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Bristol-Myers Squibb Company 10-Q 2009 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One)
Commission file number: 1-1136
BRISTOL-MYERS SQUIBB COMPANY (Exact name of registrant as specified in its charter)
345 Park Avenue, New York, N.Y. 10154 (Address of principal executive offices) (Zip Code)
(212) 546-4000 (Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ 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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No x APPLICABLE ONLY TO CORPORATE ISSUERS: At September 30, 2009, there were 1,980,980,141 shares outstanding of the Registrant’s $0.10 par value common stock.
Table of ContentsINDEX TO FORM 10-Q September 30, 2009
Table of ContentsPART I—FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS Dollars and Shares in Millions, Except Per Share Data (UNAUDITED)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND RETAINED EARNINGS Dollars in Millions (UNAUDITED)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsCONSOLIDATED BALANCE SHEETS Dollars in Millions, Except Share and Per Share Data (UNAUDITED)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in Millions (UNAUDITED)
The consolidated statements of cash flows include the activities of the discontinued operations. The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNote 1. Basis of Presentation and New Accounting Standards Bristol-Myers Squibb Company (which may be referred to as Bristol-Myers Squibb, BMS or the Company) prepared these unaudited consolidated financial statements following the requirements of the Securities and Exchange Commission and United States (U.S.) generally accepted accounting principles (GAAP) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements can be condensed or omitted. The Company is responsible for the consolidated financial statements included in this Form 10-Q. These consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at September 30, 2009 and December 31, 2008, the results of its operations for the three and nine months ended September 30, 2009 and 2008 and its cash flows for the nine months ended September 30, 2009 and 2008. All material intercompany balances and transactions have been eliminated. Material subsequent events are evaluated and disclosed through the report issuance date, October 22, 2009. These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008 included in our Current Report on Form 8-K filed on April 28, 2009. See “—Note 3. Business Segments” for discussion of the change in business segments, due to the Mead Johnson Nutrition Company (Mead Johnson) initial public offering. Certain reclassifications were made to conform to the current period presentation. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full year operating results. The Company recognizes revenue when title and substantially all the risks and rewards of ownership have transferred to the customer. Generally, revenue is recognized at the time of shipment; however, for certain sales made by Mead Johnson and certain non-U.S. businesses within the BioPharmaceuticals segment, revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of recognition to reflect expected returns that are estimated based on historical experience and business trends. Additionally, provisions are made at the time of revenue recognition for all discounts, rebates and estimated sales allowances based on historical experience updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue. In addition, the Company includes alliance revenue in net sales. The Company has agreements to promote pharmaceuticals discovered by other companies. Alliance revenue is based upon a percentage of the Company’s copromotion partners’ net sales and is earned when the related product is shipped by the copromotion partners and title passes to the customer. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining values of intangible assets; restructuring charges and accruals; sales rebate and return accruals; inventory obsolescence; legal contingencies; tax assets and tax liabilities; stock-based compensation; retirement and postretirement benefits (including the actuarial assumptions); financial instruments, including marketable securities with no observable market quotes; as well as in estimates used in applying the revenue recognition policy. Actual results may differ from the estimated results. In October 2009, the Financial Accounting Standards Board (FASB) approved for issuance Emerging Issues Task Force (EITF) issue 08-01, Revenue Arrangements with Multiple Deliverables (currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 605-25). This statement provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The EITF introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The Company is currently evaluating the impact of adopting this pronouncement. In July 2009, the FASB issued ASC topic 105 (formerly Statement of Financial Standards (SFAS) No. 168, The Hierarchy of Generally Accepted Accounting Principles). ASC 105 contains guidance which reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. This pronouncement is effective September 15, 2009. The adoption of this pronouncement did not have an effect on the consolidated financial statements. The Company adopted the provisions of ASC 820-10, Fair Value Measurements and Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to non-financial assets and liabilities effective January 1, 2009. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of ASC 820-10 did not have an impact on the Company’s consolidated financial statements.
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Table of ContentsIn June 2009, the FASB finalized SFAS No. 166, Accounting for Transfers of Financial Asset, an amendment of FASB Statement No. 140, which was later superseded by the FASB Codification and included in ASC topic 860. Among other items the provision removes the concept of a qualifying special-purpose entity and clarifies that the objective of paragraph ASC 860-10-40-4 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. This pronouncement is effective January 1, 2010. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated financial statements. In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was later superseded by the FASB Codification and included in ASC topic 810. The provisions of ASC 810 provide guidance in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. This pronouncement also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. New provisions of this pronouncement are effective January 1, 2010. The Company is currently evaluating the impact of adopting this pronouncement. The Company adopted ASC 810-10-65-1, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51) on January 1, 2009. As a result of adoption the following retroactive adjustment was made: the December 31, 2008 noncontrolling interest balance of $33 million, previously presented as $66 million of receivables and $33 million of non-current other liabilities, has been presented as part of equity. Also, noncontrolling interest has been presented as a reconciling item in the consolidated statements of earnings, the consolidated statements of comprehensive income and retained earnings and the consolidated statements of cash flows. The Company adopted ASC 805 (formerly SFAS No. 141(R), Business Combinations), for business combinations on or after January 1, 2009. This requires recognition of assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, this pronouncement requires recognition of identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This pronouncement also requires the fair value of acquired in-process research and development (IPRD) to be recorded as indefinite lived intangibles, contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. See “—Note 5. Medarex, Inc. Acquisition” for Medarex, Inc. purchase accounting details. The Company adopted the provisions of ASC 808-10 Collaborative Arrangements (formerly Emerging Issues Task Force Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property), effective January 1, 2009 and the provisions have been applied retroactively. According to this pronouncement a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third-parties in connection with collaborative arrangements are presented gross or net based on the criteria in ASC 605-45-45 Overall Considerations of Reporting Revenue Gross as a Principal vs. Net as an Agent (EITF issue No. 99-19, Reporting Revenue Gross as a Principal vs. Net as an Agent) and other accounting literature. Payments to or from collaborators are evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are disclosed along with the accounting policies and the classification of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity are accounted for under other accounting literature; however, required disclosure under ASC 808-10 applies to the entire collaborative agreement. This pronouncement did not have a material impact on the Company’s consolidated financial statements.
