
|
Investments and other assets
|
|
|
230.0 |
|
|
|
210.9 |
|
Deferred tax assets
|
|
|
115.7 |
|
|
|
118.6 |
|
Property, plant and equipment, net
|
|
|
468.5 |
|
|
|
422.5 |
|
Goodwill
|
|
|
8.7 |
|
|
|
8.4 |
|
Intangibles, net
|
|
|
58.1 |
|
|
|
66.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,257.0 |
|
|
$ |
1,754.9 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$ |
13.1 |
|
|
$ |
24.4 |
|
|
Accounts payable
|
|
|
97.9 |
|
|
|
87.2 |
|
|
Accrued compensation
|
|
|
77.1 |
|
|
|
67.8 |
|
|
Other accrued expenses
|
|
|
178.5 |
|
|
|
157.5 |
|
|
Income taxes
|
|
|
93.0 |
|
|
|
46.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
459.6 |
|
|
|
383.4 |
|
Long-term debt
|
|
|
56.5 |
|
|
|
66.0 |
|
Long-term convertible notes, net of discount
|
|
|
513.6 |
|
|
|
507.3 |
|
Other liabilities
|
|
|
108.6 |
|
|
|
77.1 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
2.5 |
|
|
|
2.5 |
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
300,000,000 shares; issued 134,255,000 shares
|
|
|
1.3 |
|
|
|
1.3 |
|
|
Additional paid-in capital
|
|
|
387.1 |
|
|
|
360.5 |
|
|
Accumulated other comprehensive loss
|
|
|
(45.7 |
) |
|
|
(54.9 |
) |
|
Retained earnings
|
|
|
982.5 |
|
|
|
695.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,325.2 |
|
|
|
1,002.6 |
|
|
Less treasury stock, at cost (2,838,000 and
4,112,000 shares)
|
|
|
(209.0 |
) |
|
|
(284.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,116.2 |
|
|
|
718.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
2,257.0 |
|
|
$ |
1,754.9 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
(in millions, except per share |
|
|
data) |
Product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
|
$ |
1,385.0 |
|
Cost of sales
|
|
|
386.7 |
|
|
|
320.3 |
|
|
|
221.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
|
1,658.9 |
|
|
|
1,435.1 |
|
|
|
1,163.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research services
|
|
|
|
|
|
|
|
|
|
|
|
|
Research service revenues
|
|
|
|
|
|
|
16.0 |
|
|
|
40.3 |
|
Cost of research services
|
|
|
|
|
|
|
14.5 |
|
|
|
36.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research services margin
|
|
|
|
|
|
|
1.5 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
778.9 |
|
|
|
697.2 |
|
|
|
623.8 |
|
Research and development
|
|
|
345.6 |
|
|
|
763.5 |
|
|
|
233.1 |
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
118.7 |
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
|
62.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
527.4 |
|
|
|
(23.7 |
) |
|
|
129.0 |
|
Interest income
|
|
|
14.1 |
|
|
|
13.0 |
|
|
|
15.8 |
|
Interest expense
|
|
|
(18.1 |
) |
|
|
(15.6 |
) |
|
|
(17.4 |
) |
Gain (loss) on investments, net
|
|
|
0.3 |
|
|
|
|
|
|
|
(30.2 |
) |
Unrealized loss on derivative instruments, net
|
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
(1.7 |
) |
Other, net
|
|
|
8.8 |
|
|
|
(2.9 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
and minority interest
|
|
|
532.1 |
|
|
|
(29.5 |
) |
|
|
89.8 |
|
Provision for income taxes
|
|
|
154.0 |
|
|
|
22.2 |
|
|
|
25.1 |
|
Minority interest
|
|
|
1.0 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
|
377.1 |
|
|
|
(52.5 |
) |
|
|
64.0 |
|
Earnings from discontinued operations, net of applicable income
tax expense of $7.0 million
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
$ |
75.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings (loss) per share
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net diluted earnings (loss) per share
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
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|
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|
|
|
|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional |
|
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|
Other |
|
|
|
Treasury Stock |
|
|
|
Comprehensive |
|
|
|
|
Paid-in |
|
Unearned |
|
Comprehensive |
|
Retained |
|
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|
|
|
Income |
|
|
Shares |
|
Par Value |
|
Capital |
|
Compensation |
|
Loss |
|
Earnings |
|
Shares |
|
Amount |
|
Total |
|
(Loss) |
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|
(in millions, except per share data) |
Balance December 31, 2001
|
|
|
134.3 |
|
|
$ |
1.3 |
|
|
$ |
325.0 |
|
|
$ |
(3.4 |
) |
|
$ |
(61.6 |
) |
|
$ |
928.4 |
|
|
|
(3.0 |
) |
|
$ |
(212.3 |
) |
|
$ |
977.4 |
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75.2 |
|
|
|
|
|
|
|
|
|
|
|
75.2 |
|
|
$ |
75.2 |
|
|
Other comprehensive income (loss), net of tax:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
5.9 |
|
|
|
Foreign currency translation adjustments
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.6 |
) |
|
|
Unrealized loss on investments
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(0.1 |
) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.8 |
) |
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
Distribution of Advanced Medical Optics, Inc. common stock to
stockholders
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53.2 |
) |
|
|
|
|
|
|
|
|
|
|
(53.2 |
) |
|
|
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46.7 |
) |
|
|
|
|
|
|
|
|
|
|
(46.7 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
(32.4 |
) |
|
|
0.9 |
|
|
|
56.3 |
|
|
|
36.3 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
9.2 |
|
|
|
4.2 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.7 |
) |
|
|
(180.8 |
) |
|
|
(180.8 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
7.7 |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2002
|
|
|
134.3 |
|
|
|
1.3 |
|
|
|
337.4 |
|
|
|
(1.1 |
) |
|
|
(73.4 |
) |
|
|
871.7 |
|
|
|
(4.8 |
) |
|
|
(327.6 |
) |
|
|
808.3 |
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52.5 |
) |
|
|
|
|
|
|
|
|
|
|
(52.5 |
) |
|
$ |
(52.5 |
) |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.4 |
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(34.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to distribution of Advanced Medical Optics, Inc.
