Mylan Inc. 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-9114
MYLAN INC.
(Exact name of registrant as
specified in its charter)
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Pennsylvania
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25-1211621
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(State of
incorporation)
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(I.R.S. Employer
Identification No.)
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1500 Corporate Drive
Canonsburg, Pennsylvania
(Address of principal
executive offices)
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15317
(Zip Code)
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(724) 514-1800
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class of
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Outstanding at
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Common Stock
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May 8, 2008
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$0.50 par value
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304,449,174
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MYLAN
INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarterly Period Ended
March 31, 2008
INDEX
2
MYLAN
INC. AND SUBSIDIARIES
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Three Months
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Ended March 31,
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2008
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2007
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(Unaudited; in thousands, except per share amounts)
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Revenues:
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Net revenues
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$
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1,062,413
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$
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483,700
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Other revenues
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12,048
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3,562
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Total revenues
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1,074,461
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487,262
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Cost of sales
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724,240
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252,415
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Gross profit
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350,221
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234,847
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Operating expenses:
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Research and development
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83,844
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36,848
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Acquired in-process research and development
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147,000
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Impairment loss on goodwill
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385,000
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Selling, general and administrative
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252,913
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62,754
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Litigation settlements, net
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(3,962
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)
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Total operating expenses
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721,757
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242,640
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Loss from operations
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(371,536
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)
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(7,793
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Interest expense
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90,747
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20,984
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Other income, net
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6,961
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10,449
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Loss before income taxes and minority interest
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(455,322
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)
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(18,328
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Income tax (benefit) provision
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(44,105
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)
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52,750
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Loss before minority interest
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(411,217
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(71,078
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Minority interest
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(2,042
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211
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Net loss before preferred dividends
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(409,175
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(71,289
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Preferred dividends
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34,718
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Net loss available to common shareholders
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$
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(443,893
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$
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(71,289
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)
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Loss per common share:
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Basic
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$
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(1.46
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)
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$
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(0.31
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Diluted
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$
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(1.46
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$
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(0.31
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Weighted average common shares outstanding:
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Basic
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304,181
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227,158
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Diluted
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304,181
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227,158
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Cash dividend declared per common share
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$
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$
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0.06
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See Notes to Condensed Consolidated Financial Statements
3
MYLAN
INC. AND SUBSIDIARIES
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March 31,
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December 31,
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2008
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2007
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(Unaudited; in thousands, except share and per share
amounts)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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692,551
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$
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484,202
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Restricted cash
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40,000
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Available for sale securities
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54,790
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91,361
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Accounts receivable, net
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1,123,408
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1,132,121
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Inventories
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1,133,572
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1,063,840
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Deferred income tax benefit
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333,713
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192,113
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Prepaid expenses and other current assets
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108,419
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95,664
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Total current assets
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3,486,453
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3,059,301
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Property, plant and equipment, net
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1,123,363
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1,102,932
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Intangible assets, net
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3,022,623
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2,978,706
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Goodwill
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3,612,751
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3,855,971
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Deferred income tax benefit
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16,872
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18,703
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Other assets
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337,122
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337,563
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Total assets
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$
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11,599,184
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$
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11,353,176
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LIABILITIES AND SHAREHOLDERS EQUITY
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Liabilities
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Current liabilities:
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Trade accounts payable
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$
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667,996
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$
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643,873
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Short-term borrowings
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158,842
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144,355
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Income taxes payable
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280,689
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133,715
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Current portion of long-term debt and other long-term obligations
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398,811
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410,934
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Other current liabilities
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714,195
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669,474
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Total current liabilities
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2,220,533
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2,002,351
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Deferred revenue
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447,821
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122,870
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Long-term debt
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4,766,486
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4,706,716
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Other long-term obligations
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207,490
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206,672
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Deferred income tax liability
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768,596
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876,816
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Total liabilities
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8,410,926
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7,915,425
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Minority interest
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32,459
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34,325
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Shareholders equity
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Preferred stock par value $0.50 per share
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Shares authorized: 5,000,000 as of March 31, 2008 and
December 31, 2007
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Shares issued: 2,139,000 as of March 31, 2008 and
December 31, 2007
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1,070
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1,070
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Common stock par value $0.50 per share
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Shares authorized: 600,000,000 as of March 31, 2008 and
December 31, 2007
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Shares issued: 395,287,669 and 395,260,355 as of March 31,
2008 and December 31, 2007, respectively
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197,644
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197,630
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Additional paid-in capital
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3,791,547
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3,785,729
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Retained earnings
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470,710
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922,857
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Accumulated other comprehensive earnings
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280,455
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83,044
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4,741,426
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4,990,330
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Less treasury stock at cost
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Shares: 90,812,400 and 90,885,188 as of March 31, 2008 and
December 31, 2007, respectively
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1,585,627
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1,586,904
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Total shareholders equity
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3,155,799
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3,403,426
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Total liabilities and shareholders equity
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$
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11,599,184
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$
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11,353,176
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See Notes to Condensed Consolidated Financial Statements
4
MYLAN
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
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Three Months
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Ended March 31,
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2008
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2007
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(Unaudited; in thousands)
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Cash flows from operating activities:
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Net loss before preferred dividends
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$
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(409,175
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)
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$
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(71,289
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)
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Adjustments to reconcile net loss to net cash provided from
operating activities:
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Depreciation and amortization
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110,510
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24,504
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Stock-based compensation expense
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6,802
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4,939
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In-process research and development
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147,000
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Minority interest
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(2,042
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)
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211
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Net income from equity method investees
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(1,442
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)
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(1,621
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)
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Change in estimated sales allowances
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(16,808
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)
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23,630
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Deferred income tax benefit
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(221,808
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)
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(47,570
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)
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Impairment loss on goodwill
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385,000
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Other non-cash items
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12,440
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1,883
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Litigation settlements, net
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37,360
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Changes in operating assets and liabilities:
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Accounts receivable
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60,499
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(27,522
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)
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Inventories
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(38,471
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)
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6,941
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Trade accounts payable
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(4,853
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)
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(5,502
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)
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Income taxes
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135,162
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40,969
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Deferred revenue
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360,411
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(2,629
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Other operating assets and liabilities, net
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(45,718
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)
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7,934
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Net cash provided by operating activities
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330,507
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139,238
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Cash flows from investing activities:
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Capital expenditures
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(36,222
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)
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(80,022
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)
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Acquisition of Matrix, net of cash acquired of $10,943
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(550,448
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)
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Increase in restricted cash
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(40,000
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)
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Purchase of available for sale securities
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(16,374
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)
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(107,121
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)
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Proceeds from sale of available for sale securities
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53,582
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112,164
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Other items, net
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(12,600
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)
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1,182
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Net cash used in investing activities
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(51,614
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)
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(624,245
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)
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Cash flows from financing activities:
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Cash dividends paid
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(33,219
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)
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(12,785
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)
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Payment of financing fees
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(13,547
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)
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Proceeds from issuance of common stock, net
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657,678
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Purchase of bond hedge
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(126,000
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)
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Proceeds from issuance of warrants
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45,360
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Change in short-term borrowings, net
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14,256
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|
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Proceeds from long-term debt
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|
7,761
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|
|
|
1,369,251
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Payment of long-term debt
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(57,491
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)
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|
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(502,000
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)
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Proceeds from exercise of stock options
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|
238
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|
|
|
13,399
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Change in outstanding checks in excess of cash disburements
accounts
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|
|
|
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18,008
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Other items, net
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|
|
13
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|
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1,160
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|
|
|
|
|
|
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Net cash (used in) provided by financing activities
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|
|
(68,442
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)
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|
|
1,450,524
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|
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Effect on cash of changes in exchange rates
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|
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(2,102
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)
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|
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(32
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)
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|
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|
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|
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Net increase in cash and cash equivalents
|
|
|
208,349
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|
|
|
965,485
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Cash and cash equivalents beginning of period
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|
|
484,202
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|
|
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286,880
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Cash and cash equivalents end of period
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$
|
692,551
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|
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$
|
1,252,365
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|
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|
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|
See Notes to Condensed Consolidated Financial Statements
5
MYLAN
INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements (interim
financial statements) of Mylan Inc. and subsidiaries
(Mylan or the Company) were prepared in
accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the
Securities and Exchange Commission for reporting on
Form 10-Q;
therefore, as permitted under these rules, certain footnotes and
other financial information included in audited financial
statements were condensed or omitted. The interim financial
statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the interim
results of operations, financial position and cash flows for the
periods presented.
These interim financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in
the Companys Transition Report on
Form 10-KT/A
for the nine months ended December 31, 2007. Effective
October 2, 2007, the Company amended its bylaws, to change
its fiscal year from beginning on April 1st and
ending on March 31st, to beginning on
January 1st and ending on December 31st.
The interim results of operations and interim cash flows for the
three months ended March 31, 2008 are not necessarily
indicative of the results to be expected for the full fiscal
year or any other future period.
|
|
2.
|
Revenue
Recognition and Accounts Receivable
|
Revenue is recognized for product sales when title and risk of
loss transfer to the Companys customers and when
provisions for estimates, including discounts, rebates, price
adjustments, returns, chargebacks and other promotional programs
are reasonably determinable. No revisions were made to the
methodology used in determining these provisions during the
three-month period ended March 31, 2008. Accounts
receivable are presented net of allowances relating to these
provisions. Such allowances were $401.7 million and
$423.2 million as of March 31, 2008 and
December 31, 2007, respectively. Other current liabilities
include $218.2 million and $213.5 million at
March 31, 2008, and December 31, 2007, for certain
rebates and other adjustments that are payable to indirect
customers.
In January 2006, the Company announced an agreement with Forest
Laboratories Holdings, Ltd. (Forest), a wholly-owned
subsidiary of Forest Laboratories, Inc., for the
commercialization, development and distribution of
Bystolictm
in the United States and Canada (the 2006
Agreement). Under the terms of that agreement, Mylan
received a $75.0 million up front payment and
$25.0 million upon approval of the product. Such amounts
were being deferred until the commercial launch of the product
and were to be amortized over the remaining term of the license
agreement. Mylan also had the potential to earn future
milestones and royalties on Bystolic sales and an option to
co-promote the product, while Forest assumed all future
development and selling and marketing expenses.
In February 2008, Mylan executed an agreement with Forest
whereby Mylan sold to Forest its rights to Bystolic (the
Amended Agreement). Under the terms of the Amended
Agreement, Mylan received a one-time cash payment of
$370.0 million, which was deferred along with the
$100.0 million received under the 2006 Agreement, and
retained its contractual royalties for three years, through
2010. Mylans obligations under the 2006 Agreement to
supply Bystolic to Forest were unchanged by the Amended
Agreement. Mylan believes that these supply obligations
represent significant continuing involvement as Mylan remains
contractually obligated to manufacture the product for Forest
while the product is being commercialized, which is estimated to
occur through the end of patent protection in 2020. As a result
of this continuing involvement, Mylan will amortize the
$470.0 million of deferred revenue ratably through 2020. As
such, $3.3 million is included in other revenues in the
Companys Condensed Consolidated Statement of Operations
for the three months ended March 31, 2008.
However, Mylan and Forest are in the process of transferring all
manufacturing responsibilities for the product to Forest and we
expect this to occur no later than December 2008. Once the
manufacturing is transferred, the Company does not believe there
to be any further significant continuing involvement and the
earnings process will
6
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
be deemed to be complete. Any remaining deferred revenue at that
time will be immediately recognized into other revenues in the
Companys consolidated statement of operations.
Future royalties are considered to be contingent consideration
and will be recognized in other revenues as earned upon sales of
the product by Forest. Such royalties will be recorded at the
net royalty rates specified in the Amended Agreement.
|
|
3.
|
Recent
Accounting Pronouncements
|
On January 1, 2008, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other assets and
liabilities at fair value on an
instrument-by-instrument
basis (the fair value option) with changes in fair value
reported in earnings. The Company already records marketable
securities at fair value in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities
(SFAS No. 115), and derivative
contracts and hedging activities at fair value in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended
(SFAS No. 133). The adoption of
SFAS No. 159 did not have a material impact on the
Companys Condensed Consolidated Financial Statements as
management did not elect the fair value option for any other
financial instrument or certain other assets and liabilities.
On January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), for financial assets
and liabilities and any other assets and liabilities carried at
fair value. This pronouncement defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. The Companys adoption of
SFAS No. 157 did not have a material effect on the
Companys Condensed Consolidated Financial Statements for
financial assets and liabilities and any other assets and
liabilities carried at fair value. On February 12, 2008,
the Financial Accounting Standards Board (FASB)
issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
No. FAS 157-2), which delays the effective date
of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on at least
an annual basis, until January 1, 2009 for calendar
year-end entities. The Company has adopted the deferral of
SFAS No. 157 with respect to the items listed in FSP
No. FAS 157-2.
See Note 10 Financial Instruments and Risk
Management for additional disclosure.
In March 2007, the Emerging Issues Task Force (EITF)
issued EITF
No. 06-10,
Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements (EITF
No. 06-10).
Under the provisions of EITF
No. 06-10,
an employer is required to recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement with the employee. The
provisions of EITF
No. 06-10
also require an employer to recognize and measure the asset in a
collateral assignment split-dollar life insurance arrangement
based on the nature and substance of the arrangement. The
Company adopted the provisions of EITF
No. 06-10
as of January 1, 2008. As a result of the adoption, the
Company recognized a liability of $8.3 million,
representing the present value of the future premium payments to
be made under the existing policies. In accordance with the
transition provisions of EITF
No. 06-10,
this amount was recorded as a direct decrease to retained
earnings.
In March 2007, the EITF issued EITF
No. 06-04,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsed Split-Dollar Life Insurance
Arrangements (EITF
No. 06-4),
which concludes that an employer should recognize a liability
for post-employment benefits promised an employee based on the
substantive arrangement between the employer and the employee.
The Company adopted the provisions of EITF
No. 06-04
as of January 1, 2008. The adoption of EITF
No. 06-04
did not have a material impact on the Companys Condensed
Consolidated Financial Statements.
On January 1, 2008, the Company adopted Statement 133
Implementation Issue No. E23, Hedging
General: Issues Involving the Application of the Shortcut Method
under Paragraph 58 (Issue No. E23).
Issue
7
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
No. E23 provides guidance on certain practice issues
related to the application of the shortcut method by amending
paragraph 68 of SFAS No. 133 with respect to the
conditions that must be met in order to apply the shortcut
method for assessing hedge effectiveness of interest rate swaps.
In addition to applying the provisions of Issue No. E23 on
hedging arrangements designated on or after January 1,
2008, an assessment was required to be made on January 1,
2008 to determine whether preexisting hedging arrangements met
the provisions of Issue No. E23 as of their original
inception. Management performed such an assessment and
determined that the adoption of Issue No. E23 did not have
a material impact on preexisting hedging arrangements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS No. 161).
SFAS No. 161 requires enhanced disclosures about an
entitys derivative and hedging activities, including
(i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items
are accounted for under SFAS No. 133, and
(iii) how derivative instruments and related hedged items
affect an entitys financial position, financial
performance, and cash flows. This standard is effective for
fiscal years beginning after November 15, 2008. As
SFAS No. 161 only requires enhanced disclosures,
management is currently assessing the impact on the disclosures
in the consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position No. APB
14-a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement). Under the new rules for convertible debt
instruments (including our Senior Convertible Notes) that may be
settled entirely or partially in cash upon conversion, an entity
should separately account for the liability and equity
components of the instrument in a manner that reflects the
issuers economic interest cost. The effect of the new
rules for the debentures is that the equity component would be
included in the
paid-in-capital
section of stockholders equity on our consolidated balance
sheet and the value of the equity component would be treated as
original issue discount for purposes of accounting for the debt
component of the Senior Convertible Notes. The FSP will be
effective for fiscal years beginning after December 15,
2008, and for interim periods within those fiscal years, with
retrospective application required. Higher interest expense
would result through the accretion of the discounted carrying
value of the Senior Convertible Notes to their face amount over
the term of the Senior Convertible Notes. Prior period interest
expense will also be higher than previously reported interest
expense due to retrospective application. Early adoption is not
permitted. The Company is currently evaluating the proposed new
rules and the impact on the consolidated financial statements.
|
|
4.
|
Acquisition
of Merck Generics
|
On October 2, 2007, Mylan completed its acquisition of
Merck KGaAs generic business (Merck Generics)
and paid a purchase price of approximately $7.0 billion. In
accordance with SFAS No. 141, Business Combinations
(SFAS No. 141), the Company used the
purchase method of accounting to account for this transaction.
Under the purchase method of accounting, the assets acquired and
liabilities assumed in the transaction were recorded at the date
of acquisition at the preliminary estimate of their respective
fair values. The purchase price plus acquisition costs exceeded
the preliminary estimate of fair values of acquired assets and
assumed liabilities.
The purchase price allocation, including the allocation of
goodwill, is preliminary and is based on the information that
was available as of the acquisition date. Management believes
that the information provides a reasonable basis for allocating
the purchase price but the Company is awaiting additional
information necessary to finalize the purchase price allocation.
The fair values reflected in the consolidated financial
statements may be adjusted and such adjustments could be
significant. The Company expects the purchase price allocation
to be finalized as soon as possible but no later than one year
from the acquisition date.
As disclosed in Note 15 Restructuring, the
Company included a $74.3 million restructuring reserve that
was recorded as of the date of the Merck Generics acquisition
associated with involuntary termination benefits for certain
Merck Generics employees and certain other costs to exit certain
activities of Merck Generics. At the date of consummation,
management began to assess and formulate a plan to exit certain
Merck Generics activities.
8
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
Management continues to strategically evaluate the Merck
Generics business in accordance with the provisions of
EITF No. 95-3,
Recognition of Liabilities in Connection with a Purchased
Business Combination. While management believes there may be
additional costs to exit certain Merck Generics activities that
could affect the purchase price allocation, it is not possible
to estimate such costs at this time with any degree of certainty.
In conjunction with the Merck Generics acquisition, the Company
assumed certain loss contingencies. As disclosed in
Note 16 Contingencies, Merck KGaA has
indemnified Mylan under the provisions of the Share Purchase
Agreement for certain of these contingencies. While it is not
feasible to predict the ultimate outcome of the remaining
assumed loss contingencies that could affect the purchase price
allocation, the Company believes that the ultimate outcome of
such other proceedings will not have a material adverse effect
on our financial position or purchase price allocation. However,
an adverse outcome in any such proceedings, or the inability or
denial of Merck KGaA to pay on an indemnified claim, could have
a material effect on the financial position or purchase price
allocation.
The operating results of Merck Generics have been included in
Mylans Condensed Consolidated Financial Statements for the
three months ended March 31, 2008. The following is a
summary of the unaudited pro forma results of operations for the
three months ended March 31, 2007 and assumes the
acquisition occurred on January 1, 2007. This summary of
the unaudited pro forma results of operations is not necessarily
indicative of what Mylans results of operations would have
been had Merck Generics been acquired at the beginning of the
period indicated, nor does it purport to represent results of
operations for any future period.
The unaudited pro forma financial information for the period
below includes the following material, non-recurring charges
directly attributable to the accounting for the acquisition:
amortization of the
step-up of
inventory of $37.6 million and an acquired in-process
research and development charge of $1.3 billion. In
addition, the pro forma financial information for the period
presented includes the effects of the preferred and common stock
offerings, which closed in November 2007, the proceeds of which
were used to repay certain temporary financing.
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2007
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Total revenues
|
|
$
|
1,080,832
|
|
|
|
|
|
|
Net loss before preferred dividends
|
|
|
(1,390,217
|
)
|
Preferred dividends
|
|
|
34,718
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(1,424,935
|
)
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
Basic
|
|
$
|
(5.08
|
)
|
|
|
|
|
|
Diluted
|
|
$
|
(5.08
|
)
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
Basic
|
|
|
280,658
|
|
|
|
|
|
|
Diluted
|
|
|
280,658
|
|
|
|
|
|
|
|
|
5.
|
Impairment
of Long-lived Assets Including Goodwill
|
On February 27, 2008 the Company announced that it was
reviewing strategic alternatives for its specialty business,
Dey, including the potential sale of the business. This decision
was based upon several factors, including a strategic review of
the business, including the expected performance of the
Perforomisttm
product, where growth is now expected to be slower and will
require a longer timeframe to reach peak sales than was
originally anticipated.
9
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
As a result of our ongoing review of strategic alternatives, we
have determined that it is more likely than not that the
business will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.
