UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
---------------------------------------------------------
COMMISSION FILE NUMBER 1-2516
PHARMACIA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 43-0420020
(State of incorporation) (I. R. S. Employer
Identification No.)
Pharmacia Corporation, 100 Route 206 North, Peapack, NJ 07977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 908/901-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $2 Par Value, outstanding as of November
11, 2002 was 1,292,916,725.
Page 1 of 48 pages
PHARMACIA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX OF INFORMATION INCLUDED IN REPORT
Page
----
PART I - FINANCIAL INFORMATION.........................................................3
Item 1. Financial Statements...........................................................3
Consolidated Statements of Earnings.................................................3
Condensed Consolidated Statements of Cash Flows.....................................4
Condensed Consolidated Balance Sheets...............................................5
Notes to Consolidated Financial Statements..........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................37
Item 4. Controls and Procedures.......................................................37
PART II - OTHER INFORMATION...........................................................38
Item 1. Legal Proceedings.............................................................38
Item 5. Other Information.............................................................40
Item 6. Exhibits and Reports on Form 8-K..............................................42
Signature.............................................................................43
Certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.........................................44
Exhibit Index.........................................................................48
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per-share data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 3,579 $ 3,530 $10,259 $10,153
Cost of products sold 740 711 2,216 2,207
Research and development 565 537 1,731 1,728
Selling, general and administrative 1,556 1,427 4,541 4,235
Amortization of goodwill -- 24 -- 79
Merger and restructuring 3 100 34 399
Interest expense 37 62 132 202
Interest income (17) (17) (54) (100)
All other, net (76) 65 (882) 49
-------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 771 621 2,541 1,354
Provision for income taxes 179 153 674 260
-------------------------------------------------------------------------------------------------
Earnings from continuing operations 592 468 1,867 1,094
Income (loss) from discontinued operations,
net of tax -- (40) -- 340
Loss on disposal of discontinued
operations, net of tax (1,021) -- (932) (8)
-------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary items and
cumulative effect of accounting change (429) 428 935 1,426
Extraordinary items, net of tax -- -- 649 (12)
Cumulative effect of accounting
change, net of tax -- -- (1,541) 1
-------------------------------------------------------------------------------------------------
Net earnings (loss) $ (429) $ 428 $ 43 $ 1,415
=================================================================================================
Net earnings per common share:
Basic
Earnings from continuing operations $ .46 $ .35 $ 1.44 $ .83
Net earnings (loss) (.33) .32 .03 1.08
Diluted
Earnings from continuing operations $ .45 $ .35 $ 1.42 $ .82
Net earnings (loss) (.33) .32 .03 1.06
=================================================================================================
See accompanying notes.
3
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
For the Nine
Months Ended
September 30,
---------------------
2002 2001
---- ----
Net cash provided by continuing operations $ 1,130 $ 1,307
Net cash provided by discontinued operations 79 73
-----------------------------------------------------------------------------------------------
Net cash provided by operations 1,209 1,380
-----------------------------------------------------------------------------------------------
Cash flows provided (required) by investment activities:
Purchases of property, plant and equipment (841) (608)
Other acquisitions and investments (1,065) (202)
Investment and property disposal proceeds 101 158
Proceeds from sale of equity investments 1,671 21
Discontinued operations, net 224 158
-----------------------------------------------------------------------------------------------
Net cash provided (required) by investment activities 90 (473)
-----------------------------------------------------------------------------------------------
Cash flows provided (required) by financing activities:
Repayment of long-term debt (48) (750)
Repayment of ESOP debt (47) (62)
Net increase in short-term borrowings 14 299
Issuance of stock 132 159
Treasury stock purchases (620) (315)
Dividend payments (536) (481)
-----------------------------------------------------------------------------------------------
Net cash required by financing activities (1,105) (1,150)
-----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 129 (93)
-----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 323 (336)
-----------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 1,276 2,035
-----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,599 $ 1,699
===============================================================================================
See accompanying notes.
4
PHARMACIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1,599 $ 1,276
Short-term investments 1,067 119
Short-term notes receivable-Monsanto -- 254
Trade accounts receivable, less allowance of $131 (2001: $132) 2,560 2,434
Inventories 2,008 1,684
Deferred income taxes 1,005 932
Receivables-Monsanto -- 87
Other current assets 938 880
-------------------------------------------------------------------------------------------------
Total Current Assets 9,177 7,666
Long-term investments 170 288
Properties, net 5,425 4,875
Goodwill, net 1,103 1,059
Other intangible assets, net 412 425
Other noncurrent assets 1,494 1,748
Net assets of discontinued operations -- 6,316
-------------------------------------------------------------------------------------------------
Total Assets $ 17,781 $ 22,377
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt $ 466 $ 484
Short-term notes payable-Monsanto -- 30
Trade accounts payable 806 1,048
Income taxes payable 1,043 685
Payables-Monsanto -- 44
Other accrued liabilities 2,618 2,712
-------------------------------------------------------------------------------------------------
Total Current Liabilities 4,933 5,003
Long-term debt and guarantee of ESOP debt 2,637 2,731
Other noncurrent liabilities 2,398 2,253
-------------------------------------------------------------------------------------------------
Total Liabilities 9,968 9,987
-------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, one cent par value; at
stated value; authorized 10 million shares;
issued 6,206 shares (2001: 6,401 shares) 250 258
Common stock, two dollar par value; authorized
3 billion shares; issued 1.485 billion shares 2,970 2,970
Capital in excess of par value 3,615 3,499
Retained earnings 6,573 11,586
ESOP-related accounts (218) (294)
Treasury stock, at cost (3,281) (2,789)
Accumulated other comprehensive loss (2,096) (2,840)
-------------------------------------------------------------------------------------------------
Total Shareholders' Equity 7,813 12,390
-------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 17,781 $ 22,377
=================================================================================================
See accompanying notes.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Dollars in millions, except per-share data
unless otherwise indicated)
The term "the company" or "Pharmacia" is used to refer to Pharmacia Corporation
or to Pharmacia Corporation and its subsidiaries, as appropriate to the context.
The term "former Monsanto" is used to refer to operations of the former Monsanto
Company before the merger with Pharmacia & Upjohn on March 31, 2000 and
"Monsanto" refers to the agricultural subsidiary, which was spun off by
Pharmacia to its shareholders on August 13, 2002 as further discussed in Note E.
As outlined in Note E, beginning in the fourth quarter of 2001, the company
began treating its agricultural subsidiary, Monsanto, as a discontinued
operation. Accordingly, the focus of these financial statements and related
notes is on the company's pharmaceutical businesses unless otherwise indicated.
The historical results of operations and net assets of Monsanto are reflected on
one line of the consolidated statements of earnings and the condensed
consolidated balance sheets, respectively. Similar adjustments were made to the
historical consolidated statements of cash flows.
As outlined in Note K, Pharmacia has entered into a definitive merger agreement
with Pfizer Inc. (Pfizer). The close of the transaction is subject to
shareholder approval at both Pharmacia and Pfizer, governmental and regulatory
approvals and other usual and customary closing conditions. The company is
targeting closing the transaction by year-end 2002; however, the final
regulatory review process may result in the closing occurring early in the first
quarter of 2003.
On October 21, 2002, the SEC declared effective Pfizer's Registration Statement
on Form S-4 in connection with the proposed acquisiton of Pharmacia Corporation.
This Registration Statement includes a joint proxy statement/prospectus that has
been sent to the shareholders of both companies. We have scheduled a meeting
for shareholders to take place on December 9, 2002 to vote on the proposed
acquisition. Pfizer's shareholder meeting is scheduled to occur on
December 6, 2002.
Trademarks owned by, or licensed to, Pharmacia Corporation are indicated in all
upper case letters. In the notes that follow, per-share amounts are presented on
a diluted, after-tax basis, unless otherwise indicated.
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited, other than
the condensed balance sheet at December 31, 2001, which is derived from audited
financial statements. The interim financial statements and notes thereto do not
include all disclosures required by U.S. generally accepted accounting
principles and should be read in conjunction with the financial statements and
notes thereto included in Pharmacia Corporation's annual report filed on Form
10-K for the year ended December 31, 2001.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. The current period's results of
operations are not necessarily indicative of results that ultimately may be
achieved for the year.
Prior year data have been reclassified for the discontinued operations treatment
of Monsanto and certain other reclassifications were made to conform the prior
period's data to the current presentation.
B - NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING PRINCIPLE
Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". The new rules amend existing
accounting for these costs by requiring that a liability be recorded at fair
value when incurred. The liability would be reviewed regularly for changes in
fair value with adjustments recorded in the consolidated financial statements.
Previous rules
6
permitted certain types of costs to be recognized when future settlement was
probable. SFAS No. 146 also provides specific guidance for lease termination
costs and one-time employee termination benefits when incurred as part of an
exit or disposal activity. The company is currently evaluating the effects the
new rules may have on its consolidated financial statements and will adopt SFAS
No. 146 on January 1, 2003.
Classification of the Extinguishment of Debt
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections". Under the current
rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
requires that all gains and losses from the extinguishment of debt be classified
as extraordinary on the company's consolidated statements of earnings, net of
applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The company is evaluating the effects the new rules
may have on its consolidated financial statements and will adopt SFAS No. 145 on
January 1, 2003.
Asset Impairments
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," became effective. It provides guidance on the accounting for
the impairment or disposal of long-lived assets. For long-lived assets to be
held and used, the new rules are similar to previous guidance which required the
recognition of an impairment when the undiscounted cash flows would not recover
its carrying amount. The impairment to be recognized will continue to be
measured as the difference between the carrying amount and fair value of the
asset. The computation of fair value now removes goodwill from consideration and
incorporates a probability-weighted cash flow estimation approach as an
alternative to the traditional present value method. The previous guidance
provided in SFAS No. 121 is to be applied to assets that are to be disposed of
by sale. Additionally, assets qualifying for discontinued operations treatment
have been expanded beyond the former major line of business or class of customer
approach. Long-lived assets to be disposed of by other than sale are now
considered assets to be held and used until the disposal date. There was no
material impact on the company's consolidated financial statements due to the
adoption of these rules.
Asset Retirements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The company is currently evaluating the effects the
new rules may have on its consolidated financial statements and will adopt SFAS
No. 143 on January 1, 2003.
Business Combinations, Goodwill and Intangibles
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and set out specific criteria for
the initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
unamortized negative goodwill be written off immediately as a change in
accounting principle instead of being deferred and amortized, and that certain
intangible assets be reclassified into or out of goodwill. The provisions of
SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived
intangible assets and require that they be tested annually for impairment or on
an
7
interim basis if indications of a possible impairment arise. If the book value
of goodwill or an indefinite-lived intangible is greater than its fair value, an
impairment loss is recognized for the difference. In addition, SFAS No. 142
requires that reporting units be identified for purposes of assessing potential
future impairments of goodwill, and removes the 40-year limitation on the
amortization period of intangible assets that have finite lives.
The company adopted the provisions of SFAS No. 141 on January 1, 2002
(requirement to use the purchase method of accounting for all business
combinations initiated after June 30, 2001 became effective with the issuance of
the standard). The provisions of SFAS No. 142 were adopted effective as of
January 1, 2002 with no impairment losses recognized related to its continuing
operations.
Monsanto also adopted SFAS No. 142 as of January 1, 2002, and an impairment
analysis resulted in the recognition of a $1,822 net-of-tax loss related to the
corn and wheat reporting units. As required by the accounting pronouncement, the
loss was recorded as a cumulative effect of accounting change, net of tax,
effective as of January 1, 2002. Earnings results for Pharmacia have been
restated for the first quarter of 2002 to reflect its $1,541 portion of the loss
based on Pharmacia's then approximately 85% ownership of Monsanto. The
impairment charge had no effect on Pharmacia's or Monsanto's liquidity or cash
flow.
The following tables reflect information pertaining to other intangible assets
relating to the continuing operations of the company.
September 30, 2002 December 31, 2001
------------------------------------- --------------------------------------
Amortized Amortized
------------------- ------------------
Not Subject to Accumulated Not Subject to Accumulated
Amortization Gross Amortization Net Amortization Gross Amortization Net
--------------------------------------------------------------------------------------------------------
Patents and trademarks $ 58 $ 422 $ (292) $ 188 $ 58 $ 413 $ (263) $ 208
Rights and licenses -- 508 (294) 214 -- 441 (256) 185
Other -- 38 (28) 10 -- 74 (42) 32
--------------------------------------------------------------------------------------------------------
Total $ 58 $ 968 $ (614) $ 412 $ 58 $ 928 $ (561) $ 425
========================================================================================================
Intangible assets acquired during the nine months ended September 30, 2002
totaled $17, and consisted of rights and licenses.
Intangible Assets Amortization Expense
--------------------------------------
Year ended December 31, 2001 $ 59
Three months ended September 30, 2002 $ 16
Nine months ended September 30, 2002 $ 47
Annual amortization expense for the years ending 2002 through 2006 is estimated
to be $68, $68, $61, $54 and $34, respectively.