common stock to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46.9 |
) |
|
|
|
|
|
|
|
|
|
|
(46.9 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
26.1 |
|
|
|
|
|
|
|
|
|
|
|
(75.5 |
) |
|
|
1.7 |
|
|
|
122.9 |
|
|
|
73.5 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
(1.4 |
) |
|
|
0.2 |
|
|
|
11.3 |
|
|
|
6.0 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(90.6 |
) |
|
|
(90.6 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
134.3 |
|
|
|
1.3 |
|
|
|
363.5 |
|
|
|
(3.0 |
) |
|
|
(54.9 |
) |
|
|
695.7 |
|
|
|
(4.1 |
) |
|
|
(284.0 |
) |
|
|
718.6 |
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377.1 |
|
|
|
|
|
|
|
|
|
|
|
377.1 |
|
|
$ |
377.1 |
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
386.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47.3 |
) |
|
|
|
|
|
|
|
|
|
|
(47.3 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
(45.8 |
) |
|
|
1.9 |
|
|
|
129.4 |
|
|
|
111.8 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
2.8 |
|
|
|
0.2 |
|
|
|
10.8 |
|
|
|
9.7 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(65.2 |
) |
|
|
(65.2 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
134.3 |
|
|
$ |
1.3 |
|
|
$ |
391.7 |
|
|
$ |
(4.6 |
) |
|
$ |
(45.7 |
) |
|
$ |
982.5 |
|
|
|
(2.8 |
) |
|
$ |
(209.0 |
) |
|
$ |
1,116.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
(in millions) |
Cash flows provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
$ |
64.0 |
|
Non-cash items included in earnings (loss) from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
458.0 |
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68.3 |
|
|
|
57.9 |
|
|
|
40.7 |
|
|
Amortization of original issue discount and debt issuance costs
|
|
|
11.8 |
|
|
|
8.6 |
|
|
|
15.3 |
|
|
Write-off of deferred convertible debt issuance costs
|
|
|
|
|
|
|
0.9 |
|
|
|
8.0 |
|
|
Deferred income tax benefit
|
|
|
(34.5 |
) |
|
|
(61.6 |
) |
|
|
(13.8 |
) |
|
(Gain) loss on investments
|
|
|
(0.3 |
) |
|
|
|
|
|
|
30.2 |
|
|
Loss (gain) on sale/abandonment of assets
|
|
|
4.1 |
|
|
|
3.7 |
|
|
|
(5.7 |
) |
|
Unrealized loss on derivative instruments, net
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
Expense of compensation plans
|
|
|
11.5 |
|
|
|
10.3 |
|
|
|
10.3 |
|
|
Minority interest
|
|
|
1.0 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
|
62.4 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(15.8 |
) |
|
|
12.5 |
|
|
|
(49.5 |
) |
|
|
Inventories
|
|
|
(11.8 |
) |
|
|
(3.3 |
) |
|
|
(16.7 |
) |
|
|
Other current assets
|
|
|
14.7 |
|
|
|
(7.6 |
) |
|
|
9.1 |
|
|
|
Accounts payable
|
|
|
9.2 |
|
|
|
(4.4 |
) |
|
|
4.1 |
|
|
|
Accrued expenses and other liabilities
|
|
|
59.5 |
|
|
|
46.0 |
|
|
|
13.6 |
|
|
|
Income taxes
|
|
|
72.3 |
|
|
|
15.3 |
|
|
|
(43.7 |
) |
|
|
Other non-current assets
|
|
|
(26.0 |
) |
|
|
(49.2 |
) |
|
|
(83.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
548.5 |
|
|
|
435.3 |
|
|
|
47.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(96.4 |
) |
|
|
(109.6 |
) |
|
|
(78.8 |
) |
Proceeds from sale of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
6.9 |
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
(469.5 |
) |
|
|
|
|
Other, net
|
|
|
(10.4 |
) |
|
|
(15.8 |
) |
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(106.8 |
) |
|
|
(594.9 |
) |
|
|
(79.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders
|
|
|
(47.3 |
) |
|
|
(46.9 |
) |
|
|
(46.7 |
) |
(Decrease) increase in notes payable
|
|
|
(12.6 |
) |
|
|
10.0 |
|
|
|
(11.8 |
) |
Sale of stock to employees
|
|
|
83.6 |
|
|
|
47.0 |
|
|
|
24.4 |
|
Net (repayments) borrowings under commercial paper
obligations
|
|
|
(10.4 |
) |
|
|
10.4 |
|
|
|
|
|
Proceeds from convertible borrowings
|
|
|
|
|
|
|
|
|
|
|
500.0 |
|
Repayments of convertible borrowings
|
|
|
|
|
|
|
(46.2 |
) |
|
|
(376.5 |
) |
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(12.1 |
) |
Repayments of long-term debt
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(25.6 |
) |
Payments to acquire treasury stock
|
|
|
(65.2 |
) |
|
|
(90.6 |
) |
|
|
(180.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(51.9 |
) |
|
|
(116.8 |
) |
|
|
(129.1 |
) |
Cash flow from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
172.0 |
|
Effect of exchange rates on cash and equivalents
|
|
|
(2.6 |
) |
|
|
10.0 |
|
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents
|
|
|
387.2 |
|
|
|
(266.4 |
) |
|
|
(0.9 |
) |
Cash and equivalents at beginning of year
|
|
|
507.6 |
|
|
|
774.0 |
|
|
|
774.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$ |
894.8 |
|
|
$ |
507.6 |
|
|
$ |
774.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (net of amount capitalized)
|
|
$ |
13.5 |
|
|
$ |
15.7 |
|
|
$ |
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$ |
110.0 |
|
|
$ |
72.3 |
|
|
$ |
85.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2003, non-cash activities included the allocation of
$6.1 million of other assets and $12.8 million in
certain intangible contract-based product marketing and other
rights to the purchase price for the acquisitions of Oculex
Pharmaceuticals, Inc. and Bardeen Sciences Company, LLC,
respectively. Additionally, the Company recorded a dividend
(dividend adjustment) in the amount of $(0.3) million and
$53.2 million in 2003 and 2002, respectively, related to
the distribution of Advanced Medical Optics, Inc.s common
stock to the Companys stockholders.
See accompanying notes to consolidated financial statements.
F-7
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1: |
Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
Allergan, Inc. (Allergan or the Company)
and all of its subsidiaries. All significant transactions among
the consolidated entities have been eliminated from the
financial statements.
The Companys consolidated financial statements and related
notes have been recast to reflect the financial position,
results of operations and cash flows of its ophthalmic surgical
and contact lens care businesses as a discontinued operation.
(See Note 2, Discontinued Operations.)
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed
estimates and judgments of management. Actual results could
differ from those estimates.
|
|
|
Foreign Currency Translation |
The financial position and results of operations of the
Companys foreign subsidiaries are generally determined
using local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange
rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the
year. Adjustments arising from the use of differing exchange
rates from period to period are included in accumulated other
comprehensive loss in stockholders equity. Gains and
losses resulting from foreign currency transactions are included
in earnings and have not been material in any year presented.
(See Note 12, Financial Instruments.)
The Company considers cash in banks, repurchase agreements,
commercial paper and deposits with financial institutions with
maturities of three months or less and that can be liquidated
without prior notice or penalty, to be cash and equivalents.