Accordingly, a recoverability test of Deys long-lived
assets was performed in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). We included
both cash flow projections and estimated proceeds from the
eventual disposition of the long-lived assets. The estimated
undiscounted future cash flows exceeded the book values of the
long-lived assets and, as a result, no impairment charge was
recorded.
Upon the closing of the Merck Generics transaction, Dey was
defined as the Specialty Segment under the provisions of
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information
(SFAS No. 131). Dey is also considered
a reporting unit under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). Upon closing of the
transaction, the Company allocated $711.2 million of
goodwill to Dey.
The Company tests goodwill for possible impairment on an annual
basis and at any other time events occur or circumstances
indicate that the carrying amount of goodwill may be impaired.
As we have determined that it is more likely than not that the
business will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life, the
Company was required to assess whether any portion of its
recorded goodwill balance was impaired.
The first step of the SFAS No. 142 impairment analysis
consists of a comparison of the fair value of the reporting unit
with its carrying amount, including the goodwill. We performed
extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following
describes the valuation methodologies used to derive the
estimated fair value of the reporting unit.
Income Approach: To determine fair value, we
discounted the expected future cash flows of the reporting unit.
We used a discount rate, which reflects the overall level of
inherent risk and the rate of return an outside investor would
expect to earn. To estimate cash flows beyond the final year of
our model, we used a terminal value approach. Under this
approach, we used estimated operating income before interest,
taxes, depreciation and amortization in the final year of our
model, adjusted to estimate a normalized cash flow, applied a
perpetuity growth assumption, and discounted by a perpetuity
discount factor to determine the terminal value. We incorporated
the present value of the resulting terminal value into our
estimate of fair value.
Market-Based Approach: To corroborate the
results of the income approach described above, we estimated the
fair value of our reporting unit using several market-based
approaches, including the guideline company method which focuses
on comparing our risk profile and growth prospects to a select
group of publicly traded companies with reasonably similar
guidelines.
Based on the SFAS No. 142 step one
analysis that was performed for Dey, the Company determined that
the carrying amount of the net assets of the reporting unit was
in excess of its estimated fair value. As such, the Company was
required to perform the step two analysis for Dey,
in order to determine the amount of any goodwill impairment. The
step two analysis consisted of comparing the implied
fair value of the goodwill with the carrying amount of the
goodwill, with an impairment charge resulting from any excess of
the carrying value of the goodwill over the implied fair value
of the goodwill based on a hypothetical allocation of the
estimated fair value to the net assets. Based on the second step
analysis, the Company concluded that $385.0 million of the
goodwill recorded at Dey was impaired. As a result, the Company
recorded a non-cash goodwill impairment charge of
$385.0 million during the three months ended March 31,
2008, which represents our best estimate as of March 31,
2008. The allocation discussed above is performed only for
purposes of assessing goodwill for impairment; accordingly, we
have not adjusted the net book value of the assets and
liabilities on the Companys Condensed Consolidated Balance
Sheet, other than goodwill, as a result of this process.
The determination of the fair value of the reporting unit
requires the Company to make significant estimates and
assumptions that affect the reporting units expected
future cash flows. These estimates and assumptions
10
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
primarily include, but are not limited to, the discount rate,
terminal growth rates, operating income before depreciation and
amortization, and capital expenditures forecasts. Due to the
inherent uncertainty involved in making these estimates, actual
results could differ from those estimates. In addition, changes
in underlying assumptions would have a significant impact on
either the fair value of the reporting unit or the goodwill
impairment charge.
The hypothetical allocation of the fair value of the reporting
unit to individual assets and liabilities within the reporting
unit also requires the Company to make significant estimates and
assumptions. The hypothetical allocation requires several
analyses to determine the estimate of the fair value of assets
and liabilities of the reporting unit.
Refer to Note 9 for a rollforward of the Companys
goodwill.
|
|
6.
|
Stock-Based
Incentive Plan
|
Mylans shareholders approved the 2003 Long-Term
Incentive Plan on July 25, 2003, and approved certain
amendments on July 28, 2006 and April 25, 2008 (as
amended, the 2003 Plan). Under the 2003 Plan,
37,500,000 shares of common stock are reserved for issuance
to key employees, consultants, independent contractors and
non-employee directors of Mylan through a variety of incentive
awards, including: stock options, stock appreciation rights,
restricted shares and units, performance awards, other
stock-based awards and short-term cash awards. Awards are
granted at the fair value of the shares underlying the options
at the date of the grant, generally become exercisable over
periods ranging from three to four years, and generally expire
in ten years. In the amended 2003 Plan, no more than
5,000,000 shares may be issued as restricted shares,
restricted units, performance shares and other stock-based
awards.
Upon approval of the 2003 Plan, the 1997 Incentive Stock
Option Plan (the 1997 Plan) was frozen, and no
further grants of stock options will be made under that plan.
However, there are stock options outstanding from the 1997 Plan,
expired plans and other plans assumed through acquisitions.
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
|
under Option
|
|
|
per Share
|
|
|
Outstanding at December 31, 2007
|
|
|
20,830,536
|
|
|
$
|
16.15
|
|
Options granted
|
|
|
3,372,503
|
|
|
|
11.25
|
|
Options exercised
|
|
|
(27,314
|
)
|
|
|
8.70
|
|
Options forfeited
|
|
|
(785,051
|
)
|
|
|
17.11
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
23,390,674
|
|
|
$
|
15.42
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2008
|
|
|
22,507,640
|
|
|
$
|
15.46
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2008
|
|
|
13,157,602
|
|
|
$
|
15.66
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, options outstanding, options vested
and expected to vest, and options exercisable had average
remaining contractual terms of 6.55 years, 6.44 years
and 4.72 years, respectively. Also at March 31, 2008,
options outstanding, options vested and expected to vest and
options exercisable had aggregate intrinsic values of
$2.7 million, $2.5 million, and $1.3 million,
respectively.
11
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
A summary of the status of the Companys nonvested
restricted stock and restricted stock unit awards as of
March 31, 2008 and the changes during the three month
period ended March 31, 2008, are presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant-Date
|
|
Restricted Stock Awards
|
|
Stock Awards
|
|
|
Fair Value Per Share
|
|
|
Nonvested at December 31, 2007
|
|
|
1,295,347
|
|
|
$
|
16.95
|
|
Granted
|
|
|
1,604,150
|
|
|
|
11.21
|
|
Released
|
|
|
(130,559
|
)
|
|
|
15.21
|
|
Forfeited
|
|
|
(12,878
|
)
|
|
|
18.64
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2008
|
|
|
2,756,060
|
|
|
$
|
13.68
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, the Company had $60.3 million of
total unrecognized compensation expense, net of estimated
forfeitures, related to all of its stock-based awards, which
will be recognized over the remaining weighted average period of
2.25 years. The total intrinsic value of stock-based awards
exercised during the quarter ended March 31, 2008 was
$0.2 million. The total fair value of all shares vested
during the three months ended March 31, 2008 and 2007 was
$0.3 million for each period.
|
|
7.
|
Balance
Sheet Components
|
Selected balance sheet components consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
265,974
|
|
|
$
|
255,744
|
|
Work in process
|
|
|
173,896
|
|
|
|
160,918
|
|
Finished goods
|
|
|
693,702
|
|
|
|
647,178
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,133,572
|
|
|
$
|
1,063,840
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
64,419
|
|
|
$
|
62,824
|
|
Buildings and improvements
|
|
|
596,763
|
|
|
|
583,097
|
|
Machinery and equipment
|
|
|
1,021,690
|
|
|
|
980,340
|
|
Construction in progress
|
|
|
121,979
|
|
|
|
125,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,804,851
|
|
|
|
1,751,943
|
|
Less accumulated depreciation
|
|
|
681,488
|
|
|
|
649,011
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,123,363
|
|
|
$
|
1,102,932
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Earnings
per Common Share
|
Basic (loss) earnings per share excludes dilution and is
computed by dividing net (loss) earnings available to common
shareholders by the weighted average number of shares
outstanding during the period. Diluted (loss) earnings per share
is computed by dividing net (loss) earnings available to common
shareholders by the weighted average number of shares
outstanding during the period increased by the number of
additional shares that would have been outstanding if the impact
is dilutive.
12
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
Basic and diluted loss per common share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Basic and diluted loss available to common shareholders
(numerator):
|
|
|
|
|
|
|
|
|
Net loss before preferred dividends
|
|
$
|
(409,175
|
)
|
|
$
|
(71,289
|
)
|
Preferred dividends
|
|
|
34,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
|
(443,893
|
)
|
|
|
(71,289
|
)
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
304,181
|
|
|
|
227,158
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock-based awards
|
|
|
|
|
|
|
|
|
Preferred stock conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dilutive shares outstanding assuming conversion
|
|
|
304,181
|
|
|
|
227,158
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.46
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.46
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
Additional stock options or restricted stock awards representing
18,885,473 and 1,572,645 shares were outstanding as of
March 31, 2008 and 2007, but were not included in the
computation of diluted earnings per share because the effect
would be anti-dilutive. In addition, the Company considered the
effect on diluted earnings per share of the preferred stock
conversion feature using the if-converted method. The preferred
stock is convertible into between a total of
125,234,172 shares and 152,785,775 shares of our
common stock, subject to anti-dilution adjustments, depending on
the average stock price of our common stock over the 20
trading-day
period ending on the third trading day prior to conversion.
However, the preferred stock conversion would have been
anti-dilutive and as such was not assumed in the computation of
diluted earnings per share.
On February 15, 2008, the Company paid a dividend of
$33.2 million in cash to the holders of the preferred
stock. On April 29, 2008, the Company announced that a
quarterly dividend of $16.25 per share was declared (based on
the annual dividend rate of 6.5% and a liquidation preference of
$1,000 per share) payable on May 15, 2008, to the holders
of preferred stock of record as of May 1, 2008.
|
|
9.
|
Goodwill
and Intangible Assets
|
A rollforward of goodwill from December 31, 2007 to
March 31, 2008 is as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Goodwill balance at December 31, 2007
|
|
$
|
3,855,971
|
|
Impairment loss on goodwill (See Note 5)
|
|
|
(385,000
|
)
|
Foreign currency translation and other
|
|
|
141,780
|
|
|
|
|
|
|
Goodwill balance at March 31, 2008
|
|
$
|
3,612,751
|
|
|
|
|
|
|
13
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
Intangible assets consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Life
|
|
|
Original
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
(Years)
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and technologies
|
|
|
20
|
|
|
$
|
118,926
|
|
|
$
|
67,097
|
|
|
$
|
51,829
|
|
Product rights and licenses
|
|
|
10
|
|
|
|
3,070,515
|
|
|
|
220,367
|
|
|
|
2,850,148
|
|
Other
|
|
|
8
|
|
|
|
138,968
|
|
|
|
18,322
|
|
|
|
120,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,328,409
|
|
|
$
|
305,786
|
|
|
$
|
3,022,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and technologies
|
|
|
20
|
|
|
$
|
118,926
|
|
|
$
|
65,578
|
|
|
$
|
53,348
|
|
Product rights and licenses
|
|
|
10
|
|
|
|
2,961,712
|
|
|
|
152,865
|
|
|
|
2,808,847
|
|
Other
|
|
|
8
|
|
|
|
129,031
|
|
|
|
12,520
|
|
|
|
116,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,209,669
|
|
|
$
|
230,963
|
|
|
$
|
2,978,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense, which is classified within cost of sales
on the Companys Condensed Consolidated Statement of
Operations, for the three months ended March 31, 2008 and
2007 was $76.8 million and $12.4 million,
respectively, and is expected to be $228.4 million,
$300.2 million, $292.2 million, $282.5 million,
and $267.0 million for years ended December 31, 2008
through 2012, respectively.
|
|
10.
|
Financial
Instruments and Risk Management
|
Interest
Rate Risk
During the three months ended March 31, 2008, the Company
executed an incremental $500.0 million of notional interest
rate swaps in order to fix the interest rate on a portion of its
U.S. dollar debt under the Senior Credit Agreement. These
swaps are designated as cash flow hedges of the variability of
interest expense related to our variable rate debt and fix a
rate of 5.44% until March 2010.
Fair
Value Measurement
As stated in Note 3, on January 1, 2008, the Company
adopted the fair value methods described in
SFAS No. 157 to value its financial assets and
liabilities. As defined in SFAS No. 157, fair value is
based on the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In order to
increase consistency and comparability in fair value
measurements, SFAS No. 157 establishes a fair value
hierarchy that prioritizes observable and unobservable inputs
used to measure fair value into three broad levels, which are
described below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for
assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by
market data.
Level 3: Unobservable inputs are used
when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
14
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
In determining fair value, the Company utilizes valuation
techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible
as well as considers counterparty credit risk in its assessment
of fair value.
Financial assets and liabilities carried at fair value as of
March 31, 2008 are classified in the table below in one of
the three categories described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Municipal bonds
|
|
$
|
|
|
|
$
|
10,242
|
|
|
$
|
|
|
|
$
|
10,242
|
|
Other available-for-sale fixed income investments
|
|
|
|
|
|
|
34,308
|
|
|
|
|
|
|
|
33,011
|
|
Equity securities
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
1,165
|
|
Auction rate securities
|
|
|
|
|
|
|
|
|
|
|
9,075
|
|
|
|
9,075
|
|
Foreign exchange derivative assets
|
|
|
|
|
|
|
1,299
|
|
|
|
|
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value(1)
|
|
$
|
1,165
|
|
|
|
44,552
|
|
|
|
9,075
|
|
|
$
|
54,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Foreign exchange derivative liabilities
|
|
$
|
|
|
|
|
3,195
|
|
|
|
|
|
|
$
|
3,195
|
|
Interest rate swap derivative liabilities
|
|
|
|
|
|
|
40,057
|
|
|
|
|
|
|
|
40,057
|
|
Total liabilities at fair value(1)
|
|
$
|
|
|
|
|
43,252
|
|
|
|
|
|
|
$
|
43,252
|
|
|
|
|
(1) |
|
The Company chose not to elect the fair value option as
prescribed by SFAS No. 159 for its financial assets
and liabilities that had not been previously carried at fair
value. Therefore, material financial assets and liabilities not
carried at fair value, such as short-term and long-term debt
obligations and trade accounts receivable and payable, are still
reported at their carrying values. |
Due to the lack of observable market quotes on the
Companys auction rate securities (ARS)
portfolio, the Company utilizes valuation models that rely
exclusively on Level 3 inputs, including those that are
based on expected cash flow streams and collateral values.
During the three months ended March 31, 2008, no auctions
failed.
For financial assets and liabilities that utilize Level 2
inputs the Company utilizes both direct and indirect observable
price quotes, including the LIBOR yield curve, foreign exchange
forward prices, and bank price quotes. Below is a summary of
valuation techniques for Level 1 and Level 2 financial
assets and liabilities:
|
|
|
|
|
Municipal bonds valued at the quoted market
price from broker or dealer quotations or transparent pricing
sources at the reporting date.
|
|
|
|
Other available-for-sale fixed income investments
valued at the quoted market price from broker or
dealer quotations or transparent pricing sources at the
reporting date.
|
|
|
|
Equity Securities valued using quoted stock
prices from the London Exchange at the reporting date and
translated to U.S. dollars at prevailing spot exchange rates.
|
|
|
|
Interest rate swap derivative assets and liabilities
valued using the LIBOR yield curve at the
reporting date. Counterparties to these contracts are highly
rated financial institutions, none of which experienced any
significant downgrades in the three months ended March 31,
2008, that would reduce the receivable amount owed, if any, to
the Company.
|
|
|
|
Foreign exchange derivative assets and liabilities
valued using quoted forward foreign exchange
prices at the reporting date. Counterparties to these contracts
are highly rated financial institutions, none of which
|
15
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
|
|
|
experienced any significant downgrades in the three months ended
March 31, 2008, that would reduce the receivable amount
owed, if any, to the Company.
|
Although the Company has not elected the fair value option for
financial assets and liabilities existing at January 1,
2008 or transacted in the three months ended March 31,
2008, any future transacted financial asset or liability will be
evaluated for the fair value election as prescribed by
SFAS No. 159 and adjusted to fair value determined
under the provisions of SFAS No. 157.
A summary of long-term debt at March 31, 2008 and
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
U.S. Tranche A Term Loans(A)
|
|
$
|
308,594
|
|
|
$
|
312,500
|
|
Euro Tranche A Term Loans(A)
|
|
|
546,735
|
|
|
|
516,127
|
|
U.S. Tranche B Term Loans(A)
|
|
|
2,549,610
|
|
|
|
2,556,000
|
|
Euro Tranche B Term Loans(A)
|
|
|
827,426
|
|
|
|
773,273
|
|
Revolving Facility(A)
|
|
|
300,000
|
|
|
|
300,000
|
|
Senior convertible notes
|
|
|
600,000
|
|
|
|
600,000
|
|
Other(B)
|
|
|
29,932
|
|
|
|
54,194
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,162,297
|
|
|
$
|
5,112,094
|
|
Less: Current portion
|
|
|
395,811
|
|
|
|
405,378
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
4,766,486
|
|
|
$
|
4,706,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
During the three months ended March 31, 2008, the Company
paid $3.9 million on the U.S. Tranche A Term Loans,
4.4 ($7.0) million on the Euro Tranche A Term
Loans, $6.4 million on the U.S. Tranche B Term Loans,
and 1.3 ($2.1) million on the Euro Tranche B
Term Loans. |
|
|
|
The interest rate in effect at March 31, 2008 and
December 31, 2007, on the outstanding borrowings under the
U.S. Tranche A Term Loans was 6.25% and 8.31% and under the
U.S. Tranche B Term Loans was 6.25% and 8.24%. The interest
rate in effect at March 31, 2008 and December 31,
2007, on the outstanding borrowings under the Euro
Tranche A Term Loans and Euro Tranche B Term Loans was
7.60% and 7.75%. |
|
(B) |
|
At December 31, 2007, other debt included the Matrix
borrowings under a Euro-denominated Facility (Facility
B). On March 31, 2008, Facility B was repaid in the
amount of 24.5 million ($39.4 million). |
At March 31, 2008, and December 31, 2007, the fair
value of the Senior Convertible Notes was approximately
$496.5 million and $545.5 million, respectively.
16
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
12.
|
Comprehensive
Earnings
|
Comprehensive earnings consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net loss before preferred dividends
|
|
|
|
|
|
$
|
(409,175
|
)
|
|
|
|
|
|
$
|
(71,289
|
)
|
Other comprehensive earnings (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
221,365
|
|
|
|
|
|
|
|
1,266
|
|
Change in unrecognized losses and prior service cost related to
post-retirement plans
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
Net unrecognized losses on derivatives
|
|
|
|
|
|
|
(24,765
|
)
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (losses) on available for sale securities
|
|
|
395
|
|
|
|
|
|
|
|
(721
|
)
|
|
|
|
|
Less: Reclassification for losses (gains) included in net
earnings
|
|
|
26
|
|
|
|
421
|
|
|
|
33
|
|
|
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss), net of tax:
|
|
|
|
|
|
$
|
197,410
|
|
|
|
|
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of tax
|
|
|
|
|
|
$
|
(211,765
|
)
|
|
|
|
|
|
$
|
(70,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive earnings, as reflected on the
condensed consolidated balance sheets, is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net unrealized gain in available for sale securities
|
|
$
|
1,255
|
|
|
$
|
834
|
|
Change in unrecognized losses and prior service cost related to
post-retirement plans
|
|
|
(1,546
|
)
|
|
|
(1,935
|
)
|
Net unrecognized losses on derivatives
|
|
|
(29,488
|
)
|
|
|
(4,723
|
)
|
Foreign currency translation adjustments
|
|
|
310,234
|
|
|
|
88,868
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
280,455
|
|
|
$
|
83,044
|
|
|
|
|
|
|
|
|
|
|
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement 109
(FIN 48) effective April 1, 2007.
FIN 48 clarifies the accounting for uncertain tax
positions. This Interpretation provides that the tax effects
from an uncertain tax position be recognized in the
Companys financial statements, only if the position is
more likely than not of being sustained upon audit, based on the
technical merits of the position.
The total amount of unrecognized tax benefits was
$91.0 million and $77.6 million as of March 31,
2008 and December 31, 2007, respectively. An additional
FIN 48 reserve was recorded this quarter related to the
price of products sold between Mylan and its foreign
subsidiaries. Accrued interest and penalties increased from
$24.4 million at December 31, 2007 to
$26.1 million at March 31, 2008.