8
Goodwill
--------
The changes in the carrying amount of goodwill relating to continuing operations
for the nine months ended September 30, 2002, are as follows:
Prescription
Total Pharmaceuticals All Other
--------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $1,059 $ 954 $ 105
Net intangible reclassifications (6) (6) --
Purchase acquisitions 14 -- 14
Foreign exchange 36 40 (4)
--------------------------------------------------------------------------------------------------------
Balance September 30, 2002 $1,103 $ 988 $ 115
Earnings Excluding Goodwill Amortization
----------------------------------------
For the Three Months Ended September 30,
2002 2001
----------------------- ----------------------
Earnings Earnings
Before Net Before Net
Items* Earnings Items* Earnings
-----------------------------------------------------------------------------------------------------
Earnings (loss) as reported $ (429) $ (429) $ 428 $ 428
Adjust for goodwill, net of tax -- -- 24 24
-----------------------------------------------------------------------------------------------------
Adjusted earnings (loss) $ (429) $ (429) $ 452 $ 452
Basic earnings per share:
Earnings (loss) as reported $ (0.33) $ (0.33) $ 0.32 $ 0.32
Adjust for goodwill -- -- 0.02 0.02
-----------------------------------------------------------------------------------------------------
Adjusted earnings (loss) $ (0.33) $ (0.33) $ 0.34 $ 0.34
Diluted earnings per share:
Earnings (loss) as reported $ (0.33) $ (0.33) $ 0.32 $ 0.32
Adjust for goodwill -- -- 0.02 0.02
-----------------------------------------------------------------------------------------------------
Adjusted earnings (loss) $ (0.33) $ (0.33) $ 0.34 $ 0.34
For the Nine Months Ended September 30,
2002 2001
----------------------- ----------------------
Earnings Earnings
Before Net Before Net
Items* Earnings Items* Earnings
-----------------------------------------------------------------------------------------------------
Earnings as reported $ 935 $ 43 $1,426 $1,415
Adjust for goodwill, net of tax -- -- 76 76
-----------------------------------------------------------------------------------------------------
Adjusted earnings $ 935 $ 43 $1,502 $1,491
Basic earnings per share:
Earnings as reported $ 0.72 $ 0.03 $ 1.09 $ 1.08
Adjust for goodwill -- -- 0.06 0.06
-----------------------------------------------------------------------------------------------------
Adjusted earnings $ 0.72 $ 0.03 $ 1.15 $ 1.14
Diluted earnings per share:
Earnings as reported $ 0.71 $ 0.03 $ 1.07 $ 1.06
Adjust for goodwill -- -- 0.06 0.06
-----------------------------------------------------------------------------------------------------
Adjusted earnings $ 0.71 $ 0.03 $ 1.13 $ 1.12
* Excludes extraordinary items and cumulative effect of accounting change as
applicable.
9
Other
The Emerging Issues Task Force Issue No. 01-09 "Accounting for Consideration
Given by a Vendor to a Customer" codified several individual issues regarding
the recognition and classification of payments between a vendor and a customer.
Of the codified issues, only two topics were applicable to the company: sales
incentives and payments to resellers. The company adopted the guidance for sales
incentives (coupons) prospectively, as allowed under the rules, on January 1,
2001 and for payments to resellers on January 1, 2002. In both cases, the impact
of adoption to the company was insignificant and, accordingly, prior period
financial statements were not reclassified.
The following does not constitute a change in Pharmacia accounting policies.
Rather, it is an expansion and clarification of existing policies and should be
read in conjunction with Note 1-Significant Accounting Policies and
Other-Research and Development as disclosed in the company's annual report on
Form 10-K for the year ended December 31, 2001. Upfront and milestone payments
made to third parties that constitute the acquisition of in-process research and
development (R&D) are expensed as incurred. Generally, the intangibles being
acquired have not been approved by the U.S. Food and Drug Administration or
comparable regulatory body and, as such, are not complete. Once the intangible
has been approved, it is considered an asset resulting from R&D.
C - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) equals net earnings (loss) plus other comprehensive
income (loss). For Pharmacia Corporation, other comprehensive income (loss)
includes currency translation adjustments (CTA), deferred amounts for hedging
purposes, unrealized holding gains and losses on available-for-sale securities
(AFS) and minimum pension liability adjustments. Comprehensive income (loss)
for the three months ended September 30, 2002 and 2001, was $(757) and $383,
respectively. For the nine months ended September 30, 2002 and 2001,
comprehensive income (loss) was $(233) and $1,046, respectively. Increases in
the minimum pension liability coupled with increases in unrealized holding
losses on AFS securities made up a large part of the difference between the net
loss and other comprehensive loss for both the third quarter and year-to-date
periods in 2002. The increase in the minimum pension liability is the result of
a remeasurement of Monsanto pension plans in conjunction with the spin-off of
Monsanto in August 2002. Also affecting the difference for both the third
quarter and year-to-date periods in 2002, were increases in CTA as a result of
certain currencies weakening against the dollar, mainly from Latin America
countries.
The main contributors for the difference between net income and comprehensive
income for the third quarter and year-to-date 2001 periods were increases in
unrealized holding losses on AFS securities. The increase in unrealized holding
losses for the third quarter of 2001 was partially offset by favorable changes
in CTA as a result of certain foreign currencies strengthening against the
dollar, while year-to-date 2001 reflects increases in CTA as a result of certain
currencies weakening against the dollar.
D - EXTRAORDINARY ITEMS
During the first quarter of 2002, the company sold its 45 percent minority
interest in Amersham Biosciences to Amersham plc for $1,000. The investment
basis as of March 2002 was $227. The sale resulted in a gain of $649 (net of
taxes of $124). The gain on the sale has been classified as an extraordinary
item in the accompanying consolidated statements of earnings in accordance with
Accounting Principles Board Opinion No. 16 "Business Combinations" because the
sale of this investment took place within the two-year period following the
merger of Pharmacia & Upjohn and former Monsanto, which was accounted for under
the pooling of interests accounting method. The sale of this investment was not
contemplated at the time of the pooling.
On June 28, 2001, the company retired certain debt obligations relating to one
of the employee stock ownership plans. The principal amount of the debt was $65.
Certain costs related to the transaction, including a premium to retire the debt
and other direct costs, were $4 (net of taxes of $2) and have been classified as
an extraordinary item on the company's consolidated statements of earnings.
Through a private transaction entered into on June 29, 2001, the company retired
debt related to adjustable conversion-rate equity securities in the principal
amount of $700. Premium on the debt and other direct costs of $8 (net of taxes
of $5) were accrued as an extraordinary item.
10
E - DISCONTINUED OPERATIONS
Monsanto
On November 28, 2001, the board of directors approved a formal plan to
distribute to Pharmacia shareholders the outstanding shares of Monsanto common
stock held by the company, in a tax-free spin-off transaction.
On July 18, 2002, the Pharmacia board of directors approved the completion of
the spin-off of Monsanto through the distribution of shares of Monsanto common
stock to Pharmacia shareholders of record on July 29, 2002. In order to effect
the distribution, the Pharmacia board of directors declared a special dividend
of the 220 million shares of Monsanto common stock held by the company which, as
of July 29, 2002, represented approximately 84% of Monsanto's outstanding stock.
Each Pharmacia shareholder received .170593 shares of Monsanto common stock for
each share of Pharmacia stock owned on the record date. The shares were
distributed at the close of business on August 13, 2002.
In connection with the spin-off of Monsanto, Pharmacia recorded a loss on
disposal of discontinued operations of $928 for the nine months ended 2002,
which was comprised of $53 of net income from discontinued operations offset by
an impairment loss of $981 calculated by comparing the recorded amount of
Monsanto shares on August 13, the date of the spin-off, to Monsanto's fair value
based upon the closing stock price on August 13, 2002 of $15.81.
On September 1, 2000, the company entered into a Transition Services Agreement
with Monsanto. Under the agreement, Pharmacia primarily provides information
technology support for Monsanto while Monsanto provides certain administrative
support services for Pharmacia. Pharmacia and Monsanto also lease research and
office space from each other. Since the initiation of the agreement, each party
has charged the other entity rent based on a percentage of occupancy multiplied
by the cost to operate the facilities. These services are continuing beyond
August 13, 2002.
Net Assets of Monsanto: September 30, December 31,
2002 2001
--------------------------------------------------------------------------------------------------------
Current assets $ -- $ 4,797
Noncurrent assets -- 6,676
--------------------------------------------------------------------------------------------------------
Total assets -- 11,473
--------------------------------------------------------------------------------------------------------
Current liabilities -- 2,367
Noncurrent liabilities -- 1,695
--------------------------------------------------------------------------------------------------------
Total liabilities -- 4,062
--------------------------------------------------------------------------------------------------------
Net assets of Monsanto before minority interest -- 7,411
Minority interest -- 1,095
--------------------------------------------------------------------------------------------------------
Net assets of discontinued operations $ -- $ 6,316
========================================================================================================
11
Other
In the third quarter and year-to-date periods of 2002, the company recorded an
additional $4 loss from discontinued operations in connection with the sale of
the artificial sweetener ingredient business that occurred in 2000. The majority
of the $8 loss from the disposal of other discontinued operations recorded in
the year-to-date period of 2001 consisted of legal and related costs also in
connection with the sale of the artificial sweetener ingredient business. There
were no sales included in the company's consolidated financial statements during
the quarter or year-to-date periods ended September 30, 2002 and 2001 related
to the disposal of other discontinued businesses.
For The Three Months Ended September 30,
------------------------------------------------
2002 2001
---------------------- ---------------------
Monsanto Other Monsanto Other
---------------------------------------------------------------------------------------------------
Net sales $ 162 -- $ 936 --
---------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations, before tax (58) (6) (64) --
Income tax (benefit) (22) (2) (24) --
---------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ (36)* $ (4)* $ (40) --
===================================================================================================
For The Nine Months Ended September 30,
------------------------------------------------
2002 2001
---------------------- ---------------------
Monsanto Other Monsanto Other
---------------------------------------------------------------------------------------------------
Net sales $ 2,936 -- $ 4,253 --
---------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations, before tax 72 (6) 544 (13)
Income tax expense (benefit) 19 (2) 204 (5)
---------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $ 53* $ (4)* $ 340 $ (8)*
====================================================================================================
* Reported as part of loss on disposal of discontinued operations, net of tax.
F - MERGER AND RESTRUCTURING CHARGES
The company recorded an additional $3 of merger and restructuring charges during
the third quarter of 2002. Approximately $1 of net expense was recorded in
connection with the merger and integration of former Monsanto and Pharmacia &
Upjohn companies into Pharmacia Corporation. These charges are part of the
comprehensive integration plan approved by the board of directors during 2000.
The company also recorded $2 of additional merger costs relating to the proposed
Pfizer transaction. The $3 recorded during the quarter is comprised of $4 of
current merger costs and a $1 net reversal of restructuring costs. During the
third quarter of 2001, the company recorded $100 in merger and restructuring
costs. The $100 recorded on the merger and restructuring line of the
consolidated statements of earnings is made up of $82 of merger costs and $18 in
restructuring charges.
For the nine months ended September 30, 2002, the company recorded a total of
$34 of merger and restructuring costs. This total is comprised of $18 of merger
costs and $16 of net restructuring costs. For the nine months ended 2001, the
company recorded a total of $399 in merger and restructuring expense. This total
is comprised of $276 in merger costs and $123 in restructuring charges.
12
Merger Costs
The $4 of merger costs for the quarter and the $18 of merger costs year-to-date
include costs necessary to integrate the former companies into a single
organization, such as consultant, relocation and information technology
integration costs. The $82 in third quarter 2001 merger costs and $276 in
year-to-date 2001 merger costs relate to costs necessary to integrate the former
companies into a single organization such as consultant fees for system and
process integration, information technology integration costs, contract
termination fees, employee relocation costs and other costs necessary to
complete the merger.
Restructuring Costs
The $1 of net restructuring reversals for the third quarter of 2002 relate to a
$4 charge to prescription pharmaceuticals and approximately $5 of reversals. The
$18 of total restructuring charges during the third quarter of 2001 is comprised
of $17 associated with prescription pharmaceuticals and $1 in connection with
corporate and administrative functions.
The year-to-date 2002 restructuring amount of $16 is comprised of $18 relating
to prescription pharmaceuticals, $3 relating to other pharmaceuticals and
reversals of $5. Year-to-date 2001 consists of $123 of total restructuring
charges and is comprised of $105 associated with prescription pharmaceuticals,
$16 in connection with corporate and administrative functions and $2 in
connection with other pharmaceutical operations.
The $4 of expense for the third quarter of 2002 relates to contract termination
fees in the prescription pharmaceutical business. The $17 of third quarter 2001
expense relating to prescription pharmaceuticals consists of $9 relating to the
involuntary separation of approximately 113 employees, $6 associated with other
exit costs and $2 relating to the write-down of assets such as duplicative
computer systems and leasehold improvements. The $18 of year-to-date 2002
expenses for prescription pharmaceuticals is made up of $5 relating to the
separation of approximately 45 employees, $9 relating to contract and lease
termination costs and $4 relating to other exit costs. For the nine months ended
September 30, 2001, the $105 of restructuring charges relating to prescription
pharmaceuticals is comprised of $72 in connection with the separation of
approximately 473 employees, $19 resulting from asset write-downs and $14
associated with other exit costs.
The $1 relating to corporate and administrative functions for the third quarter
of 2001 represents the separation of approximately 10 employees. For the nine
months ended 2001, the $16 charge for corporate and administrative functions is
comprised of $11 relating to the separation of approximately 100 employees and
$5 relating to asset write-offs.
The $3 associated with the other pharmaceutical operations for year-to-date
September 30, 2002, is in connection with the involuntary separation of
approximately 35 employees. The year-to-date 2001 other pharmaceutical
operations restructuring balance includes $2 associated with the involuntary
separation of approximately 10 employees.
The $5 of reversals during the third quarter of 2002 consist of liabilities
established in 1999 and 2000 relating to the Monsanto and Pharmacia & Upjohn
merger. These restructuring liabilities were reversed primarily as a result of
lower actual severance costs than originally estimated.
13
A roll-forward from year-end 2001 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies is included in the table
below. As of September 30, 2002, the company has paid a total of $428 relating
to the separation of approximately 2,740 employees associated with these
restructuring plans.