The Company has both marketable and non-marketable equity
investments in conjunction with its various collaboration
arrangements. The Company classifies its marketable equity
investments as available-for-sale securities with net unrealized
gains or losses recorded as a component of accumulated other
comprehensive loss. The non-marketable equity investments
represent investments in start-up technology companies or
partnerships that invest in start-up technology companies and
are recorded at cost. Marketable and non-marketable equity
investments are evaluated periodically for impairment. If it is
determined that a decline of any investment is other than
temporary, then the investment basis would be written down to
fair value and the write-down would be included in earnings as a
loss.
Inventories are valued at the lower of cost or market (net
realizable value). Cost is determined by the first-in, first-out
method.
Property, plant and equipment are stated at cost. Additions,
major renewals and improvements are capitalized, while
maintenance and repairs are expensed. Upon disposition, the net
book value of assets is relieved and resulting gains or losses
are reflected in earnings. For financial reporting purposes,
depreciation is
F-8
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
generally provided on the straight-line method over the useful
life of the related asset. The useful lives for buildings,
including building improvements, range from seven years to
40 years and, for machinery and equipment, three years to
15 years. Accelerated depreciation methods are generally
used for income tax purposes.
All long-lived assets are reviewed for impairment in value when
changes in circumstances dictate, based upon undiscounted future
operating cash flows, and appropriate losses are recognized and
reflected in current earnings, to the extent the carrying amount
of an asset exceeds its estimated fair value determined by the
use of appraisals, discounted cash flow analyses or comparable
fair values of similar assets.
|
|
|
Goodwill and Intangible Assets |
Goodwill represents the excess of acquisition cost over the fair
value of the net assets of acquired businesses. Goodwill has an
indefinite useful life and is not amortized, but instead tested
for impairment annually. Intangible assets include licensing
agreements, trademarks, core technology and other rights, which
are being amortized over their estimated useful lives ranging
from four to 15 years, and a foreign business license with
an indefinite useful life that is not amortized, but instead
tested for impairment annually.
Treasury stock is accounted for by the cost method. The Company
maintains an evergreen stock repurchase program. The evergreen
stock repurchase program authorizes management to repurchase the
Companys common stock for the primary purpose of funding
its stock-based benefit plans. Under the stock repurchase
program, the Company may maintain up to 9.2 million
repurchased shares in its treasury account at any one time. As
of December 31, 2004, the Company held approximately
2.8 million treasury shares under this program.
The Company recognizes revenue from product sales when goods are
shipped and title and risk of loss transfer to the customer. The
Company generally offers cash discounts to customers for the
early payment of receivables. Those discounts are recorded as a
reduction of revenue and accounts receivable in the same period
that the related sale is recorded. The amounts reserved for cash
discounts were $1.3 million and $1.2 million at
December 31, 2004 and 2003, respectively. The Company
permits returns of product from any product line by any class of
customer if such product is returned in a timely manner, in good
condition and from the normal channels of distribution. Return
policies in certain international markets provide for more
stringent guidelines in accordance with the terms of contractual
agreements with customers. Allowances for returns are provided
for based upon an analysis of the Companys historical
patterns of returns matched against the sales from which they
originated. The amount of allowances for sales returns reserved
at December 31, 2004 and 2003 were $5.8 million and
$6.5 million, respectively. Historical allowances for cash
discounts and product returns have been within the amounts
reserved or accrued, respectively.
Additionally, the Company participates in various managed care
sales rebate and other incentive programs, the largest of which
relates to Medicaid. Sales rebates and other incentive programs
also include chargebacks, which are contractual discounts given
primarily to federal government agencies and group purchasing
organizations. Sales rebate and incentive accruals reduce
revenue in the same period that the related sale is recorded and
are included in Other accrued expenses in the
Companys consolidated balance sheets. The amounts accrued
for sales rebates and other incentive programs at
December 31, 2004 and 2003 were $61.4 million and
$51.6 million, respectively. Procedures for estimating
amounts accrued for sales rebates and other incentive programs
at the end of any period are based on available quantitative
data and are supplemented by managements judgment with
respect to many factors including, but not limited to, current
marketplace dynamics, changes in contract terms, changes in
sales trends, an evaluation of current laws and
F-9
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
regulations and product pricing. Quantitatively, the Company
uses historical sales, product utilization and rebate data and
applies forecasting techniques in order to estimate the
Companys liability amounts. Qualitatively,
managements judgment is applied to these items to modify,
if appropriate, the estimated liability amounts. Additionally,
there is a significant time lag between the date the Company
determines the estimated liability and when the Company actually
pays the liability. Due to this time lag, the Company records
adjustments to its estimated liabilities over several periods,
which can result in a net increase to earnings or a net decrease
to earnings in those periods. Material differences may result in
the amount of revenue the Company recognizes from product sales
if the actual amount of rebates and incentives differs
materially from amounts estimated by management.
Research service revenue is recognized and related costs are
recorded as services are performed under research service
agreements. At such time, the research service customers are
obligated to pay, and such obligation is not refundable.
The Company recognizes as other income, license fees based upon
the facts and circumstances of each licensing agreement. In
general, the Company recognizes income upon the signing of a
license agreement that grants rights to products or technology
to a third party if the Company has no further obligation to
provide products or services to the third party after granting
the license. The Company defers income under license agreements
when it has further obligations that indicate that a separate
earnings process has not culminated.
As allowed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation,
the Company has elected to continue to apply the
intrinsic-value-based method of accounting. Under this method,
the Company measures stock-based compensation for option grants
to employees assuming that options granted at market price at
the date of grant have no intrinsic value. The Companys
contributions of common stock related to the Companys
savings and investment plans are measured at market price at the
date of contribution. Restricted stock awards are valued based
on the market price of a share of nonrestricted stock on the
grant date. No compensation expense has been recognized for
stock-based incentive compensation plans other than for the
contributions of common stock to the Companys savings and
investment plans and the restricted stock awards under both the
incentive compensation plan and the non-employee director equity
incentive plan. (See Note 11, Employee Stock Ownership Plan
and Stock Plans.) Had compensation expense for the
Companys stock options under the incentive compensation
plan been recognized based upon the fair value for awards
granted, the Companys net earnings (loss) would have been
reduced (increased) to the following pro forma
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
(in millions, except |
|
|
per share data) |
Net earnings (loss), as reported
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
$ |
75.2 |
|
|
Add stock-based compensation expense included in reported net
earnings (loss), net of tax
|
|
|
7.6 |
|
|
|
7.2 |
|
|
|
7.8 |
|
|
Deduct stock-based compensation expense determined under fair
value based method, net of tax
|
|
|
(45.4 |
) |
|
|
(43.6 |
) |
|
|
(41.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss)
|
|
$ |
339.3 |
|
|
$ |
(88.9 |
) |
|
$ |
41.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
$ |
0.58 |
|
|
As reported diluted
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
$ |
0.57 |
|
|
Pro forma basic
|
|
$ |
2.58 |
|
|
$ |
(0.68 |
) |
|
$ |
0.32 |
|
|
Pro forma diluted
|
|
$ |
2.53 |
|
|
$ |
(0.68 |
) |
|
$ |
0.32 |
|
F-10
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These pro forma effects are not indicative of future
amounts. The Company expects to grant additional awards in
future years. (See New Accounting Standards Not Yet Adopted
below for a discussion of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment.)
