UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-1225
Wyeth
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (973) 660-5000
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 such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock outstanding as of the close of business on April 28, 2006:
Class
Number ofShares Outstanding
WYETH
INDEX
Page No.
Part I -
Consolidated Condensed Statements of Changes in Stockholders’ Equity – Three Months EndedMarch 31, 2006 and 2005
Part II -
Signature
Exhibit Index
Items other than those listed above have been omitted because they are not applicable.
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Part I — Financial Information
The consolidated condensed financial statements included herein have been prepared by Wyeth (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the consolidated condensed financial statements reflect all adjustments, including those that are normal and recurring, considered necessary to present fairly the financial position of the Company as of March 31, 2006 and December 31, 2005, the results of its operations, changes in stockholders’ equity and cash flows for the three months ended March 31, 2006 and 2005. It is suggested that these consolidated condensed financial statements and management’s discussion and analysis of financial condition and results of operations be read in conjunction with the financial statements and the notes thereto included in the Company’s 2005 Financial Report, 2005 Annual Report on Form 10-K and information contained in Current Reports on Form 8-K filed since the filing of the 2005 Form 10-K.
We make available through our Company Internet website, free of charge, our Company filings with the SEC as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The reports we make available include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. The Company’s Internet website address is www.wyeth.com.
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CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
(Unaudited)
ASSETS
Cash and cash equivalents
Marketable securities
Accounts receivable less allowances
Inventories:
Finished goods
Work in progress
Materials and supplies
Other current assets including deferred taxes
Total Current Assets
Property, plant and equipment
Less accumulated depreciation
Goodwill
Other intangibles, net of accumulated amortization(March 31, 2006-$189,125 and December 31, 2005-$178,588)
Other assets including deferred taxes
Total Assets
LIABILITIES
Loans payable
Trade accounts payable
Accrued expenses
Accrued taxes
Total Current Liabilities
Long-term debt
Accrued postretirement benefit obligations other than pensions
Other noncurrent liabilities
Total Liabilities
Contingencies and commitments (Note 7)
STOCKHOLDERS’ EQUITY
$2.00 convertible preferred stock, par value $2.50 per share
Common stock, par value $0.33-1/3 per share
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months
Ended March 31,
Net revenue
Cost of goods sold
Selling, general and administrative expenses
Research and development expenses
Interest expense, net
Other income, net
Income before income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends paid per share of common stock
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CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2006:
Balance at January 1, 2006
Currency translation adjustments
Unrealized losses on derivative contracts, net
Unrealized losses on marketable securities, net
Comprehensive income, net of tax
Cash dividends declared (1)
Common stock acquired for treasury
Common stock issued for stock options
Stock-based compensation expense
Issuance of restricted stock awards
Transfer of restricted stock award accruals to equity
Tax benefit from exercises of stock options
Other exchanges
Balance at March 31, 2006
Three Months Ended March 31, 2005:
Balance at January 1, 2005
Unrealized gains on derivative contracts, net
Cash dividends declared (2)
Balance at March 31, 2005
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Operating Activities
Adjustments to reconcile net income to net cashprovided by (used for) operating activities:
Net gains on sales and dispositions of assets
Depreciation and amortization
Stock-based compensation
Change in deferred income taxes
Seventh Amendment security fund
Diet drug litigation payments
Changes in working capital, net
Other items, net
Net cash provided by (used for) operating activities
Investing Activities
Purchases of property, plant and equipment
Proceeds from sales of assets
Proceeds from sales and maturities of marketable securities
Purchases of marketable securities
Net cash provided by (used for) investing activities
Financing Activities
Repayments of long-term debt
Other borrowing transactions, net
Dividends paid
Purchases of common stock for treasury
Exercises of stock options
Net cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following policies are required interim updates to those disclosed in Note 1 of the Company’s 2005 Financial Report as incorporated in its 2005 Annual Report on Form 10-K:
Stock-Based Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). This statement requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. The Company adopted SFAS No. 123R using the modified prospective method and therefore, prior periods were not restated. Under the modified prospective method, companies are required to record compensation expense for (1) the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and (2) for any awards issued, modified or settled after the effective date of the statement. See Note 6 for further discussion.