Workforce
Reductions Other Exit Costs Total
-----------------------------------------------------------------------------------------------
December 31, 2001 $ 115 $ 10 $ 125
Year-to-date charges 7 9 16
Year-to-date spending (83) (4) (87)
Year-to-date reversals (5) -- (5)
-----------------------------------------------------------------------------------------------
September 30, 2002 $ 34 $ 15 $ 49
===============================================================================================
G - EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings measure by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed assuming the exercise of stock options, conversion of
preferred stock, and the issuance of stock as incentive compensation to certain
employees. Also in the diluted computation, earnings from continuing operations
and net earnings are reduced by an incremental contribution to the Employee
Stock Ownership Plan (ESOP). This contribution is the after-tax difference
between the income that the ESOP would have received in preferred stock
dividends and the dividend on the common shares assumed to have been
outstanding.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
For the Three Months Ended September 30,
-------------------------------------------------
2002 2002 2001 2001
Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------
EPS numerator:
Earnings from continuing operations $ 592 $ 592 $ 468 $ 468
Less: Preferred stock dividends, net of tax (3) -- (4) --
Less: ESOP contribution, net of tax -- (2) -- (2)
---------------------------------------------------------------------------------------------------
Earnings from continuing operations
available to common shareholders $ 589 $ 590 $ 464 $ 466
===================================================================================================
EPS denominator:
Average common shares outstanding 1,290 1,290 1,299 1,299
Effect of dilutive securities:
Stock options and stock warrants -- 9 -- 10
Convertible instruments and
incentive compensation -- 12 -- 12
---------------------------------------------------------------------------------------------------
Total shares (in millions) 1,290 1,311 1,299 1,321
===================================================================================================
Earnings (loss) per share:
Continuing operations $ .46 $ .45 $ .35 $ .35
Discontinued operations (.79) (.78) (.03) (.03)
Extraordinary items -- -- -- --
---------------------------------------------------------------------------------------------------
Net earnings (loss) $ (.33) $ (.33) $ .32 $ .32
===================================================================================================
14
For the Nine Months Ended September 30,
--------------------------------------------------
2002 2002 2001 2001
Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------
EPS numerator:
Earnings from continuing operations $ 1,867 $ 1,867 $ 1,094 $ 1,094
Less: Preferred stock dividends, net of tax (10) -- (10) --
Less: ESOP contribution, net of tax -- (6) -- (6)
---------------------------------------------------------------------------------------------------
Earnings from continuing operations
available to common shareholders $ 1,857 $ 1,861 $ 1,084 $ 1,088
===================================================================================================
EPS denominator:
Average common shares outstanding 1,293 1,293 1,299 1,299
Effect of dilutive securities:
Stock options and stock warrants -- 10 -- 13
Convertible instruments and
incentive compensation -- 12 -- 12
---------------------------------------------------------------------------------------------------
Total shares (in millions) 1,293 1,315 1,299 1,324
===================================================================================================
Earnings (loss) per share:
Continuing operations $ 1.44 $ 1.42 $ .83 $ .82
Discontinued operations (.72) (.71) .26 .25
Extraordinary items .50 .49 (.01) (.01)
Cumulative effect of accounting change (1.19) (1.17) -- --
---------------------------------------------------------------------------------------------------
Net earnings $ .03 $ .03 $ 1.08 $ 1.06
===================================================================================================
H - INVENTORIES
September 30, December 31,
2002 2001
---------------------------------------------------------------------------------------------------
Estimated replacement cost (FIFO basis):
Finished products $ 113 $ 202
Raw materials, supplies and work-in-process 2,131 1,662
---------------------------------------------------------------------------------------------------
Inventories (FIFO basis) 2,244 1,864
Less reduction to LIFO cost (236) (180)
---------------------------------------------------------------------------------------------------
Total $ 2,008 $ 1,684
===================================================================================================
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,381 at September 30, 2002, and $1,060 at December 31, 2001.
I - COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites that, under the
Comprehensive Environmental Response, Compensation and Liability Act, are
commonly known as Superfund sites. The company's ultimate liability in
connection with Superfund sites depends on many factors, including the number of
other responsible parties and their financial viability and the remediation
methods and technology to be used. Actual costs to be incurred may vary from the
estimates, given the inherent uncertainties in evaluating environmental
exposures.
15
Environmental Matters
With regard to the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency. It is reasonably
possible that a material increase in accrued liabilities will be required. It is
not possible, however, to estimate a range of potential losses. Accordingly, it
is not possible to determine what, if any, additional exposure exists at this
time.
Litigation Matters
The company has been a defendant, along with a number of other manufacturers and
wholesalers, in several civil antitrust lawsuits, including a federal class
action, brought by retail pharmacies alleging that the defendants violated the
law by providing discounts to hospitals, nursing homes, mail-order pharmacies
and health maintenance organizations that were not offered on equal terms to
retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the
federal class action for $103, and G.D. Searle & Co. (Searle), another
subsidiary of the company, received a favorable verdict in the federal class
action in 1999. State class action lawsuits seeking damages based on the same
alleged conduct were filed in 14 states and the District of Columbia, all but
one of which have been settled or dismissed. A number of the federal cases
brought by plaintiffs who opted out of the federal class action are still
pending.
The company and Pfizer are defendants in a lawsuit brought by the University of
Rochester in Federal Court in New York alleging infringement of the University's
U.S. patent by the sale and use of CELEBREX. The University's patent has claims
directed to a method of treating human patients by administering a selective
COX-2 inhibitor. The case, which seeks injunctive relief and monetary damages,
is expected to be tried during the first half of 2003.
The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the company who were transferred to
CP Kelco. The company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint.
Discovery has been completed in the lawsuit. A September 2002 Report and
Recommendation (September Report) issued by the magistrate judge in the case
granted Lehman's and Hercules' motion for judgment on the pleadings. The company
has filed objections to the September Report and those objections have not been
ruled upon. An October 2002 Report and Recommendation (October Report) granted
in part and denied in part the company's motion for summary judgment. The
company has filed objections to that portion of the October Report that denied
its motion. Those objections have not been ruled upon. There is no trial date in
the matter, as the judge originally handling the action resigned from the bench
and has not yet been replaced.
The company, Searle and Pfizer are defendants in a purported class action
complaint filed in Federal Court in New Jersey seeking damages based on the
claim that the defendants misrepresented and over-promoted CELEBREX in violation
of state law and misled and defrauded the U.S. Food and Drug Administration
during the CELEBREX approval process. The complaint seeks economic damages and
claims no specific medical injury. The company, Searle and Pfizer were also sued
in State Court in New Jersey by a purported class alleging the same set of facts
and seeking the same relief as the federal case.
16
The company, Pfizer and Merck & Co., Inc. are defendants in a purported class
action complaint filed in Federal Court in New York alleging medical concerns
related to Vioxx and CELEBREX and seeking reimbursement of the purchase price,
for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and
attorneys' fees. The complaint also seeks revised labeling for the products,
emergency notice to the class and a medical monitoring program funded by
defendants.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended
(the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia
for liabilities related to the agricultural business. In addition, in the
proceedings where the company is the defendant, Monsanto will indemnify the
company for costs, expenses and any judgments or settlements; and in the
proceedings where the company is the plaintiff, Monsanto will pay the fees and
costs of, and receive any benefits from, the litigation. Therefore, Pharmacia
may remain the named party in certain legal proceedings, but Monsanto will
manage the litigation including indemnifying Pharmacia for costs, expenses and
any judgments or settlements.
In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997,
Solutia assumed from Pharmacia liabilities related to the former Monsanto
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings but Solutia manages the litigation and pays all costs,
expenses and any judgments or settlements.
As a result, Solutia assumed responsibility for litigation currently pending in
state and federal court in Alabama brought by several thousand plaintiffs,
alleging property damage, anxiety and emotional distress and personal injury
arising from exposure to polychlorinated biphenyls (PCBs), which were discharged
from an Anniston, Alabama plant site that was owned by former Monsanto and that
was transferred to Solutia as part of the spin-off. This litigation includes,
but is not limited to, the Abernathy litigation referred to below. Pursuant to
the terms of the Distribution Agreement, Solutia is required to indemnify
Pharmacia for liabilities that Pharmacia incurs in connection with this
litigation.
Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy,
et al. v. Monsanto Company, et al., currently pending in state court in Alabama.
The jury has found Solutia and Pharmacia (former Monsanto) liable with respect
to certain claims in this litigation, and proceedings have commenced to
determine damages. Solutia has requested that Pharmacia commit to posting any
appeal bond that may be required to stay execution of any judgment in this
litigation pending an appeal. Pursuant to a Protocol agreement dated as of July
1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not
post a bond sufficient to stay the execution of any judgment in the litigation
pending an appeal, Pharmacia will post such a bond if it is able to do so on
commercially reasonable terms. Solutia shall pay the expenses incurred in
connection with obtaining any such bond. The agreement also specifies which
party or parties would control any decisions regarding settlement of the
Abernathy litigation, depending upon whether or not collateral must be provided
to secure the bond and, if so, which party provides it. Under the agreement, the
continued defense of the Abernathy litigation and the prosecution of any appeal
will continue to be managed by Solutia, at Solutia's expense.
Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and
agreed to indemnify Pharmacia for, any liabilities primarily related to former
Monsanto's former chemical businesses, including any liabilities that Solutia
has assumed from Pharmacia in connection with the spin-off of Solutia, to the
extent Solutia fails to pay, perform or discharge these liabilities. This
indemnification obligation applies to litigation, environmental and other
liabilities assumed by Solutia.
With respect to the matters described above, the company cannot estimate a range
of potential losses or what, if any, additional exposure exists at this time.
The company believes it has valid defenses to these matters and intends to
vigorously contest them.
17
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
J - AGREEMENTS WITH SANOFI~SYNTHELABO
Pursuant to previously existing agreements, the company had rights from
Sanofi~Synthelabo (Sanofi) to manufacture, sell and market two products in North
America: Ambien and Kerlone. On April 16, 2002, Sanofi exercised its right to
acquire all rights to the products in North America in accordance with the
agreements. In connection with such acquisition, the company received a pretax
payment of $671 ($661 net pretax gain) for its interest. This payment was
recorded in the second fiscal quarter of 2002 in all other, net in the
consolidated statements of earnings. See Pharmacia Corporation Form 8-K filed
with the Securities and Exchange Commission on April 30, 2002.
K - INTENTION TO MERGE WITH PFIZER
On July 13, 2002, the company entered into a definitive merger agreement with
Pfizer. In accordance with the agreement, each Pharmacia shareholder of record
on the closing date will receive 1.4 shares of Pfizer stock for each share of
Pharmacia stock owned. It is estimated that the shares of Pfizer common stock to
be issued to Pharmacia shareholders in the merger will represent approximately
23 percent of the outstanding Pfizer common stock after the merger on a fully
diluted basis. Until the closing date, which is targeted to occur by year-end,
Pharmacia will continue to operate independently of Pfizer. The closing of the
transaction is contingent upon an affirmative vote by Pharmacia and Pfizer
shareholders and approval by certain regulatory authorities including the U.S.
Federal Trade Commission. The final regulatory review process may result in the
closing occurring early in the first quarter of 2003.
On October 21, 2002, the SEC declared effective Pfizer's Registration Statement
on Form S-4 in connection with the proposed acquisiton of Pharmacia Corporation.
This Registration Statement includes a joint proxy statement/prospectus that has
been sent to the shareholders of both companies. We have scheduled a meeting
for shareholders to take place on December 9, 2002 to vote on the proposed
acquisition. Pfizer's shareholder meeting is scheduled to occur on
December 6, 2002.
L - SEGMENT INFORMATION
The company's core business is the development, manufacture and sale of
pharmaceutical products. Prescription pharmaceuticals is the company's only
reportable segment and includes primary care, hospital care, cancer care,
ophthalmology and endocrine care products.
The company also operates several business units that do not constitute
reportable business segments. These operating units include consumer health
care, animal health, diagnostics, contract manufacturing and bulk pharmaceutical
chemicals. Due to the size of these operating units, they have been grouped into
the other pharmaceuticals category.
Corporate amounts represent general and administrative expenses of corporate
support functions, restructuring charges and other corporate items such as
litigation accruals, merger costs and non-operating income and expense. Certain
goodwill (prior year) and intangible assets and associated amortization are not
allocated to categories.
The following table shows revenues and earnings by category and reconciling
items necessary to total to the amounts reported in the consolidated financial
statements. Information about interest income and expense, and income taxes is
not provided on a segment level as the segments are reviewed based on earnings
before interest and income taxes (EBIT). There are no inter-category revenues.
Long-lived assets are not allocated to categories and, accordingly, depreciation
is not available at that level.
18
For The Three Months Ended September 30,
--------------------------------------------
Sales Earnings
--------------------- --------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Prescription pharmaceuticals $ 3,095 $ 3,075 $ 784 $ 720
Other pharmaceuticals 484 455 148 109
Corporate -- -- (141) (163)
-----------------------------------------------------------------------------------------------
Total Pharmacia - Sales $ 3,579 $ 3,530
- EBIT * 791 666
-----------------------------------------------------------------------------------------------
Interest expense, net (20) (45)
Income tax provision (179) (153)
-----------------------------------------------------------------------------------------------
Earnings from continuing operations $ 592 $ 468
===============================================================================================
For The Nine Months Ended September 30,
--------------------------------------------
Sales Earnings
--------------------- --------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Prescription pharmaceuticals $ 8,824 $ 8,747 $ 2,042 $ 1,801
Other pharmaceuticals 1,435 1,406 387 304
Corporate -- -- 190 (649)
-----------------------------------------------------------------------------------------------
Total Pharmacia - Sales $10,259 $10,153
- EBIT* 2,619 1,456
-----------------------------------------------------------------------------------------------
Interest expense, net (78) (102)
Income tax provision (674) (260)
-----------------------------------------------------------------------------------------------
Earnings from continuing operations $ 1,867 $ 1,094
===============================================================================================
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with U.S. generally accepted accounting principles.
Determination of EBIT may vary from company to company.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The term "the company" or "Pharmacia" is used to refer to Pharmacia Corporation
or to Pharmacia Corporation and its subsidiaries, as appropriate to the context.
The term "former Monsanto" is used to refer to pre-merger operations of the
former Monsanto Company before the merger with Pharmacia & Upjohn on March 31,
2000 and "Monsanto" refers to the agricultural subsidiary, which was spun-off by
Pharmacia to its shareholders on August 13, 2002 as discussed below.
Product names indicated in all upper case letters are trademarks owned by, or
licensed to, Pharmacia Corporation. In the following discussion of consolidated
results, per-share amounts are presented on a diluted, after-tax basis, unless
otherwise indicated.