Income taxes are determined using an annual effective tax rate,
which is generally less than the U.S. Federal statutory
rate, primarily because of lower tax rates in certain
non-U.S. jurisdictions and research and development
(R&D) tax credits available in the United States. The
Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities,
along with net operating loss and credit carryforwards. The
Company records a valuation allowance against its deferred tax
assets to reduce the net carrying value to an amount that it
believes is more likely than not to be realized. When the
Company establishes or reduces the valuation allowance against
its deferred tax assets, its income tax expense will increase or
decrease, respectively, in the period such determination is made.
Valuation allowances against the Companys deferred tax
assets were $51.9 million and $74.1 million at
December 31, 2004 and 2003, respectively. Material
differences in the estimated amount of valuation allowances may
result in an increase or decrease in the provision for income
taxes if the actual amounts for valuation allowances required
against deferred tax assets differ from the amounts estimated by
management.
The Company has not provided for withholding and U.S. taxes
for the unremitted earnings of certain
non-U.S. subsidiaries because the Company has currently
reinvested these earnings permanently in such operations. At
December 31, 2004, the Company had approximately
$1,011 million in unremitted earnings outside the United
States for which withholding and U.S. taxes were not
provided. Tax expense would be incurred if these funds were
remitted to the United States. It is not practicable to estimate
the amount of the deferred tax liability on such unremitted
earnings. Upon remittance, certain foreign countries impose
withholding taxes that are then available, subject to certain
limitations, for use as credits against the Companys
U.S. tax liability, if any.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was enacted in the United States. The Company is
currently evaluating the impact of the Act on its operations and
effective tax rate. In particular, the Company is evaluating the
Acts provisions relating to incentives to reinvest foreign
earnings in the United States, which require a domestic
reinvestment plan to be created and approved by the
Companys board of directors before executing any
repatriation activities. At this time, the Company has not
completed its evaluation. The Company expects to complete its
evaluation by the end of the Companys third fiscal quarter
2005. The range of reasonably possible amounts of unremitted
foreign earnings that may be considered for repatriation is
currently between zero and $674 million. The related range
of income tax effects of such repatriation cannot be reasonably
estimated at this time. The Company is also evaluating allowable
deductions, beginning in 2005, for income attributable to United
States production activities. At this time, the Company is
unable to determine the effect of this new deduction on the
Companys provision for income taxes, but the Company does
not believe that it will have a material effect on the
Companys 2005 consolidated financial statements.
|
|
|
Purchase Price Allocation |
The allocation of purchase price for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the identifiable tangible and intangible
assets acquired, including in-process research and development,
and liabilities assumed based on their respective fair values.
Additionally, the Company must determine whether an acquired
entity is considered to be a business or a set of net assets,
because a portion of the purchase price can only be allocated to
goodwill in a business combination.
F-11
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2003, the Company acquired Oculex Pharmaceuticals, Inc.
(Oculex) and Bardeen Sciences Company, LLC (Bardeen) for
aggregate purchase prices of approximately $223.8 million
and $264.6 million, respectively. The prices were allocated
to identified assets acquired and liabilities assumed based on
their estimated fair values as of the acquisition dates. The
Oculex transaction was determined to be a business combination,
while the Bardeen transaction was considered to be an asset
acquisition and not a business combination.
The Company determined that the assets acquired from Oculex and
Bardeen consisted principally of incomplete in-process research
and development and that these projects had no alternative
future uses in their current state. The Company reached this
conclusion based on discussions with its business development
and research and development personnel, its review of long-range
product plans and its review of a valuation report prepared by
an independent valuation specialist. The valuation
specialists report reached a conclusion with regard to the
fair value of the in-process research and development assets in
a manner consistent with principles prescribed in the AICPA
practice aid, Assets Acquired in a Business Combination to Be
Used in Research and Development Activities: A Focus on
Software, Electronic Devices and Pharmaceutical Industries.
In connection with the acquisition of Oculex, the Company
determined that the assets acquired also included a proprietary
technology drug delivery platform which was separately valued
and capitalized as core technology. The Company reached this
conclusion based on its determination that the acquired
technology had alternative future uses in its current state. The
Company believes the fair values assigned to the assets acquired
and liabilities assumed are based on reasonable assumptions.
|
|
|
Comprehensive Income (Loss) |
Comprehensive income (loss) encompasses all changes in equity
other than those with stockholders and consists of net earnings
(losses), foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains or losses on
marketable equity investments. The Company does not provide for
U.S. income taxes on foreign currency translation
adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Certain reclassifications of prior year amounts have been made
to conform with the current year presentation.
|
|
|
Recently Adopted Accounting Standards |
In December 2004, Financial Accounting Standards Board Position
109-2 (FASB Staff Position 109-2) was issued and is effective
upon issuance. FASB Staff Position 109-2 establishes standards
for how an issuer accounts for a special one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer pursuant to the American Jobs
Creation Act of 2004 (the Act). The Financial Accounting
Standards Board (FASB) staff believes that the lack of
clarification of certain provisions within the Act and the
timing of the enactment necessitate a practical exception to the
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109),
requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the
effect of the Act on its plan for reinvestment or repatriation
of foreign earnings for purposes of applying
SFAS No. 109. The Company currently has no plans to
change its policy regarding permanent reinvestment of unremitted
earnings in the Companys foreign operations. However, the
Company is evaluating the Acts provisions relating to
incentives to reinvest foreign earnings in the United States,
which require a domestic reinvestment plan to be created and
approved by the Companys board of directors before
executing any repatriation activities. At this time, the Company
has not completed its evaluation. The Company expects to
complete its evaluation by the end of the Companys third
fiscal quarter
F-12
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005. The range of reasonably possible amounts of unremitted
foreign earnings that may be considered for repatriation is
currently between zero and $674 million. The related range
of income tax effects of such repatriation cannot be reasonably
estimated at this time.
In December 2004, Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets an amendment of
APB Opinion No. 29 (SFAS No. 153), was issued
and is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005.
SFAS No. 153 requires nonmonetary exchanges to be
accounted for at fair value, recognizing any gain or loss, if
the transactions meet a commercial-substance criterion and fair
value is determinable. The Company adopted the provisions of
SFAS No. 153 in its fourth fiscal quarter of 2004. The
adoption did not have a material effect on the Companys
consolidated financial statements.
In November 2004, Statement of Financial Accounting Standards
No. 151, Inventory Costs an amendment of ARB
No. 43, Chapter 4 (SFAS No. 151), was
issued and is effective for fiscal years beginning after the
date SFAS No. 151 was issued. SFAS No. 151
requires abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) to be
recognized as current-period charges, and the allocation of
fixed production overheads to the costs of conversion to be
based on the normal capacity of the production facilities. The
Company adopted the provisions of SFAS No. 151 in its
fourth fiscal quarter of 2004. The adoption did not have a
material effect on the Companys consolidated financial
statements.