It is anticipated that the amount of unrecognized tax benefits
will change in the next 12 months; however, these changes
are not expected to have a significant impact on the results of
operations, cash flows or the financial position of the Company.
17
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
The March 31, 2007 and December 31, 2007 tax years
remain open to examination by the Internal Revenue Service. The
major state taxing jurisdictions applicable to the Company
remain open from 2004 through 2007.
The Company has three reportable segments, the Generics
Segment, the Specialty Segment, and the
Matrix Segment. The Generics Segment primarily
develops, manufactures, sells and distributes generic or branded
generic pharmaceutical products in tablet, capsule or
transdermal patch form. The Specialty Segment engages mainly in
the manufacture and sale of branded specialty nebulized and
injectable products. The Matrix Segment engages mainly in the
manufacture and sale of active pharmaceutical ingredients
(APIs) and the distribution of certain branded
generic products. Additionally, certain general and
administrative expenses, as well as litigation settlements, and
non-operating income and expenses are reported in
Corporate/Other. In accordance with SFAS No. 131,
information for earlier periods has been recast.
The Companys chief operating decision maker evaluates the
performance of its reportable segments based on total revenues
and segment profitability (loss). For the Generics, Specialty,
and Matrix Segments, segment profitability (loss) represents
segment gross profit less direct research and development
expenses and direct selling, general and administrative
expenses. Amortization of intangible assets as well as other
purchase accounting related items including the write-off of
in-process research and development and the amortization of the
inventory
step-up are
excluded from segment profitability (loss). Items below the
earnings from operations line on the Companys Condensed
Consolidated Statements of Operations are not presented by
segment, since they are excluded from the measure of segment
profitability (loss) reviewed by the Companys chief
operating decision maker. The Company does not report
depreciation expense, total assets and capital expenditures by
segment as such information is not used by the chief operating
decision maker.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting
Policies included in the Companys Transition Report
on
Form 10-KT/A
for the nine months ended December 31, 2007. Intersegment
revenues are accounted for at current market values.
The table below presents segment information for the periods
identified and provides a reconciliation of segment information
to total consolidated information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generics
|
|
|
Specialty
|
|
|
Matrix
|
|
|
Corporate/
|
|
|
|
|
|
|
Segment
|
|
|
Segment(1)
|
|
|
Segment
|
|
|
Other(2)
|
|
|
Consolidated
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
$
|
909,693
|
|
|
$
|
77,139
|
|
|
$
|
87,629
|
|
|
$
|
|
|
|
$
|
1,074,461
|
|
Intersegment
|
|
|
257
|
|
|
|
12,328
|
|
|
|
15,787
|
|
|
|
(28,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
909,950
|
|
|
|
89,467
|
|
|
|
103,416
|
|
|
|
(28,372
|
)
|
|
|
1,074,461
|
|
Segment profitability (loss)
|
|
$
|
196,161
|
|
|
$
|
(382,493
|
)
|
|
$
|
3,617
|
|
|
$
|
(188,821
|
)
|
|
$
|
(371,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generics
|
|
|
Specialty
|
|
|
Matrix
|
|
|
Corporate/
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Other(1)
|
|
|
Consolidated
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party
|
|
$
|
407,850
|
|
|
$
|
|
|
|
$
|
79,412
|
|
|
$
|
|
|
|
$
|
487,262
|
|
Intersegment
|
|
|
|
|
|
|
|
|
|
|
16,389
|
|
|
|
(16,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
407,850
|
|
|
|
|
|
|
|
95,801
|
|
|
|
(16,389
|
)
|
|
|
487,262
|
|
Segment profitability (loss)
|
|
$
|
191,775
|
|
|
$
|
|
|
|
$
|
8,578
|
|
|
$
|
(208,146
|
)
|
|
$
|
(7,793
|
)
|
18
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
|
|
|
(1) |
|
Segment profitability (loss) includes a $385.0 million
non-cash impairment charge. |
|
(2) |
|
Segment profitability (loss) includes corporate overhead,
certain purchase accounting items, intercompany eliminations and
charges not directly attributable to segments. |
The Companys Condensed Consolidated Balance Sheet as of
March 31, 2008, includes a $74.3 million restructuring
reserve that was recorded as of the date of the Merck Generics
acquisition and which related to estimated exit costs associated
with this acquisition. The plans related to these exit
activities have yet to be finalized and there may be additional
costs incurred. No material payments have been made during the
three months ended March 31, 2008.
The Company has also announced its intent to restructure certain
activities and incur certain related exit costs unrelated to the
Merck Generics acquisition. At March 31, 2008, the Company
has not met all the criteria in SFAS No. 146,
Accounting for Certain Costs Associated with Exit of Disposal
Activities (SFAS No. 146), thus, it
has not recorded a reserve for such activities. As development
of the plan is in progress, we have not yet estimated the total
amount expected to be incurred in connection with such
activities. However, we expect the majority of such costs will
relate to one-time termination benefits and certain asset
write-downs.
While it is not possible to determine with any degree of
certainty the ultimate outcome of the following legal
proceedings, the Company believes that it has meritorious
defenses with respect to the claims asserted against it and
intends to vigorously defend its position. The Company is also
party to certain litigation matters, some of which are described
below, for which Merck KGaA has agreed to indemnify the Company,
under the terms of the Share Purchase Agreement by which we
acquired Merck Generics. An adverse outcome in any of these
proceedings, or the inability or denial of Merck KGaA to pay an
indemnified claim, could have a material adverse effect on the
Companys financial position and results of operations.
Omeprazole
On May 7, 2000, Mylan Pharmaceuticals Inc.
(MPI) filed an Abbreviated New Drug Application
(ANDA) seeking approval from the U.S. Food and
Drug Administration (FDA) to manufacture, market and
sell omeprazole delayed-release capsules and on August 8,
2000 made Paragraph IV certifications to several patents
owned by AstraZeneca PLC (AstraZeneca) that were
listed in the FDAs Orange Book. On
September 8, 2000, AstraZeneca filed suit against MPI and
Mylan Inc. (Mylan) in the U.S. District Court
for the Southern District of New York alleging infringement of
several of AstraZenecas patents. On May 29, 2003, the
FDA approved MPIs ANDA for the 10 mg and 20 mg
strengths of omeprazole delayed-release capsules, and, on
August 4, 2003, Mylan announced that MPI had commenced the
sale of omeprazole 10 mg and 20 mg delayed-release
capsules. AstraZeneca then amended the pending lawsuit to assert
claims against Mylan and MPI and filed a separate lawsuit
against MPIs supplier, Esteve Quimica S.A.
(Esteve), for unspecified money damages and a
finding of willful infringement, which could result in treble
damages, injunctive relief, attorneys fees, costs of
litigation and such further relief as the court deems just and
proper. MPI has certain indemnity obligations to Esteve in
connection with this litigation. MPI, Esteve and the other
generic manufacturers who are co-defendants in the case filed
motions for summary judgment of non-infringement and patent
invalidity. On January 12, 2006, those motions were denied.
On May 31, 2007, the district court ruled in Mylans
and Esteves favor by finding that the asserted patents
were not infringed by Mylans/Esteves products. On
July 18, 2007, AstraZeneca appealed the decision to the
United States Court of Appeals for the Federal Circuit. Oral
argument was held on May 6, 2008.
19
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
Lorazepam
and Clorazepate
On June 1, 2005, a jury verdict was rendered against Mylan,
MPI, and co-defendants Cambrex Corporation and Gyma Laboratories
in the U.S. District Court for the District of Columbia
(D.C.) in the amount of approximately
$12 million, which has been accrued for by the Company. The
jury found that Mylan and its
co-defendants
willfully violated Massachusetts, Minnesota and Illinois state
antitrust laws in connection with API supply agreements entered
into between the Company and its API supplier (Cambrex) and
broker (Gyma) for two drugs, lorazepam and clorazepate, in 1997,
and subsequent price increases on these drugs in 1998. The case
was brought by four health insurers who opted out of earlier
class action settlements agreed to by the Company in 2001 and
represents the last remaining antitrust claims relating to
Mylans 1998 price increases for lorazepam and clorazepate.
Following the verdict, the Company filed a motion for judgment
as a matter of law, a motion for a new trial, a motion to
dismiss two of the insurers and a motion to reduce the verdict.
On December 20, 2006, the Companys motion for
judgment as a matter of law and motion for a new trial were
denied and the remaining motions were denied on January 24,
2008. In post-trial filings, the plaintiffs requested that the
verdict be trebled and that request was granted on
January 24, 2008. On February 6, 2008, a judgment
issued against Mylan and its
co-defendants
in the total amount of approximately $69.0 million, some or
all of which may be subject to indemnification obligations by
Mylan. Plaintiffs are also seeking an award of attorneys
fees and litigation costs in unspecified amounts and prejudgment
interest of approximately $9.0 million. The Company and its
co-defendants have appealed to the U.S. Court of Appeals
for the D.C. Circuit. The appeals have been held in abeyance
pending a ruling on the motion for prejudgment interest. In
connection with the Companys appeal of the lorazepam
Judgment, the company submitted a surety bond underwritten by a
third party insurance company in the amount of
$74.5 million. This surety bond is secured by a pledge of a
$40.0 million cash deposit (which is included as restricted
cash on the Companys Condensed Consolidated Balance Sheet
as of March 31, 2008) and an irrevocable letter of
credit for $34.5 million issued under the Senior Credit
Agreement.
Pricing
and Medicaid Litigation
On June 26, 2003, MPI and UDL Laboratories Inc.
(UDL) received requests from the U.S. House of
Representatives Energy and Commerce Committee (the
Committee) seeking information about certain
products sold by MPI and UDL in connection with the
Committees investigation into pharmaceutical reimbursement
and rebates under Medicaid. MPI and UDL cooperated with this
inquiry and provided information in response to the
Committees requests in 2003. Several states
attorneys general (AG) have also sent letters to
MPI, UDL and Mylan Bertek, demanding that those companies retain
documents relating to Medicaid reimbursement and rebate
calculations pending the outcome of unspecified investigations
by those AGs into such matters. In addition, in July 2004, Mylan
received subpoenas from the AGs of California and Florida in
connection with civil investigations purportedly related to
price reporting and marketing practices regarding various drugs.
As noted below, both California and Florida subsequently filed
suits against Mylan, and the Company believes any further
requests for information and disclosures will be made as part of
that litigation.
Beginning in September 2003, Mylan, MPI
and/or UDL,
together with many other pharmaceutical companies, have been
named in a series of civil lawsuits filed by state AGs and
municipal bodies within the state of New York alleging generally
that the defendants defrauded the state Medicaid systems by
allegedly reporting Average Wholesale Prices
(AWP)
and/or
Wholesale Acquisition Costs that exceeded the actual
selling price of the defendants prescription drugs. To
date, Mylan, MPI
and/or UDL
have been named as defendants in substantially similar civil
lawsuits filed by the AGs of Alabama, Alaska, California,
Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts,
Mississippi, Missouri, South Carolina, Texas, Utah and Wisconsin
and also by the city of New York and approximately 40 counties
across New York State. Several of these cases have been
transferred to the AWP multi-district litigation proceedings
pending in the U.S. District Court for the District of
Massachusetts for pretrial proceedings. Others of these cases
will likely be litigated in the state courts in which they were
filed. Each of the cases seeks an unspecified amount in money
damages, civil penalties
and/or
treble damages, counsel fees and costs, and injunctive relief.
In each of these matters, Mylan, MPI
and/or UDL
have either moved to dismiss the
20
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
complaints or have answered the complaints denying liability.
Mylan and its subsidiaries intend to defend each of these
actions vigorously.
In addition, by letter dated January 12, 2005, MPI was
notified by the U.S. Department of Justice of an
investigation concerning calculations of Medicaid drug rebates.
The investigation involves whether MPI and UDL may have violated
the False Claims Act or other laws by classifying certain
authorized generics launched in the 1990s and early
2000s as non-innovator rather than innovator drugs for
purposes of Medicaid and other federal healthcare programs until
2005. MPI and UDL deny the governments allegations and
deny that they engaged in any wrongful conduct. Based on our
understanding of the governments allegations, the alleged
difference in rebates for the MPI and UDL products currently at
issue may be up to approximately $100.0 million, which
includes interest. Remedies under the False Claims Act could
include treble damages and penalties. MPI and UDL have been
cooperating fully with the governments investigation and
are currently in discussions with the government about a
possible resolution of the matter. Additionally, we believe that
we have contractual and other rights to recover from the
innovator a substantial portion of any payments that MPI and UDL
may remit to the government. The Company has not recorded any
amounts in the consolidated financial statements related to this
matter.
Dey, Inc. has also been named in suits brought by the state
AGs of Alaska, Arizona, California, Florida, Illinois,
Iowa, Kentucky, Mississippi, Pennsylvania, South Carolina (on
behalf of the state and the state health plan), Utah and
Wisconsin and the city of New York and approximately 40 New York
counties. Dey is also named as a defendant in several class
actions brought by consumers and third party payors. Dey has
reached a settlement of most of these class actions, which has
been preliminarily approved by the court. Additionally, the
U.S. federal government filed a claim against Dey, Inc. in
September 2006. These cases all generally allege that Dey
falsely reported certain price information concerning certain
drugs marketed by Dey. Dey intends to defend each of these
actions vigorously. In conjunction with the Merck Generics
acquisition by Mylan, Mylan is entitled to indemnification by
Merck KGaA for these Dey pricing related suits.
Modafinil
Antitrust Litigation and FTC Inquiry
Beginning in April 2006, Mylan, along with four other drug
manufacturers, has been named in a series of civil lawsuits
filed in the Eastern District of Pennsylvania by a variety of
plaintiffs purportedly representing direct and indirect
purchasers of the drug modafinil and a third party payor and one
action brought by Apotex, Inc., a manufacturer of generic drugs
seeking approval to market a generic modafinil product. These
actions allege violations of federal and state laws in
connection with the defendants settlement of patent
litigation relating to modafinil. These actions are in their
preliminary stages, and motions to dismiss each action are
pending, with the exception of the third party payor action, in
which Mylans response to the complaint is not due until
the motions filed in the other cases have been decided. Mylan
intends to defend each of these actions vigorously. In addition,
by letter dated July 11, 2006, Mylan was notified by the
U.S. Federal Trade Commission (FTC) of an
investigation relating to the settlement of the modafinil patent
litigation. In its letter, the FTC requested certain information
from Mylan, MPI and Mylan Technologies Inc. (MTI) pertaining to
the patent litigation and the settlement thereof. On
March 29, 2007, the FTC issued a subpoena, and on
April 26, 2007, the FTC issued a civil investigative demand
to Mylan requesting additional information from the Company
relating to the investigation. Mylan is cooperating fully with
the governments investigation and completed all requests
for information. On February 13, 2008, the FTC filed a
lawsuit against Cephalon in the U.S. District Court for the
District of Columbia and the case has subsequently been
transferred to the U.S. District Court for the Eastern
District of Pennsylvania. Mylan is not named as a defendant in
the lawsuit, although the complaint includes allegations
pertaining to the Mylan/Cephalon settlement.
Merck
Generics Litigation
Generics UK Ltd. is accused of having been involved in pricing
agreements pertaining to certain drugs during the years 1996 and
2000. Generics UK Ltd. was able to settle claims for damages
asserted by the Health Service in England and Wales out of
court, which does not constitute any admission of liability.
Additional claims were filed
21
MYLAN
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial
Statements (Continued)
against Generics UK Ltd. by health authorities in Scotland and
Northern Ireland totaling £20.0 ($39.9) million plus
interest. In addition to these civil claims, in 2006 criminal
proceedings were filed in Southwark Crown Court against Generics
UK Ltd. and the people responsible for running this company.
The Company has approximately $132.3 million recorded in
other liabilities related to the litigation involving Dey and
Generics UK Ltd. As stated above, in conjunction with the Merck
Generics acquisition, Mylan is entitled to indemnification from
Merck KGaA under the Share Purchase Agreement. As a result, the
Company has recorded approximately $132.3 million in other
assets.
Digitek®
Recall
On April 25, 2008, Actavis Totowa LLC, a division of
Actavis Group, announced a voluntary, nationwide recall of all
lots and all strengths of
Digitek®
(digoxin tablets USP). Digitek is distributed in the United
States by MPI and UDL. Actavis, as the manufacturer, initiated
the recall and the Company believes that Actavis is responsible
for all costs and expenses associated with the recall. While the
Company is unable to estimate total potential costs with any
degree of certainty, such costs could be significant.
Levetiracetam
In March 2004, Mylan Laboratories, Inc. and Mylan
Pharmaceuticals, Inc., (Mylan), along with
Dr. Reddys Laboratories, Inc., was named in a civil
lawsuit filed in the Northern District of Georgia by UCB Society
Anonyme and UCB Pharma, Inc. (UCB) alleging
infringement of U.S. Patent No. 4,943,639 relating to
levetiracetam tablets. This litigation was settled in October
2007. Under the terms of the settlement, Mylan has the right to
market 250 mg, 500 mg, and 750 mg levetiracetam
tablets in the United States beginning on November 1, 2008,
provided that UCB obtains pediatric exclusivity for its product
and Mylan obtains final approval for its abbreviated new drug
application (ANDA) from the Food and Drug
Administration (FDA). Mylans entry into the
market could come sooner than November 1, 2008, if the FDA
does not grant pediatric exclusivity to UCB. In addition, by
letter dated November 19, 2007, Mylan was notified by the
Federal Trade Commission (FTC) of an investigation
relating to the settlement of the levetiracetam patent
litigation. In its letter, the FTC requested certain information
from Mylan pertaining to the patent litigation and the
settlement thereof. On April 9, 2008, the FTC issued a
civil investigative demand to Mylan requesting additional
information from Mylan relating to the investigation. Mylan is
cooperating fully with the governments investigation and
its outstanding requests for information.
Other
Litigation
The Company is involved in various other legal proceedings that
are considered normal to its business, including certain
proceedings assumed as a result of the Merck Generics
acquisition. While it is not feasible to predict the ultimate
outcome of such other proceedings, the Company believes that the
ultimate outcome of such other proceedings will not have a
material adverse effect on its financial position or results of
operations.
22
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
|
The following discussion and analysis addresses material changes
in the results of operations and financial condition of Mylan
Inc. and Subsidiaries (the Company,
Mylan or we) for the periods presented.
This discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, the related Notes to
Consolidated Financial Statements and Managements
Discussion and Analysis of Results of Operations and Financial
Condition included in the Companys Transition Report on
Form 10-KT/A
for the nine-month period ended December 31, 2007, the
unaudited interim Condensed Consolidated Financial Statements
and related Notes included in Part I
Item 1 of this Quarterly Report on
Form 10-Q
(Form 10-Q)
and the Companys other SEC filings and public disclosures.
This
Form 10-Q
may contain forward-looking statements. These
statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, without limitation,
statements about the Companys market opportunities,
strategies, competition and expected activities and
expenditures, and at times may be identified by the use of words
such as may, will, could,
should, would, project,
believe, anticipate, expect,
plan, estimate, forecast,
potential, intend, continue
and variations of these words or comparable words.
Forward-looking statements inherently involve risks and
uncertainties. Accordingly, actual results may differ materially
from those expressed or implied by these forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, the risks described
below under Risk Factors in Part II,
Item 1A. The Company undertakes no obligation to update any
forward-looking statements for revisions or changes after the
filing date of this
Form 10-Q.
Executive
Overview
We are a leading global pharmaceutical company and have
developed, manufactured, marketed, licensed and distributed high
quality generic, branded and branded generic pharmaceutical
products for more than 45 years. As a result of our
acquisition of Merck Generics in October 2007 and the
acquisition of a controlling interest in Matrix in January 2007,
we are the third largest generic pharmaceutical company in the
world based on 2006 combined calendar year revenues, a leader in
branded specialty pharmaceuticals and the second largest active
pharmaceutical ingredient (API) manufacturer with
respect to the number of drug master files, or DMFs, filed with
regulatory agencies. We hold a leading sales position in four of
the worlds six largest generic pharmaceutical markets: the
United States, the United Kingdom (U.K), France and
Japan, and we also hold leading sales positions in several other
key generics markets, including Australia, Belgium, Italy,
Portugal and Spain.
Mylan previously had two reportable segments, the Mylan
Segment and the Matrix Segment. With the
acquisition of Merck Generics, Mylan now has three reportable
segments: the Generics Segment, the Specialty
Segment, and the Matrix Segment. The former
Mylan Segment is included within the Generics Segment.