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Table of ContentsNote 2. Alliances and Collaborations sanofi The Company has agreements with sanofi-aventis (sanofi) for the codevelopment and cocommercialization of AVAPRO*/AVALIDE* (irbesartan/irbesartan-hydrochlorothiazide), an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy, and PLAVIX* (clopidogrel bisulfate), a platelet aggregation inhibitor. The worldwide alliance operates under the framework of two geographic territories; one in the Americas (principally the U.S., Canada, Puerto Rico and Latin American countries) and Australia and the other in Europe and Asia. Accordingly, two territory partnerships were formed to manage central expenses, such as marketing, research and development and royalties, and to supply finished product to the individual countries. In general, at the country level, agreements either to copromote (whereby a partnership was formed between the parties to sell each brand) or to comarket (whereby the parties operate and sell their brands independently of each other) are in place. The agreements expire on the later of (i) with respect to PLAVIX*, 2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas and Australia and 2013 in Europe and Asia and (ii) the expiration of all patents and other exclusivity rights in the applicable territory. The Company acts as the operating partner for the territory covering the Americas and Australia and owns a 50.1% majority controlling interest in this territory. Sanofi’s ownership interest in this territory is 49.9%. As such, the Company consolidates all country partnership results for this territory and records sanofi’s share of the results as a noncontrolling interest which was $443 million ($300 million after-tax) and $375 million ($250 million after-tax) for the three months ended September 30, 2009 and 2008, respectively, and $1,258 million ($849 million after-tax) and $1,063 million ($714 million after-tax) for the nine months ended September 30, 2009 and 2008, respectively. The Company recorded net sales in this territory and in comarketing countries outside this territory (Germany, Italy, Spain and Greece) of $1,883 million and $1,773 million for the three months ended September 30, 2009 and 2008, respectively, and $5,472 million and $5,108 million for the nine months ended September 30, 2009 and 2008, respectively. Discovery royalties owed to sanofi were included in cost of products sold and amounted to $305 million and $273 million during the three months ended September 30, 2009 and 2008, respectively, and $881 and $778 million during the nine months ended September 30, 2009 and 2008, respectively. Cash flows from operating activities of the partnerships in the territory covering the Americas and Australia are recorded as operating activities within the Company’s consolidated statements of cash flows. Distributions of partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are also recorded within operating activities on the Company’s consolidated statements of cash flows. Sanofi acts as the operating partner for the territory covering Europe and Asia and owns a 50.1% majority financial controlling interest within this territory. The Company’s ownership interest in the partnership within this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statements of earnings. The Company’s share of income from these partnership entities before taxes was $141 million and $163 million for the three months ended September 30, 2009 and 2008, respectively, and $442 million and $487 million for the nine months ended September 30, 2009 and 2008, respectively. The Company routinely receives distributions of profits and provides funding for the ongoing operations of the partnerships in the territory covering Europe and Asia. These transactions are recorded as operating activities within the Company’s consolidated statements of cash flows. The Company and sanofi have a separate partnership governing the copromotion of irbesartan in the U.S. Under this alliance, the Company recognized other income of $8 million in each of the three month periods ended September 30, 2009 and 2008, and $24 million in each of the nine month periods ended September 30, 2009 and 2008, related to the amortization of deferred income associated with sanofi’s $350 million payment to the Company for their acquisition of an interest in the irbesartan license for the U.S. upon formation of the alliance. The unrecognized portion of the deferred income amounted to $99 million and $123 million at September 30, 2009 and December 31, 2008, respectively, and will continue to amortize through 2012, the expected expiration of the license. The income attributed to certain packaging activities and development royalties with sanofi are reflected net in other income and were $20 million and $26 million during the three months ended September 30, 2009 and 2008, respectively, and $43 million and $76 million during the nine months ended September 30, 2009 and 2008, respectively.
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Table of ContentsThe following is the summarized financial information for the Company’s equity interests in the partnerships with sanofi for the territory covering Europe and Asia:
Otsuka The Company has a worldwide commercialization agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka), to codevelop and copromote with Otsuka, ABILIFY* (aripiprazole), for the treatment of schizophrenia, bipolar mania disorder and major depressive disorder, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company or Otsuka to third-party customers. The product is currently copromoted with Otsuka in the U.S., United Kingdom (UK), Germany, France and Spain. Currently in the U.S., Germany, France and Spain, where the product is invoiced to third-party customers by the Company on behalf of Otsuka, the Company records alliance revenue for its 65% contractual share of third-party net sales and records all expenses related to the product. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to third-party customers. In the UK and Italy, where the Company is presently the exclusive distributor for the product, the Company records 100% of the net sales and related cost of products sold and expenses. The Company also has an exclusive right to sell ABILIFY* in other countries in Europe, the Americas and a number of countries in Asia. In these countries, the Company records 100% of the net sales and related cost of products sold. In April 2009, the Company and Otsuka announced an agreement to extend the U.S. portion of the commercialization and manufacturing agreement until the expected loss of product exclusivity in April 2015. Under the terms of the agreement, the Company paid Otsuka $400 million, which will be amortized as a reduction of net sales through the extension period. Beginning on January 1, 2010, the share of ABILIFY* U.S. net sales that the Company records will change from 65% to the following:
During this period, Otsuka will be responsible for 30% of the expenses related to the commercialization of ABILIFY*. Beginning January 1, 2013, and through the expected loss of U.S. exclusivity in 2015, the Company will receive the following percentages of U.S. annual net sales:
During this period, Otsuka will be responsible for 50% of all expenses related to the commercialization of ABILIFY*. In addition, the Company and Otsuka announced that they have entered into an oncology collaboration for SPRYCEL (dasatinab) and IXEMPRA (ixabepilone), which includes the U.S., Japan and European Union (EU) markets (the Oncology Territory). Beginning in 2010 through 2020, the collaboration fees the Company will pay to Otsuka annually are the following percentages of net sales of SPRYCEL and IXEMPRA in the Oncology Territory:
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Table of ContentsDuring these periods, Otsuka will contribute (i) 20% of the first $175 million of certain commercial operational expenses relating to the oncology products, and (ii) 1% of such commercial operational expenses relating to the products in the territory in excess of $175 million. Starting in 2011, Otsuka will have the right to co-promote SPRYCEL with the Company in the U.S. and Japan and in 2012, in the top five EU markets. The U.S. extension and the oncology collaboration include a change-of-control provision in the case of an acquisition of the Company. If the acquiring company does not have a competing product to ABILIFY*, then the new company will assume the ABILIFY* agreement (as amended) and the oncology collaboration as it exists today. If the acquiring company has a product that competes with ABILIFY*, Otsuka can elect to request the acquiring company to choose whether to divest ABILIFY* or the competing product. In the scenario where ABILIFY* is divested, Otsuka would be obligated to acquire the Company’s rights under the ABILIFY* agreement (as amended). The agreements also provide that in the event of a generic competitor to ABILIFY* after January 1, 2010, the Company has the option of terminating the ABILIFY* April 2009 amendment (with the agreement as previously amended remaining in force). If the Company were to exercise such option then either (i) the Company would receive a payment from Otsuka according to a pre-determined schedule and the oncology collaboration would terminate at the same time or (ii) the oncology collaboration would continue for a truncated period according to a pre-determined schedule. For the entire EU, the agreement remained unchanged and will expire in June 2014. In other countries where the Company has the exclusive right to sell ABILIFY*, the agreement expires on the later of the 10th anniversary of the first commercial sale in such country or expiration of the applicable patent in such country. The Company recorded total revenue for ABILIFY* of $653 million and $564 million for the three months ended September 30, 2009 and 2008, respectively, and $1,885 million and $1,547 million for the nine months ended September 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $1 million for the each of the three months periods ended September 30, 2009 and 2008 and $5 million for the each of the nine months periods ended September 30, 2009 and 2008 for previously capitalized milestone payments. The unamortized capitalized payment balance is recorded in other intangible assets, net and was $18 million at September 30, 2009 and $23 million at December 31, 2008, and will continue to amortize through 2012. The Company amortized as a reduction of net sales $17 million and $33 million for the three and nine month periods ended September 30, 2009, related to the $400 million extension payment. The unamortized portion of this payment amounted to $367 million at September 30, 2009, and is included in other assets, net. Lilly The Company has a commercialization agreement with Eli Lilly and Company (Lilly) through Lilly’s November 2008 acquisition of ImClone Systems Incorporated (ImClone) for the codevelopment and copromotion of ERBITUX* (cetuximab) in the U.S., which expires as to ERBITUX* in September of 2018. The Company also has codevelopment and copromotion rights in Canada and Japan. ERBITUX* is indicated for use in the treatment of patients with metastatic colorectal cancer and for use in the treatment of squamous cell carcinoma of the head and neck. Under the agreement covering North America, Lilly receives a distribution fee based on a flat rate of 39% of net sales in North America. In October 2007, the Company and ImClone amended their codevelopment agreement with Merck KGaA to provide for cocommercialization of ERBITUX* in Japan, which expires in 2032. Lilly has the ability to terminate the agreement after 2018 if it determines that it is commercially unreasonable for Lilly to continue. ERBITUX* received marketing approval in Japan in July 2008 for the use of ERBITUX* in treating patients with advanced or recurrent colorectal cancer. Merck recorded sales of ERBITUX* in Japan and the Company receives 50% of the pre-tax profit which is further shared equally with Lilly. The Company records its share of profits from commercialization in Japan in other income which was $8 million and $18 million for the three and nine months ended September 30, 2009. The Company recorded net sales for ERBITUX* of $179 million and $184 million for the three months ended September 30, 2009 and 2008, respectively, and $516 million and $567 million for the nine months ended September 30, 2009 and 2008, respectively. The Company amortized into cost of products sold $9 million in each of the three month periods ended September 30, 2009 and 2008, respectively, and $28 million in each of the nine month periods ended September 30, 2009 and 2008, for previously capitalized milestone payments, which were accounted for as a license acquisition. The unamortized portion of the approval payments is recorded in other intangible assets, net and was $332 million at September 30, 2009 and $360 million at December 31, 2008, and will continue to amortize through 2018, the remaining term of the agreement. Upon initial execution of the commercialization agreement, the Company acquired an ownership interest in ImClone which approximated 17% at the time of the transaction noted below, and had been accounting for its investment under the equity method. The Company recorded equity income of $2 million and an equity loss of $3 million in net income of affiliates for the three and nine months ended September 30, 2008, respectively, which was adjusted for revenue recognized by ImClone for pre-approved milestone payments made by the Company prior to 2004. The Company sold its shares of ImClone for $1.0 billion and recognized a pre-tax gain of $895 million in November 2008.