Goodwill and Other Intangibles: In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2006 are as follows:
(In thousands)
Balance at December 31, 2005
Recently Issued Accounting Standards: In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of SFAS No. 133 and 140 (SFAS No. 155). This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140) and resolves issues addressed in Statement 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. One of the key provisions of SFAS No. 155 is fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not anticipate the adoption of SFAS No. 155 will have a material effect on its financial position or results of operations or cash flows.
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In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of SFAS No. 140. This Statement, which would be effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, relates to the accounting for separately recognized servicing assets and servicing liabilities. The Company does not anticipate the adoption of SFAS No. 156 will have a material effect on its financial position or results of operations or cash flows.
In April 2006, the FASB issued FASB Staff Position (FSP) No. FIN 46(R)-6 Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R). This FASB Staff Position (FSP) addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The FSP is effective prospectively to all entities (including newly created entities) with which that enterprise first becomes involved, and to all entities previously required to be analyzed under Interpretation 46(R), when a reconsideration event has occurred pursuant to paragraph 7 in Interpretation 46(R) beginning the first day of the first reporting period beginning after June 15, 2006.
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The following table sets forth the computations of basic earnings per share and diluted earnings per share:
(In thousands except per share amounts)
Net income less preferred dividends
Denominator:
Weighted average common shares outstanding
Numerator:
Interest expense on contingently convertible debt
Net income, as adjusted
Common stock equivalents of outstanding stock options, deferred contingent common stock awards, restricted stock awards and convertible preferred stock(1)
Common stock equivalents of assumed conversion of contingently convertible debt
Total shares(1)
Diluted earnings per share(1)
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The Company has marketable debt and equity securities, which are classified as either available-for-sale or held-to-maturity, depending on management’s investment intentions at the time of purchase relating to these securities.
The cost, gross unrealized gains (losses) and fair value of available-for-sale and held-to-maturity securities by major security type at March 31, 2006 and December 31, 2005 were as follows:
At March 31, 2006
Available-for-sale:
U.S. Treasury securities
Commercial paper
Corporate debt securities
Mortgage-backed securities
Equity securities
Institutional fixed income fund
Total available-for-sale
Held-to-maturity:
Certificates of deposit
Total held-to-maturity
Total marketable securities
At December 31, 2005
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The contractual maturities of debt securities classified as available-for-sale at March 31, 2006 were as follows:
Due within one year
Due after one year through five years
Due after five years through 10 years
Due after 10 years
All held-to-maturity debt securities are due within one year and had aggregate fair values of $182.0 million at March 31, 2006.
Net periodic benefit cost for the Company’s defined benefit plans for the three months ended March 31, 2006 and 2005 (principally for the U.S.) was as follows:
Other
Postretirement
Benefits
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of transition obligation
Recognized net actuarial loss
Net periodic benefit cost
For the three months ended March 31, 2006, contributions of $13.8 million were made to the Company’s defined benefit pension plans and payments of $25.7 million were made for other postretirement benefits. The Company expects to contribute approximately $240.0 million to its defined benefit pension plans and make payments of approximately $100.0 million for its other postretirement benefits in 2006.
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During 2005, the Company launched its long-term global productivity initiatives to adapt to the changing pharmaceutical industry environment. The guiding principles of these initiatives include innovation, cost savings, process excellence and accountability, with an emphasis on improving productivity.
In the 2006 first quarter, the Company recorded charges of $35.1 million ($24.2 million after-tax or $0.02 per share-diluted) related to the productivity initiatives. These charges included severance and other related personnel costs of $8.4 million, accelerated depreciation for certain facilities expected to be closed of $17.5 million, and period costs related to the implementation of the initiatives of $9.2 million.
The Company recorded the charges, including personnel and other costs, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, SFAS No. 112, Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5 and 43 and SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. The activities are primarily related to the Pharmaceuticals business and the charges were recorded to recognize the costs of closing certain manufacturing facilities and the elimination of certain positions at the Company’s facilities. Charges of $28.7 million were recorded within Cost of Goods Sold, $3.2 million within Selling, General and Administrative Expenses and $3.2 million within Research and Development Expenses.