In October 2004, the Financial Accounting Standards Board
(FASB) ratified the consensuses reached by the Emerging
Issues Task Force (EITF) in EITF Issue No. 04-8,
The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share (EITF 04-8), which became effective
for reporting periods ending after December 15, 2004. EITF
No. 04-8 requires all instruments that have embedded
conversion features, including contingently convertible debt,
that are contingent on market conditions indexed to an
issuers share price to be included in diluted earnings per
share computations, if dilutive, regardless of whether the
market conditions have been met. The Company adopted the
provisions of EITF No. 04-8 in its fourth fiscal quarter of
2004 and restated all prior period diluted earnings per share
amounts to conform to the guidance in EITF No. 04-8.
In May 2004, the Financial Accounting Standards Board released
Financial Accounting Standards Board Position 106-2 (FASB Staff
Position 106-2) to supercede FASB Staff Position 106-1 and to
provide guidance on accounting and disclosure requirements
related to the Medicare Act. FASB Staff Position 106-2 was
effective for financial reporting periods beginning after
June 15, 2004. The Company adopted FASB Staff Position
106-2 effective the beginning of its second fiscal quarter 2004
on a retroactive application to date of enactment
basis as allowed by FASB Staff Position 106-2. In conjunction
with the implementation of FASB Staff Position 106-2, the
Company will receive the direct subsidy from the government. As
a result of the adoption of FASB Staff Position 106-2, the
Companys net periodic benefit cost was reduced by
$0.2 million for the year ended December 31, 2004 and
its accumulated projected benefit obligation was reduced by
$2.3 million. The reduction in accumulated benefit
obligation will be accounted for as an actuarial experience gain
as required by FASB Staff Position 106-2.
In April 2004, Financial Accounting Standards Board Position
129-1 (FASB Staff Position 129-1) was issued and was effective
upon issuance. FASB Staff Position 129-1 requires the Company to
provide certain quantitative and qualitative disclosures
regarding the conversion features of contingently convertible
securities, which would be helpful in understanding both the
nature of the contingency and the potential impact of
conversion. The Company adopted the provisions of FASB Staff
Position 129-1 in its second fiscal quarter of 2004.
In December 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132
(revised 2003), Employers Disclosure about Pensions and
Other Postretirement Benefits (SFAS No. 132
Revised), which revised employers disclosures about
pension plans and other postretirement
F-13
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
benefit plans. SFAS No. 132 Revised does not change
the measurement or recognition of those plans required by
Financial Accounting Standards Board Statements No. 87,
Employers Accounting for Pensions, No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination
Benefits, and No. 106, Employers Accounting
for Postretirement Benefits Other than Pensions.
SFAS No. 132 Revised retains the disclosure
requirements contained in Financial Accounting Standards Board
Statement No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits, which it
replaces. SFAS No. 132 Revised requires additional
disclosures to those in the original statement about the assets,
obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit
postretirement plans. The provisions of SFAS No. 132
Revised are effective for financial statements with fiscal years
ended after December 15, 2003, with the exception of
disclosure information regarding foreign pension plans and
estimated future benefit payments which provisions are effective
for fiscal years ended after June 15, 2004.
As required by SFAS No. 132 Revised, the Company has
provided the additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of its
U.S. pension plans and other postretirement benefit plan
for its fiscal year ended December 31, 2003, and elected
early adoption and implemented the provisions regarding the
disclosure information for its foreign pension plans for its
fiscal year ended December 31, 2003. As required by
SFAS No. 132 Revised, the Company began to provide
disclosure information regarding estimated future benefit
payments effective with its fiscal year ended December 31,
2004. (See Note 10, Employee Retirement and Other Benefit
Plans.)
|
|
|
New Accounting Standards Not Yet Adopted |
In December 2004, Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), was issued and is effective for
entities that do not file as small business issuers as of the
beginning of the first interim reporting period that begins
after June 15, 2005, which is the Companys third
fiscal quarter of 2005. SFAS No. 123R requires
companies to recognize in the income statement the grant-date
fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R sets accounting
requirements for measuring, recognizing and reporting
share-based compensation, including income tax considerations.
In general, SFAS No. 123R does not express a
preference for a type of valuation model for measuring the grant
date fair value, generally requires equity- and
liability-classified awards to be recognized in earnings over
the requisite service period, generally the vesting period for
service condition awards, allows for a one-time policy election
regarding one of two alternatives for recognizing compensation
cost for grant awards with graded vesting, and requires the use
of the estimated forfeitures method. Upon adoption of
SFAS No. 123R, the Company will begin recognizing the
cost of stock options using the modified prospective application
method whereby the cost of new awards and awards modified,
repurchased or cancelled after the required effective date and
the portion of awards for which the requisite service has not
been rendered (unvested awards) that are outstanding as of the
required effective date shall be recognized as the requisite
service is rendered on or after the required effective date.
Because the Company historically accounted for share-based
payment arrangements under the intrinsic value method of
accounting, the Company will continue to provide the disclosures
required by Statement of Financial Accounting Standards
No. 123 until the effective date of
SFAS No. 123R, regarding pro forma net earnings
and basic and diluted earnings per share, had compensation
expense for the Companys stock options been recognized
based upon the fair value for awards granted.
In December 2004, Financial Accounting Standards Board
Position 109-1 (FASB Staff Position 109-1) was issued
and is effective upon issuance. FASB Staff Position 109-1
requires the Company to treat the effect of a newly enacted
U.S. tax deduction, beginning in 2005, for income
attributable to United States production activities as a special
deduction, and not a tax rate reduction, in accordance with
SFAS No. 109. At this time, the Company is unable to
determine the effect of this new deduction on its future
provision for income taxes,
F-14
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
but the Company does not believe that it will have a material
effect on the Companys 2005 consolidated financial
statements.
|
|
Note 2: |
Discontinued Operations |
In June 2002, the Company completed the spin-off of its optical
medical device business to its stockholders. The optical medical
device business consisted of two businesses: the ophthalmic
surgical products business and the contact lens care products
business. The spin-off was effected by contributing the optical
medical device business to a newly formed subsidiary, Advanced
Medical Optics, Inc. (AMO), and issuing a dividend of AMOs
common stock to the Companys stockholders. The
Companys consolidated financial statements and related
notes contained herein have been recast to reflect the financial
position, results of operations and cash flows of AMO as a
discontinued operation.
The Company did not account for its ophthalmic surgical and
contact lens care businesses as a separate legal entity.