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Table of ContentsGilead The Company and Gilead Sciences, Inc. (Gilead) have a joint venture to develop and commercialize ATRIPLA* (efavirenz 600 mg/ emtricitabine 200 mg/ tenofovir disoproxil fumarate 300 mg), a once-daily single tablet three-drug regimen combining the Company’s SUSTIVA (efavirenz) and Gilead’s TRUVADA* (emtricitabine and tenofovir disoproxil fumarate), in the U.S., Canada and Europe. Gilead records all ATRIPLA* revenues in the U.S., Canada and most countries in Europe and consolidates the results of the joint venture in its operating results. The Company records revenue for the bulk efavirenz component of ATRIPLA* upon sales of that product to third-party customers. In a limited number of EU countries, the Company records revenue for ATRIPLA* where the Company agreed to purchase the product from Gilead and distribute it to third-party customers. The Company recorded revenues of $218 million and $155 million for the three months ended September 30, 2009 and 2008, respectively, and $606 million and $405 million for the nine months ended September 30, 2009 and 2008, respectively, related to ATRIPLA* sales. The Company accounts for its participation in the U.S. joint venture under the equity method of accounting and records its share of the joint venture results in equity in net income of affiliates in the consolidated statements of earnings. The Company recorded an equity loss on the U.S. joint venture with Gilead of $2 million and $2 million for the three months ended September 30, 2009 and 2008, respectively, and $7 million and $6 million for the nine months ended September 30, 2009 and 2008, respectively. AstraZeneca The Company maintains two worldwide codevelopment and cocommercialization agreements with AstraZeneca PLC (AstraZeneca), one for the worldwide (except for Japan) codevelopment and cocommercialization of ONGLYZA (saxagliptin), a DPP-IV inhibitor (Saxagliptin Agreement), and one for the worldwide (including Japan) codevelopment and cocommercialization of dapagliflozin, a sodium-glucose cotransporter-2 (SGLT2) inhibitor (SGLT2 Agreement). Both compounds are being studied for the treatment of diabetes and were discovered by the Company. Under each agreement, the two companies will jointly develop the clinical and marketing strategy and share commercialization expenses and profits/losses equally on a global basis (excluding, in the case of saxagliptin, Japan), and the Company will manufacture both products. The companies will cocommercialize dapagliflozin in Japan and share profits/losses equally. Under each agreement, the Company has the option to decline involvement in cocommercialization in a given country and instead receive a royalty. On July 31, 2009, the FDA approved ONGLYZA as an adjunct to diet and exercise to improve blood sugar (glycemic) control in adults for the treatment of type 2 diabetes mellitus. In August 2009, the Company and AstraZeneca launched ONGLYZA in the U.S. The Company recorded sales of $20 million in third quarter of 2009. Due to the ONGLYZA (saxagliptin) U.S. launch, the Company received a $100 million milestone payment from AstraZeneca in September 2009. On October 1, 2009 ONGLYZA received a Marketing Authorization for use in the EU to treat adults with type 2 diabetes in combination with either metformin, a sulfonylurea or a thiazolidinedione, when any of these agents alone, with diet and exercise, do not provide adequate glycemic control. The $250 million in upfront and milestone payments received by the Company, including the $100 million milestone payment noted above, were deferred and are being recognized over the useful life of the products into other income. The Company amortized into other income $4 million and $1 million of these payments in the three months ended September 30, 2009 and 2008, respectively, and $10 million and $5 million in the nine months ended September 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $224 million at September 30, 2009 and $134 million at December 31, 2008. Additional milestone payments are expected to be received by the Company upon the successful achievement of various development and regulatory events as well as sales-related milestones. Under the Saxagliptin Agreement, the Company could receive up to an additional $150 million if all development and regulatory milestones for saxagliptin are met and up to an additional $300 million if all sales-based milestones for saxagliptin are met. Under the SGLT2 Agreement, the Company could receive up to an additional $350 million if all development and regulatory milestones for dapagliflozin are met and up to an additional $390 million if all sales-based milestones for dapagliflozin are met. Under each agreement, the Company and AstraZeneca also share in development and commercialization costs. The majority of development costs under the initial development plans through 2009 will be paid by AstraZeneca (with AstraZeneca bearing all the costs of the initial agreed upon development plan for dapagliflozin in Japan) and any additional development costs will generally be shared equally. The net reimbursements to the Company for development costs related to saxagliptin and dapagliflozin are classified in research and development expenses and were $2 million and $29 million for the three months ended September 30, 2009 and 2008, respectively, and $31 million and $110 million for the nine months ended September 30, 2009 and 2008, respectively.
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Table of ContentsPfizer The Company and Pfizer Inc. (Pfizer) maintain a worldwide codevelopment and cocommercialization agreement for apixaban, an anticoagulant discovered by the Company being studied for the prevention and treatment of a broad range of venous and arterial thrombotic conditions. The Company received $290 million in upfront payments in the two year period ended December 31, 2008. In addition, the Company received a $150 million milestone payment in April 2009 for the commencement of Phase III clinical trials for prevention of major adverse cardiovascular events in acute coronary syndrome. The Company amortized into other income $7 million and $5 million of the upfront and milestone payments in the three months ended September 30, 2009 and 2008, respectively, and $19 million and $14 million for the nine months ended September 30, 2009 and 2008, respectively. The unamortized portion of the upfront and milestone payments was $392 million at September 30, 2009 and $261 million at December 31, 2008. Pfizer will fund 60% of all development costs effective January 1, 2007 going forward, and the Company will fund 40%. The net reimbursements to the Company for apixaban development costs are classified in research and development expenses and were $49 million and $42 million for the three months ended September 30, 2009 and 2008, respectively, and $136 million and $125 million for the nine months ended September 30, 2009 and 2008, respectively. The Company may also receive additional payments from Pfizer of up to an additional $630 million based on development and regulatory milestones. The companies will jointly develop the clinical and marketing strategy, will share commercialization expenses and profits/losses equally on a global basis, and will manufacture product under this arrangement. Exelixis In December 2008, the Company and Exelixis, Inc. (Exelixis) entered into a global codevelopment and cocommercialization arrangement for XL184 (a MET/VEG/RET inhibitor), an oral anti-cancer compound, and a license for XL281 with utility in RAS and RAF mutant tumors under development by Exelixis. Under the terms of the arrangement, the Company paid Exelixis $195 million in 2008 upon execution of the agreement, and paid an additional $45 million in the first nine months of 2009, all of which was expensed as research and development in 2008. Exelixis will fund the first $100 million of development for XL184. If Exelixis elects to continue sharing development, Exelixis will fund 35% of future global development costs (excluding Japan) and share U.S. profits/losses equally and has an option to copromote in the U.S.; failing such elections, Exelixis receives milestones and royalties on U.S. sales. The Company will fund 100% of development costs in Japan. In addition to royalties on non-U.S. sales, the Company could pay up to $610 million if all development and regulatory milestones are met on both compounds and up to an additional $300 million if all sales-based milestones are met on both compounds. In addition, the Company and Exelixis have a history of collaborations to identify, develop and promote oncology targets. In January 2007, the Company and Exelixis entered into an oncology collaboration and license agreement under which Exelixis is responsible for the identification and preclinical development of small molecule drug candidates directed against mutually selected targets. Under the terms of this agreement, the Company paid Exelixis $60 million of upfront fees in 2007. During 2008, the Company paid Exelixis $40 million in IND acceptance milestones. If Exelixis elects to codevelop and copromote in the U.S., both parties will equally share development costs and profits. If Exelixis opts out of the codevelopment and copromotion agreement, the Company will take over full development and U.S. commercial rights, and, if successful, will pay Exelixis development and regulatory milestones up to $380 million and up to an additional $180 million of sales-based milestones, as well as royalties. Since July 2001, the Company has held an equity investment in Exelixis, which at September 30, 2009 represented less than 1% of their outstanding shares. ZymoGenetics In January 2009, the Company and ZymoGenetics, Inc. (ZymoGenetics) entered into a global codevelopment arrangement in the U.S. for PEG-Interferon lambda, a novel type 3 interferon for the treatment of hepatitis C. Under the terms of the arrangement, the Company paid ZymoGenetics $130 million of upfront and milestone payments in the first nine months of 2009, all of which was expensed as research and development. ZymoGenetics will fund the first $100 million of global development for PEG-Interferon lambda after which, ZymoGenetics will fund 20% of development costs in the U.S. and Europe and the Company will fund 100% of the development costs in the rest of the world. If ZymoGenetics elects to continue sharing development and commercialization costs in the U.S., ZymoGenetics will share 40% of U.S. profits/losses and has an option to copromote in the U.S. Failing such election to fund development costs in the U.S., ZymoGenetics will receive royalties on U.S. sales. The Company will pay ZymoGenetics royalties on all non-U.S. sales. In addition, the Company could pay up to $405 million if all hepatitis C development and regulatory milestones are met; up to $287 million if development and regulatory milestones for other potential indications are met; and up to an additional $285 million if all sales-based milestones are met.