Additionally, certain general and administrative expenses, as
well as litigation settlements, and non-operating income and
expenses are reported in Corporate/Other. In accordance with
Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131),
information for earlier periods has been recast.
The measure of profitability (loss) used by the Company with
respect to segments is gross profit less direct research and
development expenses (R&D) and direct selling,
general and administrative expenses (SG&A). The
amortization of intangible assets as well as certain purchase
accounting related items, including the write-off of in-process
research and development and the amortization of the inventory
step-up, are
excluded from segment profitability (loss).
Strategic
Initiatives
We have an ongoing process that includes a review of our
operations. These alternatives may include forming strategic
alliances or divestitures. As part of this process, we are
initially focused on Dey, our specialty branded business and
Matrix is focusing on Docpharma, their commercial operations in
the Benelux countries. To that end,
23
we may engage outside advisors to assist us in considering our
alternatives, including the potential sale of one or more of
these businesses.
Bystolic
In January 2006, the Company announced an agreement with Forest
Laboratories Holdings, Ltd. (Forest), a wholly-owned
subsidiary of Forest Laboratories, Inc., for the
commercialization, development and distribution of
Bystolictm
in the United States and Canada (the 2006
Agreement). Under the terms of that agreement, Mylan
received a $75.0 million up front payment and
$25.0 million upon approval of the product. Such amounts
were being deferred until the commercial launch of the product
and were to be amortized over the remaining term of the license
agreement. Mylan also had the potential to earn future
milestones and royalties on Bystolic sales and an option to
co-promote the product, while Forest assumed all future
development and selling and marketing expenses.
In February 2008, Mylan executed an agreement with Forest
whereby Mylan sold to Forest its rights to Bystolic (the
Amended Agreement). Under the terms of the Amended
Agreement, Mylan received a one-time cash payment of
$370.0 million, which was deferred along with the
$100.0 million received under the 2006 Agreement, and
retained its contractual royalties for three years, through
2010. Mylans obligations under the 2006 Agreement to
supply Bystolic to Forest were unchanged by the Amended
Agreement. Mylan believes that these supply obligations
represent significant continuing involvement as Mylan remains
contractually obligated to manufacture the product for Forest
while the product is being commercialized, which is estimated to
occur through the end of patent protection in 2020. As a result
of this continuing involvement, Mylan will amortize the
$470.0 million of deferred revenue ratably through 2020. As
such, $3.3 million is included in other revenues in the
Companys Condensed Consolidated Statement of Operations
for the three months ended March 31, 2008.
However, Mylan and Forest are in the process of transferring all
manufacturing responsibilities for the product to Forest and we
expect this to occur no later than December 2008. Once the
manufacturing is transferred, we do not believe there to be any
further significant continuing involvement and the earnings
process will be deemed to be complete. Any remaining deferred
revenue at that time will be immediately recognized into other
revenues in the Companys consolidated statement of
operations.
Future royalties are considered to be contingent consideration
and will be recognized in other revenue as earned upon sales of
the product by Forest. Such royalties will be recorded at the
net royalty rates specified in the Amended Agreement.
Goodwill
Impairment
On February 27, 2008 the Company announced that it is
reviewing strategic alternatives for its specialty business,
Dey, including the potential sale of the business. This decision
was based upon several factors, including a strategic review of
the business, including the expected performance of the
Perforomisttm
product, where growth is now expected to be slower and will
require a longer timeframe to reach peak sales than was
originally anticipated.
As a result of our ongoing review of strategic alternatives, we
have determined that it is more likely than not that the
business will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.
Accordingly, a recoverability test of Deys long-lived
assets was performed in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. We included both cash flow projections and estimated
proceeds from the eventual disposition of the long-lived assets.
The estimated undiscounted future cash flows exceeded the book
values of the long-lived assets and, as a result, no impairment
charge was recorded.
Upon the closing of the Merck Generics transaction, Dey was
defined as the Specialty Segment under the provisions of
SFAS No. 131. Dey is also considered a reporting unit
under the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets
(SFAS No. 142). Upon closing of the
transaction, the Company allocated $711.2 million of
goodwill to Dey.
The Company tests goodwill for possible impairment on an annual
basis and at any other time events occur or circumstances
indicate that the carrying amount of goodwill may be impaired.
As we have determined that it is more likely than not that the
business will be sold or otherwise disposed of significantly
before the end of its previously
24
estimated useful life, the Company was required to assess
whether any portion of its recorded goodwill balance was
impaired.
The first step of the SFAS No. 142 impairment analysis
consists of a comparison of the fair value of the reporting unit
with its carrying amount, including the goodwill. We performed
extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following
describes the valuation methodologies used to derive the
estimated fair value of the reporting unit.
Income Approach: To determine fair value, we
discounted the expected future cash flows of the reporting unit.
We used a discount rate, which reflects the overall level of
inherent risk and the rate of return an outside investor would
expect to earn. To estimate cash flows beyond the final year of
our model, we used a terminal value approach. Under this
approach, we used estimated operating income before interest,
taxes, depreciation and amortization in the final year of our
model, adjusted to estimate a normalized cash flow, applied a
perpetuity growth assumption and discounted by a perpetuity
discount factor to determine the terminal value. We incorporated
the present value of the resulting terminal value into our
estimate of fair value.
Market-Based Approach: To corroborate the
results of the income approach described above, we estimated the
fair value of our reporting unit using several market-based
approaches, including the guideline company method which focuses
on comparing our risk profile and growth prospects to a select
group of publicly traded companies with reasonably similar
guidelines.
Based on the SFAS No. 142 step one
analysis that was performed for Dey, the Company determined that
the carrying amount of the net assets of the reporting unit was
in excess of its estimated fair value. As such, the Company was
required to perform the step two analysis for Dey,
in order to determine the amount of any goodwill impairment. The
step two analysis consisted of comparing the implied
fair value of the goodwill with the carrying amount of the
goodwill, with an impairment charge resulting from any excess of
the carrying value of the goodwill over the implied fair value
of the goodwill based on a hypothetical allocation of the
estimated fair value to the net assets. Based on the second step
analysis, the Company concluded that $385.0 million of the
goodwill recorded at Dey was impaired. As a result, the Company
recorded a non-cash goodwill impairment charge of
$385.0 million during the three months ended March 31,
2008, which represents our best estimate as of March 31,
2008. The allocation discussed above is performed only for
purposes of assessing goodwill for impairment; accordingly, we
have not adjusted the net book value of the assets and
liabilities on our Condensed Consolidated Balance Sheet, other
than goodwill, as a result of this process.
The determination of the fair value of the reporting unit
requires us to make significant estimates and assumptions that
affect the reporting units expected future cash flows.
These estimates and assumptions primarily include, but are not
limited to, the discount rate, terminal growth rates, operating
income before depreciation and amortization, and capital
expenditures forecasts. Due to the inherent uncertainty involved
in making these estimates, actual results could differ from
those estimates. In addition, changes in underlying assumptions
would have a significant impact on either the fair value of the
reporting unit or the goodwill impairment charge.
The hypothetical allocation of the fair value of the reporting
unit to individual assets and liabilities within the reporting
unit also requires us to make significant estimates and
assumptions. The hypothetical allocation requires several
analyses to determine the estimate of the fair value of assets
and liabilities of the reporting unit.
Financial
Summary
Mylans financial results for the three months ended
March 31, 2008, included total revenues of
$1.07 billion compared to $487.3 million for the three
months ended March 31, 2007. This represents an increase in
revenues of $587.2 million. Consolidated gross profit for
the current quarter was $350.2 million compared to
$234.8 million in the same prior year period, an increase
of 49%. For the current quarter, an operating loss of
$371.5 million was realized compared to an operating loss
of $7.8 million for the three months ended March 31,
2007.
The net loss available to common shareholders for the current
quarter was $443.9 million compared to $71.3 million
in the comparable prior year period. This translates into a loss
per diluted common share of $1.46 for
25
the three months ended March 31, 2008, compared to a loss
per diluted common share of $0.31 for the comparable three-month
period. Comparability of results between the two periods is
affected by the following items:
Three
Months Ended March 31, 2008:
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Amortization expense related to intangible assets acquired in
the Merck Generics acquisition of $64.1 million (pre-tax);
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Amortization of the inventory
step-up
related to the Merck Generics acquisition of $36.9 million
(pre-tax);
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A non-cash impairment loss on the goodwill of the Specialty
Segment of $385.0 million (pre-tax); and
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A $34.7 million (pre-tax and after-tax) dividend on the
6.50% mandatory convertible preferred stock.
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Three
Months Ended March 31, 2007:
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Amortization of the inventory
step-up
related to the Matrix acquisition of $9.4 million;
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The write-off of acquired in-process research and development
related to the Matrix acquisition of $147.0 million
(pre-tax and after-tax); and
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The favorable settlement of litigation in the amount of
$4.0 million (pre-tax).
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In addition to the above, the loss per common share in the
current quarter was impacted by additional dilution as a result
of the issuance of 26.2 million shares of common stock in
March 2007 and the issuance of 55.4 million shares of
common stock in November 2007. Because the first offering
occurred in March 2007, the loss per common share for the three
months ended March 31, 2007 did not bear the full impact of
the new shares. However, these 26.2 million shares, as well
as the additional 55.4 million shares were outstanding for
the full three months ended March 31, 2008. A more detailed
discussion of the Companys financial results can be found
below in the section titled Results of Operations.
Results
of Operations
Three
Months Ended March 31, 2008, Compared to Three Months Ended
March 31, 2007
Total
Revenues and Gross Profit
For the current quarter, Mylan reported total revenues of
$1.07 billion compared to $487.3 million in the same
prior year period. This represents an increase of
$587.2 million. The acquisition of Merck Generics
contributed revenues of $629.8 million, of which
$552.7 million are included in the Generics Segment and
$77.1 million are included in the Specialty Segment. Matrix
contributed third party revenues of $87.6 million compared
to $79.4 million in the comparable three-month period.
Gross profit for the three months ended March 31, 2008 was
$350.2 million and gross margins were 32.6%. For the three
months ended March 31, 2007, gross profit was
$234.8 million and gross margins were 48.2%. Gross profit
is impacted by certain purchase accounting related items
recorded during the three months ended March 31, 2008 of
approximately $118.1 million, which consisted primarily of
incremental amortization related to purchased intangible assets
and the amortization of the inventory
step-up
associated with the acquisition of Merck Generics. Excluding
such items, gross margins would have been approximately 43.6%.
Prior year gross profit is also impacted by similar purchase
accounting related items recorded with respect to the Matrix
acquisition in the amount of $21.9 million. Excluding such
items, gross margins in the prior year would have been
approximately 52.7%.
The decrease in gross margins excluding amounts related to the
acquisition of Merck Generics and Matrix, is due to the fact
that on average, the newly acquired Merck Generics entities,
particularly in countries outside of the United States,
contribute margins that are lower than those realized by
Mylans domestic subsidiaries. Additionally, margins were
negatively impacted by the loss of exclusivity on certain
products. Products generally contribute most significantly to
gross margin at the time of their launch and even more so in
periods of market exclusivity or limited generic competition.
During the three months ended March 31, 2007, Mylan had
exclusivity on both amlodipine and oxybutynin. This exclusivity
was lost in subsequent periods. DuoNeb, a product sold by Dey,
also lost
26
exclusivity in July 2007. Even though this occurred prior to the
acquisition by Mylan, the loss of exclusivity resulted in lower
gross margins than could have otherwise been realized had the
product not lost exclusivity. Finally, gross margins in the
current period were negatively impacted by additional generic
competition on fentanyl.
Generics
Segment
For the current quarter, the Generics Segment reported total
revenues of $910.0 million. Generics Segment total revenues
are derived from sales primarily in or from the U.S. and
Canada (collectively, North America), Europe, the
Middle East and Africa (collectively, EMEA) and
Australia, Japan and New Zealand (collectively, Asia
Pacific).
Total revenues from North America were $392.1 million for
the three-month period ended March 31, 2008 compared to
$407.9 million for the three months ended March 31,
2007, representing a decrease of $15.8 million. In the
current quarter, revenue of $34.8 million is the result of
the acquisition of Merck Generics. Excluding the impact of the
acquisition, total North America revenues decreased by
$50.6 million or 12%. This decrease is the result of
unfavorable pricing as discussed below, partially offset by
increased volume, as doses shipped during the quarter, excluding
the impact of the acquisition, increased by over 3.5% to
4.0 billion.
Fentanyl, Mylans AB-rated generic alternative to
Duragesic®,
continued to contribute significantly to the financial results,
accounting for approximately 16% of net revenues in North
America despite the entrance into the market of additional
generic competition in August 2007. As expected, the additional
competition had an unfavorable impact on fentanyl pricing.
Competition, including additional generic competition upon the
loss of exclusivity on oxybutynin, resulted in lower sales of
certain other products in the Companys portfolio. As is
the case in the generic industry, the entrance into the market
of additional competition generally has a negative impact on the
volume and pricing of the affected products. Additionally, North
American revenues in the current quarter were negatively
impacted by measures undertaken by Mylans largest
wholesale customers to reduce the amount of inventory on their
shelves.
Total revenues from EMEA were $389.0 million for the three
months ended March 31, 2008, all of which were the result
of the acquisition of Merck Generics. Within EMEA, approximately
70% of net revenues are derived from the three largest markets;
France, the U.K. and Germany.
Total revenues from Asia Pacific were $128.9 million for
the current quarter, all of which were the result of the
acquisition of Merck Generics. The majority of revenues from
Asia Pacific are contributed by Alphapharm, Mylans
Australian subsidiary, with the remainder comprised of sales in
Japan and New Zealand.
For the three months ended March 31, 2008, the segment
profitability for the Generics Segment was $196.2 million
compared to $191.8 million in the comparable three month
period. Of the current year amount, approximately
$59.6 million is due to the acquisition of Merck Generics.
Excluding this amount, segment profitability decreased by
$55.2 million. This decrease is the result of lower
revenues, as discussed above, as well as increased R&D
expense.
Specialty
Segment
For the current quarter, the Specialty Segment reported total
revenues of $89.5 million, of which $77.1 million
represented sales to third parties. The Specialty Segment
consists primarily of Dey, an entity acquired as part of the
Merck Generics acquisition that focuses on the development,
manufacturing and marketing of specialty pharmaceuticals in the
respiratory and severe allergy markets. The majority of the
Specialty Segment revenues are derived from two products: EpiPen
and DuoNeb.
EpiPen, which is used in the treatment of severe allergies, is
an epinephrine auto-injector. EpiPen is the number one
prescribed treatment for severe allergic reactions with a market
share of over 95%.
DuoNeb is a nebulized unit dose formulation of ipratropium
bromide and albuterol sulfate for treatment of chronic
obstructive pulmonary disorder. DuoNeb lost exclusivity in July
2007, at which time authorized generic competition entered the
market. At the end of December 2007 and early January 2008,
several other generics entered the market. As expected, sales of
this product have declined as a result of additional competition.
27
Segment loss for the Specialty Segment for the three months
ended March 31, 2008 was $382.5 million, which
includes the $385.0 million non-cash goodwill impairment
charge discussed previously.
Matrix
Segment
For the three months ended March 31, 2008, the Matrix
Segment reported total revenues of $103.4 million, of which
$87.6 million represented third-party sales compared to net
revenues of $95.8 million, of which $79.4 million
represented third party sales during the prior year comparable
period. Approximately 60% of the Matrix Segments
third-party net revenues come from the sale of API and
intermediates, and approximately 20% comes from the distribution
of branded generic products in Europe. In addition to its net
revenue, Matrix realized other revenue of $11.8 million
through intersegment product development agreements.
Intersegment net revenue consists of API sales to the Generics
Segment primarily in conjunction with Mylans vertical
integration strategy.
Segment profitability for the Matrix Segment for the current
quarter was $3.6 million compared to $8.6 million in
the comparable three-month period.
Operating
Expenses
R&D expense for the three months ended March 31, 2008
was $83.8 million compared to $36.8 million in the
same prior year period. For the current quarter, R&D
expense includes approximately $41.3 million related to the
newly acquired Merck Generics entities, all of which was
incremental to the prior year. Excluding these amounts, R&D
expense increased by $5.7 million or 15% as a result of
increased clinical studies.
During the three months ended March 31, 2007, the Company
recognized a charge of $147.0 million to write-off acquired
in-process R&D associated with the Matrix acquisition. This
amount represents the fair value of purchased in-process
technology for research projects that, as of the closing date of
the acquisition, had not reached technological feasibility and
had no alternative future use.
SG&A expense for the current quarter was
$252.9 million compared to $62.8 million for the same
period in the prior year, an increase of $190.1 million.
For the current quarter, SG&A expense includes
approximately $153.9 million related to the newly acquired
Merck Generics entities, all of which was incremental to the
prior year. Excluding these amounts, SG&A expense increased
by $36.2 million or 58%. This increase was primarily
realized by Corporate/Other. The increase in Corporate/Other
SG&A expense is due primarily to an increase in
professional and consulting fees as well as higher payroll and
payroll related costs. The increase in professional and
consulting fees is associated primarily with the ongoing
integration of Merck Generics. The increase in payroll and
related costs is principally attributable to the
build-up of
additional corporate infrastructure as a direct result of the
Merck Generics acquisition.
Interest
Expense
Interest expense for the three months ended March 31, 2008
totaled $90.7 million compared to $21.0 million for
the three months ended March 31, 2007. The increase is due
to the additional debt incurred to finance the acquisition of
Merck Generics.
Other
Income, net
Other income, net was $7.0 million in the current quarter
compared to $10.4 million in the comparable three-month
period. The decrease is primarily the result of lower interest
and dividend income.
Income
Tax Expense
The Companys provision for income tax was a benefit of
$44.1 million for the three month period ending
March 31, 2008 compared to expense of $52.8 million in
the comparable prior year quarter. The change in the tax rate is
due to a larger operating loss offset by the non-deductible
impairment charge related to Dey. The prior year effective rate
was largely impacted by the write-off of acquired in-process
research and development related to the Matrix acquisition.
28
Liquidity
and Capital Resources
Cash flows from operating activities were $330.5 million
for the three months ended March 31, 2008. The amount
consists primarily of non-cash add-backs for the
$385.0 million goodwill impairment related to Dey and for
depreciation and amortization, an increase in deferred revenue
of $360.4 million, as well as a net increase in operating
assets and liabilities. These items are partially offset by the
deferred tax benefit of $221.8 million. The increases in
deferred revenue and income taxes payable, as well as a
significant component of the current quarter change in deferred
tax benefit, is due to the Bystolic agreement with Forest.
Cash used in investing activities for the three months ended
March 31, 2008 was $51.6 million. Net sales of
investments in available for sale securities, which consist of a
variety of high-credit quality debt securities, including
U.S. government, state and local government and corporate
obligations, generated a net $37.2 million in cash. These
investments are highly liquid and available for working capital
and other needs. As these instruments mature, the funds are
generally reinvested in instruments with similar characteristics.
Capital expenditures during the three months ended
March 31, 2008 were $36.2 million. These expenditures
were incurred primarily for equipment, including with respect to
the Companys previously announced planned expansions and
integration plans with respect to the Merck Generics
acquisition. Also included in investing activities was a cash
outflow of $40.0 million to secure a surety bond with
respect to the Companys lorazepam and clorazepate
litigation.
Cash used in financing activities was $68.4 million for the
three months ended March 31, 2008. Cash dividends of
$33.2 million were paid on the Companys 6.50%
mandatory convertible preferred stock. Additionally, the Company
made repayments on its long-term debt in the amount of
$57.5 million.
The Company is involved in various legal proceedings that are
considered normal to its business (see Note 16 of our
Condensed Consolidated Financial Statements). While it is not
feasible to predict the outcome of such proceedings, an adverse
outcome in any of these proceedings could materially affect the
Companys financial position and results of operations.
The Companys Condensed Consolidated Balance Sheet includes
$74.3 million of restructuring reserves that were recorded
as of the date of the Merck Generics acquisition and which
related to estimated exit costs associated with this
acquisition. The plans related to these exit activities have yet
to be finalized and there may be additional costs incurred. The
Company also announced its intent to restructure certain
activities and incur certain related exit costs unrelated to the
Merck Generics acquisition. However, as of March 31, 2008,
the Company had not met all the criteria in
SFAS No. 146, Accounting for Certain Costs
Associated with Exit of Disposal, thus, it has not recorded
a reserve for such activities. As development of the plan is in
progress, we have not yet estimated the total amount expected to
be incurred in connection with such activities. However, we
expect the majority of such costs will relate to one-time
termination benefits and certain asset write-downs. No material
payments have been made during the three months ended
March 31, 2008 related to these activities. (See
Note 15 of our Condensed Consolidated Financial Statements).