Therefore, the following selected financial data for the
Companys discontinued operations is presented for
informational purposes only and does not necessarily reflect
what the net sales or earnings would have been had the
businesses operated as a stand-alone entity. The financial
information for the Companys discontinued operations
includes allocations of certain Allergan expenses to those
operations. These amounts have been allocated to the
Companys discontinued operations on the basis that is
considered by management to reflect most fairly or reasonably
the utilization of the services provided to, or the benefit
obtained by, those operations.
Effective with the third quarter of the Companys 2002
fiscal year, the Company no longer includes the results of
operations and cash flows of its discontinued optical medical
device business in its consolidated financial statements.
The following table sets forth selected financial data of the
Companys discontinued operations.
Selected Financial Data for Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
(in millions) |
Net sales
|
|
$ |
|
|
|
$ |
|
|
|
$ |
251.7 |
|
Earnings from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
Through the end of 2002, actual costs incurred by the Company
related to the AMO spin-off, including restructuring and
duplicate operating expenses, were approximately
$104.7 million, including $4.4 million of costs
incurred in 2001. This amount excludes $14.3 million in
costs incurred in 2002 that were allocated to discontinued
operations. During 2004 and 2003, the Company reversed
approximately $0.1 million and $0.4 million,
respectively, of its restructuring charges related to the AMO
spin-off due to adjustments to certain estimated amounts. During
2003, the Company also paid $18.7 million for various
taxes, net of amounts associated with a tax sharing agreement
with AMO, related to intercompany purchases of assets by AMO
prior to the spin-off that were deferred and charged to retained
earnings as part of the dividend of AMOs stock to the
Companys stockholders.
As part of the AMO spin-off, Allergan and AMO entered into a tax
sharing agreement, employee matters agreement, limited
transitional services agreement (such as general and
administrative support, transitional facilities subleases,
research and development services, and retail channel support)
and a manufacturing and supply agreement. The transitional
services agreement sets forth charges generally intended to
allow Allergan to fully recover the allocated costs of providing
the services, plus all out-of-pocket costs and expenses. AMO
recovers costs from Allergan in a similar manner for services
provided by AMO. As of December 31, 2004, all transitional
services have terminated.
F-15
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the manufacturing and supply agreement, Allergan agreed to
manufacture certain contact lens care products and VITRAX, a
surgical viscoelastic, for a period of up to three years from
the date of the distribution. Under the manufacturing and supply
agreement, AMO may purchase these products at a price equal to
Allergans fully allocated costs plus 10%. The
manufacturing and supply agreement is scheduled to terminate in
June 2005. (See Note 3, Restructuring Charges and Asset
Write-offs and Duplicate Operating Expenses, for a discussion of
the termination of the manufacturing and supply agreement with
AMO.)
The tax sharing agreement governs Allergans and AMOs
respective rights, responsibilities and obligations after the
distribution with respect to taxes for any tax period ending
before, on or after the distribution. Generally, Allergan agreed
to be liable for all pre-distribution taxes attributable to its
business, and AMO agreed to indemnify Allergan for all
pre-distribution taxes attributable to AMOs business for
the 2002 taxable year. In addition, the tax sharing agreement
provides that Allergan is generally liable for taxes that are
incurred as a result of restructuring activities undertaken to
effect the distribution.
Allergan and AMO have made representations to each other and to
the Internal Revenue Service in connection with the private
letter ruling that Allergan received regarding the tax-free
nature of the distribution of AMOs common stock by
Allergan to its stockholders. If Allergan or AMO breach their
respective representations to each other or to the Internal
Revenue Service, or if Allergan or AMO take or fail to take, as
the case may be, actions that result in the distribution failing
to meet the requirements of a tax-free distribution pursuant to
Section 355 of the Internal Revenue Code, the party in
breach will indemnify the other party for any and all resulting
taxes.
|
|
Note 3: |
Restructuring Charges and Asset Write-offs and Duplicate
Operating Expenses |
|
|
|
Termination of Manufacturing and Supply Agreement with
Advanced Medical Optics |
In October 2004, the Companys board of directors approved
certain restructuring activities related to the scheduled
termination of the Companys manufacturing and supply
agreement with AMO. Under the manufacturing and supply
agreement, which was entered into in connection with the June
2002 spin-off of AMO, the Company agreed to manufacture certain
contact lens care products and VITRAX for AMO for a period of up
to three years ending in June 2005. As part of the termination
of the manufacturing and supply agreement, the Company plans to
eliminate certain manufacturing positions at its Westport,
Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing
facilities.
The Company anticipates that the pre-tax restructuring charges
to be incurred in connection with the termination of the
manufacturing and supply agreement, which are expected to total
between $24 million and $28 million, will be recorded
beginning in the fourth quarter of 2004 and continue up through
and including the fourth quarter of 2005. The pre-tax charges
are net of expected tax credits available under qualifying
government-sponsored employment programs. Approximately
$24 million of the restructuring charges are expected to be
cash charges. The restructuring charges are expected to include
approximately $20 million to $22 million associated
with the reduction in the Companys workforce of
approximately 350 individuals. The workforce reduction is
expected to impact personnel in Europe, the United States and
Latin America. The workforce reduction began in the fourth
quarter of 2004 and is expected to be completed by the end of
the second quarter 2005. The restructuring costs are also
expected to include approximately $4 million to
$6 million of other costs associated with the termination
of the manufacturing and supply agreement.
During the fourth quarter of 2004, the Company recorded pre-tax
restructuring charges of $7.1 million related to the
termination of the manufacturing and supply agreement. These
charges primarily include accruals for net statutory severance
costs and the ratable recognition of termination benefits to be
earned by employees who are required to render service until
they are terminated in order to receive the termination benefits.
F-16
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the cumulative restructuring
activities through December 31, 2004 resulting from the
scheduled termination of the manufacturing and supply agreement:
|
|
|
|
|
|
|
Charges for Employees |
|
|
Involuntarily and |
|
|
Voluntarily Terminated |
|
|
|
|
|
(in millions) |
Net charge during 2004
|
|
$ |
7.1 |
|
Spending
|
|
|
(0.1 |
) |
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
7.0 |
|
|
|
|
|
|
The remaining balance at December 31, 2004 is comprised of
accrued statutory severance and one-time termination benefits of
$10.2 million, less expected employment program tax credits
of $3.2 million.
|
|
|
Spin-off of Advanced Medical Optics |
The Company recorded a $63.5 million pre-tax charge for
restructuring costs and asset write-offs for the year ended
December 31, 2002, associated with the AMO spin-off, as
more fully described in Note 2, Discontinued Operations.
This restructuring charge consisted primarily of employee
severance, facility closure and consolidation costs, asset
write-offs and other costs, all substantially related to the AMO
spin-off. The assets written-off consisted primarily of
manufacturing machinery and equipment, a building and various
building improvements that were impaired or demolished in
connection with the AMO spin-off. The full year 2002
restructuring charge also included asset write-offs of
$1.9 million unrelated to the AMO spin-off. Included in
other costs within the net charge during 2002 is
$1.1 million of inventory write-offs that have been
recorded as a component of Cost of sales in the
consolidated statements of operations. During 2004 and 2003, the
Company adjusted its restructuring charge estimates, resulting
in certain reclassifications between restructuring activities
and a net restructuring charge reversal of $0.1 million in
2004 and $0.4 million in 2003, respectively.