On July 13, 2002, Pharmacia entered into a definitive merger agreement with
Pfizer Inc. (Pfizer). The transaction is targeted to close by year-end and until
that time Pharmacia will continue to operate independently of Pfizer. The
closing of the transaction is contingent upon an affirmative vote by Pharmacia
and Pfizer shareholders and approval by certain regulatory authorities including
the U.S. Federal Trade Commission. The final regulatory review process may
result in the closing occurring early in the first quarter of 2003.
On November 28, 2001, the board of directors approved a formal plan to
distribute to Pharmacia shareholders the outstanding shares of Monsanto common
stock held by the company, in a tax-free spin-off transaction.
On July 18, 2002, the Pharmacia board of directors approved the completion of
the spin-off of Monsanto through the distribution of shares of Monsanto common
stock to Pharmacia shareholders of record on July 29, 2002. The shares were
distributed at the close of business on August 13, 2002.
On October 21, 2002, the SEC declared effective Pfizer's Registration Statement
on Form S-4 in connection with the proposed acquisition of Pharmacia
Corporation. This Regisration Statement includes a joint proxy
statement/prospectus that has been sent to the shareholders of both companies.
We have scheduled a meeting for shareholders to take place on December 9, 2002
to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled
to occur on December 6, 2002.
FINANCIAL REVIEW
Overview
The table below provides a comparative overview of consolidated results for the
third quarter and first nine-month periods of 2002 and 2001.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
(Dollars in millions, % %
except per share data) 2002 Change 2001 2002 Change 2001
--------------------------------------------------------------------------------------------------------
Sales $3,579 1% $3,530 $10,259 1% $10,153
Earnings from continuing operations
before income taxes 771 24 621 2,541 88 1,354
Earnings from continuing operations 592 27 468 1,867 71 1,094
Net earnings (loss) (429) -- 428 43 (97) 1,415
--------------------------------------------------------------------------------------------------------
Earnings from continuing operations
per common share (EPS):
Basic $ .46 31% $ .35 $ 1.44 73% $ .83
20
Diluted .45 29 .35 1.42 73 .82
--------------------------------------------------------------------------------------------------------
Net earnings (loss) per
common share (EPS):
Basic $ (.33) --% $ .32 $ .03 (97)% $ 1.08
Diluted (.33) -- .32 .03 (97) 1.06
========================================================================================================
The company has six key growth products: CELEBREX, BEXTRA, XALATAN, DETROL
LA/DETROL, CAMPTOSAR and ZYVOX. Sales for these key prescription products
increased 12 percent in the third quarter of 2002 as compared with the third
quarter of 2001. On a year-to-date basis, sales of these key growth drivers
increased 14 percent compared to the same period of 2001. The increase in sales
is partially due to the launch of BEXTRA during April of 2002.
On December 31, 2001, the company relinquished control over Ambien to
Sanofi~Synthelabo, Inc. (Sanofi) and ceased recording sales and expenses of
Ambien. In the third quarter and year-to-date 2001 results, Ambien was included
in sales and the company reported related payments to Sanofi as an expense.
During the year-to-date period ended September 30, 2002, the company recorded
its final share of profits of $73 million and a gain on the transfer of its
interests of $661 million ($424 million net of tax or $0.32 per share) in all
other, net. Excluding Ambien from prior year data, sales of continuing products
rose 11 percent over the third quarter of 2001 and 8 percent over year-to-date
2001. Excluding Ambien and the impact of foreign exchange, sales rose 9 percent
and 8 percent for the quarter and year-to-date periods, respectively.
Earnings from continuing operations increased 27 percent to $592 million or
$0.45 per share during the third quarter of 2002. On a year-to-date basis,
earnings from continuing operations increased 71 percent to $1.9 billion or
$1.42 per share. Quarter-to-quarter and year-to-year comparisons are impacted by
special items in research and development (R&D), selling, general and
administrative (SG&A), merger and restructuring and all other, net.
Year-to-date 2002 includes a $30 million ($19 million net of tax or $0.02 per
share) payment to Altana AG, which was recorded in R&D, related to the
co-promotion and co-development agreement for the compound roflumilast. Third
quarter and year-to-date 2001 includes a $30 million ($19 million net of tax or
$0.02 per share) payment to Orion Corporation, related to the development and
commercialization of deramciclane. Also included in 2001 year-to-date amounts
are charges of $67 million ($42 million net of tax or $0.03 per share)
associated with the Sensus purchase acquisition and a $50 million ($31 million
net of tax or $0.02 per share) upfront R&D payment related to the agreement with
Celltech Group plc for the compound CDP 870.
Year-to-date 2002 includes a $75 million ($46 million net of tax or $0.04 per
share) charge to SG&A relating to a charitable contribution to the Pharmacia
Foundation.
Merger and restructuring charges totaled $3 million ($2 million net of tax with
no per share impact) and $100 million ($88 million net of tax or $0.06 per
share) during the third quarter of 2002 and 2001, respectively. Year-to-date
merger and restructuring charges for 2002 and 2001 total $34 million ($22
million net of tax or $0.01 per share) and $399 million ($239 million net of tax
or $0.18 per share), respectively.
All other, net for the year-to-date period of 2002, in addition to other items,
includes the aforementioned $661 million gain for the return of product rights
to Sanofi and a $28 million gain ($17 million net of tax or $0.02 per share)
related to the sale of clinical data to Boehringer Ingelheim.
The loss of $429 million for the third quarter of 2002, was primarily due to a
loss on disposal of discontinued operations of approximately $1.0 billion, net
of tax ($0.78 per share), representing the company's share of Monsanto's
operating results and an impairment loss as of the date of the spin-off of
Monsanto. The impairment loss was the difference between the fair value and the
recorded amount of Monsanto shares on August 13, the date of the spin-off, in
the amount of
21
$981 million. This impairment loss was the principal cause of the year-to-date
net loss on disposal of discontinued operations of $932 million, net of tax
($0.71 per share). Year-to-date net earnings decreased 97 percent to $43
million. The decrease is primarily due to the events mentioned above, and the
cumulative effect of an accounting change of $1.5 billion net of tax ($1.17 per
share), which relates to the write-down of Monsanto goodwill in accordance with
the adoption of SFAS No. 142 on January 1, 2002. Also affecting the year-to-year
comparability is the $649 million net of tax ($0.49 per share) extraordinary
gain on the sale of Amersham Biosciences Corporation (Amersham) recorded in
March 2002.
Net Sales
Sales by Segment For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
% %
(Dollars in millions) 2002 Change 2001 2002 Change 2001
--------------------------------------------------------------------------------------------------------
Prescription pharmaceuticals $3,095 1% $3,075 $ 8,824 1% $ 8,747
Other pharmaceuticals 484 6 455 1,435 2 1,406
--------------------------------------------------------------------------------------------------------
Total consolidated sales $3,579 1% $3,530 $10,259 1% $10,153
========================================================================================================
The increase in consolidated sales for the third quarter of 2002 is the result
of a favorable impact from foreign exchange of 2 percent, which is partially
offset by a 1 percent decrease in volume. The increase in consolidated sales for
the first nine months of 2002 is the result of price increases of 1 percent.
Volume comparisons were affected significantly by the absence of Ambien sales
during 2002 due to the transfer of that product to Sanofi at the end of 2001.
Excluding Ambien from 2001 data, volume rose 8 percent and 7 percent in the
quarter and year-to-date periods, respectively.
Geographic Sales For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
%Chg. %Chg.
% Excl. % Excl.
(Dollars in millions) 2002 Change Ex.* 2001 2002 Change Ex.* 2001
---------------------------------------------------------------------------------------------------------
United States $1,965 (7)% (7)% $2,117 $ 5,613 (1)% (1)% $ 5,679
Japan 223 8 6 207 614 (2) 2 628
Italy 153 19 7 128 463 10 6 421
Germany 134 15 4 117 389 8 4 361
United Kingdom 143 22 14 117 382 12 10 339
France 123 9 (1) 113 365 (5) (8) 386
Rest of world 838 15 14 731 2,433 4 6 2,339
---------------------------------------------------------------------------------------------------------
Net sales $3,579 1% -- $3,530 $10,259 1% 1% $10,153
=========================================================================================================
* Underlying growth reflects the percentage change excluding currency exchange
effects.
The decline in U.S. sales was solely attributable to the transfer of rights to
Ambien at the end of 2001. Excluding Ambien from prior year data, sales in the
U.S. increased 8 percent and 11 percent in the quarter and year-to-date,
respectively.
Sales of Top Products For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
% %
(Dollars in millions) 2002 Change 2001 2002 Change 2001
---------------------------------------------------------------------------------------------------
CELEBREX $ 824 (3)% $ 851 $2,238 1 % $2,210
BEXTRA 139 N/A -- 286 N/A --
XALATAN 256 16 221 685 16 592
DETROL LA/DETROL 197 5 189 562 17 482
CAMPTOSAR 153 7 145 437 (5) 462
GENOTROPIN 136 12 121 386 5 369
22
NICORETTE Line 111 48 75 283 39 204
DEPO-PROVERA 104 30 80 278 24 224
PHARMORUBICIN/ELLENCE 83 27 65 252 30 193
MEDROL 99 29 77 243 3 236
XANAX 60 (20) 75 233 (4) 242
CLEOCIN 69 (5) 74 206 (7) 223
FRAGMIN 61 5 58 189 12 169
ARTHROTEC 72 70 42 186 13 164
CABASER/DOSTINEX 62 59 39 175 47 119
ALDACTONE/Spiro Line 50 18 43 142 5 135
MIRAPEX 36 51 24 133 28 104
ZYVOX 25 19 22 130 75 75
COVERA/CALAN 23 (9) 26 113 3 110
PLETAL 19 (21) 22 85 24 68
---------------------------------------------------------------------------------------------------
Total $2,579 15% $2,249 $7,242 13% $6,381
===================================================================================================
Costs and Expenses
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
% of % of % of % of
(Dollars in millions) 2002 Sales 2001 Sales 2002 Sales 2001 Sales
--------------------------------------------------------------------------------------------------------
Cost of products sold $ 740 20.7% $ 711 20.1% $2,216 21.6% $2,207 21.7%
Research and development 565 15.8 537 15.2 1,731 16.9 1,728 17.0
Selling, general and
administrative 1,556 43.5 1,427 40.4 4,541 44.3 4,235 41.7
Merger and restructuring 3 0.1 100 2.8 34 0.3 399 3.9
Cost of products sold for the quarter ended September 30, 2002 and 2001 was $740
million and $711 million, respectively. Cost of products sold as a percentage of
net sales increased slightly for the current year quarter primarily due to
additional compliance costs. Cost of products sold was $2.2 billion for both
nine month periods ended September 30, 2002 and 2001 and generally remained
unchanged in the current year period as a percentage of net sales.
R&D spending increased by $28 million to $565 million in the third quarter of
2002 compared to $537 million in the third quarter of 2001. An increase in
external development costs was the main contributor to the quarter-to-quarter
change. Year-to-date expenditures remained constant at $1.7 billion for both
years. The ratio of expense to sales was lowered fractionally to 16.9 percent.
Increased development costs offset by fewer one-time payments for R&D agreements
resulted in essentially unchanged spending for the period.
SG&A expense of $1.6 billion in the third quarter of 2002 increased $129 million
or 9 percent compared to the third quarter of 2001. For the year-to-date periods
ended September 30, 2002 and 2001, SG&A expenses were $4.5 billion and $4.2
billion, respectively. The increase in the third quarter of 2002 is attributable
to co-marketing payments as well as promotional and sales force spending for the
company's new key product BEXTRA. Also affecting quarter-to-quarter
comparability is an increase in corporate expenses, primarily compensation and
benefit costs. Year-to-date increases for 2002 include items mentioned above as
well as increased co-marketing payments related to CELEBREX and the commitment
to a contribution of $75 million to the Pharmacia Foundation.
Prescription Pharmaceuticals
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
% %
(Dollars in millions) 2002 Change 2001 2002 Change 2001
--------------------------------------------------------------------------------------------------------
Net sales $3,095 1 % $3,075 $8,824 1 % $8,747
Cost of products sold 547 (2) 558 1,616 (1) 1,640
Research and development 539 7 506 1,643 2 1,610
Selling, general and administrative 1,251 4 1,200 3,678 4 3,533
23
EBIT, before merger and restructuring * 784 9 720 2,042 13 1,801
--------------------
* Earnings before interest and taxes (EBIT) and before merger and
restructuring is presented here to provide additional information about the
company's operations and is in keeping with the manner in which the company
manages its segments. This item should be considered in addition to, but
not as a substitute for or superior to, net earnings, cash flows or other
measures of financial performance prepared in accordance with U.S.
generally accepted accounting principles. Determination of EBIT may vary
from company to company.
Prescription pharmaceutical net sales constituted 86 percent of total
consolidated sales for both the third quarter and year-to-date periods ended
September 30, 2002. Sales increased 1 percent for both the third quarter and
year-to-date periods as compared with prior year periods. Excluding the impact
from the transfer of Ambien, sales increased 12 percent in the third quarter of
2002 and 9 percent year-to-date. CELEBREX, BEXTRA, XALATAN, DETROL LA/DETROL,
CAMPTOSAR and ZYVOX drove sales growth in the prescription pharmaceutical
business. Sales of these products for the quarter totaled $1.6 billion, a 12
percent increase from the prior year period, and represented 52 percent of the
quarter's prescription pharmaceutical sales compared to 46 percent for the same
period in 2001. Year-to-date sales of these products totaled $4.3 billion, a 14
percent increase from the prior year period, and represented 49 percent of the
first nine months of prescription pharmaceutical sales compared to 44 percent
for the same period in 2001.
The following product analysis discusses product achievements and fluctuations
in product sales versus comparable prior periods. While some sales comparisons
include variances resulting from normal fluctuations in trade inventory levels
from period to period, there has been no material change in the company's
estimate of total trade inventory.