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Table of ContentsNote 3. Business Segments Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company reports financial and operating information in two segments —BioPharmaceuticals and Mead Johnson. The BioPharmaceuticals segment is comprised of the global biopharmaceutical and international consumer medicines businesses. The Mead Johnson segment consists of the Company’s 83.1% interest in Mead Johnson Nutrition Company, which is primarily an infant formula and children’s nutrition business. Effective January 1, 2009, the Company changed its measurement of segment income for all the periods presented. The following summarizes the most significant changes from the previously reported amounts:
The following table reconciles the Company’s segment results to earnings from continuing operations before income taxes:
Net sales of the Company’s key products and product categories within business segments were as follows:
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Table of ContentsNote 4. Restructuring The Company’s productivity transformation initiative is designed to fundamentally change the way it runs its business to meet the challenges of a changing business environment, to take advantage of the diverse opportunities in the marketplace as the Company is transforming into a next-generation biopharmaceutical company, and to create a total of $2.5 billion in annual productivity cost savings and cost avoidance by 2012. In connection with the PTI, the Company aims to achieve a culture of continuous improvement to enhance its efficiency, effectiveness and competitiveness and to substantially improve its cost base. The charges associated with the PTI are estimated to be in the range of $1.3 billion to $1.6 billion, which includes $1.1 billion of costs already incurred. In addition, PTI also includes $231 million of gains related to the sale of mature product lines and businesses. The exact timing of the recognition of PTI charges cannot be predicted with certainty and will be affected by the existence of triggering events for expense recognition, among other factors. The Company recorded the following PTI charges:
Most of the accelerated depreciation, asset impairment charges and other shutdown costs were included in cost of products sold and primarily relate to the rationalization of the Company’s manufacturing network in the BioPharmaceuticals segment. These assets continue to be depreciated until the facility closures are complete. The remaining costs of PTI were primarily attributed to process standardization activities across the Company and are recognized as incurred. Restructuring charges included termination benefits for workforce reductions of manufacturing, selling, administrative, and research and development personnel across all geographic regions of approximately 232 and 310 for the three months ended September 30, 2009 and 2008, respectively, and 587 and 680 for the nine months ended September 30, 2009 and 2008, respectively. The following tables present the detail of expenses incurred in connection with the restructuring activities:
The Company excludes the impact of restructuring charges and other related PTI costs from segment income. See “—Note 3. Business Segments” for a reconciliation of segment results to earnings from continuing operations before income taxes. Provisions for restructuring, net originating from the BioPharmaceuticals segment were $51 million and $26 million for the three months ended September 30, 2009 and 2008, respectively, and $89 million and $65 million for the nine months ended September 30, 2009 and 2008, respectively, with the remaining charges relating to the Mead Johnson segment. The following table represents the reconciliation of restructuring liabilities and spending against those liabilities:
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Table of ContentsNote 5. Medarex, Inc. Acquisition On September 1, 2009 the Company acquired 100% of the remaining outstanding shares of Medarex, Inc. (Medarex) and its outstanding stock options and restricted stock units upon completion of tender offers that expired on August 27, 2009 and September 1, 2009. The total purchase price of $2.3 billion was allocated to the estimated fair value of the assets acquired and liabilities assumed as presented below. Acquisition costs were $11 million and classified as other (income)/expenses, net. Medarex is a biopharmaceutical company focused on the discovery, development and commercialization of fully human antibody-based therapeutic products to address major unmet healthcare needs in the areas of oncology, inflammation, autoimmune disorders and infectious diseases. As a result of the acquisition, the Company receives full rights over ipilimumab, currently in Phase III development, and increases the biologics development pipeline creating a more balanced portfolio of small molecules and biologics. This more balanced portfolio associated with our BioPharma model and potential to optimize our existing ipilimumab programs drives a significant amount of the goodwill arising from this acquisition. Goodwill along with in-process research and development and other intangible assets valued in this acquisition are non-deductible for tax purposes and is assigned to the biopharmaceutical segment. The purchase price allocation presented below is considered preliminary pending completion of the final valuation.
The results of Medarex operations have been included in the accompanying consolidated financial statements from August 27, 2009. Pro forma supplemental financial information was not included as the impact of the acquisition was not material to the operations of the Company. A project is considered to be IPRD when the underlying project has not received regulatory approval and it has no alternative future use. IPRD projects are initially considered indefinite lived assets subject to annual impairment reviews or more often upon the occurrence of certain events. Upon commercialization, the assets are amortized over the expected useful lives. The fair value of the IPRD acquired in the business combination was determined based on the present value of each research project’s projected cash flows utilizing an income approach. Future cash flows are predominately based on the net income forecast of each project, consistent with historical pricing, margins and expense levels of similar products. Revenues are estimated based on relevant market size and growth factors, expected industry trends, individual project life cycles and the life of each research project’s underlying patent. In determining the fair value of each research project, expected revenues are first adjusted for technical risk of completion. The resulting cash flows are then discounted at a rate approximating the Company’s weighted-average cost of capital.