The activity related to the productivity initiatives was as follows:
Productivity Initiatives
Reserve at
December 31,
2005
Total
Charges
First
Quarter
Net
Payments/
Non-cash
March 31,
2006
Personnel costs
Accelerated depreciation
Other closure/exit costs
Asset sales
At March 31, 2006, the reserve balance for personnel costs related primarily to committed employee severance obligations, which, in accordance with the specific productivity initiatives, are expected to be paid over the next 36 months.
As other strategic decisions are made, the Company expects additional costs, such as asset impairment, accelerated depreciation, personnel costs and other exit costs, as well as certain implementation costs associated with these initiatives, to continue for several years.
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The Company adopted the provisions of SFAS No. 123R effective January 1, 2006. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards.
Prior to the adoption of SFAS No. 123R, the Company accounted for its stock incentive plans using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Under APB No. 25, no stock-based employee compensation cost was reflected in net income, other than for the Company’s restricted stock and performance-based restricted stock awards, as options granted under all other plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The Company has several Stock Incentive Plans, which provide for the granting of stock options, restricted stock and performance share awards. Stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date the option is granted. Stock options vest ratably over a three-year period and have a contractual term of 10 years. Restricted stock awards consist of time-vested restricted stock units and are generally converted to shares of the Company’s common stock on the third anniversary of the date of the award. Performance share awards consist of performance-based restricted stock units and are converted to shares (up to 200% of the award) based on the achievement of certain performance criteria related to a future performance year. If less than the full award was earned, up to 100% of the award may be earned based on the achievement of certain multi-year market-based performance criteria. Under the Stock Incentive Plans, options may be granted to purchase a maximum of 175,000,000 shares of which 22,000,000 shares may be used for restricted stock issuances. At March 31, 2006, there were 42,596,063 shares available for future grants under the Stock Incentive Plans, of which up to 8,558,493 shares were available for restricted stock awards.
The Company selected the modified prospective method as prescribed under SFAS No. 123R, which requires companies (1) to record the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and (2) to record compensation expense for any awards issued, modified or settled after the effective date of the statement. As a result of the adoption of SFAS No. 123R, the Company began expensing stock options in the 2006 first quarter. The Company’s income before income taxes and net income for the three months ended March 31, 2006 were $58.0 million and $41.4 million ($0.03 per share) lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Prior to the adoption of SFAS No. 123R,
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no expense was recorded for stock options. The 2006 first quarter included stock-based compensation expense for stock options, restricted stock and performance share awards and was recorded as follows: $6.2 million in Cost of Goods Sold, $47.8 million in Selling, General and Administrative Expenses and $21.2 million in Research and Development Expenses, as well as a related tax benefit of $21.4 million.
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows (reflected in accrued taxes). SFAS No. 123R requires the cash flows resulting from excess tax benefits (tax deductions realized in excess of the compensation costs recognized for the options exercised) from the date of adoption of SFAS No. 123R to be classified as financing cash flows. Therefore, excess tax benefits for the three months ended March 31, 2006, have been classified as financing cash flows.
Under the modified prospective method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123R. The following table illustrates the effect on net income and earnings per share for the 2005 first quarter if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, Amendment of SFAS No. 123, to stock-based employee compensation:
Net income, as reported
Add: Stock-based employee compensation expense included in reported net income, net of tax
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax
Adjusted net income
Earnings per share:
Basic - as reported
Basic - adjusted
Diluted - as reported
Diluted - adjusted
Based on recent accounting interpretations, pro forma stock-based compensation expense should include amounts related to the accelerated amortization of the fair value of options granted to retirement-eligible employees. Prior to January 1, 2006, the Company recognized pro forma stock-based compensation expense related to retirement-eligible
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employees over the award’s contractual vesting period. The impact of accelerated vesting on the pro forma stock-based compensation expense would have resulted in an expense reduction of $7.5 million and $17.1 million, both net of tax for the 2006 and 2005 first quarter.
The Company recorded the impact of accelerated vesting for options granted to retirement-eligible employees subsequent to January 1, 2006 and will continue to provide pro forma disclosure related to those options granted in prior periods.