The Company is actively pursuing, and is currently involved in,
joint projects related to the development, distribution and
marketing of both generic and brand products. Many of these
arrangements provide for payments by the Company upon the
attainment of specified milestones. While these arrangements
help to reduce the financial risk for unsuccessful projects,
fulfillment of specified milestones or the occurrence of other
obligations may result in fluctuations in cash flows.
The Company is continuously evaluating the potential acquisition
of products, as well as companies, as a strategic part of its
future growth. Consequently, the Company may utilize current
cash reserves or incur additional indebtedness to finance any
such acquisitions, which could impact future liquidity.
In addition, the Company is evaluating potential divestures of
products and businesses as part of its future strategy. Any
divestitures could impact future liquidity.
29
Recent
Accounting Pronouncements
On January 1, 2008, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other assets and
liabilities at fair value on an
instrument-by-instrument
basis (the fair value option) with changes in fair value
reported in earnings. The Company already records marketable
securities at fair value in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities
(SFAS No. 115), and derivative
contracts and hedging activities at fair value in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended
(SFAS No. 133). The adoption of
SFAS No. 159 did not have a material impact on the
Companys Condensed Consolidated Financial Statements as
management did not elect the fair value option for any other
financial instrument or certain other assets and liabilities.
On January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), for financial assets
and liabilities and any other assets and liabilities carried at
fair value. This pronouncement defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. On November 14, 2007, the
Financial Accounting Standards Board (FASB) agreed
to a one-year deferral for the implementation of
SFAS No. 157 for other non-financial assets and
liabilities. The Companys adoption of
SFAS No. 157 did not have a material effect on the
Companys Condensed Consolidated Financial Statements for
financial assets and liabilities and any other assets and
liabilities carried at fair value. On February 12, 2008,
the Financial Accounting Standards Board (FASB)
issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
No. FAS 157-2),
which delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on at least an annual basis, until
January 1, 2009 for calendar year-end entities. The Company
has adopted the deferral of SFAS No. 157 with respect
to the items listed in FSP
No. FAS 157-2.
See Note 10 Financial Instruments and Risk
Management for additional disclosure.
In March 2007, the Emerging Issues Task Force (EITF)
issued EITF
No. 06-10,
Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements (EITF
No. 06-10).
Under the provisions of EITF
No. 06-10,
an employer is required to recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement with the employee. The
provisions of EITF
No. 06-10
also require an employer to recognize and measure the asset in a
collateral assignment split-dollar life insurance arrangement
based on the nature and substance of the arrangement. The
Company adopted the provisions of EITF
No. 06-10
as of January 1, 2008. As a result of the adoption, the
Company recognized a liability of $8.3 million,
representing the present value of the future premium payments to
be made under the existing policies. In accordance with the
transition provisions of EITF
No. 06-10,
this amount was recorded as a direct decrease to retained
earnings.
In March 2007, the EITF issued EITF
No. 06-04,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsed Split-Dollar Life Insurance
Arrangements (EITF
No. 06-4),
which concludes that an employer should recognize a liability
for post-employment benefits promised an employee based on the
substantive arrangement between the employer and the employee.
The Company adopted the provisions of EITF
No. 06-04
as of January 1, 2008. The adoption of EITF
No. 06-04
did not have a material impact on the Companys Condensed
Consolidated Financial Statements.
On January 1, 2008, the Company adopted Statement 133
Implementation Issue No. E23, Hedging
General: Issues Involving the Application of the Shortcut Method
under Paragraph 58 (Issue No. E23).
Issue No. E23 provides guidance on certain practice issues
related to the application of the shortcut method by amending
paragraph 68 of SFAS No. 133 with respect to the
conditions that must be met in order to apply the shortcut
method for assessing hedge effectiveness of interest rate swaps.
In addition to applying the provisions of Issue No. E23 on
hedging arrangements designated on or after January 1,
2008, an assessment was required to be made on January 1,
2008 to determine whether preexisting hedging arrangements met
the provisions of Issue No. E23 as of their original
inception. Management performed such an assessment and
determined that the adoption of Issue No. E23 did not have
a material impact on preexisting hedging arrangements.
30
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS No. 161).
SFAS No. 161 requires enhanced disclosures about an
entitys derivative and hedging activities, including
(i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedged items
are accounted for under SFAS No. 133, and
(iii) how derivative instruments and related hedged items
affect an entitys financial position, financial
performance, and cash flows. This standard is effective for
fiscal years beginning after November 15, 2008. As
SFAS No. 161 only requires enhanced disclosures,
management is currently assessing the impact on the disclosures
in the consolidated financial statements.
In May 2008 the FASB issued FASB Staff Position No. APB
14-a,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash
Settlement). Under the new rules for convertible debt
instruments (including our Senior Convertible Notes) that may be
settled entirely or partially in cash upon conversion, an entity
should separately account for the liability and equity
components of the instrument in a manner that reflects the
issuers economic interest cost. The effect of the proposed
new rules for the debentures is that the equity component would
be included in the
paid-in-capital
section of stockholders equity on our consolidated balance
sheet and the value of the equity component would be treated as
original issue discount for purposes of accounting for the debt
component of the Senior Convertible Notes. The FSP will be
effective for fiscal years beginning after December 15,
2008, and for interim periods within those fiscal years, with
retrospective application required. Higher interest expense
would result through the accretion of the discounted carrying
value of the Senior Convertible Notes to their face amount over
the term of the Senior Convertible Notes. Prior period interest
expense will also be higher than previously reported interest
expense due to retrospective application. Early adoption is not
permitted. The Company is currently evaluating the proposed new
rules and the impact on the consolidated financial statements.
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ITEM 3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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For a discussion of the Companys market risk, see
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk in the Companys Transition Report
filed on
Form 10-KT/A.
In the three months ended March 31, 2008, we executed an
incremental $500.0 million of notional interest rate swaps
in order to fix the interest rate on a portion of our
U.S. dollar debt under the Senior Credit Agreement. These
swaps are designated as cash flow hedges of the variability of
interest expense related to our variable rate debt and fix a
rate of 5.44% until March 2010.
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ITEM 4.
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CONTROLS
AND PROCEDURES
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An evaluation was performed under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures as of March 31, 2008.
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective. No change in
the Companys internal control over financial reporting
occurred during the quarter ended March 31, 2008, that has
materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.
PART II.
OTHER INFORMATION
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ITEM 1.
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LEGAL
PROCEEDINGS
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While it is not possible to determine with any degree of
certainty the ultimate outcome of the following legal
proceedings, the Company believes that it has meritorious
defenses with respect to the claims asserted against it and
intends to vigorously defend its position. The Company is also
party to certain litigation matters, some of which are described
below, for which Merck KGaA has agreed to indemnify the Company,
under the terms of the Share Purchase Agreement by which we
acquired Merck Generics. An adverse outcome in any of these
proceedings, or the inability or denial of Merck KGaA to pay on
indemnified claim, could have a material adverse effect on the
Companys financial position and results of operations.
31
Omeprazole
On May 17, 2000, Mylan Pharmaceuticals Inc.
(MPI) filed an Abbreviated New Drug Application
(ANDA) seeking approval from the U.S. Food and
Drug Administration (FDA) to manufacture, market and
sell omeprazole delayed-release capsules and on August 8,
2000 made Paragraph IV certifications to several patents
owned by AstraZeneca PLC (AstraZeneca) that were
listed in the FDAs Orange Book. On
September 8, 2000, AstraZeneca filed suit against MPI and
Mylan Inc. (Mylan) in the U.S. District Court
for the Southern District of New York alleging infringement of
several of AstraZenecas patents. On May 29, 2003, the
FDA approved MPIs ANDA for the 10 mg and 20 mg
strengths of omeprazole delayed-release capsules, and, on
August 4, 2003, Mylan announced that MPI had commenced the
sale of omeprazole 10 mg and 20 mg delayed-release
capsules. AstraZeneca then amended the pending lawsuit to assert
claims against Mylan and MPI and filed a separate lawsuit
against MPIs supplier, Esteve Quimica S.A.
(Esteve), for unspecified money damages and a
finding of willful infringement, which could result in treble
damages, injunctive relief, attorneys fees, costs of
litigation and such further relief as the court deems just and
proper. MPI has certain indemnity obligations to Esteve in
connection with this litigation. MPI, Esteve and the other
generic manufacturers who are co-defendants in the case filed
motions for summary judgment of non-infringement and patent
invalidity. On January 12, 2006, those motions were denied.
On May 31, 2007, the district court ruled in Mylans
and Esteves favor by finding that the asserted patents
were not infringed by Mylans/Esteves products. On
July 18, 2007, AstraZeneca appealed the decision to the
United States Court of Appeals for the Federal Circuit. Oral
argument was held on May 6, 2008.
Lorazepam
and Clorazepate
On June 1, 2005, a jury verdict was rendered against Mylan,
MPI, and co-defendants Cambrex Corporation and Gyma Laboratories
in the U.S. District Court for the District of Columbia
(D.C.) in the amount of approximately
$12 million, which has been accrued for by the Company. The
jury found that Mylan and its
co-defendants
willfully violated Massachusetts, Minnesota and Illinois state
antitrust laws in connection with API supply agreements entered
into between the Company and its API supplier (Cambrex) and
broker (Gyma) for two drugs, lorazepam and clorazepate, in 1997,
and subsequent price increases on these drugs in 1998. The case
was brought by four health insurers who opted out of earlier
class action settlements agreed to by the Company in 2001 and
represents the last remaining antitrust claims relating to
Mylans 1998 price increases for lorazepam and clorazepate.
Following the verdict, the Company filed a motion for judgment
as a matter of law, a motion for a new trial, a motion to
dismiss two of the insurers and a motion to reduce the verdict.
On December 20, 2006, the Companys motion for
judgment as a matter of law and motion for a new trial were
denied and the remaining motions were denied on January 24,
2008. In post-trial filings, the plaintiffs requested that the
verdict be trebled and that request was granted on
January 24, 2008. On February 6, 2008, a judgment
issued against Mylan and its
co-defendants
in the total amount of approximately $69.0 million, some or
all of which may be subject to indemnification obligations by
Mylan. Plaintiffs are also seeking an award of attorneys
fees and litigation costs in unspecified amounts and prejudgment
interest of approximately $9.0 million. The Company and its
co-defendants have appealed to the U.S. Court of Appeals
for the D.C. Circuit. The appeals have been held in abeyance
pending a ruling on the motion for prejudgment interest. In
connection with the Companys appeal of the lorazepam
Judgment, the company submitted a surety bond underwritten by a
third party insurance company in the amount of
$74.5 million. This surety bond is secured by a pledge of a
$40.0 million cash deposit (which is included as restricted
cash on the Companys Condensed Consolidated Balance Sheet
as of March 31, 2008) and an irrevocable letter of
credit for $34.5 million issued under the Senior Credit
Agreement.
Pricing
and Medicaid Litigation
On June 26, 2003, MPI and UDL Laboratories Inc.
(UDL) received requests from the U.S. House of
Representatives Energy and Commerce Committee (the
Committee) seeking information about certain
products sold by MPI and UDL in connection with the
Committees investigation into pharmaceutical reimbursement
and rebates under Medicaid. MPI and UDL cooperated with this
inquiry and provided information in response to the
Committees requests in 2003. Several states
attorneys general (AG) have also sent letters to
MPI, UDL and Mylan Bertek, demanding that those companies retain
documents relating to Medicaid reimbursement and rebate
calculations pending the outcome of unspecified investigations
by those AGs into such matters. In addition, in July
32
2004, Mylan received subpoenas from the AGs of California and
Florida in connection with civil investigations purportedly
related to price reporting and marketing practices regarding
various drugs. As noted below, both California and Florida
subsequently filed suits against Mylan, and the Company believes
any further requests for information and disclosures will be
made as part of that litigation.
Beginning in September 2003, Mylan, MPI
and/or UDL,
together with many other pharmaceutical companies, have been
named in a series of civil lawsuits filed by state AGs and
municipal bodies within the state of New York alleging generally
that the defendants defrauded the state Medicaid systems by
allegedly reporting Average Wholesale Prices
(AWP)
and/or
Wholesale Acquisition Costs that exceeded the actual
selling price of the defendants prescription drugs. To
date, Mylan, MPI
and/or UDL
have been named as defendants in substantially similar civil
lawsuits filed by the AGs of Alabama, Alaska, California,
Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Massachusetts,
Mississippi, Missouri, South Carolina, Texas, Utah and Wisconsin
and also by the city of New York and approximately 40 counties
across New York State. Several of these cases have been
transferred to the AWP multi-district litigation proceedings
pending in the U.S. District Court for the District of
Massachusetts for pretrial proceedings. Others of these cases
will likely be litigated in the state courts in which they were
filed. Each of the cases seeks an unspecified amount in money
damages, civil penalties
and/or
treble damages, counsel fees and costs, and injunctive relief.
In each of these matters, Mylan, MPI
and/or UDL
have either moved to dismiss the complaints or have answered the
complaints denying liability. Mylan and its subsidiaries intend
to defend each of these actions vigorously.
In addition, by letter dated January 12, 2005, MPI was
notified by the U.S. Department of Justice of an
investigation concerning calculations of Medicaid drug rebates.
The investigation involves whether MPI and UDL may have violated
the False Claims Act or other laws by classifying certain
authorized generics launched in the 1990s and early
2000s as non-innovator rather than innovator drugs for
purposes of Medicaid and other federal healthcare programs until
2005. MPI and UDL deny the governments allegations and
deny that they engaged in any wrongful conduct. Based on our
understanding of the governments allegations, the alleged
difference in rebates for the MPI and UDL products currently at
issue may be up to approximately $100.0 million, which
includes interest. Remedies under the False Claims Act could
include treble damages and penalties. MPI and UDL have been
cooperating fully with the governments investigation and
are currently in discussions with the government about a
possible resolution of the matter. Additionally, we believe that
we have contractual and other rights to recover from the
innovator a substantial portion of any payments that MPI and UDL
may remit to the government. The Company has not recorded any
amounts in the consolidated financial statements related to this
matter.
Dey, Inc. has also been named in suits brought by the state
AGs of Alaska, Arizona, California, Florida, Illinois,
Iowa, Kentucky, Mississippi, Pennsylvania, South Carolina (on
behalf of the state and the state health plan), Utah and
Wisconsin and the city of New York and approximately 40 New York
counties. Dey is also named as a defendant in several class
actions brought by consumers and third party payors. Dey has
reached a settlement of most of these class actions, which has
been preliminarily approved by the court. Additionally, the
U.S. federal government filed a claim against Dey, Inc. in
September 2006. These cases all generally allege that Dey
falsely reported certain price information concerning certain
drugs marketed by Dey. Dey intends to defend each of these
actions vigorously. In conjunction with the Merck Generics
acquisition by Mylan, Mylan is entitled to indemnification by
Merck KGaA for these Dey pricing related suits.
Modafinil
Antitrust Litigation and FTC Inquiry
Beginning in April 2006, Mylan, along with four other drug
manufacturers, has been named in a series of civil lawsuits
filed in the Eastern District of Pennsylvania by a variety of
plaintiffs purportedly representing direct and indirect
purchasers of the drug modafinil and a third party payor and one
action brought by Apotex, Inc., a manufacturer of generic drugs
seeking approval to market a generic modafinil product. These
actions allege violations of federal and state laws in
connection with the defendants settlement of patent
litigation relating to modafinil. These actions are in their
preliminary stages, and motions to dismiss each action are
pending, with the exception of the third party payor action, in
which Mylans response to the complaint is not due until
the motions filed in the other cases have been decided. Mylan
intends to defend each of these actions vigorously. In addition,
by letter dated July 11, 2006, Mylan was notified by the
U.S. Federal Trade Commission (FTC) of an
investigation relating to the settlement of the modafinil patent
litigation. In its letter, the FTC requested certain information
from
33
Mylan, MPI and Mylan Technologies Inc. (MTI) pertaining to the
patent litigation and the settlement thereof. On March 29,
2007, the FTC issued a subpoena, and on April 26, 2007, the
FTC issued a civil investigative demand to Mylan requesting
additional information from the Company relating to the
investigation. Mylan is cooperating fully with the
governments investigation and completed all requests for
information. On February 13, 2008, the FTC filed a lawsuit
against Cephalon in the U.S. District Court for the
District of Columbia and the case has subsequently been
transferred to the U.S. District Court for the Eastern
District of Pennsylvania. Mylan is not named as a defendant in
the lawsuit, although the complaint includes allegations
pertaining to the Mylan/Cephalon settlement.
Merck
Generics Litigation
Generics UK Ltd., is accused of having been involved in pricing
agreements pertaining to certain drugs during the years 1996 and
2000. Generics UK Ltd. was able to settle claims for damages
asserted by the Health Service in England and Wales out of
court, which does not constitute any admission of liability.
Additional claims were filed against Generics UK Ltd. by health
authorities in Scotland and Northern Ireland totaling £20.0
($39.9) million plus interest. In addition to these civil
claims in 2006, criminal proceedings were filed in Southwark
Crown Court against Generics UK Ltd. and the people responsible
for running this company.
The Company has approximately $132.3 million recorded in
other liabilities related to the litigation involving Dey and
Generics UK Ltd. As stated above, in conjunction with the Merck
Generics acquisition, Mylan is entitled to indemnification from
Merck KGaA under the Share Purchase Agreement. As a result, the
Company has recorded approximately $132.3 million in other
assets.
Digitek®
Recall
On April 25, 2008, Actavis Totowa LLC, a division of
Actavis Group, announced a voluntary, nationwide recall of all
lots and all strengths of
Digitek®
(digoxin tablets USP). Digitek is distributed in the United
States by MPI and UDL. Actavis, as the manufacturer, initiated
the recall and the Company believes that Actavis is responsible
for all costs and expenses associated with the recall. While the
Company is unable to estimate total potential costs with any
degree of certainty, such costs could be significant.
Levetiracetam
In March 2004, Mylan Laboratories, Inc. and Mylan
Pharmaceuticals, Inc., (Mylan), along with
Dr. Reddys Laboratories, Inc., was named in a civil
lawsuit filed in the Northern District of Georgia by UCB Society
Anonyme and UCB Pharma, Inc. (UCB) alleging
infringement of U.S. Patent No. 4,943,639 relating to
levetiracetam tablets. This litigation was settled in October
2007. Under the terms of the settlement, Mylan has the right to
market 250 mg, 500 mg, and 750 mg levetiracetam
tablets in the United States beginning on November 1, 2008,
provided that UCB obtains pediatric exclusivity for its product
and Mylan obtains final approval for its abbreviated new drug
application (ANDA) from the Food and Drug
Administration (FDA). Mylans entry into the
market could come sooner than November 1, 2008, if the FDA
does not grant pediatric exclusivity to UCB. In addition, by
letter dated November 19, 2007, Mylan was notified by the
Federal Trade Commission (FTC) of an investigation
relating to the settlement of the levetiracetam patent
litigation. In its letter, the FTC requested certain information
from Mylan pertaining to the patent litigation and the
settlement thereof. On April 9, 2008, the FTC issued a
civil investigative demand to Mylan requesting additional
information from Mylan relating to the investigation. Mylan is
cooperating fully with the governments investigation and
its outstanding requests for information.
Other
Litigation
The Company is involved in various other legal proceedings that
are considered normal to its business, including certain
proceedings assumed as a result of the Merck Generics
acquisition. While it is not feasible to predict the ultimate
outcome of such other proceedings, the Company believes that the
ultimate outcome of such other proceedings will not have a
material adverse effect on its financial position or results of
operations.
34
The following risk factors could have a material adverse effect
on our business, financial position or results of operations and
could cause the market value of our common stock to decline.
These risk factors may not include all of the important factors
that could affect our business or our industry or that could
cause our future financial results to differ materially from
historic or expected results or cause the market price of our
common stock to fluctuate or decline.