Pharmacia markets three products that are members of a class of drugs known as
selective COX-2 inhibitors. These drugs include CELEBREX, BEXTRA, and the
injectable COX-2 inhibitor, DYNASTAT, which has been approved in many European
and Latin American markets. In the third quarter, sales of the company's COX-2
inhibitors increased 13 percent to $966 million. On a year-to-date basis, sales
increased 14 percent to $2.5 billion.
CELEBREX, the company's leading product and the number-one selling prescription
arthritis medication worldwide, recorded sales of $824 million in the third
quarter, a decline of 3 percent compared to the prior year period. Year-to-date
sales of CELEBREX increased 1 percent to $2.2 billion.
BEXTRA, the company's second selective COX-2 inhibitor, was approved by the U.S.
Food and Drug Administration (FDA) in November 2001 for the treatment of
osteoarthritis, rheumatoid arthritis and primary dysmenorrhea (menstrual pain).
The full launch of BEXTRA in the U.S. occurred in April 2002. BEXTRA achieved
sales of $139 million in the quarter and $286 million in the first nine months
as a result of rapid acceptance by physicians.
XALATAN, the number-one prescribed glaucoma medication in the U.S., Europe and
Japan, increased 16 percent in the quarter and year-to-date. European sales
contributed significantly to the growth of the franchise in the third quarter
with sales up 34 percent to $77 million. European growth is benefiting from the
introduction of XALACOM, a fixed combination of XALATAN and timolol, and the
recent European launch of XALATAN for first-line therapy of patients with
glaucoma. XALATAN sales also increased in the U.S. and Japan.
Sales of DETROL LA/DETROL, the world's leading treatment for overactive bladder,
increased 5 percent in the third quarter and 17 percent on a year-to-date basis,
reflecting strong demand for the once-daily DETROL LA. DETROL LA has been
launched in 12 countries, including the U.S. and Europe since January 2001.
Outside the U.S., the once-daily formulation is sold under various trade names
including DETRUSITOL SR.
24
CAMPTOSAR, the leading treatment for metastatic colorectal cancer in the U.S.,
recorded sales of $153 million, a 7 percent increase. CAMPTOSAR sales decreased
5 percent in the year-to-date period largely reflecting the impact of trade
inventory fluctuations in the fourth quarter of 2001 and first quarter of 2002.
GENOTROPIN, the world's leading growth hormone, recorded sales of $136 million
during the third quarter, a 12 percent increase over the prior year. Sales in
the U.S. increased 19 percent to $34 million in the third quarter, as the
company continues to increase market share. In the first nine months, worldwide
sales increased 5 percent to $386 million and U.S. sales increased 27 percent to
$101 million. Sales outside the U.S. have been negatively impacted by foreign
exchange rates and a government mandated reduction in the reimbursement price in
Japan, which took effect in April 2002.
Sales of ZYVOX, the company's antibiotic for Gram-positive infections, increased
19 percent to $25 million in the quarter. U.S. sales declined 26 percent in the
third quarter, following increased trade purchasing in the first half of the
year. On a year-to-date basis, ZYVOX sales increased 75 percent to $130 million
globally and 52 percent to $104 million in the U.S.
DEPO-PROVERA, the company's long-lasting monthly injectable for contraception,
increased 30 percent in the third quarter driven by the U.S. where sales
increased 52 percent. Trade purchasing as a result of a price increase and
continued strong demand positively impacted U.S. sales of DEPO-PROVERA in the
third quarter and first nine months. Sales in the first nine months of 2002
increased 24 percent to $278 million.
PHARMORUBICIN, a widely used chemotherapeutic agent for breast cancer, increased
27 percent and 30 percent in the third quarter and year-to-date periods,
respectively. Sales of ELLENCE, the trade name for PHARMORUBICIN in the U.S.,
have doubled this year, driving the overall increase in sales of the
PHARMORUBICIN brand. A regimen containing ELLENCE is being rapidly adopted by
physicians for the treatment of early breast cancer following surgery or
radiation therapy.
The company's Parkinson's disease drugs, MIRAPEX and CABASER continued to grow
at a rapid pace. MIRAPEX increased 51 percent in the third quarter, in part due
to the impact of trade purchasing. MIRAPEX sales increased 28 percent in the
first nine months. Meanwhile, sales of CABASER/DOSTINEX for Parkinson's disease
and hyperprolactinemia grew 59 percent and 47 percent in the third quarter and
first nine months, respectively. Sales of the Parkinson's disease drugs are
growing as the company continues to take a greater share of the Parkinson's
disease market.
Among the company's older products, XANAX, for anxiety, and the antibiotic
CLEOCIN decreased in the quarter and year-to-date periods due to generic
competition. Meanwhile, the anti-inflammatory steroid MEDROL and arthritis
medication ARTHROTEC increased in the quarter due to trade inventory purchasing.
On a year-to-date basis, MEDROL and ARTHROTEC have increased slightly.
On September 30, 2002, the U.S. Food and Drug Administration granted marketing
approval for Pharmacia's INSPRA (eplerenone tablets), the first agent designed
to selectively block aldosterone, for the treatment of high blood pressure. The
approval is based on clinical trials involving approximately 3,000 patients that
demonstrated the effectiveness of INSPRA in lowering high blood pressure, both
alone and in combination with other anti-hypertensive therapies. The U.S. launch
of INSPRA is expected to occur in 2003.
Key prescription pharmaceutical segment operating expenses, stated as a
percentage of net prescription pharmaceutical sales, are provided in the table
below.
25
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------
Cost of products sold 17.7% 18.2% 18.3% 18.8%
Research and development 17.4 16.4 18.6 18.4
Selling, general and administrative 40.4 39.0 41.7 40.4
EBIT, before merger and restructuring * 25.3 23.4 23.1 20.6
* Earnings before interest and taxes (EBIT) and before merger and
restructuring is presented here to provide additional information about the
company's operations and is in keeping with the manner in which the company
manages its segments. This item should be considered in addition to, but
not as a substitute for or superior to, net earnings, cash flows or other
measures of financial performance prepared in accordance with U.S.
generally accepted accounting principles. Determination of EBIT may vary
from company to company.
Cost of products sold for the quarter and year-to-date periods ended September
30, 2002 and 2001 was $547 million and $558 million and $1.6 billion and $1.6
billion, respectively. Favorable shifts in the product mix and lower royalty
costs resulted in cost of products sold as a percentage of sales improving
slightly versus the prior periods.
R&D expense increased $33 million, or 7 percent, for the quarter ended September
30, 2002 versus the same period in the prior year. As a percent of sales, R&D
expense increased 1 percentage point to 17 percent. The increase in expense was
mainly the result of increases in development costs for CDP 870 (rheumatoid
arthritis), Phase IV expenses for BEXTRA and GENOTROPIN and R&D administrative
costs. Partially offsetting the impact of these increases in the current year
was a $30 million 2001 payment to Orion Corporation in connection with an
agreement to collaborate in the development and commercialization of
deramciclane (anti-anxiety) in the U.S.
R&D spending for the year-to-date periods ending September 30, 2002 and 2001 was
unchanged at $1.6 billion. For the nine-month period ended September 30, 2002,
increases were realized versus the prior period for development costs primarily
related to CDP 870. Additionally, Phase IV costs, mainly related to ongoing
studies for BEXTRA and GENOTROPIN, and R&D administrative costs rose for the
year-to-date period. Also impacting the current year period was a second quarter
$30 million payment to Altana AG in connection with the acquisition of rights
for the development of roflumilast, a new compound being developed for the
treatment of respiratory diseases. Offsetting these increases were certain
expenses in 2001 that were not present in the 2002 year-to-date period. These
2001 year-to-date expenses include $29 million related to the former plasma
business that was spun off in the third quarter of 2001 under the name Biovitrum
AB (Biovitrum) and first quarter costs of $67 million relating to the
acquisition of Sensus Drug Development Corporation. Also, during the first
quarter of 2001, the company entered into an agreement with Celltech plc for the
development and promotion of CDP 870. In connection with the agreement, the
company recorded an R&D expense of $50 million. During the third quarter of
2001, the company recorded the aforementioned $30 million of R&D expense for a
payment to Orion Corporation in connection with an agreement to collaborate in
the development and commercialization of deramciclane in the U.S.
SG&A expense increased $51 million, or 4 percent, during the third quarter ended
September 30, 2002 versus the same prior year quarter. SG&A expense stated as a
percentage of sales increased over the prior year quarter by 1 percentage point
to 40 percent. The primary reason for the increase in SG&A for the period was
due to co-marketing agreement payments relating to BEXTRA for the North American
market. Additionally, increased promotional and sales force expenditures for
BEXTRA, INSPRA (eplerenone tablets) and XALATAN were realized during the
quarter. BEXTRA, valdecoxib tablets, was launched in April of 2002. On a
year-to-date basis, SG&A increased $145 million to $3.7 billion. This represents
an increase of 4 percent over the prior year period. Similar to the quarterly
change, co-marketing payments relating to CELEBREX and BEXTRA were the main
contributors to the increase. Also, direct sales force expenditures rose versus
the prior year period in the United States, mainly relating to the April 2002
launch of BEXTRA.
26
Other Pharmaceuticals
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
% %
(Dollars in millions) 2002 Change 2001 2002 Change 2001
---------------------------------------------------------------------------------------------------
Sales $484 6 % $455 $1,435 2 % $1,406
Cost of products sold 183 1 181 554 (6) 591
Research and development 26 (17) 32 88 (26) 118
Selling, general and administrative 138 (5) 144 428 -- 426
Sales in the company's other pharmaceuticals businesses are comprised of
consumer health care (over the counter products), animal health, contract
manufacturing, bulk pharmaceutical chemicals and diagnostics. Sales for the
third quarter and year-to-date periods increased by 6 percent and 2 percent,
respectively, compared with the prior year periods.
Sales in the consumer health care business increased for both the third quarter
and year-to-date periods by 23 percent and 14 percent, respectively. The
business' leading products are for the treatment of tobacco dependency and
hereditary hair loss. Sales growth for the quarter and year-to-date periods was
driven primarily from market share growth of NICORETTE in Canada, increased
demand of tobacco dependence products in the U.S. and the acquisition of LUDEN'S
during September of 2001. There was a slight decrease in the U.S. sales of
ROGAINE due to non-branded competition, which was partially offset by the
re-launch of the hair care therapy PROGAINE.
Sales in the animal health business increased for both the third quarter and
year-to-date by 10 percent and 8 percent, respectively. Sales growth was driven
by the antibiotic NAXCEL/EXCENEL, which is used to treat a variety of infections
in animals. Third quarter and year-to-date sales of NAXCEL/EXCENEL increased by
24 percent to $45 million and 22 percent to $124 million, respectively.
Partially offsetting the increase in both the consumer health care and animal
health care businesses was the continuing planned cutback in the contract
manufacturing business.
Corporate and Other
In addition to normal corporate administrative costs, items that are not
assigned to a specific business or are of a non-recurring nature are designated
as corporate. Corporate items resulted in a net expense amount of $141 million
in the third quarter of 2002, as compared with a net expense amount of $163
million for the third quarter of 2001.
The decrease in expense from third quarter 2001 to 2002 is primarily
attributable to the decrease in merger and restructuring expenses during 2002.
Third quarter 2002 merger and restructuring expenses totaled $3 million as
compared with $100 million during the same period of 2001. This decrease was
significantly offset by an increase in other corporate expenses, primarily
compensation and benefits.
Year-to-date 2002 corporate income totaled $190 million as compared to $649
million of corporate expense for the same period in 2001. Corporate income for
year-to-date 2002 includes the $661 million gain relating to the transfer of
Ambien to Sanofi, $28 million gain relating to the sale of clinical study data
to Boehringer Ingelheim, partially off-set by a $75 million charitable
contribution to the Pharmacia Foundation and $34 million of merger and
restructuring charges. The net expense during the same period of 2001 includes
$276 million of merger costs and $123 million of restructuring charges. The
favorable earnings impact is mainly attributable to the one-time
27
transfer payment relating to Ambien and the decrease in merger and restructuring
costs in 2002 as compared with 2001.
Net interest expense decreased $25 million to $20 million compared to $45
million net expense in the third quarter of the prior year. The
quarter-to-quarter change is mainly attributable to lower U.S. interest rates on
debt, coupled with repayments of long-term debt and partially offset by lower
interest income. On a year-to-date basis net interest expense for 2002 decreased
to $78 million, as compared with 2001 net interest expense of $102 million.
The estimated annual effective tax rate for 2002 is 24 percent, excluding
merger, restructuring and certain other items. This compares with a tax rate of
25 percent for the full year 2001 and represents a 50 basis point reduction from
the previously anticipated full-year tax rate for 2002. Changing the rate in the
third quarter of 2002 resulted in the quarterly effective tax rate being 23.2
percent.
In October 2002, Pharmacia settled patent infringement suits with Alcon Inc.
(Alcon) and Allergan Inc. (Allergan), who each manufacture products that compete
with XALATAN. The cases involved disputes over patent infringement by Alcon and
Allergan related to Pharmacia's intellectual property. In the settlement with
Allergan, Pharmacia will receive an estimated $100-$110 million, net of amounts
transferable to another licensor, and certain royalty payments on sales of
Allergan's glaucoma medication. Pharmacia will also receive royalty payments
from Alcon on sales of its glaucoma medication.
Merger and Restructuring Charges
The company recorded an additional $3 million of merger and restructuring
charges during the third quarter of 2002. Approximately $1 million of net
expense was recorded in connection with the merger and integration of former
Monsanto and Pharmacia & Upjohn companies into Pharmacia Corporation. These
charges are part of the comprehensive integration plan approved by the board of
directors during 2000. The company also recorded $2 million of additional merger
costs relating to the proposed Pfizer transaction. The $3 million recorded
during the quarter is comprised of $4 million of total merger costs and a $1
million net reversal of restructuring costs. During the third quarter of 2001,
the company recorded $100 million in merger and restructuring costs. The $100
million recorded on the merger and restructuring line of the consolidated
statements of earnings is made up of $82 million of merger costs and $18 million
in restructuring charges.