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Table of ContentsNote 6. Mead Johnson Nutrition Company Initial Public Offering In February 2009, Mead Johnson Nutrition Company completed an initial public offering (IPO), in which it sold 34.5 million shares of its Class A common stock at $24 per share. The net proceeds, after deducting $46 million of underwriting discounts, commissions and offering expenses, were $782 million, which were allocated to noncontrolling interest and capital in excess of par value of stock within the Company’s equity. Upon completion of the IPO, the Company held 42.3 million shares of Mead Johnson Class A common stock and 127.7 million shares of Mead Johnson Class B common stock, representing an 83.1% interest in Mead Johnson and 97.5% of the combined voting power of the outstanding common stock. The rights of the holders of the shares of Class A common stock and Class B common stock are identical, except with regard to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time at the election of the holder into one share of Class A common stock. The Class B common stock will automatically convert into shares of Class A common stock in certain circumstances. Mead Johnson continues to be consolidated for financial reporting purposes. The Company has entered into various agreements related to the separation of Mead Johnson, including a separation agreement, a transitional services agreement, a tax matters agreement, a registration rights agreement and an employee matters agreement. Note 7. Discontinued Operations As discussed in our 2008 Annual Report on Form 10-K, the Company completed the divestitures of ConvaTec and Medical Imaging. The results of the ConvaTec and Medical Imaging businesses are included in net earnings from discontinued operations for the three months and nine months ended September 30, 2008. The Medical Imaging business divestiture was completed in the first quarter of 2008, resulting in a pre-tax gain of $25 million (after-tax loss of $43 million). The ConvaTec business divestiture was completed in the third quarter of 2008, resulting in a pre-tax gain of $3,394 million (after-tax gain of $1,982 million). The following summarized financial information related to the ConvaTec and Medical Imaging businesses has been segregated from continuing operations in 2008 and reported as discontinued operations through the date of disposition and does not reflect the costs of certain services provided to ConvaTec and Medical Imaging by the Company. These costs were not allocated by the Company to ConvaTec and Medical Imaging and were for services that included legal counsel, insurance, external audit fees, payroll processing, certain human resource services and information technology systems support.
The consolidated statements of cash flows include the ConvaTec and Medical Imaging businesses through the date of disposition. The Company uses a centralized approach for cash management and financing of its operations; as such, debt was not allocated to these businesses.
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Table of ContentsNote 8. Earnings Per Share The numerator for basic earnings per share is net earnings attributable to shareholders reduced by dividends and undistributed earnings attributable to unvested shares. The numerator for diluted earnings per share is net earnings attributable to shareholders with interest expense added back for the assumed conversion of the convertible debt into common stock and reduced by dividends and undistributed earnings attributable to unvested shares. The denominator for basic earnings per share is the weighted-average number of common stock outstanding during the period. The denominator for diluted earnings per share is the weighted-average shares outstanding adjusted for the effect of dilutive common share equivalents and contingently convertible debt into common stock. The computations for basic and diluted earnings per common share were as follows:
Weighted-average equivalent common shares under the Company’s stock incentive plans, which were not included in the diluted earnings per share calculation because they were anti-dilutive, were 117 million and 138 million for the three months ended September 30, 2009 and 2008, respectively, and 121 million and 141 million for the nine months ended September 30, 2009 and 2008, respectively.
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Table of ContentsNote 9. Other (Income)/Expense, Net The components of other (income)/expense, net were as follows:
Interest expense was reduced by $32 million and $17 million for the three months ended September 30, 2009 and 2008, respectively, and $85 million and $39 million for the nine months ended September 30, 2009 and 2008, respectively, from the effects of interest rate swaps. In addition, interest expense was further reduced by $6 million and less than $1 million for the three months ended September 30, 2009 and 2008, respectively, and $18 million and less than $1 million for the nine months ended September 30, 2009 and 2008, respectively, from the termination of interest rate swaps during 2009 and 2008. See “—Note 22. Financial Instruments” for additional discussion on terminated swap contracts. Interest income relates primarily to interest earned on cash, cash equivalents and investments in marketable securities. Foreign exchange transaction losses/(gains) were primarily due to a weakening U.S. dollar impact on non-qualifying foreign exchange hedges, discontinued hedges and the re-measurement of non-functional currency denominated transactions. Gain on sale of product lines, businesses and assets were primarily related to the sale of mature brands, including the Pakistan and other middle eastern businesses in 2009 and sales of various trademarks. Other, net includes gains and losses on the sale of property, plant and equipment, certain litigation charges/recoveries, and ConvaTec and Medical Imaging net transitional service fees.