OUR
ACQUISITION OF MERCK GENERICS INVOLVES A NUMBER OF INTEGRATION
RISKS. THESE RISKS COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD
CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
Our acquisition of Merck Generics involves a number of
integration risks, such as:
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difficulties in successfully integrating the facilities,
operations and personnel of Merck Generics with our historical
business and corporate culture;
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difficulties in achieving identified financial and operating
synergies;
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diversion of managements attention from our ongoing
business concerns to integration matters;
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the potential loss of key personnel or customers;
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difficulties in consolidating information technology platforms
and corporate infrastructure;
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difficulties in transitioning the Merck Generics business and
products from the Merck name to achieve a global
brand alignment;
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our substantial indebtedness and assumed liabilities;
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the incurrence of significant additional capital expenditures,
transaction and operating expenses and non-recurring
acquisition-related charges;
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challenges in operating in other markets outside of the United
States that are new to us; and
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unanticipated effects of export controls, exchange rate
fluctuations, domestic and foreign political conditions or
domestic and foreign economic conditions.
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These factors could impair our growth and ability to compete,
require us to focus additional resources on integration of
operations rather than other profitable areas, or otherwise
cause a material adverse effect on our business, financial
position and results of operations and could cause a decline in
the market value of our common stock.
WE MAY
FAIL TO REALIZE THE EXPECTED COST SAVINGS, GROWTH OPPORTUNITIES
AND OTHER BENEFITS ANTICIPATED FROM THE ACQUISITIONS OF MERCK
GENERICS AND A CONTROLLING INTEREST IN MATRIX.
The success of the acquisitions of Merck Generics and a
controlling interest in Matrix will depend, in part, on our
ability to realize anticipated cost savings, revenue synergies
and growth opportunities from integrating the historical
businesses of Mylan, Merck Generics and Matrix. We expect to
benefit from operational cost savings resulting from the
consolidation of capabilities and elimination of redundancies as
well as greater efficiencies from increased scale and market
integration.
There is a risk, however, that the historical businesses of
Mylan, Merck Generics and Matrix may not be combined in a manner
that permits these costs savings or synergies to be realized in
the time currently expected, or at all. This may limit or delay
our ability to integrate the companies manufacturing,
research and development, marketing, organizations, procedures,
policies and operations. In addition, a variety of factors,
including, but not limited to, wage inflation and currency
fluctuations, may adversely affect our anticipated cost savings
and revenues.
35
Also, we may be unable to achieve our anticipated cost savings
and synergies without adversely affecting our revenues. If we
are not able to successfully achieve these objectives, the
anticipated benefits of these acquisitions may not be realized
fully, or at all, or may take longer to realize than expected.
These factors could impair our growth and ability to compete,
require us to focus additional resources on integration of
operations rather than other profitable areas, or otherwise
cause a material adverse effect on our business, financial
position and results of operations and could cause a decline in
the market value of our common stock.
WE
HAVE GROWN AT A VERY RAPID PACE. OUR INABILITY TO PROPERLY
MANAGE OR SUPPORT THIS GROWTH MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS
AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
We have grown very rapidly over the past few years, through our
acquisitions of Merck Generics and a controlling interest in
Matrix. This growth has put significant demands on our
processes, systems and people. We expect to make significant
investments in additional personnel, systems and internal
control processes to help manage our growth. Attracting,
retaining and motivating key employees in various departments
and locations to support our growth is critical to our business,
and competition for these people can be intense. If we are
unable to hire and retain qualified employees and if we do not
continue to invest in systems and processes to manage and
support our rapid growth, there may be a material adverse effect
on our business, financial position and results of operations,
and the market value of our common stock could decline.
OUR
GLOBAL EXPANSION THROUGH THE ACQUISITIONS OF MERCK GENERICS AND
A CONTROLLING INTEREST IN MATRIX EXPOSES US TO ADDITIONAL RISKS
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
With our recent acquisitions of Merck Generics and a controlling
interest in Matrix, our operations extend to numerous countries
outside the United States. Operating globally exposes us to
certain additional risks including, but not limited to:
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compliance with a variety of national and local laws of
countries in which we do business, including restrictions on the
import and export of certain intermediates, drugs and
technologies;
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fluctuations in exchange rates for transactions conducted in
currencies other than the functional currency;
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adverse changes in the economies in which we operate as a result
of a slowdown in overall growth, a change in government or
economic liberalization policies, or financial, political or
social instability in such countries that affects the markets in
which we operate, particularly emerging markets;
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wage increases or rising inflation in the countries in which we
operate;
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natural disasters, including drought, floods and earthquakes in
the countries in which we operate; and
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communal disturbances, terrorist attacks, riots or regional
hostilities in the countries in which we operate.
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We also face the risk that some of our competitors have more
experience with operations in such countries or with
international operations generally. Certain of the above factors
could have a material adverse effect on our business, financial
position and results of operations and could cause a decline in
the market value of our common stock.
36
OUR
FUTURE REVENUE GROWTH AND PROFITABILITY ARE DEPENDENT UPON OUR
ABILITY TO DEVELOP AND/OR LICENSE, OR OTHERWISE ACQUIRE, AND
INTRODUCE NEW PRODUCTS ON A TIMELY BASIS IN RELATION TO OUR
COMPETITORS PRODUCT INTRODUCTIONS. OUR FAILURE TO DO SO
SUCCESSFULLY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Our future revenues and profitability will depend, to a
significant extent, upon our ability to successfully develop
and/or
license, or otherwise acquire and commercialize, new generic and
patent or statutorily protected pharmaceutical products in a
timely manner. Product development is inherently risky,
especially for new drugs for which safety and efficacy have not
been established and the market is not yet proven. Likewise,
product licensing involves inherent risks including
uncertainties due to matters that may affect the achievement of
milestones, as well as the possibility of contractual
disagreements with regard to terms such as license scope or
termination rights. The development and commercialization
process, particularly with regard to new drugs, also requires
substantial time, effort and financial resources. We, or a
partner, may not be successful in commercializing any of such
products on a timely basis, if at all, including, without
limitation, Bystolic, for which we are dependent on our partner
Forest Laboratories, which could adversely affect our business,
financial position and results of operations and could cause the
market value of our common stock to decline.
Before any prescription drug product, including generic drug
products, can be marketed, marketing authorization approval is
required by the relevant regulatory authorities
and/or
national regulatory agencies (for example the FDA in the United
States and the European Medicines Agency (or EMA) in
the European Union (or EU). The process of obtaining
regulatory approval to manufacture and market new and generic
pharmaceutical products is rigorous, time consuming, costly and
largely unpredictable. Outside the United States, the approval
process may be more or less rigorous, and the time required for
approval may be longer or shorter than that required in the
United States. Bioequivalency studies conducted in one country
may not be accepted in other countries, and the approval of a
pharmaceutical product in one country does not necessarily mean
that the product will be approved in another country. We, or a
partner, may be unable to obtain requisite approvals on a timely
basis for new generic or branded products that we may develop,
license or otherwise acquire. Moreover, if we obtain regulatory
approval for a drug it may be limited with respect to the
indicated uses and delivery methods for which the drug may be
marketed, which could in turn restrict our potential market for
the drug. Also, for products pending approval, we may obtain raw
materials or produce batches of inventory to be used in efficacy
and bioequivalence testing, as well as in anticipation of the
products launch. In the event that regulatory approval is
denied or delayed, we could be exposed to the risk of this
inventory becoming obsolete. The timing and cost of obtaining
regulatory approvals could adversely affect our product
introduction plans, business, financial position and results of
operations and could cause the market value of our common stock
to decline. See Item 1. Business Product
Development and Government Regulation.
The approval process for generic pharmaceutical products often
results in the relevant regulatory agency granting final
approval to a number of generic pharmaceutical products at the
time a patent claim for a corresponding branded product or other
market exclusivity expires. This often forces us to face
immediate competition when we introduce a generic product into
the market. Additionally, further generic approvals often
continue to be granted for a given product subsequent to the
initial launch of the generic product. These circumstances
generally result in significantly lower prices, as well as
reduced margins, for generic products compared to branded
products. New generic market entrants generally cause continued
price and margin erosion over the generic product life cycle.
In the United States, the Drug Price Competition and Patent Term
Restoration Act of 1984, or the Waxman-Hatch Act, provides for a
period of 180 days of generic marketing exclusivity for
each ANDA applicant that is first-to-file an ANDA containing a
certification of invalidity, non-infringement or
unenforceability related to a patent listed with respect to a
reference drug product, commonly referred to as a
Paragraph IV certification. During this exclusivity period,
which under certain circumstances may be required to be shared
with other applicable ANDA sponsors with Paragraph IV
certifications, the FDA cannot grant final approval to other
ANDA sponsors holding applications for the same generic
equivalent. If an ANDA containing a Paragraph IV
certification is successful and the applicant is awarded
exclusivity, the applicant generally enjoys higher market share,
net revenues and gross margin for that product. Even if we
obtain FDA approval for our generic drug products, if we are not
the first ANDA applicant to challenge a listed patent for such a
37
product, we may lose significant advantages to a competitor that
filed its ANDA containing such a challenge. The same would be
true in situations where we are required to share our
exclusivity period with other ANDA sponsors with
Paragraph IV certifications. Such situations could have a
material adverse effect on our ability to market that product
profitably and on our business, financial position and results
of operations, and the market value of our common stock could
decline.
In Europe, there is no exclusivity period for the first generic.
The EMA or national regulatory agencies may grant marketing
authorizations to any number of generics. However, if there are
other relevant patents when the core patent expires, for
example, new formulations, the owner of the original brand
pharmaceutical may be able to obtain preliminary injunctions in
certain European jurisdictions preventing launch of the generic
product, if the generic company did not commence proceedings in
a timely manner to invalidate any relevant patents prior to
launch of its generic.
In addition, in jurisdictions other than the United States, we
may face similar regulatory hurdles and constraints. If we are
unable to navigate our products through all of the regulatory
hurdles we face in a timely manner it could adversely affect our
product introduction plans, business, financial position and
results of operations and could cause the market value of our
common stock to decline.
IF THE
INTERCOMPANY TERMS OF CROSS BORDER ARRANGEMENTS WE HAVE AMONG
OUR SUBSIDIARIES ARE DETERMINED TO BE INAPPROPRIATE, OUR TAX
LIABILITY MAY INCREASE, WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
We have potential tax exposures resulting from the varying
application of statutes, regulations and interpretations which
include exposures on intercompany terms of cross border
arrangements among our subsidiaries in relation to various
aspects of our business, including manufacturing, marketing,
sales and delivery functions. Although our cross border
arrangements between affiliates are based upon internationally
accepted standards, tax authorities in various jurisdictions may
disagree with and subsequently challenge the amount of profits
taxed in their country, which may result in increased tax
liability, including accrued interest and penalties, which would
cause our tax expense to increase. This could have a material
adverse effect on our business, financial position and results
of operations and could cause the market value of our common
stock to decline.
OUR
APPROVED PRODUCTS MAY NOT ACHIEVE EXPECTED LEVELS OF MARKET
ACCEPTANCE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
PROFITABILITY, BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
Even if we are able to obtain regulatory approvals for our new
pharmaceutical products, generic or branded, the success of
those products is dependent upon market acceptance. Levels of
market acceptance for our new products could be impacted by
several factors, including:
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the availability of alternative products from our competitors;
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the price of our products relative to that of our competitors;
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the timing of our market entry;
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the ability to market our products effectively to the retail
level; and
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the acceptance of our products by government and private
formularies.
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Some of these factors are not within our control. Additionally,
continuing studies of the proper utilization, safety and
efficacy of pharmaceutical products are being conducted by the
industry, government agencies and others. Such studies, which
increasingly employ sophisticated methods and techniques, can
call into question the utilization, safety and efficacy of
previously marketed products. In some cases, studies have
resulted, and may in the future result, in the discontinuance of
product marketing or other risk management programs such as the
need for a patient registry. These situations, should they
occur, could have a material adverse effect on our
profitability,
38
business, financial position and results of operations, and
could cause the market value of our common stock to decline.
A
RELATIVELY SMALL GROUP OF PRODUCTS MAY REPRESENT A SIGNIFICANT
PORTION OF OUR NET REVENUES, GROSS PROFIT OR NET EARNINGS FROM
TIME TO TIME. IF THE VOLUME OR PRICING OF ANY OF THESE PRODUCTS
DECLINES, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD
CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
Sales of a limited number of our products often represent a
significant portion of our net revenues, gross profit and net
earnings. If the volume or pricing of our largest selling
products declines in the future, our business, financial
position and results of operations could be materially adversely
affected, and the market value of our common stock could decline.
WE
FACE VIGOROUS COMPETITION FROM OTHER PHARMACEUTICAL
MANUFACTURERS THAT THREATENS THE COMMERCIAL ACCEPTANCE AND
PRICING OF OUR PRODUCTS. SUCH COMPETITION COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
The generic pharmaceutical industry is highly competitive. We
face competition from many U.S. and foreign manufacturers,
some of whom are significantly larger than we are. Our
competitors may be able to develop products and processes
competitive with or superior to our own for many reasons,
including that they may have:
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proprietary processes or delivery systems;
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larger research and development and marketing staffs;
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larger production capabilities in a particular therapeutic area;
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more experience in preclinical testing and human clinical trials;
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more products; or
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more experience in developing new drugs and greater financial
resources, particularly with regard to manufacturers of branded
products.
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Any of these factors and others could have a material adverse
effect on our business, financial position and results of
operations and could cause the market value of our common stock
to decline.
BECAUSE
THE PHARMACEUTICAL INDUSTRY IS HEAVILY REGULATED, WE FACE
SIGNIFICANT COSTS AND UNCERTAINTIES ASSOCIATED WITH OUR EFFORTS
TO COMPLY WITH APPLICABLE REGULATIONS. SHOULD WE FAIL TO COMPLY,
WE COULD EXPERIENCE MATERIAL ADVERSE EFFECTS ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET
VALUE OF OUR COMMON STOCK COULD DECLINE.
The pharmaceutical industry is subject to regulation by various
governmental authorities. For instance, we must comply with
requirements of the FDA and similar requirements of similar
agencies in our other markets with respect to the manufacture,
labeling, sale, distribution, marketing, advertising, promotion
and development of pharmaceutical products. Failure to comply
with regulations of the FDA and other regulators can result in
fines, disgorgement, unanticipated compliance expenditures,
recall or seizure of products, total or partial suspension of
production
and/or
distribution, suspension of the applicable regulators
review of our submissions, enforcement actions, injunctions and
criminal prosecution. Under certain circumstances, the
regulators may also have the authority to revoke previously
granted drug approvals. Although we have internal regulatory
compliance programs and policies and have had a favorable
compliance history, there is no guarantee that these programs,
as currently designed, will meet regulatory agency standards in
the future. Additionally, despite our efforts at compliance,
there is no guarantee that we may not be deemed to be deficient
in some manner in the future. If we were deemed to be
39
deficient in any significant way, our business, financial
position and results of operations could be materially affected
and the market value of our common stock could decline.
In Europe we must also comply with regulatory requirements with
respect to the manufacture, labeling, sale, distribution,
marketing, advertising, promotion and development of
pharmaceutical products. Some of these requirements are
contained in EU regulations and governed by the EMA. Other
requirements are set down in national laws and regulations of
the EU Member States. Failure to comply with the regulations can
result in a range of fines, penalties, product
recalls/suspensions or even criminal liability. Similar laws and
regulations exist in most of the markets in which we operate.
In addition to the new drug approval process, government
agencies also regulate the facilities and operational procedures
that we use to manufacture our products. We must register our
facilities with the FDA and other similar regulators. Products
manufactured in our facilities must be made in a manner
consistent with current good manufacturing practices, or cGMP.
Compliance with cGMP regulations requires substantial
expenditures of time, money and effort in such areas as
production and quality control to ensure full technical
compliance. The FDA and other agencies periodically inspect our
manufacturing facilities for compliance. Regulatory approval to
manufacture a drug is site-specific. Failure to comply with cGMP
regulations at one of our manufacturing facilities could result
in an enforcement action brought by the FDA or other regulatory
bodies which could include withholding the approval of our
submissions or other product applications of that facility. If
any regulatory body were to require one of our manufacturing
facilities to cease or limit production, our business could be
adversely affected. Delay and cost in obtaining FDA or other
regulatory approval to manufacture at a different facility also
could have a material adverse effect on our business, financial
position and results of operations and could cause the market
value of our common stock to decline.
We are subject, as are generally all manufacturers, to various
federal, state and local laws regulating working conditions, as
well as environmental protection laws and regulations, including
those governing the discharge of materials into the environment.
We are also required to comply with data protection and data
privacy rules in many countries. Although we have not incurred
significant costs associated with complying with environmental
provisions in the past, if changes to such environmental laws
and regulations are made in the future that require significant
changes in our operations or if we engage in the development and
manufacturing of new products requiring new or different
environmental controls, we may be required to expend significant
funds. Such changes could have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
OUR
REPORTING AND PAYMENT OBLIGATIONS UNDER THE MEDICARE AND/OR
MEDICAID REBATE PROGRAM AND OTHER GOVERNMENTAL PURCHASING AND
REBATE PROGRAMS ARE COMPLEX AND MAY INVOLVE SUBJECTIVE DECISIONS
THAT COULD CHANGE AS A RESULT OF NEW BUSINESS CIRCUMSTANCES, NEW
REGULATORY GUIDANCE, OR ADVICE OF LEGAL COUNSEL. ANY
DETERMINATION OF FAILURE TO COMPLY WITH THOSE OBLIGATIONS COULD
SUBJECT US TO PENALTIES AND SANCTIONS WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND
RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK
COULD DECLINE.
The regulations regarding reporting and payment obligations with
respect to Medicare
and/or
Medicaid reimbursement and rebates and other governmental
programs are complex. As discussed elsewhere in this
Form 10-Q
and other reports we file with the SEC, we and other
pharmaceutical companies are defendants in a number of suits
filed by state attorneys general and have been notified of an
investigation by the United States Department of Justice with
respect to Medicaid reimbursement and rebates. While we cannot
predict the outcome of the investigation, possible remedies
which the United States government could seek include treble
damages, civil monetary penalties and exclusion from the
Medicare and Medicaid programs. In connection with such an
investigation, the United States government may also seek a
Corporate Integrity Agreement (administered by the Office of
Inspector General of HHS) with us which could include ongoing
compliance and reporting obligations. Because our processes for
these calculations and the judgments involved in making these
calculations involve, and will continue to involve, subjective
decisions and complex methodologies, these calculations are
subject to the risk of errors. In addition, they are subject to
review and challenge by the applicable governmental agencies,
and it is
40
possible that such reviews could result in material changes.
Further, effective October 1, 2007, the Centers for
Medicaid and Medicare Services, or CMS, adopted new rules for
Average Manufacturers Price, or AMP, based on the
provisions of the Deficit Reduction Act of 2005, or DRA. One
significant change as a result of the DRA is that AMP will be
disclosed to the public. AMP was historically kept confidential
by the government and participants in the Medicaid program.
Disclosing AMP to competitors, customers, and the public at
large could negatively affect our leverage in commercial price
negotiations.
In addition, as also disclosed herein, a number of state and
federal government agencies are conducting investigations of
manufacturers reporting practices with respect to Average
Wholesale Prices, or AWP, in which they have suggested that
reporting of inflated AWP has led to excessive payments for
prescription drugs. We and numerous other pharmaceutical
companies have been named as defendants in various actions
relating to pharmaceutical pricing issues and whether allegedly
improper actions by pharmaceutical manufacturers led to
excessive payments by Medicare
and/or
Medicaid.
Any governmental agencies that have commenced, or may commence,
an investigation of the Company could impose, based on a claim
of violation of fraud and false claims laws or otherwise, civil
and/or
criminal sanctions, including fines, penalties and possible
exclusion from federal health care programs including Medicare
and/or
Medicaid. Some of the applicable laws may impose liability even
in the absence of specific intent to defraud. Furthermore,
should there be ambiguity with regard to how to properly
calculate and report payments and even in the
absence of any such ambiguity a governmental
authority may take a position contrary to a position we have
taken, and may impose civil
and/or
criminal sanctions. Any such penalties or sanctions could have a
material adverse effect on our business, financial position and
results of operations and could cause the market value of our
common stock to decline.
WE
EXPEND A SIGNIFICANT AMOUNT OF RESOURCES ON RESEARCH AND
DEVELOPMENT EFFORTS THAT MAY NOT LEAD TO SUCCESSFUL PRODUCT
INTRODUCTIONS. FAILURE TO SUCCESSFULLY INTRODUCE PRODUCTS INTO
THE MARKET COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS, AND THE MARKET
VALUE OF OUR COMMON STOCK COULD DECLINE.