The AMO restructuring and spin-off activities included a
workforce reduction of 263 positions, consisting of 106
manufacturing, 17 research and development, and 140 selling,
general and administrative positions over a one year period. As
of December 31, 2004, severance payments totaling
$12.6 million have been made to 237 terminated
employees since January 2002. A total of 18 and 8 manufacturing
positions for the year ended December 31, 2002 and 2003,
respectively, included in the original 263 position reduction
did not require severance payments as certain employees
terminated their employment prior to the date they would have
qualified for severance or transferred to unfilled positions in
other areas.
F-17
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the cumulative restructuring
activities through December 31, 2004 resulting from the
2002 restructuring charge and asset write-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for |
|
Facility |
|
|
|
|
|
|
|
|
Employees |
|
Closure and |
|
|
|
|
|
|
|
|
Involuntarily |
|
Consolidation |
|
Asset |
|
Other |
|
|
|
|
Terminated |
|
Costs |
|
Write-offs |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2002
|
|
$ |
13.5 |
|
|
$ |
3.5 |
|
|
$ |
40.4 |
|
|
$ |
6.1 |
|
|
$ |
63.5 |
|
Adjustments to net charge during 2003
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
1.2 |
|
|
|
(0.4 |
) |
Assets written off
|
|
|
|
|
|
|
(1.9 |
) |
|
|
(40.4 |
) |
|
|
|
|
|
|
(42.3 |
) |
Spending
|
|
|
(12.5 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
(4.4 |
) |
|
|
(17.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
3.1 |
|
Adjustments to net charge during 2004
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.0 |
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2004 for other costs
of $3.0 million is comprised of accrued expenses for
present obligations related to exit liabilities associated with
the scheduled termination of the manufacturing and supply
agreement with AMO, which the Company expects to settle in 2005.
During 2002, the Company incurred $42.5 million of
duplicate operating expenses associated with the AMO spin-off.
Duplicate operating expenses included advisory fees, salary and
recruiting costs, product and regulatory transition costs,
equipment and personnel relocation costs and other business
transition expenses. Duplicate operating expenses have been
included in the normal operating expense classifications to
which they relate on the consolidated statements of operations.
|
|
|
Oculex Pharmaceuticals, Inc. |
On November 20, 2003, the Company purchased all of the
outstanding equity interests of Oculex Pharmaceuticals, Inc.
(Oculex), a privately held company, for an aggregate purchase
price of approximately $223.8 million, net of cash
acquired, including transaction costs of $1.6 million and
$6.1 million in other assets, comprised principally of
notes receivable, an equity investment and certain deferred tax
assets related to Oculex. The acquisition was accounted for by
the purchase method of accounting and accordingly, the
consolidated statements of operations include the results of
Oculex beginning November 20, 2003. In conjunction with the
acquisition, the Company recorded a charge to in-process
research and development expense of $179.2 million during
2003 for an acquired in-process research and development asset
which the Company determined was not yet complete and had no
alternative future uses in its current state. This asset is
Oculexs lead investigational product,
Posurdex®, which is a proprietary, bioerodable,
sustained release implant that delivers dexamethasone to the
targeted disease site at the back of the eye. Phase 2
clinical trials for Posurdex® have already been
completed, and the Company has initiated Phase 3 clinical
trials for macular edema associated with diabetes and vein
occlusions. Additionally, the Company determined that the assets
acquired also included a proprietary technology drug delivery
platform which had alternative future uses in its current state,
which the Company separately valued and capitalized as core
technology. The core technology is a versatile bioerodable
polymer drug delivery technology which can be used for sustained
local delivery of compounds to the eye.
F-18
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company believes the fair values assigned to the assets
acquired and liabilities assumed are based on reasonable
assumptions. A summary of the net assets acquired follows:
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
Current assets
|
|
$ |
0.6 |
|
Property, plant and equipment
|
|
|
1.0 |
|
Capitalized intangible core technology (straight-line
amortization over a 15 year useful life)
|
|
|
29.6 |
|
In-process research and development
|
|
|
179.2 |
|
Other non-current assets, primarily deferred tax assets
|
|
|
19.3 |
|
Accounts payable and accrued liabilities
|
|
|
(5.9 |
) |
|
|
|
|
|
|
Total
|
|
$ |
223.8 |
|
|
|
|
|
|
The estimated fair value of the in-process research and
development was determined based on the use of a discounted cash
flow model using an income approach for the acquired
Posurdex® technology. Estimated revenues were
probability adjusted to take into account the stage of
completion and the risks surrounding the successful development
and commercialization. The estimated after-tax cash flows were
then discounted to a present value using a discount rate of 22%.
Material net cash inflows were estimated to begin in 2006. Gross
margin and expense levels were estimated to be consistent with
other eye care pharmaceutical products currently marketed by the
Company. Solely for the purpose of estimating the fair value of
this technology, the Company assumed that it would incur future
research and development costs of approximately $45 million
to $50 million from the date of acquisition through and
including the year when commercialization is expected to occur.
The estimated fair value of the core technology was determined
based on the use of a discounted cash flow model using a relief
of royalty approach. Estimated after-tax cash flows were
determined using an estimated pre-tax royalty rate applied to
the estimated revenue stream leveraging the acquired polymer
technology. Material cash flows were estimated to begin in 2006.
The cash flows were then discounted to a present value using a
discount rate of 22%.
The major risks and uncertainties associated with the timely and
successful completion of the acquired in-process project consist
of the ability to confirm the safety and efficacy of the
technology based on the data from clinical trials and obtaining
necessary regulatory approvals. The major risks and
uncertainties associated with the core technology consist of the
Companys ability to successfully utilize the technology in
future research projects. No assurance can be given that the
underlying assumptions used to forecast the cash flows or the
timely and successful completion of the projects will
materialize, as estimated. For these reasons, among others,
actual results may vary significantly from the estimated results.
F-19
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited pro forma operating results for the Company,
assuming the acquisition of Oculex occurred January 1, 2003
and 2002, respectively, and excluding any pro forma
charge for in-process research and development costs, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
(in millions, except per |
|
|
share amounts) |
Product net sales
|
|
$ |
1,755.4 |
|
|
$ |
1,385.0 |
|
Research service revenues
|
|
$ |
16.0 |
|
|
$ |
40.3 |
|
Earnings (loss) from continuing operations
|
|
$ |
(76.1 |
) |
|
$ |
43.1 |
|
Net earnings (loss)
|
|
$ |
(76.1 |
) |
|
$ |
54.3 |
|
Basic net earnings (loss) per share
|
|
$ |
(0.58 |
) |
|
$ |
0.42 |
|
Diluted net earnings (loss) per share
|
|
$ |
(0.58 |
) |
|
$ |
0.41 |
|
The pro forma loss from continuing operations and net
loss in 2003 exclude pre-acquisition expenses recorded by Oculex
related to actions taken to complete the sale of Oculex to the
Company, including severance costs and transaction advisory
fees. The Company estimates the pro forma effect of these
pre-acquisition expenses to be approximately $3.3 million
after tax.