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Table of ContentsNote 10. Income Taxes The effective income tax rate on earnings from continuing operations before income taxes was 25.2% and 27.6% for the three and nine months ended September 30, 2009, respectively, compared to 26.7% and 25.0% for the three and nine months ended September 30, 2008, respectively. The 1.5% lower effective tax rate in the three months ended September 30, 2009 was due to the impairment of auction rate security notes with little tax benefit in 2008 and the benefit of the research and development credit in 2009 partially offset by the tax effect of the Mead Johnson separation activities discussed below. The 2.6% higher effective tax rate in the nine months ended September 30, 2009 was due to the transfer of various international units of the Company to Mead Johnson prior to its initial public offering and a 2008 tax benefit of $91 million related to the effective settlement of the 2002—2003 audit with the Internal Revenue Service. The effect of these items were partially offset by the 2009 benefit of the research credit and a $40 million tax benefit related to the final settlement of certain state audits as well as the 2008 impairment of auction rate securities with little tax benefit. U.S. income taxes have not been provided on the earnings of certain low tax non-U.S. subsidiaries that are not projected to be distributed since the Company has invested or expects to invest such earnings permanently offshore. If, in the future, these earnings are repatriated to the U.S., or if the Company determines such earnings will be remitted in the foreseeable future, additional tax provisions would be required. President Obama’s Administration has proposed reforms to the international tax laws that if adopted may increase taxes and reduce the Company’s results of operations and cash flows. The Company has recorded significant deferred tax assets related to U.S. foreign tax credit and research and development tax credit carryforwards. The foreign tax credit and research and development tax credit carryforwards expire in varying amounts beginning in 2014. Realization of foreign tax credit and research tax credit carryforwards is dependent on generating sufficient domestic-sourced taxable income prior to their expiration. Although realization is not assured, management believes it is more likely than not that these deferred tax assets will be realized. The Company will continue to file a U.S. consolidated federal tax return and various state combined tax returns with Mead Johnson. As part of the initial public offering of Mead Johnson, a tax sharing agreement was put in place between the Company and Mead Johnson. Mead Johnson will make payments to the Company on a quarterly basis for its tax liability for U.S. federal purposes and various state purposes computed as a stand alone entity. These payments represent either Mead Johnson’s share of the tax liability or reimbursement to the Company for utilization of certain tax attributes. The Company has agreed to indemnify Mead Johnson for any outstanding tax liabilities or audit exposures (such as, income, sales and use, or property taxes) that existed for periods prior to the initial public offering. The Company classifies interest expense and penalties related to unrecognized tax benefits as income tax expense. The Company is currently under examination by a number of tax authorities, which have potential adjustments to tax for issues such as transfer pricing, certain tax credits and the deductibility of certain expenses. The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits at September 30, 2009 will decrease in the range of approximately $55 million to $85 million in the next 12 months as a result of the settlement of certain tax audits and other events. The expected change in unrecognized tax benefits, primarily settlement related, will involve the payment of additional taxes, the adjustment of certain deferred taxes, and/or the recognition of tax benefits. The Company also anticipates that it is reasonably possible that new issues will be raised by tax authorities, which may require increases to the balance of unrecognized tax benefits. However, an estimate of such increases cannot reasonably be made at this time.
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Table of ContentsNote 11. Fair Value Measurement Financial assets and liabilities carried at fair value at September 30, 2009 are classified in one of the three categories, which are described below: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical 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.
At September 30, 2009, the majority of the Company’s ARS are primarily rated ‘BBB/Baa1’ or better; however, $14 million in ARS are rated below investment grade at ‘BB/Caa2’. ARS primarily represent interests in insurance securitizations and, to a lesser extent, structured credits. Due to the lack of observable market quotes on the Company’s 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 including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The Company’s determination of fair value on its ARS investment portfolio at September 30, 2009 included internally developed valuations that were based in part on indicative bids received on the underlying assets of the securities and other non-observable evidence of fair value. Because the Company intends to sell these investments before recovery of their amortized cost basis, the Company will consider any further decline in fair value to be an other-than-temporary impairment. During the third quarter of 2008, the Company recorded an impairment charge of $224 million related to certain ARS. Floating Rate Securities (FRS) are long-term debt securities with coupons that are reset periodically against a benchmark interest rate. During the third quarter of 2009, one rating agency withdrew its rating of the FRS securities and in the fourth quarter another lowered
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Table of Contentsits rating to ‘BB’ on which the Company continues to rely. The Company also continues to receive principal payments and interest on all FRS securities and the Company is not aware of any reported defaults of the securities through September 30, 2009. The underlying assets of the FRS primarily consist of consumer loans, auto loans, collateralized loan obligations, monoline securities, asset-backed securities and corporate bonds and loans. Since the latter part of 2007, the general FRS market became less liquid or active due to continuing credit and liquidity concerns; as a result, there are no available observable market quotes in the active market (Level 1 inputs) or market quotes on similar or identical assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means (Level 2 inputs). Due to the current lack of an active market for the Company’s FRS and the general lack of transparency into their underlying assets, the Company relies on other qualitative analysis including discussion with brokers and fund managers, default risk underlying the security and overall capital market liquidity (Level 3 inputs) to value its FRS portfolio. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, the Company does not consider any decline in fair value to be an other-than-temporary impairment. Therefore, any declines in fair value are reported as a temporary loss in other comprehensive income. During the nine months ended September 30, 2009 the Company received $131 million of principal at par for FRS. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR and EURIBOR yield curves, foreign exchange forward prices, NYMEX futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities:
For further discussion on the Company’s September 30, 2009 fair value, carrying value and rollforward of activity that occurred during 2009, see “—Note 12. Cash, Cash Equivalents and Marketable Securities.”
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Table of ContentsNote 12. Cash, Cash Equivalents and Marketable Securities Cash and cash equivalents at September 30, 2009 and December 31, 2008 of $6,367 million and $7,976 million, respectively, primarily consisted of prime money market funds, government agency securities and treasury securities. Cash equivalents primarily consist of highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value. The Company maintains cash and cash equivalent balances in U.S. dollars and foreign currencies, which are subject to currency rate risk. The following tables summarize the Company’s current and non-current marketable securities, which include U.S. dollar-denominated FRS and ARS, and are accounted for as “available for sale” debt securities:
The following table summarizes the activity for those financial assets where fair value measurements are estimated utilizing Level 3 inputs (ARS and FRS):
The following table summarizes the marketable securities that have been in an unrealized loss position for less than 12 months and those that have been in a loss position for more than 12 months at September 30, 2009:
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Table of ContentsNote 13. Receivables, Net The major categories of receivables were as follows:
Receivables are netted with deferred income related to alliance partners until recognition of income. As a result, a corresponding reclassification was made which reduced alliance partner receivables and deferred income by $662 million and $566 million at September 30, 2009 and December 31, 2008, respectively. For additional information on the Company’s alliance partners, see “—Note 2. Alliances and Collaborations.” In the aggregate, receivables due from three pharmaceutical wholesalers in the U.S. represented 40% and 35% of total trade receivables at September 30, 2009 and December 31, 2008, respectively. Note 14. Inventories, Net The major categories of inventories were as follows:
Inventories expected to remain on-hand beyond one year were $266 million at September 30, 2009 and $185 million at December 31, 2008 and were included in non-current other assets. Inventories include capitalized costs related to production of products for programs in Phase III development subject to final U.S. Food and Drug Administration approval. The probability of future sales, as well as the status of the regulatory approval process was considered in assessing the recoverability of these costs. These capitalized costs were $36 million and $47 million at September 30, 2009 and December 31, 2008, respectively. Note 15. Property, Plant and Equipment, Net The major categories of property, plant and equipment were as follows:
Capitalized interest was $10 million and $16 million for the nine months ended September 30, 2009 and 2008, respectively.