Much of our development effort is focused on technically
difficult-to-formulate products
and/or
products that require advanced manufacturing technology. We
conduct research and development primarily to enable us to
manufacture and market approved pharmaceuticals in accordance
with applicable regulations. Typically, research expenses
related to the development of innovative compounds and the
filing of marketing authorization applications for innovative
compounds (such as NDAs in the United States) are significantly
greater than those expenses associated with the development of
and filing of marketing authorization applications for generic
products (such as ANDAs in the United States and abridged
applications in Europe). As we continue to develop new products,
our research expenses will likely increase. Because of the
inherent risk associated with research and development efforts
in our industry, particularly with respect to new drugs
(including, without limitation, Bystolic), our, or a
partners, research and development expenditures may not
result in the successful introduction of new pharmaceutical
products approved by the relevant regulatory bodies. Also, after
we submit a marketing authorization application for a new
compound or generic product, the relevant regulatory authority
may request that we conduct additional studies and, as a result,
we may be unable to reasonably determine the total research and
development costs to develop a particular product. Finally, we
cannot be certain that any investment made in developing
products will be recovered, even if we are successful in
commercialization. To the extent that we expend significant
resources on research and development efforts and are not able,
ultimately, to introduce successful new products as a result of
those efforts, our business, financial position and results of
operations may be materially adversely affected, and the market
value of our common stock could decline.
41
A
SIGNIFICANT PORTION OF OUR NET REVENUES IS DERIVED FROM SALES TO
A LIMITED NUMBER OF CUSTOMERS. ANY SIGNIFICANT REDUCTION OF
BUSINESS WITH ANY OF THESE CUSTOMERS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK COULD
DECLINE.
A significant portion of our net revenues is derived from sales
to a limited number of customers. If we were to experience a
significant reduction in or loss of business with one such
customer, or if one such customer were to experience difficulty
in paying us on a timely basis, our business, financial position
and results of operations could be materially adversely
affected, and the market value of our common stock could decline.
THE
USE OF LEGAL, REGULATORY AND LEGISLATIVE STRATEGIES BY
COMPETITORS, BOTH BRAND AND GENERIC, INCLUDING AUTHORIZED
GENERICS AND CITIZENS PETITIONS, AS WELL AS THE
POTENTIAL IMPACT OF PROPOSED LEGISLATION, MAY INCREASE OUR COSTS
ASSOCIATED WITH THE INTRODUCTION OR MARKETING OF OUR GENERIC
PRODUCTS, COULD DELAY OR PREVENT SUCH INTRODUCTION AND/OR COULD
SIGNIFICANTLY REDUCE OUR PROFIT POTENTIAL. THESE FACTORS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET
VALUE OF OUR COMMON STOCK TO DECLINE.
Our competitors, both branded and generic, often pursue
strategies to prevent or delay competition from generic
alternatives to branded products. These strategies include, but
are not limited to:
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entering into agreements whereby other generic companies will
begin to market an authorized generic, a generic equivalent of a
branded product, at the same time generic competition initially
enters the market;
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filing citizens petitions with the FDA or other regulatory
bodies, including timing the filings so as to thwart generic
competition by causing delays of our product approvals;
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seeking to establish regulatory and legal obstacles that would
make it more difficult to demonstrate bioequivalence;
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initiating legislative efforts to limit the substitution of
generic versions of brand pharmaceuticals;
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filing suits for patent infringement that may delay regulatory
approval of many generic products;
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introducing next-generation products prior to the
expiration of market exclusivity for the reference product,
which often materially reduces the demand for the first generic
product for which we seek regulatory approval;
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obtaining extensions of market exclusivity by conducting
clinical trials of brand drugs in pediatric populations or by
other potential methods;
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persuading regulatory bodies to withdraw the approval of brand
name drugs for which the patents are about to expire, thus
allowing the brand name company to obtain new patented products
serving as substitutes for the products withdrawn; and
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seeking to obtain new patents on drugs for which patent
protection is about to expire.
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In the United States, some companies have lobbied Congress for
amendments to the Waxman-Hatch legislation that would give them
additional advantages over generic competitors. For example,
although the term of a companys drug patent can be
extended to reflect a portion of the time an NDA is under
regulatory review, some companies have proposed extending the
patent term by a full year for each year spent in clinical
trials rather than the one-half year that is currently permitted.
If proposals like these in the United States, Europe or in other
countries where we operate were to become effective, our entry
into the market and our ability to generate revenues associated
with new products may be delayed, reduced or eliminated, which
could have a material adverse effect on our business, financial
position and results of operations and could cause the market
value of our common stock to decline.
42
WE
HAVE SUBSTANTIAL INDEBTEDNESS AND WILL BE REQUIRED TO APPLY A
SUBSTANTIAL PORTION OF OUR CASH FLOW FROM OPERATIONS TO SERVICE
OUR INDEBTEDNESS. OUR SUBSTANTIAL INDEBTEDNESS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND
RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
We incurred significant indebtedness to fund a portion of the
consideration for our acquisition of Merck Generics. Our high
level of indebtedness could have important consequences,
including:
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increasing our vulnerability to general adverse economic and
industry conditions;
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requiring us to dedicate a substantial portion of our cash flow
from operations and proceeds of any equity issuances to payments
on our indebtedness, thereby reducing the availability of cash
flow to fund working capital, capital expenditures, acquisitions
and investments and other general corporate purposes;
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making it difficult for us to optimally capitalize and manage
the cash flow for our businesses;
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limiting our flexibility in planning for, or reacting to,
changes in our businesses and the markets in which we operate;
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making it difficult for us to meet the leverage and interest
coverage ratios required by our Senior Credit Agreement;
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limiting our ability to borrow money or sell stock to fund our
working capital, capital expenditures, acquisitions and debt
service requirements and other financing needs;
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increasing our vulnerability to increases in interest rates in
general because a substantial portion of our indebtedness bears
interest at floating rates;
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requiring us to sell assets in order to pay down debt; and
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placing us at a competitive disadvantage to our competitors that
have less debt.
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If we do not have sufficient cash flow to service our
indebtedness, we may need to refinance all or part of our
existing indebtedness, borrow more money or sell securities,
some or all of which may not be available to us at acceptable
terms or at all. In addition, we may need to incur additional
indebtedness in the future in the ordinary course of business.
Although the terms of our Senior Credit Agreement allow us to
incur additional debt, this is subject to certain limitations
which may preclude us from incurring the amount of indebtedness
we otherwise desire. In addition, if we incur additional debt,
the risks described above could intensify. Furthermore, if
future debt financing is not available to us when required or is
not available on acceptable terms, we may be unable to grow our
business, take advantage of business opportunities, respond to
competitive pressures or satisfy our obligations under our
indebtedness. Any of the foregoing could have a material adverse
effect on our business, financial position and results of
operations and could cause the market value of our common stock
to decline.
WE MAY
DECIDE TO SELL ASSETS WHICH COULD ADVERSELY AFFECT OUR PROSPECTS
AND OPPORTUNITIES FOR GROWTH, AND WHICH COULD AFFECT OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD
CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
We may from time to time consider selling certain assets if we
determine that such assets are not critical to our strategy, or
if we believe the opportunity to monetize the asset is
attractive, or in order to reduce indebtedness, or for other
reasons. We have explored and will continue to explore the sale
of certain non-core assets; in addition, we have recently
announced that we are exploring strategic alternatives
(including a divestiture) for our Dey business, and that Matrix
is doing the same in regard to Docpharma. Although our intention
is to engage in asset sales only if they advance our overall
strategy, any such sale could reduce the size or scope of our
business, our market share in particular markets or our
opportunities with respect to certain markets, products or
therapeutic categories. We also continue to review the carrying
value of manufacturing and intangible assets for indications of
impairment as circumstances require. Future events and decisions
may lead to asset impairments
and/or
related costs. As a result,
43
any such sale or impairment could have an adverse effect on our
business, prospects and opportunities for growth, financial
position and results of operations and could cause the market
value of our common stock to decline.
OUR
CREDIT FACILITIES AND ANY ADDITIONAL INDEBTEDNESS WE INCUR IN
THE FUTURE IMPOSE, OR MAY IMPOSE, SIGNIFICANT OPERATING AND
FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM CAPITALIZING
ON BUSINESS OPPORTUNITIES. THESE FACTORS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
Our credit facilities and any additional indebtedness we incur
in the future impose, or may impose, significant operating and
financial restrictions on us. These restrictions limit our
ability to, among other things, incur additional indebtedness,
make investments, pay dividends, prepay other indebtedness, sell
assets, incur certain liens, enter into agreements with our
affiliates or restricting our subsidiaries ability to pay
dividends, or merge or consolidate. In addition, our Senior
Secured Credit Agreement requires us to maintain specified
financial ratios. We cannot assure you that these covenants will
not adversely affect our ability to finance our future
operations or capital needs or to pursue available business
opportunities. A breach of any of these covenants or our
inability to maintain the required financial ratios could result
in a default under the related indebtedness. If a default
occurs, the relevant lenders could elect to declare our
indebtedness, together with accrued interest and other fees, to
be immediately due and payable. These factors could have a
material adverse effect on our business, financial position and
results of operations and could cause the market value of our
common stock to decline.
WE
DEPEND ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS FOR THE RAW
MATERIALS, PARTICULARLY THE CHEMICAL COMPOUND(S) COMPRISING THE
ACTIVE PHARMACEUTICAL INGREDIENT, THAT WE USE TO MANUFACTURE OUR
PRODUCTS AS WELL AS CERTAIN FINISHED GOODS. A PROLONGED
INTERRUPTION IN THE SUPPLY OF SUCH PRODUCTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND
RESULTS OF OPERATIONS, AND THE MARKET VALUE OF OUR COMMON STOCK
COULD DECLINE.
We typically purchase the active pharmaceutical ingredient
(i.e., the chemical compounds that produce the desired
therapeutic effect in our products) and other materials and
supplies that we use in our manufacturing operations, as well as
certain finished products, from many different foreign and
domestic suppliers.
Additionally, we maintain safety stocks in our raw materials
inventory and, in certain cases where we have listed only one
supplier in our applications with regulatory agencies, have
received regulatory agency approval to use alternative suppliers
should the need arise. However, there is no guarantee that we
will always have timely and sufficient access to a critical raw
material or finished product. A prolonged interruption in the
supply of a single-sourced raw material, including the active
ingredient, or finished product could cause our financial
position and results of operations to be materially adversely
affected, and the market value of our common stock could
decline. In addition, our manufacturing capabilities could be
impacted by quality deficiencies in the products which our
suppliers provide, which could have a material adverse effect on
our business, financial position and results of operations, and
the market value of our common stock could decline.
We utilize controlled substances in certain of our current
products and products in development and therefore must meet the
requirements of the Controlled Substances Act of 1970 and the
related regulations administered by the Drug Enforcement
Administration, or DEA, in the United States as well as similar
laws in other countries where we operate. These laws relate to
the manufacture, shipment, storage, sale and use of controlled
substances. The DEA and other regulatory agencies limit the
availability of the active ingredients used in certain of our
current products and products in development and, as a result,
our procurement quota of these active ingredients may not be
sufficient to meet commercial demand or complete clinical
trials. We must annually apply to the DEA and other regulatory
agencies for procurement quota in order to obtain these
substances. Any delay or refusal by the DEA or such regulatory
agencies in establishing our procurement quota for controlled
substances could delay or stop our clinical trials or product
launches, or could cause trade inventory disruptions for those
products that have already
44
been launched, which could have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
OUR
EFFORTS TO TRANSITION OUR MERCK GENERICS SUBSIDIARIES AWAY FROM
THE MERCK NAME AND AWAY FROM SERVICES BEING PROVIDED BY MERCK
KGAA MAY IMPOSE INHERENT RISKS OR RESULT IN GREATER THAN
EXPECTED COSTS OR IMPEDIMENTS, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
We have a license from Merck KGaA to continue using the
Merck name in company and product names in respect
of the Merck Generics businesses for a two-year transitional
period. We are engaged in efforts to transition in an orderly
manner away from the Merck name and to achieve global brand
alignment. Re-branding may prove to be costly, especially in
markets where the Merck Generics name has strong dominance or
significant equity locally. In addition, brand migration poses
risks of both business disruption and customer confusion. Our
customer outreach and similar efforts may not mitigate fully the
risks of the name changes, which may lead to reductions in
revenues in some markets. These losses may have a material
adverse effect on our business, financial position and results
of operations and could cause the market value of our common
stock to decline.
As part of the Merck Generics acquisition we entered into a
transitional services agreement whereby Merck KGaA agreed to
continue to provide certain services including accounting and
information technology to Merck Generics for certain periods.
The cost of transitioning such services from Merck KGaA to us
during those periods as well as the capital expenditures that
may be required for system upgrades may be greater than we
expect or result in other impediments to our business. Such
costs or impediments may have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
In addition, in limited circumstances, entities we acquired in
the acquisition of Merck Generics are party to litigation
and/or
subject to investigation in matters under which we are entitled
to indemnification by Merck KGaA. However, there are risks
inherent in such indemnities and, accordingly, there can be no
assurance that we will receive the full benefits of such
indemnification.
OUR
BUSINESS IS HIGHLY DEPENDENT UPON MARKET PERCEPTIONS OF US, OUR
BRANDS AND THE SAFETY AND QUALITY OF OUR PRODUCTS. OUR BUSINESS
OR BRANDS COULD BE SUBJECT TO NEGATIVE PUBLICITY, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET
VALUE OF OUR COMMON STOCK TO DECLINE.
Market perceptions of our business are very important to us,
especially market perceptions of our brands and the safety and
quality of our products. If we, or our brands, suffer from
negative publicity, or if any of our products or similar
products which other companies distribute are proven to be, or
are claimed to be, harmful to consumers then this could have a
material adverse effect on our business, financial position and
results of operations and could cause the market value of our
common stock to decline. Also, because we are dependant on
market perceptions, negative publicity associated with illness
or other adverse effects resulting from our products could have
a material adverse impact on our business, financial position
and results of operations and could cause the market value of
our common stock to decline.
WE
HAVE A LIMITED NUMBER OF MANUFACTURING FACILITIES PRODUCING A
SUBSTANTIAL PORTION OF OUR PRODUCTS. PRODUCTION AT ANY ONE OF
THESE FACILITIES COULD BE INTERRUPTED, WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND
RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR
COMMON STOCK TO DECLINE.
A substantial portion of our capacity as well as our current
production is attributable to a limited number of manufacturing
facilities. A significant disruption at any one of those
facilities, even on a short-term basis, could impair our ability
to produce and ship products to the market on a timely basis,
which could have a material adverse
45
effect on our business, financial position and results of
operations and could cause the market value of our common stock
to decline.
WE MAY
EXPERIENCE DECLINES IN THE SALES VOLUME AND PRICES OF OUR
PRODUCTS AS THE RESULT OF THE CONTINUING TREND TOWARD
CONSOLIDATION OF CERTAIN CUSTOMER GROUPS, SUCH AS THE WHOLESALE
DRUG DISTRIBUTION AND RETAIL PHARMACY INDUSTRIES, AS WELL AS THE
EMERGENCE OF LARGE BUYING GROUPS. THE RESULT OF SUCH
DEVELOPMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD
CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
A significant amount of our sales are to a relatively small
number of drug wholesalers and retail drug chains. These
customers represent an essential part of the distribution chain
of generic pharmaceutical products. Drug wholesalers and retail
drug chains have undergone, and are continuing to undergo,
significant consolidation. This consolidation may result in
these groups gaining additional purchasing leverage and
consequently increasing the product pricing pressures facing our
business. Additionally, the emergence of large buying groups
representing independent retail pharmacies and the prevalence
and influence of managed care organizations and similar
institutions potentially enable those groups to attempt to
extract price discounts on our products. The result of these
developments may have a material adverse effect on our business,
financial position and results of operations and could cause the
market value of our common stock to decline.
OUR
COMPETITORS, INCLUDING BRANDED PHARMACEUTICAL COMPANIES, OR
OTHER THIRD PARTIES MAY ALLEGE THAT WE ARE INFRINGING THEIR
INTELLECTUAL PROPERTY, FORCING US TO EXPEND SUBSTANTIAL
RESOURCES IN RESULTING LITIGATION, THE OUTCOME OF WHICH IS
UNCERTAIN. ANY UNFAVORABLE OUTCOME OF SUCH LITIGATION COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION
AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF
OUR COMMON STOCK TO DECLINE.
Companies that produce brand pharmaceutical products routinely
bring litigation against ANDA or similar applicants that seek
regulatory approval to manufacture and market generic forms of
their branded products. These companies allege patent
infringement or other violations of intellectual property rights
as the basis for filing suit against an ANDA or similar
applicant. Likewise, patent holders may bring patent
infringement suits against companies that are currently
marketing and selling their approved generic products.
Litigation often involves significant expense and can delay or
prevent introduction or sale of our generic products. If patents
are held valid and infringed by our products in a particular
jurisdiction, we would, unless we could obtain a license from
the patent holder, need to cease selling in that jurisdiction
and may need to deliver up or destroy existing stock in that
jurisdiction.
There may also be situations where the Company uses its business
judgment and decides to market and sell products,
notwithstanding the fact that allegations of patent
infringement(s) have not been finally resolved by the courts.
The risk involved in doing so can be substantial because the
remedies available to the owner of a patent for infringement
include, among other things, damages measured by the profits
lost by the patent owner and not necessarily by the profits
earned by the infringer. In the case of a willful infringement,
the definition of which is subjective, such damages may be
trebled. Moreover, because of the discount pricing typically
involved with bioequivalent products, patented branded products
generally realize a substantially higher profit margin than
bioequivalent products. An adverse decision in a case such as
this or in other similar litigation could have a material
adverse effect on our business, financial position and results
of operations and could cause the market value of our common
stock to decline.
WE MAY
EXPERIENCE REDUCTIONS IN THE LEVELS OF REIMBURSEMENT FOR
PHARMACEUTICAL PRODUCTS BY GOVERNMENTAL AUTHORITIES, HMOS OR
OTHER THIRD-PARTY PAYERS. ANY SUCH REDUCTIONS COULD HAVE A
MATERIAL ADVERSE
46
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
Various governmental authorities (including the UK National
Health Service and the German statutory health insurance scheme)
and private health insurers and other organizations, such as
health maintenance organizations, or HMOs, in the United States,
provide reimbursement to consumers for the cost of certain
pharmaceutical products. Demand for our products depends in part
on the extent to which such reimbursement is available. In the
United States, third-party payers increasingly challenge the
pricing of pharmaceutical products. This trend and other trends
toward the growth of HMOs, managed health care and legislative
health care reform create significant uncertainties regarding
the future levels of reimbursement for pharmaceutical products.
Further, any reimbursement may be reduced in the future, perhaps
to the point that market demand for our products declines. Such
a decline could have a material adverse effect on our business,
financial position and results of operations and could cause the
market value of our common stock to decline.
In Germany, recent legislative changes have been introduced
which are aimed at reducing costs for the German statutory
health insurance, or SHI, scheme. The measure is likely to have
an impact upon marketing practice and reimbursement of drugs and
may increase pressure on competition and reimbursement margins.
These changes could have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
In the UK, the Office of Fair Trading produced recommendations
in February 2007 that suggested that the UK should move towards
a value based pricing structure for the reimbursement of
pharmaceutical products from 2010. If these recommendations are
accepted and lead to change in the system of reimbursement, this
could lead to increased pressure on competition and
reimbursement margins. This could have a material adverse effect
on our business, financial position and results of operations
and could cause the market value of our common stock to decline.
LEGISLATIVE
OR REGULATORY PROGRAMS THAT MAY INFLUENCE PRICES OF PRESCRIPTION
DRUGS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
Current or future federal, state or foreign laws and regulations
may influence the prices of drugs and, therefore, could
adversely affect the prices that we receive for our products.
For example, programs in existence in certain states in the
United States seek to set prices of all drugs sold within those
states through the regulation and administration of the sale of
prescription drugs. Expansion of these programs, in particular
state Medicare
and/or
Medicaid programs, or changes required in the way in which
Medicare
and/or
Medicaid rebates are calculated under such programs, could
adversely affect the prices we receive for our products and
could have a material adverse effect on our business, financial
position and results of operations and could cause the market
value of our common stock to decline.
In order to control expenditure on pharmaceuticals, most member
states in the EU regulate the pricing of products and, in some
cases, limit the range of different forms of pharmaceuticals
available for prescription by national health services. These
controls can result in considerable price differences between
member states.