For the nine months ended September 30, 2002, the company recorded a total of
$34 million of merger and restructuring costs. This total is comprised of $18
million of merger costs and $16 million of net restructuring costs. For the nine
months ended 2001, the company recorded a total of $399 million in merger and
restructuring expense. This total is comprised of $276 million in merger costs
and $123 million in restructuring charges.
Merger Costs
The $4 million of merger costs for the quarter and the $18 million of merger
costs year-to-date include costs necessary to integrate the former companies
into a single organization, such as consultant, relocation and information
technology integration costs. The $82 million in third quarter 2001 merger costs
and $276 million in year-to-date 2001 merger costs relate to costs necessary to
integrate the former companies into a single organization such as consultant
fees for system and process integration, information technology integration
costs, contract termination fees, employee relocation costs and other costs
necessary to complete the merger.
Restructuring Costs
28
The $1 million of net restructuring reversals for the third quarter of 2002
relate to a $4 million charge to prescription pharmaceuticals and approximately
$5 million of reversals. The $18 million of total restructuring charges during
the third quarter of 2001 is comprised of $17 million associated with
prescription pharmaceuticals and $1 million in connection with corporate and
administrative functions.
The year-to-date 2002 restructuring amount of $16 million is comprised of $18
million relating to prescription pharmaceuticals, $3 million relating to other
pharmaceuticals and reversals of $5 million. Year-to-date 2001 consists of $123
million of total restructuring charges and is comprised of $105 million
associated with prescription pharmaceuticals, $16 million in connection with
corporate and administrative functions and $2 million in connection with other
pharmaceutical operations.
The $4 million of expense for the third quarter of 2002 relates to contract
termination fees in the prescription pharmaceutical business. The $17 million of
third quarter 2001 expense relating to prescription pharmaceuticals consists of
$9 million relating to the involuntary separation of approximately 113
employees, $6 million associated with other exit costs and $2 million relating
to the write-down of assets such as duplicative computer systems and leasehold
improvements. The $18 million of year-to-date 2002 expense for prescription
pharmaceuticals is made up of $5 million relating to the separation of
approximately 45 employees, $9 million relating to contract and lease
termination costs and $4 million relating to other exit costs. For the nine
months ended September 30, 2001, the $105 million of restructuring charges
relating to prescription pharmaceuticals is comprised of $72 million in
connection with the separation of approximately 473 employees, $19 million
resulting from asset write-downs and $14 million associated with other exit
costs.
The $1 million relating to corporate and administrative functions for the third
quarter of 2001 represents the separation of approximately 10 employees. For the
nine months ended 2001, the $16 million charge is comprised of $11 million
relating to the separation of approximately 100 employees and $5 million
relating to asset write-offs.
The $3 million associated with the other pharmaceutical operations for
year-to-date September 30, 2002, is in connection with the involuntary
separation of approximately 35 employees. The year-to-date 2001 other
pharmaceutical operations restructuring balance includes $2 million associated
with the involuntary separation of approximately 10 employees.
The $5 million of reversals during the third quarter of 2002 consist of
liabilities established in 1999 and 2000 relating to the Monsanto and Pharmacia
& Upjohn merger. These restructuring liabilities were reversed primarily as a
result of lower actual severance costs than originally estimated.
A roll-forward from year-end 2001 of restructuring charges and spending
associated with the current restructuring plans relating to the integration of
the former Monsanto and Pharmacia & Upjohn companies is included in the table
below. As of September 30, 2002, the company has paid a total of $428 million
relating to the separation of approximately 2,740 employees associated with
these restructuring plans.
Workforce
(Dollars in millions) Reductions Other Exit Costs Total
---------------------------------------------------------------------------------------------------
December 31, 2001 $ 115 $10 $125
Year-to-date charges 7 9 16
Year-to-date spending (83) (4) (87)
Year-to-date reversals (5) -- (5)
---------------------------------------------------------------------------------------------------
September 30, 2002 $ 34 $15 $ 49
===================================================================================================
29
Due to the comprehensive nature of the restructuring and integration, the
company anticipates the restructuring activities to continue into 2003 as
Pharmacia continues to streamline operations. The company's aggregate merger and
restructuring charges relating to the Pharmacia merger have been approximately
$1.7 billion and the restructuring plan is expected to yield annual savings of
approximately $600 million that will be reinvested into the company's
operations.
Comprehensive Income (Loss)
Comprehensive income (loss) equals net earnings (loss) plus other comprehensive
income (loss). For Pharmacia Corporation, other comprehensive income (loss)
includes currency translation adjustments (CTA), deferred amounts for hedging
purposes, unrealized holding gains and losses on available-for-sale securities
(AFS) and minimum pension liability adjustments. Comprehensive income (loss)
for the three months ended September 30, 2002 and 2001, was $(757) million and
$383 million, respectively. For the nine months ended September 30, 2002 and
2001, comprehensive income (loss) was $(233) million and $1.0 billion,
respectively. Increases in the minimum pension liability coupled with increases
in unrealized holding losses on AFS securities made up a large part of the
difference between the net loss and other comprehensive loss for both the third
quarter and year-to-date periods in 2002. The increase in the minimum pension
liability is the result of a remeasurement of Monsanto pension plans in
conjunction with the spin-off of Monsanto in August 2002. Also affecting the
difference for both the third quarter and year-to-date periods in 2002, were
increases in CTA as a result of certain currencies weakening against the dollar,
mainly from Latin America countries.
The main contributors for the difference between net income and comprehensive
income for the third quarter and year-to-date 2001 periods were increases in
unrealized holding losses on AFS securities. The increase in unrealized holding
losses for the third quarter of 2001 was partially offset by favorable changes
in CTA as a result of certain foreign currencies strengthening against the
dollar, while year-to-date 2001 reflects increases in CTA as a result of certain
currencies weakening against the dollar.
Financial Condition, Liquidity, and Capital Resources
On July 13, 2002, the company entered into a definitive merger agreement with
Pfizer. Until the acquisition closes, Pharmacia will continue to operate
independently and does not expect a negative impact on financial condition,
liquidity or sales resulting from the intention to merge.
September 30, December 31,
(Dollars in millions) 2002 2001
-------------------------------------------------------------------------------------
Working capital $4,244 $2,663
Current ratio 1.86:1 1.53:1
Debt to total capitalization 28.4% 20.1%
Working capital for the quarter ended September 30, 2002 increased $1.6 billion
or 59 percent versus the prior year end. Similarly, the current ratio improved
during the first nine months of fiscal 2002 increasing 22 percent over prior
year-end levels. Increases in cash, inventories and short-term investments
coupled with declines in accounts payable and other accrued expenses are the
main factors contributing to the improvement. An increase in income taxes
payable partially offset the overall improvement in these measures. Cash
received from the transfer of Ambien and the sale of the Amersham Biosciences
investment contributed to the increased cash and short-term investments at
September 30, 2002. Cash outflows to purchase land and buildings in New Jersey
from AT&T Corp. for $200 million in the third quarter and reduced accounts
payable and other accrued liabilities during the period tempered overall cash
inflows. Accounts payable and accrued liabilities decreased mainly due to timing
differences of actual payments. Net gains resulting from the Amersham and Ambien
transactions also contributed to the increase in income taxes payable.
30
During the period, there was a net decrease in total outstanding debt resulting
from recurring principal payments and retirements. The debt-to-total-
capitalization ratio was unfavorably affected during the period by the
distribution of the remaining 84% of Monsanto common stock through a dividend to
the shareholders of Pharmacia common stock. The special dividend was charged
against retained earnings, thereby significantly reducing shareholders' equity.
During the second quarter, the company completed the transfer of Ambien to
Sanofi. In connection with the transfer, the company received a one-time payment
of $671 million. The company will use these funds for general corporate
purposes.
For the nine months ended September 30, 2002, $620 million of Pharmacia shares
were repurchased under the $3.0 billion stock buy-back program. Since inception
of the program in the fourth quarter of 2001, $1.5 billion of company shares
have been acquired. Shares repurchased through the buy-back program are used
principally to fund employee benefit programs. The buy-back program has been
suspended since the company entered into a definitive merger agreement with
Pfizer.
During the first quarter of 2002, the company completed the sale of its minority
interest in Amersham Biosciences. Proceeds received from the sale of these
shares were $1.0 billion. The company will use the funds for general corporate
purposes.
Qualified U.S. pension plan funding requirements for the 2002 plan year are
estimated to be approximately $65 million. This amount may be contributed any
time prior to September 2003. Consideration is being given to making a voluntary
contribution in the fourth quarter of 2002. It is expected that additional
funding may be required in future periods, but the amounts have not yet been
calculated. Also, the company may choose to make contributions in excess of the
required amounts.
During the fourth quarter of 2002, the company intends to fund a trust to
satisfy certain employee benefit payment obligations as a result of the planned
merger with Pfizer. This will be a revocable trust and the funding may be
retrieved if the planned merger with Pfizer does not close. The expected $350 -
$400 million that will be invested in the trust will be restricted and not
available for general corporate purposes. However, the company's liquidity will
not be significantly affected and future cash provided by operations and
borrowing capacity are expected to cover normal operating cash flow needs,
planned capital acquisitions and dividend payments as approved by the board of
directors for the foreseeable future.
Contingent Liabilities and Litigation
The consolidated balance sheets include accruals for estimated product,
intellectual property and other litigation and environmental liabilities. The
latter includes exposures related to discontinued operations, including the
industrial chemical facility referred to below and several sites that, under the
Comprehensive Environmental Response, Compensation and Liability Act, are
commonly known as Superfund sites. The company's ultimate liability in
connection with Superfund sites depends on many factors, including the number of
other responsible parties and their financial viability and the remediation
methods and technology to be used. Actual costs to be incurred may vary from the
estimates, given the inherent uncertainties in evaluating environmental
exposures.
Environmental Matters
With regard to the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency. It is reasonably
possible that a material increase in accrued liabilities will be required. It is
not possible, however, to estimate a range of potential losses. Accordingly, it
is not possible to determine what, if any, additional exposure exists at this
time.
31
Litigation Matters
The company has been a defendant, along with a number of other manufacturers and
wholesalers, in several civil antitrust lawsuits, including a federal class
action, brought by retail pharmacies alleging that the defendants violated the
law by providing discounts to hospitals, nursing homes, mail-order pharmacies
and health maintenance organizations that were not offered on equal terms to
retail pharmacies. Pharmacia & Upjohn, a subsidiary of the company, settled the
federal class action for $103 million, and G.D. Searle & Co. (Searle), another
subsidiary of the company, received a favorable verdict in the federal class
action in 1999. State class action lawsuits seeking damages based on the same
alleged conduct were filed in 14 states and the District of Columbia, all but
one of which have been settled or dismissed. A number of the federal cases
brought by plaintiffs who opted out of the federal class action are still
pending.
The company and Pfizer are defendants in a lawsuit brought by the University of
Rochester in Federal Court in New York alleging infringement of the University's
U.S. patent by the sale and use of CELEBREX. The University's patent has claims
directed to a method of treating human patients by administering a selective
COX-2 inhibitor. The case, which seeks injunctive relief and monetary damages,
is expected to be tried during the first half of 2003.
The company is a defendant in a lawsuit brought by CP Kelco in Federal Court in
Delaware seeking compensatory and punitive damages for alleged breach of
contract, fraud and securities law violations arising out of the purchase of the
company's Kelco biogums business in 2000 by Lehman Brothers Merchant Bank
Partners II, L.P. (Lehman), which combined the company's Kelco biogums business
with a business purchased from Hercules, Inc. to form CP Kelco. The company has
asserted counterclaims against the plaintiff for the return of certain payments
and specific performance of plaintiff's contractual obligation to provide
severance benefits to certain employees of the company who were transferred to
CP Kelco. The company has also asserted indemnification claims against Lehman
and Hercules in a third-party complaint.
Discovery has been completed in the lawsuit. A September 2002 Report and
Recommendation (September Report) issued by the magistrate judge in the case
granted Lehman's and Hercules' motion for judgment on the pleadings. The company
has filed objections to the September Report and those objections have not been
ruled upon. An October 2002 Report and Recommendation (October Report) granted
in part and denied in part the company's motion for summary judgment. The
company has filed objections to that portion of the October Report that denied
its motion. Those objections have not been ruled upon. There is no trial date in
the matter, as the judge originally handling the action resigned from the bench
and has not yet been replaced.
The company, Searle and Pfizer are defendants in a purported class action
complaint filed in Federal Court in New Jersey seeking damages based on the
claim that the defendants misrepresented and over-promoted CELEBREX in violation
of state law and misled and defrauded the U.S. Food and Drug Administration
during the CELEBREX approval process. The complaint seeks economic damages and
claims no specific medical injury. The company, Searle and Pfizer were also sued
in State Court in New Jersey by a purported class alleging the same set of facts
and seeking the same relief as the federal case.
The company, Pfizer and Merck & Co., Inc. are defendants in a purported class
action complaint filed in Federal Court in New York alleging medical concerns
related to Vioxx and CELEBREX and seeking reimbursement of the purchase price,
for the Vioxx and CELEBREX used by the plaintiffs, medical expenses and
attorneys' fees. The complaint also seeks revised labeling for the products,
emergency notice to the class and a medical monitoring program funded by
defendants.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended
(the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia
for liabilities related to the agricultural business. In addition, in the
proceedings where the company is the
32
defendant, Monsanto will indemnify the company for costs, expenses and any
judgments or settlements; and in the proceedings where the company is the
plaintiff, Monsanto will pay the fees and costs of, and receive any benefits
from, the litigation. Therefore, Pharmacia may remain the named party in certain
legal proceedings, but Monsanto will manage the litigation including
indemnifying Pharmacia for costs, expenses and any judgments or settlements.
In connection with the spin-off of Solutia Inc. (Solutia) on September 1, 1997,
Solutia assumed from Pharmacia liabilities related to the former Monsanto
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings but Solutia manages the litigation and pays all costs,
expenses and any judgments or settlements.