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Table of ContentsNote 16. Accrued Expenses The major categories of accrued expenses were as follows:
Note 17. Goodwill and Other Intangible Assets The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2009 were as follows:
At September 30, 2009 and December 31, 2008, other intangible assets consisted of the following:
The change in the carrying amount of other intangible assets for the nine months periods ended September 30, 2009 and 2008 were as follows:
Amortization expense for other intangible assets related to ConvaTec and Medical Imaging reflected in discontinued operations was $4 million in 2008.
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Table of ContentsExpected amortization expense related to the September 30, 2009 net carrying amount of finite lived other intangible assets follows:
Note 18. Equity Changes in common shares, treasury stock, capital in excess of par value of stock and restricted stock were as follows:
The accumulated balances related to each component of other comprehensive income/(loss) (OCI), net of taxes, were as follows:
The reconciliation of noncontrolling interest was as follows:
Noncontrolling interest is primarily related to the Company’s partnerships with sanofi for the territory covering the Americas for sales of PLAVIX* and the 16.9% of Mead Johnson owned by the public. Net earnings attributable to noncontrolling interest are presented net of taxes of $145 million and $124 million for the three months ended September 30, 2009 and 2008, respectively, and $434 million and $352 million for the nine months ended September 30, 2009 and 2008, respectively, in the consolidated statements of earnings with a corresponding increase to the provision for income taxes. Distribution of the partnership profits to sanofi and sanofi’s funding of ongoing partnership operations occur on a routine basis and are included within operating activities in the consolidated statements of cash flows. The above activity includes the pre-tax income and distributions related to these partnerships.
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Table of ContentsNote 19. Pension, Postretirement and Postemployment Liabilities The net periodic benefit cost of the Company’s defined benefit pension and postretirement benefit plans included the following components:
During June 2009, the Company amended its U.S. Retirement Income Plan (and several other plans) whereby, effective December 31, 2009, the crediting of future benefits relating to service will be eliminated. The Company will continue to consider salary increases for an additional five-year period in determining the benefit obligation related to prior service. The plan amendment was accounted for as a curtailment. As a result, the Company re-measured the applicable plan assets and obligations. The re-measurement resulted in a $455 million reduction to accumulated OCI ($295 million net of taxes) and a corresponding decrease to the unfunded status of the plan due to the curtailment, updated plan asset valuations and a change in the discount rate from 7.0% to 7.5%. A curtailment charge of $25 million was also recognized in other (income)/expense, net during the second quarter of 2009 for the remaining amount of unrecognized prior service cost. In addition, the Company has reclassified all participants as inactive for benefit plan purposes and will amortize actuarial gains and losses over the expected weighted-average remaining lives of plan participants (32 years). In connection with the plan amendment, the Company will also increase its expected contributions to its principal defined contribution plans in the U.S. and Puerto Rico effective January 1, 2010. The net impact of the above actions is expected to reduce the future retiree benefit costs, although future costs will continue to be subject to market conditions and other factors including actual and expected plan asset performance, interest rate fluctuations and lump-sum benefit payments. In February 2009, the Company re-measured the U.S. Retirement Income Plan (and several other plans) upon the transfer of certain plan assets and related obligations to new Mead Johnson plans for active Mead Johnson participants. The re-measurement resulted in a $170 million reduction to accumulated OCI ($110 million net of taxes) in the first quarter of 2009 and a corresponding decrease to the unfunded status of the plan due to updated plan asset valuations and a change in the discount rate from 6.5% to 7.0%. During the third quarter of 2009, the actuarial valuations for the US pension plans were completed resulting in a $18 million reduction in the net pension cost including amounts attributed to earlier interim periods. Contributions to the U.S. pension plans are expected to be approximately $650 million during 2009, of which $643 million was contributed in the nine months ended September 30, 2009. Contributions to the international plans are expected to be in the range of $120 million to $140 million in 2009, of which $70 million was contributed in the nine months ended September 30, 2009. In 2008, concurrent with the agreement to sell ConvaTec, a revaluation of various pension plans’ assets and obligations was performed. The revaluation resulted in a curtailment charge of $5 million and special termination benefit charge of $13 million, which are included in discontinued operations.
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Table of ContentsNote 20. Employee Stock Benefit Plans The following table summarizes stock-based compensation expense, net of taxes:
In the nine months ended September 30, 2009, the Company granted 23.8 million stock options, 6.3 million restricted stock units and 1.6 million long-term performance awards. The weighted-average grant date fair value of stock options granted was $3.70 per share. The weighted-average grant date fair value for restricted stock and long-term performance awards granted during the nine months ended September 30, 2009 was $17.97 and $16.52, respectively. Total compensation costs, related to nonvested awards not yet recognized and the weighted-average period over which such awards are expected to be recognized at September 30, 2009 were as follows:
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Table of ContentsNote 21. Short-Term Borrowings and Long-Term Debt Short-term borrowings were $286 million and $154 million at September 30, 2009 and December 31, 2008, respectively, and consist primarily of outstanding bank drafts. As part of the Medarex, Inc. acquisition in September 2009 (see “—Note 5. Medarex, Inc. Acquisition,”), the Company’s consolidated financial statements now reflect Medarex’s outstanding 2.25% Convertible Senior Notes due May 15, 2011 (the “2.25% Notes”). These notes, originally convertible into Medarex shares at the rate of $72.9129 per each $1,000 principal amount ($13.72 per share), were adjusted into the right to receive $1,167 in cash for each $1,000 principal amount outstanding (the equivalent of $16 per share). Short-term borrowings include $88 million related to these notes as of September 30, 2009. As of September 30, 2009, the 1.81% Yen Notes due 2010 amounting to $38 million were reclassified to short-term borrowings. The components of long-term debt were as follows:
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