WE ARE
INVOLVED IN VARIOUS LEGAL PROCEEDINGS AND CERTAIN GOVERNMENT
INQUIRIES AND MAY EXPERIENCE UNFAVORABLE OUTCOMES OF SUCH
PROCEEDINGS OR INQUIRIES, WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
We are involved in various legal proceedings and certain
government inquiries, including, but not limited to, patent
infringement, product liability, breach of contract and claims
involving Medicare
and/or
Medicaid reimbursements, some of which are described in our
periodic reports and involve claims for, or the possibility of
fines and penalties involving, substantial amounts of money or
other relief. If any of these legal proceedings or inquiries
47
were to result in an adverse outcome, the impact could have a
material adverse effect on our business, financial position and
results of operations and could cause the market value of our
common stock to decline.
With respect to product liability, we maintain commercial
insurance to protect against and manage a portion of the risks
involved in conducting our business. Although we carry
insurance, we believe that no reasonable amount of insurance can
fully protect against all such risks because of the potential
liability inherent in the business of producing pharmaceuticals
for human consumption. To the extent that a loss occurs,
depending on the nature of the loss and the level of insurance
coverage maintained, it could have a material adverse effect on
our business, financial position and results of operations and
could cause the market value of our common stock to decline.
WE
ENTER INTO VARIOUS AGREEMENTS IN THE NORMAL COURSE OF BUSINESS
WHICH PERIODICALLY INCORPORATE PROVISIONS WHEREBY WE INDEMNIFY
THE OTHER PARTY TO THE AGREEMENT. IN THE EVENT THAT WE WOULD
HAVE TO PERFORM UNDER THESE INDEMNIFICATION PROVISIONS, IT COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET
VALUE OF OUR COMMON STOCK TO DECLINE.
In the normal course of business, we periodically enter into
employment, legal settlement, and other agreements which
incorporate indemnification provisions. We maintain insurance
coverage which we believe will effectively mitigate our
obligations under certain of these indemnification provisions.
However, should our obligation under an indemnification
provision exceed our coverage or should coverage be denied, our
business, financial position and results of operations could be
materially affected and the market value of our common stock
could decline.
OUR
FUTURE SUCCESS IS HIGHLY DEPENDENT ON OUR CONTINUED ABILITY TO
ATTRACT AND RETAIN KEY PERSONNEL. ANY FAILURE TO ATTRACT AND
RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD
CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
It is important that we attract and retain qualified personnel
in order to develop new products and compete effectively. If we
fail to attract and retain key scientific, technical or
management personnel, our business could be affected adversely.
Additionally, while we have employment agreements with certain
key employees in place, their employment for the duration of the
agreement is not guaranteed. If we are unsuccessful in retaining
our key employees, it could have a material adverse effect on
our business, financial position and results of operations and
could cause the market value of our common stock to decline.
WE
HAVE BEGUN THE IMPLEMENTATION OF AN ENTERPRISE RESOURCE PLANNING
SYSTEM. AS WITH ANY IMPLEMENTATION OF A SIGNIFICANT NEW SYSTEM,
DIFFICULTIES ENCOUNTERED COULD RESULT IN BUSINESS INTERRUPTIONS,
AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE
MARKET VALUE OF OUR COMMON STOCK TO DECLINE.
We have begun the implementation of an enterprise resource
planning, or ERP, system in the United States to enhance
operating efficiencies and provide more effective management of
our business operations. Implementations of ERP systems and
related software carry risks such as cost overruns, project
delays and business interruptions and delays. If we experience a
material business interruption as a result of our ERP
implementation, it could have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
48
ANY
FUTURE ACQUISITIONS OR DIVESTITURES WOULD INVOLVE A NUMBER OF
INHERENT RISKS. THESE RISKS COULD CAUSE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
We may continue to seek to expand our product line through
complementary or strategic acquisitions of other companies,
products or assets, or through joint ventures, licensing
agreements or other arrangements or may determine to divest
certain products or assets. Any such acquisitions, joint
ventures or other business combinations may involve significant
challenges in integrating the new companys operations and
divestitures could be equally challenging. Either process may
prove to be complex and time consuming and require substantial
resources and effort. It may also disrupt our ongoing
businesses, which may adversely affect our relationships with
customers, employees, regulators and others with whom we have
business or other dealings.
We may be unable to realize synergies or other benefits expected
to result from any acquisitions, joint ventures or other
transactions or investments we may undertake, or be unable to
generate additional revenue to offset any unanticipated
inability to realize these expected synergies or benefits.
Realization of the anticipated benefits of acquisitions or other
transactions could take longer than expected, and implementation
difficulties, unforeseen expenses, complications and delays,
market factors or a deterioration in domestic and global
economic conditions could alter the anticipated benefits of any
such transactions. We may also compete for certain acquisition
targets with companies having greater financial resources than
us or other advantages over us that may prevent us from
acquiring a target. These factors could impair our growth and
ability to compete, require us to focus additional resources on
integration of operations rather than other profitable areas,
otherwise cause a material adverse effect on our business,
financial position and results of operations and could cause the
market value of our common stock to decline.
MATRIX,
AN IMPORTANT PART OF OUR BUSINESS, IS LOCATED IN INDIA AND
IT IS SUBJECT TO REGULATORY, ECONOMIC, SOCIAL AND POLITICAL
UNCERTAINTIES IN INDIA. THESE RISKS COULD CAUSE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
In recent years, Matrix has benefited from many policies of the
Government of India and the Indian state governments in the
states in which we operate, which are designed to promote
foreign investment generally, including significant tax
incentives, liberalized import and export duties and
preferential rules on foreign investment and repatriation. There
is no assurance that such policies will continue. Various
factors, such as changes in the current federal government,
could trigger significant changes in Indias economic
liberalization and deregulation policies and disrupt business
and economic conditions in India generally and our business in
particular.
In addition, our financial performance and the market price of
our securities may be adversely affected by general economic
conditions and economic and fiscal policy in India, including
changes in exchange rates and controls, interest rates and
taxation policies, as well as social stability and political,
economic or diplomatic developments affecting India in the
future. In particular, India has experienced significant
economic growth over the last several years, but faces major
challenges in sustaining that growth in the years ahead. These
challenges include the need for substantial infrastructure
development and improving access to healthcare and education.
Our ability to recruit, train and retain qualified employees and
develop and operate our manufacturing facilities could be
adversely affected if India does not successfully meet these
challenges.
Southern Asia has, from time to time, experienced instances of
civil unrest and hostilities among neighboring countries,
including India and Pakistan. Such military activity or
terrorist attacks in the future could influence the Indian
economy by disrupting communications and making travel more
difficult. Resulting political tensions could create a greater
perception that investments in companies with Indian operations
involve a high degree of risk, and that there is a risk of
disruption of services provided by companies with Indian
operations, which could have a material adverse effect on our
share price
and/or the
market for Matrixs products. Furthermore, if India were to
become engaged in armed hostilities, particularly hostilities
that were protracted or involved the threat or use of nuclear
weapons, Matrix might not be able to continue its operations. We
generally do not have insurance for losses
49
and interruptions caused by terrorist attacks, military
conflicts and wars. These risks could cause a material adverse
effect on our business, financial position and results of
operations and could cause the market value of our common stock
to decline.
MOVEMENTS
IN FOREIGN CURRENCY EXCHANGE RATES COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
A significant portion of our revenues, indebtedness and our
costs will be denominated in foreign currencies including the
Australian dollar, the British pound, the Canadian dollar, the
Euro, the Indian rupee and the Japanese Yen. We report our
financial results in U.S. dollars. Our results of
operations could be adversely affected by certain movements in
exchange rates. From time to time, we may implement currency
hedges intended to reduce our exposure to changes in foreign
currency exchange rates. However, our hedging strategies may not
be successful, and any of our unhedged foreign exchange payments
will continue to be subject to market fluctuations. These risks
could cause a material adverse effect on our business, financial
position and results of operations and could cause the market
value of our common stock to decline.
IF WE
FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, THEN WE COULD LOSE REVENUE UNDER OUR LICENSING
AGREEMENTS OR LOSE SALES TO GENERIC COPIES OF OUR BRANDED
PRODUCTS. THESE RISKS COULD CAUSE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF OPERATIONS AND
COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK TO
DECLINE.
Our success, particularly in our specialty business, depends in
large part on our ability to obtain, maintain and enforce
patents, and protect trade secrets, know-how and other
proprietary information. Our ability to commercialize any
branded product successfully will largely depend upon our
ability to obtain and maintain patents of sufficient scope to
prevent third parties from developing substantially equivalent
products. In the absence of patent and trade secret protection,
competitors may adversely affect our branded products business
by independently developing and marketing substantially
equivalent products. It is also possible that we could incur
substantial costs if we are required to initiate litigation
against others to protect or enforce our intellectual property
rights.
We have filed patent applications covering composition of,
methods of making,
and/or
methods of using, our branded products and branded product
candidates. We may not be issued patents based on patent
applications already filed or that we file in the future and if
patents are issued, they may be insufficient in scope to cover
our branded products. The issuance of a patent in one country
does not ensure the issuance of a patent in any other country.
Furthermore, the patent position of companies in the
pharmaceutical industry generally involves complex legal and
factual questions and has been and remains the subject of much
litigation. Legal standards relating to scope and validity of
patent claims are evolving. Any patents we have obtained, or
obtain in the future, may be challenged, invalidated or
circumvented. Moreover, the United States Patent and Trademark
Office may commence interference proceedings involving our
patents or patent applications. Any challenge to, or
invalidation or circumvention of, our patents or patent
applications would be costly, would require significant time and
attention of our management, could cause a material adverse
effect on our business, financial position and results of
operations and could cause the market value of our common stock
to decline.
OUR
SPECIALTY BUSINESS DEVELOPS, FORMULATES, MANUFACTURES AND
MARKETS BRANDED PRODUCTS THAT ARE SUBJECT TO RISKS. THESE RISKS
COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
POSITION AND RESULTS OF OPERATIONS AND COULD CAUSE THE MARKET
VALUE OF OUR COMMON STOCK TO DECLINE.
Our branded products, developed, formulated, manufactured and
marketed by our specialty business may be subject to the
following risks:
50
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competition from generic products;
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reductions in reimbursement rates by third-party payors;
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importation by consumers;
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product liability;
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drug development risks arising from typically greater research
and development investments than generics; and
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unpredictability with regard to establishing a market.
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These risks could cause a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
WE
MUST MAINTAIN ADEQUATE INTERNAL CONTROLS AND BE ABLE, ON AN
ANNUAL BASIS, TO PROVIDE AN ASSERTION AS TO THE EFFECTIVENESS OF
SUCH CONTROLS. FAILURE TO MAINTAIN ADEQUATE INTERNAL CONTROLS OR
TO IMPLEMENT NEW OR IMPROVED CONTROLS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
Effective internal controls are necessary for the Company to
provide reasonable assurance with respect to its financial
reports. We are spending a substantial amount of management time
and resources to comply with changing laws, regulations and
standards relating to corporate governance and public
disclosure. In the United States such changes include the
Sarbanes-Oxley Act of 2002, new SEC regulations and the New York
Stock Exchange rules. In particular, Section 404 of the
Sarbanes-Oxley Act of 2002 requires managements annual
review and evaluation of our internal control over financial
reporting and attestations as to the effectiveness of these
controls by our independent registered public accounting firm.
If we fail to maintain the adequacy of our internal controls, we
may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal control over financial
reporting. Additionally, internal control over financial
reporting may not prevent or detect misstatements because of its
inherent limitations, including the possibility of human error,
the circumvention or overriding of controls, or fraud.
Therefore, even effective internal controls can provide only
reasonable assurance with respect to the preparation and fair
presentation of financial statements. In addition, projections
of any evaluation of effectiveness of internal control over
financial reporting to future periods are subject to the risk
that the control may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate. If the Company fails to maintain
the adequacy of its internal controls, including any failure to
implement required new or improved controls, this could have a
material adverse effect on our business, financial position and
results of operations, and the market value of our common stock
could decline.
On October 2, 2007 we acquired Merck Generics. For purposes
of managements evaluation of our internal control over
financial reporting as of December 31, 2007, we elected to
exclude Merck Generics from the scope of managements
assessment as permitted by guidance provided by the SEC.
THERE
ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN
ACCORDANCE WITH GAAP. ANY FUTURE CHANGES IN ESTIMATES, JUDGMENTS
AND ASSUMPTIONS USED OR NECESSARY REVISIONS TO PRIOR ESTIMATES,
JUDGMENTS OR ASSUMPTIONS OR CHANGES IN ACCOUNTING STANDARDS
COULD LEAD TO A RESTATEMENT OR REVISION TO PREVIOUSLY
CONSOLIDATED FINANCIAL STATEMENTS WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS
OF OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON
STOCK TO DECLINE.
The consolidated and condensed consolidated financial statements
included in the periodic reports we file with the SEC are
prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP. The
preparation of financial statements in accordance with GAAP
involves making estimates, judgments
51
and assumptions that affect reported amounts of assets
(including intangible assets), liabilities, revenues, expenses
(including acquired in-process research and development) and
income. Estimates, judgments and assumptions are inherently
subject to change in the future and any necessary revisions to
prior estimates, judgments or assumptions could lead to a
restatement. Also, any new or revised accounting standards may
require adjustments to previously issued financial statements.
Any such changes could result in corresponding changes to the
amounts of assets (including goodwill and other intangible
assets), liabilities, revenues, expenses (including acquired
in-process research and development) and income. Any such
changes could have a material adverse effect on our business,
financial position and results of operations and could cause the
market value of our common stock to decline.
WE ARE
SUBJECT TO THE U.S. FOREIGN CORRUPT PRACTICES ACT AND SIMILAR
WORLDWIDE ANTI-BRIBERY LAWS, WHICH IMPOSE RESTRICTIONS AND MAY
CARRY SUBSTANTIAL PENALTIES. ANY VIOLATIONS OF THESE LAWS, OR
ALLEGATIONS OF SUCH VIOLATIONS, COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL POSITION AND RESULTS OF
OPERATIONS AND COULD CAUSE THE MARKET VALUE OF OUR COMMON STOCK
TO DECLINE.
The U.S. Foreign Corrupt Practices Act and similar
anti-bribery laws in other jurisdictions generally prohibit
companies and their intermediaries from making improper payments
to officials for the purpose of obtaining or retaining business.
Our policies mandate compliance with these anti-bribery laws,
which often carry substantial penalties. We operate in
jurisdictions that have experienced governmental corruption to
some degree, and, in certain circumstances, strict compliance
with anti-bribery laws may conflict with certain local customs
and practices. We cannot assure you that our internal control
policies and procedures always will protect us from reckless or
other inappropriate acts committed by our affiliates, employees
or agents. Violations of these laws, or allegations of such
violations, could have a material adverse effect on our
business, financial position and results of operations and could
cause the market value of our common stock to decline.
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ITEM 5.
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OTHER
INFORMATION
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None.
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3
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.1(a)
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Amended and Restated Articles of Incorporation of the
registrant, as amended, filed as Exhibit 3.1 to the
Form 10-Q
for the quarterly period ended June 30, 2003, and
incorporated herein by reference.
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3
|
.1(b)
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Amendment to Amended and Restated Articles of Incorporation of
the registrant, filed as Exhibit 3.2 to the Report on
Form 8-K
filed with the SEC on October 5, 2007, and incorporated
herein by reference.
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3
|
.1(c)
|
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Amendment to Amended and Restated Articles of Incorporation of
the registrant, filed as Exhibit 3.1 to the Report on
Form 8-K
filed with the SEC on November 20, 2007, and incorporated
herein by reference.
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3
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.2
|
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Bylaws of the registrant, as amended to date, filed as
Exhibit 3.1 to the Report of
Form 8-K
filed on October 5, 2007, and incorporated herein by
reference.
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4
|
.1(a)
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Rights Agreement dated as of August 22, 1996, between the
registrant and American Stock Transfer &
Trust Company, filed as Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on September 3, 1996, and incorporated
herein by reference.
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4
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.1(b)
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Amendment to Rights Agreement dated as of November 8, 1999,
between the registrant and American Stock Transfer &
Trust Company, filed as Exhibit 1 to
Form 8-A/A
filed with the SEC on March 31, 2000, and incorporated
herein by reference.
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4
|
.1(c)
|
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Amendment No. 2 to Rights Agreement dated as of
August 13, 2004, between the registrant and American Stock
Transfer & Trust Company, filed as
Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on August 16, 2004, and incorporated
herein by reference.
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4
|
.1(d)
|
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Amendment No. 3 to Rights Agreement dated as of
September 8, 2004, between the registrant and American
Stock Transfer & Trust Company, filed as
Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on September 9, 2004, and incorporated
herein by reference.
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52
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4
|
.1(e)
|
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Amendment No. 4 to Rights Agreement dated as of
December 2, 2004, between the registrant and American Stock
Transfer & Trust Company, filed as
Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on December 3, 2004, and incorporated
herein by reference.
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4
|
.1(f)
|
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Amendment No. 5 to Rights Agreement dated as of
December 19, 2005, between the registrant and American
Stock Transfer & Trust Company, filed as
Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on December 19, 2005, and incorporated
herein by reference.
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4
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.2(a)
|
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Indenture, dated as of July 21, 2005, between the
registrant and The Bank of New York, as trustee, filed as
Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on July 27, 2005, and incorporated
herein by reference.
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4
|
.2(b)
|
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Second Supplemental Indenture, dated as of October 1, 2007,
among the registrant, the Subsidiaries of the registrant listed
on the signature page thereto and The Bank of New York, as
trustee, filed as Exhibit 4.1 to the Report on
Form 8-K
filed with the SEC on October 5, 2007, and incorporated
herein by reference.
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4
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.3
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Registration Rights Agreement, dated as of July 21, 2005,
among the registrant, the Guarantors party thereto and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, BNY
Capital Markets, Inc., KeyBanc Capital Markets (a Division of
McDonald Investments Inc.), PNC Capital Markets, Inc. and
SunTrust Capital Markets, Inc., filed as Exhibit 4.2 to the
Report on
Form 8-K
filed with the SEC on July 27, 2005, and incorporated
herein by reference.
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10
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.1
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Amendment No. 2 to Executive Employment Agreement dated as
of March 12, 2008, by and between registrant and Edward J.
Borkowski filed as Exhibit 99.1 to the Report on
Form 8-K
filed with the SEC on March 12, 2008, and incorporated
herein by reference.
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10
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.2
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Amended and Restated Transition and Succession Agreement dated
as of October 2, 2007, between the registrant and Heather
Bresch.
|
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10
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.3
|
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Executive Employment Agreement, dated as of January 31,
2007, between the registrant and Heather Bresch.
|
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10
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.4
|
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Amendment No. 1 to Executive Employment Agreement dated as
of October 2, 2007, by and between the registrant and
Heather Bresch.
|
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10
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.5
|
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Transition and Succession Agreement dated as of January 31,
2007, between the registrant and Rajiv Malik.
|
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10
|
.6
|
|
Executive Employment Agreement, dated as of January 31,
2007, between the registrant and Rajiv Malik.
|
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10
|
.7
|
|
Amendment No. 1 to Executive Employment Agreement dated as
of October 2, 2007, by and between the registrant and Rajiv
Malik.
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31
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.1
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Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31
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.2
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Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32
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|
|
Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
53
SIGNATURES
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.
Mylan Inc.
(Registrant)
Robert J. Coury
Vice Chairman and Chief Executive Officer
May 12, 2008
Edward J. Borkowski
Executive Vice President and Chief Financial Officer
(Principal financial officer)
May 12, 2008
Daniel C. Rizzo, Jr.
Senior Vice President and Corporate Controller
(Principal accounting officer)
May 12, 2008
54
EXHIBIT INDEX
|
|
|
|
|
|
10
|
.2
|
|
Amended and Restated Transition and Succession Agreement dated
as of October 2, 2007, between the registrant and Heather
Bresch.
|
|
10
|
.3
|
|
Executive Employment Agreement, dated as of January 31,
2007, between the registrant and Heather Bresch.
|
|
10
|
.4
|
|
Amendment No. 1 to Executive Employment Agreement dated as
of October 2, 2007, by and between the registrant and
Heather Bresch.
|
|
10
|
.5
|
|
Transition and Succession Agreement dated as of January 31,
2007, between the registrant and Rajiv Malik.
|
|
10
|
.6
|
|
Executive Employment Agreement, dated as of January 31,
2007, between the registrant and Rajiv Malik.
|
|
10
|
.7
|
|
Amendment No. 1 to Executive Employment Agreement dated as
of October 2, 2007, by and between the registrant and Rajiv
Malik.
|
|
31
|
.1
|
|
Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
55