As a result, Solutia assumed responsibility for litigation currently pending in
state and federal court in Alabama brought by several thousand plaintiffs,
alleging property damage, anxiety and emotional distress and personal injury
arising from exposure to polychlorinated biphenyls (PCBs), which were discharged
from an Anniston, Alabama plant site that was owned by former Monsanto and that
was transferred to Solutia as part of the spin-off. This litigation includes,
but is not limited to, the Abernathy litigation referred to below. Pursuant to
the terms of the Distribution Agreement, Solutia is required to indemnify
Pharmacia for liabilities that Pharmacia incurs in connection with this
litigation.
Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy,
et al. v. Monsanto Company, et al., currently pending in state court in Alabama.
The jury has found Solutia and Pharmacia (former Monsanto) liable with respect
to certain claims in this litigation, and proceedings have commenced to
determine damages. Solutia has requested that Pharmacia commit to posting any
appeal bond that may be required to stay execution of any judgment in this
litigation pending an appeal. Pursuant to a Protocol agreement dated as of July
1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not
post a bond sufficient to stay the execution of any judgment in the litigation
pending an appeal, Pharmacia will post such a bond if it is able to do so on
commercially reasonable terms. Solutia shall pay the expenses incurred in
connection with obtaining any such bond. The agreement also specifies which
party or parties would control any decisions regarding settlement of the
Abernathy litigation, depending upon whether or not collateral must be provided
to secure the bond and, if so, which party provides it. Under the agreement, the
continued defense of the Abernathy litigation and the prosecution of any appeal
will continue to be managed by Solutia, at Solutia's expense.
Pursuant to the terms of the amended Separation Agreement, Monsanto has assumed,
and agreed to indemnify Pharmacia for, any liabilities primarily related to
former Monsanto's former chemical businesses, including any liabilities that
Solutia has assumed from Pharmacia in connection with the spin-off of Solutia,
to the extent Solutia fails to pay, perform or discharge these liabilities. This
indemnification obligation applies to litigation, environmental and other
liabilities assumed by Solutia.
With respect to the matters described above, the company cannot estimate a range
of potential losses or what, if any, additional exposure exists at this time.
The company believes it has valid defenses to these matters and intends to
vigorously contest them.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, management's belief is that any potential remaining liability from
such proceedings that might exceed amounts already accrued will not have a
material adverse effect on the company's consolidated financial position,
profitability or liquidity.
Extraordinary Items
33
During the first quarter of 2002, the company sold its 45 percent minority
interest in Amersham Biosciences to Amersham plc for $1.0 billion. The
investment basis as of March 2002 was $227 million. The sale resulted in a gain
of $649 million (net of taxes of $124 million). The gain has been classified as
an extraordinary item in the accompanying consolidated statements of earnings in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations" because the sale of this investment took place within the two-year
period following the merger of Pharmacia & Upjohn and former Monsanto which was
accounted for under the pooling of interests accounting method. The sale of this
investment was not contemplated at the time of the pooling.
On June 28, 2001, the company retired certain debt obligations relating to one
of the employee stock ownership plans. The principal amount of the debt was $65
million. Certain costs related to the transaction, including a premium to retire
the debt and other direct costs, were $4 million (net of taxes of $2 million)
and have been classified as an extraordinary item on the company's consolidated
statements of earnings.
Through a private transaction occurring on June 29, 2001, the company retired
debt related to adjustable conversion-rate equity securities in the principal
amount of $700 million. Premium on the debt and other direct costs of $8 million
(net of taxes of $5 million) were accrued as an extraordinary item. The physical
settlement, including the exchange of cash, occurred in July 2001.
Discontinued Operations
Monsanto
On November 28, 2001, the Pharmacia board of directors approved a formal plan to
distribute to Pharmacia shareholders the shares of Monsanto common stock held by
the company, in a tax-free spin-off transaction.
On July 18, 2002, the Pharmacia board of directors approved the completion of
the spin-off of Monsanto through the distribution of shares of Monsanto common
stock to Pharmacia shareholders of record on July 29, 2002. In order to effect
the distribution, the Pharmacia board of directors declared a special dividend
of the 220 million shares of Monsanto common stock held by the company which, as
of July 29, 2002, represented approximately 84% of Monsanto's outstanding common
stock. Each Pharmacia shareholder received .170593 shares of Monsanto common
stock for each share of Pharmacia stock owned on the record date. The shares
were distributed at the close of business on August 13, 2002.
In connection with the spin-off of Monsanto, Pharmacia recorded a loss from
discontinued operations of $928 million which was comprised of $53 million of
net income from discontinued operations offset by an impairment loss of $981
million calculated by comparing the net assets of Monsanto recorded on
Pharmacia's books to Monsanto's fair value based upon the closing stock price
on August 13, 2002 of $15.81.
On September 1, 2000, the company entered into a Transition Services Agreement
with Monsanto. Under the agreement, Pharmacia primarily provides information
technology support for Monsanto while Monsanto provides certain administrative
support services for Pharmacia. Pharmacia and Monsanto also lease research and
office space from each other. Since the initiation of the agreement, each party
has charged the other entity rent based on a percentage of occupancy multiplied
by the cost to operate the facilities. These services are continuing beyond
August 13, 2002.
Other
34
In the third quarter and year-to-date period of 2002, the company recorded an
additional $4 loss from discontinued operations in connection with the sale of
the artificial sweetener ingredient business that occurred in 2000. The majority
of the $8 million loss from other discontinued operations recorded in the
year-to-date 2001 period consisted of legal and related costs also in connection
with the sale of the artificial sweetener ingredient business. There were no net
sales included in the company's consolidated financial statements during the
quarters ended September 30, 2002 and 2001 related to other discontinued
businesses.
Agreements with Sanofi~Synthelabo
Pursuant to previously existing agreements, the company had rights from Sanofi
to manufacture, sell and market two products in North America: Ambien and
Kerlone. Ambien is a prescription medicine used in the treatment of sleep
disorders including insomnia. Kerlone, also a prescription medicine, is used in
the treatment of hypertension and cardiovascular disease.
On December 31, 2001, the company relinquished control over the products to
Sanofi and ceased recording sales and expenses of Ambien and Kerlone. In the
first quarter of 2002, the company received a payment for its share of Ambien
and Kerlone earnings of $73 million that was recorded in all other, net on the
consolidated statements of earnings.
On April 16, 2002, Sanofi exercised its right to acquire all rights to the
products in North America in accordance with the agreements. In connection with
such acquisition, the company received a pretax payment of $671 million ($661
million net pretax gain) for its interest. For additional information on the
effects of this transaction, see Pharmacia Corporation Form 8-K filed with the
Securities and Exchange Commission on April 30, 2002.
New Accounting Standards
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The new rules amend existing
accounting for these costs by requiring that a liability be recorded at fair
value when incurred. The liability would be reviewed regularly for changes in
fair value with adjustments recorded in the consolidated financial statements.
Previous rules permitted certain types of costs to be recognized when future
settlement was probable. SFAS No. 146 also provides specific guidance for lease
termination costs and one-time employee termination benefits when incurred as
part of an exit or disposal activity. The company is currently evaluating the
effects the new rules may have on its consolidated financial statements and will
adopt SFAS No. 146 on January 1, 2003.
On May 1, 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections". Under the current rules,
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," requires
that all gains and losses from the extinguishment of debt be classified as
extraordinary on the company's consolidated statements of earnings, net of
applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The company is evaluating the effects the new rules
may have on its consolidated financial statements and will adopt SFAS No. 145 on
January 1, 2003.
On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," became effective. It provides guidance on the accounting for
the impairment or disposal of long-lived assets. For long-lived assets to be
held and used, the new rules are similar to previous guidance which required the
recognition of an impairment when the undiscounted cash flows would not recover
its carrying amount. The impairment to be recognized will continue to be
35
measured as the difference between the carrying amount and fair value of the
asset. The computation of fair value now removes goodwill from consideration and
incorporates a probability-weighted cash flow estimation approach as an
alternative to the traditional present value method. The previous guidance
provided in SFAS No. 121 is to be applied to assets that are to be disposed of
by sale. Additionally, assets qualifying for discontinued operations treatment
have been expanded beyond the former major line of business or class of customer
approach. Long-lived assets to be disposed of by other than sale are now
considered assets to be held and used until the disposal date. There was no
material impact on the company's consolidated financial statements due to the
adoption of these rules.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The company is currently evaluating the effects the
new rules may have on its consolidated financial statements and will adopt SFAS
No. 143 on January 1, 2003.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 141
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and set out specific criteria for
the initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
unamortized negative goodwill be written off immediately as a change in
accounting principle instead of being deferred and amortized, and that certain
intangible assets be reclassified into or out of goodwill. The provisions of
SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived
intangible assets and require that they be tested annually for impairment or on
an interim basis if indications of a possible impairment arise. If the book
value of goodwill or an indefinite-lived intangible is greater than its fair
value, an impairment loss is recognized for the difference. In addition, SFAS
No. 142 requires that reporting units be identified for purposes of assessing
potential future impairments of goodwill, and removes the 40-year limitation on
the amortization period of intangible assets that have finite lives.
The company adopted the provisions of SFAS No. 141 on January 1, 2002
(requirement to use the purchase method of accounting for all business
combinations initiated after June 30, 2001 became effective with the issuance of
the standard). The provisions of SFAS No. 142 were adopted effective as of
January 1, 2002 with no impairment losses recognized related to its continuing
operations.
Monsanto also adopted SFAS No. 142 as of January 1, 2002, and an impairment
analysis resulted in the recognition of a $1.8 billion net-of-tax loss related
to the corn and wheat reporting units. As required by the accounting
pronouncement, the loss was recorded as a cumulative effect of accounting
change, net of tax, effective as of January 1, 2002. Earnings results for
Pharmacia have been restated for the first quarter of 2002 to reflect its $1.5
billion portion of the loss based on Pharmacia's then approximately 85%
ownership of Monsanto. The impairment charge had no effect on Pharmacia's or
Monsanto's liquidity or cash flow.
The Emerging Issues Task Force Issue No. 01-09 "Accounting for Consideration
Given by a Vendor to a Customer" codified several individual issues regarding
the recognition and classification of payments between a vendor and a customer.
Of the codified issues, only two topics were applicable to the company: sales
incentives and payments to resellers. The company adopted the guidance for sales
incentives (coupons) prospectively as allowed under the rules, on January 1,
2001 and for payments to resellers on January 1, 2002. In both cases, the impact
of adoption to the company was insignificant and accordingly prior period
financial statements were not reclassified.
Intention to Merge with Pfizer
36
On July 13, 2002, the company entered into a definitive merger agreement with
Pfizer. In accordance with the agreement, each Pharmacia shareholder of record
on the closing date will receive 1.4 shares of Pfizer stock for each share of
Pharmacia stock owned. It is estimated that the shares of Pfizer common stock to
be issued to Pharmacia shareholders in the merger will represent approximately
23 percent of the outstanding Pfizer common stock after the merger on a fully
diluted basis. The closing of the transaction is contingent upon an affirmative
vote by Pharmacia and Pfizer shareholders and approval by certain regulatory
authorities including the U.S. Federal Trade Commission. Until the closing date,
which is targeted to close by year-end (although the final regulatory review
process may result in a delay until early in the first quarter of 2003),
Pharmacia will continue to operate independently of Pfizer.
On October 21, 2002, the SEC declared effective Pfizer's Registration Statement
on Form S-4 in connection with the proposed acquisition of Pharmacia
Corporation. This Regisration Statement includes a joint proxy
statement/prospectus that has been sent to the shareholders of both companies.
We have scheduled a meeting for shareholders to take place on December 9, 2002
to vote on the proposed acquisition. Pfizer's shareholder meeting is scheduled
to occur on December 6, 2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There are no material changes related to market risk from the disclosures in
Pharmacia Corporation's Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2001.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of Pharmacia's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the company's disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in the company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
References to Pharmacia throughout Part II, Item I will include "former
Monsanto" when referring to the pre-merger activities of the former Monsanto
Company. References to "Monsanto" or "new Monsanto" refers to Monsanto Company,
Pharmacia's former agricultural subsidiary which was spun-off by Pharmacia to
its shareholders on August 13, 2002.
Pursuant to the Separation Agreement between Pharmacia and Monsanto, as amended
(the "Separation Agreement"), Monsanto assumed and agreed to indemnify Pharmacia
for liabilities related to the agricultural business. In addition, in the
proceedings where the company is the defendant, Monsanto will indemnify the
company for costs, expenses and any judgments or settlements; and in the
proceedings where the company is the plaintiff, Monsanto will pay the fees and
costs of, and receive any benefits from, the litigation. Therefore, Pharmacia
may remain the named party in certain legal proceedings, but Monsanto will
manage the litigation including indemnifying Pharmacia for costs, expenses and
any judgments or settlements.
Monsanto has notified the U.S. Securities and Exchange Commission's staff of
certain books and records and compliance irregularities involving Monsanto's
Indonesian affiliate companies and certain of their foreign national employees.
In connection with the spin-off of Solutia Inc. ("Solutia") on September 1,
1997, Solutia assumed from Pharmacia liabilities related to the former Monsanto
chemical businesses pursuant to the Distribution Agreement, as amended (the
"Distribution Agreement"). As a result, Pharmacia remains the named defendant in
certain legal proceedings but Solutia manages the litigation and pays all costs,
expenses and any judgments or settlements.
Solutia assumed responsibility for litigation currently pending in state and
federal court in Alabama brought by several thousand plaintiffs, alleging
property damage, anxiety and emotional distress and personal injury arising from
exposure to polychlorinated biphenyls (PCBs), which were discharged from an
Anniston, Alabama plant site that was owned by former Monsanto and that was
transferred to Solutia as part of the spin-off. This litigation includes, but is
not limited to, the Abernathy litigation referred to below. Pursuant to the
terms of the Distribution Agreement, Solutia is required to indemnify Pharmacia
for liabilities that Pharmacia incurs in connection with this litigation.
Solutia is defending itself and Pharmacia in connection with Sabrina Abernathy,
et al. v. Monsanto Company, et al., currently pending in state court in Alabama.