During 2004, the Company adjusted the fair value of certain net
assets acquired by $0.6 million, which resulted in a
decrease in the amount of capitalized core technology and
in-process research and development of $0.1 million and
$0.5 million, respectively. The $0.5 million decrease
in in-process research and development was included in research
and development expenses in 2004.
|
|
|
Bardeen Sciences Company, LLC |
On May 16, 2003, the Company completed an acquisition of
all of the outstanding equity interests of Bardeen Sciences
Company, LLC (Bardeen) from Farallon Pharma Investors, LLC
(Farallon) for an aggregate purchase price of approximately
$264.6 million, including transaction costs of
$1.1 million and $12.8 million in certain intangible
contract-based product marketing and other rights, net of cash
acquired. The Company accounted for the acquisition as a
purchase of net assets and not as a business combination since
Bardeen had no revenue producing operations, no employee base or
self-sustaining operations, among other things, at the
acquisition date. The Company acquired all of Bardeens
assets, which consisted of the rights to certain pharmaceutical
compounds under development and research projects, including
memantine, androgen tears, tazarotene in oral form for the
treatment of acne, AGN 195795, AGN 196923, AGN 197075, a
hypotensive lipid/timolol combination, a photodynamic therapy
project, tyrosine kinase inhibitors for the treatment of ocular
neovascularization, a vision-sparing project and a retinal
disease project.
Bardeen was formed in April 2001 upon the contribution of a
portfolio of pharmaceutical compounds and research projects by
the Company and the commitment of a $250 million capital
investment by Farallon. In return for its contribution of the
portfolio, the Company received certain commercialization rights
to market products developed from the compounds comprising the
portfolio. In addition, the Company acquired an option to
purchase rights to any one product and a separate option to
purchase all of the outstanding equity interests of Bardeen at
an option price based on the amount of research and development
funds expended by Bardeen on the portfolio and the time elapsed
since the effective date of the option agreement. The Company
acquired Bardeen upon the exercise of its option to purchase all
the outstanding equity interests of Bardeen at the option price.
Neither the Company nor any of its officers or directors owned
any interest in Bardeen or Farallon prior to the acquisition of
the outstanding interests.
The Company determined that the assets acquired consisted
principally of incomplete in-process research and development
assets and that these assets had no alternative future uses in
their current state.
F-20
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated fair value of assets acquired and liabilities
assumed are as follows:
|
|
|
|
|
|
|
(in millions) |
Intangible assets In-process research and development
|
|
$ |
278.8 |
|
Accounts payable
|
|
|
(14.2 |
) |
|
|
|
|
|
|
|
$ |
264.6 |
|
|
|
|
|
|
From the time of Bardeens formation until the acquisition
date, the Company performed research and development on the
compounds comprising the portfolio on Bardeens behalf
pursuant to a research and development services agreement
between the Company and Bardeen under which all such activities
were fully funded by Bardeen and services were performed on a
cost plus 10% basis. Because the financial risk associated with
the research and development was transferred to Bardeen, the
Company recognized revenues and related costs as services were
performed under such agreements as required under
SFAS No. 68, Research and Development
Arrangements. These amounts are included in research service
revenues in the accompanying consolidated statements of
operations. For the years ended December 31, 2003 and 2002,
the Company recognized $16.0 million and $40.3 million
in research revenues, respectively, and $14.5 million and
$36.6 million in research costs, respectively, under the
research and development services agreement with Bardeen.
|
|
Note 5: |
Composition of Certain Financial Statement Captions |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(in millions) |
Trade receivables, net
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$ |
249.2 |
|
|
$ |
225.4 |
|
|
Less allowance for doubtful accounts
|
|
|
5.7 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
243.5 |
|
|
$ |
220.1 |
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
Finished products
|
|
$ |
50.5 |
|
|
$ |
38.3 |
|
|
Work in process
|
|
|
23.2 |
|
|
|
22.3 |
|
|
Raw materials
|
|
|
16.2 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89.9 |
|
|
$ |
76.3 |
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$ |
50.0 |
|
|
$ |
60.7 |
|
|
Deferred taxes
|
|
|
72.0 |
|
|
|
40.9 |
|
|
Other
|
|
|
25.8 |
|
|
|
22.6 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
147.8 |
|
|
$ |
124.2 |
|
|
|
|
|
|
|
|
|
|
Investments and other assets
|
|
|
|
|
|
|
|
|
|
Prepaid pensions
|
|
$ |
110.9 |
|
|
$ |
105.3 |
|
|
Investments in corporate-owned life insurance contracts used to
fund deferred executive compensation
|
|
|
34.3 |
|
|
|
27.6 |
|
|
Capitalized software
|
|
|
22.6 |
|
|
|
21.6 |
|
|
Equity investments
|
|
|
9.0 |
|
|
|
7.1 |
|
|
Other
|
|
|
53.2 |
|
|
|
49.3 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
230.0 |
|
|
$ |
210.9 |
|
|
|
|
|
|
|
|
|
|
F-21
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(in millions) |
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
6.6 |
|
|
$ |
6.0 |
|
|
Buildings
|
|
|
487.1 |
|
|
|
425.3 |
|
|
Machinery and equipment
|
|
|
310.2 |
|
|
|
290.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
803.9 |
|
|
|
721.7 |
|
|
Less accumulated depreciation
|
|
|
335.4 |
|
|
|
299.2 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
468.5 |
|
|
$ |
422.5 |
|
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
|
|
|
Sales rebates and other incentive programs
|
|
$ |
61.4 |
|
|
$ |
51.6 |
|
|
Accrued restructuring charges
|
|
|
13.2 |
|
|
|
3.1 |
|
|
Royalties
|
|
|
27.3 |
|
|
|
19.4 |
|
|
Sales returns
|
|
|
5.8 |
|
|
|
6.5 |
|
|
Other
|
|
|
70.8 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
178.5 |
|
|
$ |
157.5 |
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Postretirement benefit plan
|
|
$ |
24.5 |
|
|
$ |
22.5 |
|
|
Non-qualified benefit plan
|
|
|
29.2 |
|
|
|
17.5 |
|
|
Deferred executive compensation
|
|
|
37.5 |
|
|
|
30.0 |
|
|
Deferred income
|
|
|
10.4 |
|
|
|
|
|
|
Other
|
|
|
7.0 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
108.6 |
|
|
$ |
77.1 |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|