The jury has found Solutia and Pharmacia (former Monsanto) liable with respect
to certain claims in this litigation, and proceedings have commenced to
determine damages. Solutia has requested that Pharmacia commit to posting any
appeal bond that may be required to stay execution of any judgment in this
litigation pending an appeal. Pursuant to a Protocol agreement dated as of July
1, 2002, Pharmacia, Monsanto and Solutia have agreed that, if Solutia does not
post a bond sufficient to stay the execution of any judgment in the litigation
pending an appeal, Pharmacia will post such a bond if it is able to do so on
commercially reasonable terms. Solutia shall pay the expenses incurred in
connection with obtaining any such bond. The agreement also specifies which
party or parties would control any decisions regarding settlement of the
Abernathy litigation, depending upon whether or not collateral must be provided
to secure the bond and, if so, which party provides it. Under the agreement, the
continued defense of the Abernathy litigation and the prosecution of any appeal
will continue to be managed by Solutia, at Solutia's expense.
Pursuant to the terms of the Separation Agreement, Monsanto has assumed, and
agreed to indemnify Pharmacia for, any liabilities primarily related to former
Monsanto's former chemical businesses, including any liabilities that Solutia
has assumed from Pharmacia in connection with the spin-off of Solutia, to the
extent Solutia fails to pay, perform or discharge these liabilities. This
38
indemnification obligation applies to litigation, environmental and other
liabilities assumed by Solutia.
On April 19, 2002, NeoPharm filed a Demand for Arbitration with the company
pursuant to the terms of the February 19, 1999 License Agreement. A contractual
dispute has arisen between NeoPharm and Pharmacia involving our partnership to
develop LEP (Liposomal Encapsulated Paclitaxel) and LED (Liposomal Encapsulated
Doxorubicin). NeoPharm claims that Pharmacia failed to use "reasonable efforts"
to develop, market and sell LEP/LED. NeoPharm is seeking specific performance
and monetary damages. In May 2002, the company filed its response and
counter-claim.
The States of Nevada, Montana and Minnesota have sued the company, in their
respective state courts, alleging that the company manipulated the "average
wholesale price" ("AWP") of Medicare Part B "Covered Drugs," causing the states'
respective Medicaid agencies, and their respective Medicare and Medicaid
beneficiaries, among others, to pay artificially inflated prices for "Covered
Drugs." In addition, the Nevada and Montana suits allege that the company did
not report to the states its "best price" under the Medicaid Program. Each of
the suits alleges various causes of action, including, but not limited to,
deceptive trade practices and Medicaid fraud, purportedly sounding in state law.
The suits seek monetary and other relief, including civil penalties and treble
damages. The company believes that the claims stated in these lawsuits are not
actionable and are without merit. The company will vigorously contest them.
In addition, the company has been named in the following self-styled class
action lawsuits, brought by private individuals, public interest groups and
employee welfare benefit plans in which similar allegations of AWP manipulation
have been made: Board of Trustees of Carpenters and Millwrights of Houston and
Vicinity Welfare Trust Fund v. Abbott Laboratories, Inc., et, al., 5:01 CV 339
(E.D.Tex.); Citizens for Consumer Justice, et. seq. v. Abbott Laboratories, et.
al., C.A. No. 01-12257 (D. Mass.); Congress of California Seniors, et. al. v.
Abbott Laboratories, et. al., BC282102 (Ca. Sup. Ct., Los Angeles Co.); Geller
v. Abbott Laboratories, et. al., CV 02-00553 (C.D. Cal.); Rice v. Abbott
Laboratories, et. al., C 02-3925 (N.D. Cal.); Robinson and Hudson v. Abbott
Laboratories, et. al, CV02-0493-S (W.D.La.); Swanston v. TAP Pharmaceutical
Products Inc., et. al., CV2002-004988 (Az. Sup. Ct., Maricopa Co.); Thompson v.
Abbott Laboratories, et. al., CGC-02-411813 (Ca. Sup. Ct., San Francisco Co.);
Teamsters Health & Welfare Fund of Philadelphia and Vicinity v. Abbott
Laboratories, Inc., et. al., 02 CV 2002 (E.D.Pa.); Turner v. Abbott
Laboratories, et. al., 412357 (Ca. Sup. Ct., San Francisco Co.); United Food and
Commercial Workers Unions, et. seq. v. Pharmacia Corporation, et. al., 3:01 CV
5427 (D.N.J.); and Virag v. Allergan, Inc., et. al, BC282690 (Ca. Sup. Ct., Los
Angeles Co.).
Typical claims asserted in these suits include fraud, unfair competition and
unfair trade practices. Some of the suits assert claims under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"). Some suits assert antitrust
claims. The suits seek various measures of injunctive, monetary and other
relief, including civil penalties and treble damages. The company believes that
the claims stated in these lawsuits are not actionable and are without merit.
The company will vigorously contest them. All of the private plaintiff lawsuits,
with the exception of the Swanston suit in Arizona state court, have been
consolidated for pretrial purposes and transferred to the federal district court
for Massachusetts, in the multidistrict litigation captioned, In re
Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456, Master
File No. 01-CV-12257-PBS (D. Mass.). On November 4, 2002, the company joined the
other defendants in the MDL 1456 in moving to dismiss all claims asserted
against defendants in the master consolidated complaint. Briefing on that, and
related, motions in the case is expected to be completed in 2002, and oral
argument of the motions is scheduled for January 2003. During this same period,
defendants will be providing limited discovery to the plaintiffs.
39
The Montana and Nevada suits have been removed to those states' respective
federal courts and transferred to MDL 1456. The company also has removed the
Minnesota suit to federal court and sought transfer of the suit to MDL 1456. The
magistrate judge in the Minnesota suit issued a September 2002 Report and
Recommendation (Report) granting plaintiff's motion to remand the suit to state
court. The company has filed objections to the Report and those objections have
not yet been ruled upon by the district court judge.
On July 15, 2002, a suit was filed in the Chancery Court in Delaware on behalf
of a purported class of Pharmacia's shareholders against the company, Pharmacia
directors and Pfizer Inc., alleging that the price to be paid for Pharmacia's
shares is inadequate as a result of the Pharmacia's directors' breach of their
fiduciary duties to the shareholders of Pharmacia and that Pfizer is alleged to
have aided and abetted the alleged breach. The complaint, which Pfizer and
Pharmacia believe to be without merit, seeks damages and to enjoin the merger.
On the same date, a second suit was filed in the Chancery Court in Delaware
against the company and Pharmacia directors, alleging that the price to be paid
for Pharmacia's shares is inadequate as a result of the Pharmacia directors'
breach of their fiduciary duties to the shareholders of Pharmacia. The
complaint, which Pharmacia believes to be without merit, seeks damages and to
enjoin the merger.
Pharmacia will be required to submit a corrective measures study report to the
EPA with regard to the company's discontinued industrial chemical facility in
North Haven, Connecticut. While the company has existing reserves designated for
remediation, in the light of changing circumstances, it is reasonably possible
that a material increase in accrued liabilities will be required. However, it is
not possible to determine what, if any, additional exposure exists at this time.
Please see the discussion in Item 1, Environmental Matters, above.
The company is involved in other legal proceedings arising in the ordinary
course of its business. While the results of litigation cannot be predicted with
certainty, the company does not believe that the resolution of these
proceedings, either individually or taken as a whole, will have a material
adverse effect on its financial position, profitability or liquidity. The
company believes it has valid defenses to these matters and intends to
vigorously contest them.
Item 5. Other Information
Forward-Looking Statements
Certain statements contained in this Report, as well as in other documents
incorporating by reference all or part of this Report, are "forward-looking
statements" provided under the "safe harbor" protection of the Private
Securities Litigation Reform Act of 1995. These statements are made to enable a
better understanding of the company's business, but because these
forward-looking statements are subject to many risks, uncertainties, future
developments and changes over time, actual results may differ materially from
those expressed or implied by such forward-looking statements. Examples of
forward-looking statements are statements about anticipated financial or
operating results, financial projections, business prospects, future product
performance, future research and development results, anticipated regulatory
filings and approvals and other matters that are not historical facts. Such
statements often include words such as: believes, expects, anticipates, intends,
plans, estimates or similar expressions.
40
These forward-looking statements are based on the information that was currently
available to the company, and the expectations and assumptions that were deemed
reasonable by the company, at the time when the statements were made. The
company does not undertake any obligation to update any forward-looking
statements in this Report or in any other communications of the company, whether
as a result of new information, future events, changed assumptions or otherwise,
and all such forward-looking statements should be read as of the time when the
statements were made, and with the recognition that these forward-looking
statements may not be complete or accurate at a later date.
Many factors may cause or contribute to actual results or events being
materially different from those expressed or implied by such forward-looking
statements. Although it is not possible to predict or identify all such factors,
they may include the following factors discussed below:
Competition for our products: Competitive effects from current and new products,
including generic products, sold by other companies; competition and loss of
patent protection could lead to significant loss of sales.
Pharmaceutical pricing: Price constraints and other restrictions on the
marketing of products imposed by governmental agencies or by managed care
groups, institutions and other purchasing agencies could result in lower prices
for the company's products.
Product discovery and approval: The company's ability to discover and license
new compounds, develop product candidates, obtain regulatory approvals and
market new products is risky and uncertain.
Product recalls or withdrawals: Efficacy or safety concerns raised in the
scientific literature, increase in trends of adverse events in the marketplace,
and/or manufacturing quality issues with respect to our products, could lead to
product recalls, withdrawals or declining sales.
Manufacturing facilities: Failure to comply with Current Good Manufacturing
Practices and other applicable regulations and quality assurance guidelines
could lead to temporary manufacturing shutdowns, product shortages and delays in
product manufacturing.
Restrictions on marketing: Restrictions on promotion in patient populations as a
result of FDA warning letters on promotional materials could effect sales of the
company's products and could lead to holds on current and future New Drug
Applications and supplements filed with the FDA.
Legal claims: The company's ability to secure and defend its intellectual
property rights; the company's involvement in numerous lawsuits including
product liability claims, antitrust litigation, environmental concerns,
commercial disputes, any of which could affect the company's profits or ability
to sell and market its products. In addition, in connection with the separation
of the agricultural business from the pharmaceutical business on September 1,
2000, Monsanto assumed, and agreed to indemnify Pharmacia Corporation for, any
liabilities primarily related to Pharmacia's former agricultural or chemical
businesses, including any liabilities that Solutia had assumed from Pharmacia in
connection with the spin-off of Solutia on September 1, 1997, to the extent that
Solutia fails to pay, perform or discharge those liabilities. This includes
among other things, litigation and environmental liabilities that were assumed
by Solutia.
Employees: The company's ability to attract and retain management and other key
employees.
External pressures: Social, legal, political and governmental developments,
especially those relating to health care reform, pharmaceutical pricing and
reimbursement, patient privacy, and tax laws.
41
Economic conditions: Changes in foreign currency exchange rates or in general
economic or business conditions including inflation and interest rates.
Business combinations: Acquisitions, divestitures, mergers, restructurings or
strategic initiatives that change the company's structure, including the
proposed merger with Pfizer which is subject to regulatory and shareholder
approval; business combinations among the company's competitors and major
customers could affect our competitive position.
Accounting policies and estimates: Changes to accounting standards or generally
accepted accounting principles, which may require adjustments to financial
statements and may affect future results.
Such other factors that may be described elsewhere in this Report or in other
company filings with the U.S. Securities and Exchange Commission.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits - See the Exhibit Index
(b) Reports on Form 8-K during the quarter ended on September 30, 2002 were
filed on August 2, 2002 pursuant to Item 5 (Other Events); August 13, 2002
pursuant to Item 9 (Regulation FD Disclosure); August 16, 2002 pursuant to
Item 2 (Disposition of Assets); and filed subsequent to the effective date
of this report on October 22, 2002 pursuant to Item 5 (Other Events).
42
SIGNATURE:
Pursuant to the requirements 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.
PHARMACIA CORPORATION
(Registrant)
DATE: November 14, 2002 /s/ R. G. Thompson
-----------------
R. G. Thompson
Senior Vice President
and Corporate Controller
43
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fred Hassan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmacia
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Fred Hassan
---------------
44
Fred Hassan
Chairman & CEO, Pharmacia Corporation
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.
Subscribed and sworn to before me this 8th day of November 2002.
/s/ Cecilia Rueda-Stephens
-----------------------------
Notary Public of New Jersey
My Commission Expires: February 23, 2004
45
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher J. Coughlin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmacia
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
46
/s/ Christopher J. Coughlin
---------------------------
Christopher J. Coughlin
Executive Vice President & CFO, Pharmacia Corporation
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.
Subscribed and sworn to before me this 7th day of November 2002.
/s/ Deborah Rein
----------------
Notary Public of New Jersey
My Commission Expires: January 13, 2004
47
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K.
Exhibit
Number Description
------ ---------------
4. Omitted - Inapplicable
10(1) Amended Employment Agreement with Tim G. Rothwell, dated July 12,
2002.
10(2) Amended Employment Agreement with Dr. Philip Needleman, dated July
12, 2002.
10(3) Amended Employment Agreement with Carrie S. Cox, dated July 18,
2002.
10(4) Amended Employment Agreement with Dr. Goran Ando, dated July 12,
2002.
10(5) Amended and Restated Founders Performance Contingent Shares
Program, effective September 17, 2002.
10(6) Amended and Restated Long-Term Performance Share Unit Incentive
Plan, effective July 9, 2002.
10(7) Amended and Restated Pharmacia Corporation Operations Committee
Incentive Plan, effective July 9, 2002.
10(8) Amended and Restated Pharmacia Corporation Cash Long-Term Incentive
Plan, effective July 9, 2002.
11. Omitted - Inapplicable; see Note G of Notes to Financial Statements
on page 14.
15. Omitted - Inapplicable
18. Omitted - Inapplicable
19. Omitted - Inapplicable
22. Omitted - Inapplicable
23. Omitted - Inapplicable
24. Omitted - Inapplicable
48