The fair value of issued stock options is estimated on the date of grant utilizing a Black-Scholes option-pricing model that incorporates the assumptions noted in the table below. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock price and other factors. Effective January 1, 2006, the Company changed its method for determining expected volatility. For all new options granted after January 1, 2006, blended volatility rates, which incorporate both implied and historical volatility rates are utilized, rather than relying solely on historical volatility rates. Based on available guidance, we believe blended volatility rates that combine market-based measures of implied volatility with historical volatility rates are a more appropriate indicator of our expected volatility. The expected life of stock options is estimated based on historical data on exercises of stock options, post vesting forfeitures and other factors to estimate the expected term of the stock options granted. For options granted subsequent to January 1, 2006, the Company has adjusted the assumption for the expected life of stock options from five years to six years as a result of continued reassessment of historical experience. The effect of the changes in these assumptions on income before income taxes, net income and diluted earnings per share for the three months ended March 31, 2006 was not material. The expected dividend yields are based on the approved annualized dividend rate in effect on the date of grant. The risk-free interest rates are derived from the U.S. Treasury yield curve in effect on the date of grant for instruments with a remaining term similar to the expected life of the options. In addition, the Company applies an expected forfeiture rate when amortizing stock-based compensation expenses. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. As individual grant awards become fully vested, stock-based compensation expense is adjusted to recognize actual forfeitures.
The weighted-average fair values of the options granted in the 2006 first quarter were $12.71 per option, as determined using the following assumptions:
Range of expected volatility
Weighted-average expected volatility
Expected life of options
Risk-free interest rate
Expected dividend yield
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A summary of stock option activity during the three months ended, and as of March 31, 2006, is presented below:
Stock Options
AggregateIntrinsicValue
Outstanding at January 1, 2006
Granted
Canceled/forfeited
Exercised
Outstanding at March 31, 2006
Exercisable at March 31, 2006
The following table summarizes information regarding stock options outstanding at March 31, 2006:
Range ofExercise Prices
$26.53 to 29.99
30.00 to 39.99
40.00 to 49.99
50.00 to 59.99
60.00 to 65.32
The total intrinsic value of options exercised during the three months ended March 31, 2006 was $42.0 million. As of March 31, 2006, the total remaining unrecognized compensation cost related to stock options was $234.5 million, which will be amortized over the respective remaining requisite service periods ranging from one month to three years.
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A summary of time-vested restricted stock and performance-based restricted stock unit activity as of March 31, 2006 and changes during the three months ended March 31, 2006, is presented below:
Time-Vested and Performance-Based
Restricted Stock Units
Number of
Nonvested
Units
Weighted
Average
Grant Date
Fair Value
Nonvested units at January 1, 2006
Vested
Forfeited
Nonvested units at March 31, 2006
As of March 31, 2006, the total remaining unrecognized compensation cost related to time-vested restricted stock and performance-based restricted stock awards amounted to $67.8 million and $44.9 million respectively, which will be amortized over the respective remaining requisite service periods ranging from seven months to three years.
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The Company is involved in various legal proceedings, including product liability, patent, commercial, environmental and antitrust matters, of a nature considered normal to its business, the most important of which are described below and have been described in the Company’s 2005 Annual Report on Form 10-K and Current Reports on Form 8-K in 2006. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable. Additionally, the Company records insurance receivable amounts from third-party insurers when recovery is probable.
In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with its legal proceedings (other than the diet drug litigation discussed immediately below and in the Company’s 2005 Annual Report on Form 10-K) is unlikely to have a material adverse effect on the Company’s financial position but could be material to the results of operations or cash flows in one or more reporting periods.
Product Liability Litigation
Diet Drug Litigation
Overview
The Company has been named as a defendant in numerous legal actions relating to the diet drugs PONDIMIN (which in combination with phentermine, a product that was not manufactured, distributed or sold by the Company, was commonly referred to as “fen-phen”) or REDUX, which the Company estimated were used in the United States, prior to their 1997 voluntary market withdrawal, by approximately 5.8 million people. These actions allege, among other things, that the use of REDUX and/or PONDIMIN, independently or in combination with phentermine, caused certain serious conditions, including valvular heart disease and primary pulmonary hypertension (PPH). The REDUX and PONDIMIN litigation is described in additional detail in the Company’s 2005 Annual Report on Form 10-K.
On October 7, 1999, the Company announced a nationwide class action settlement (the settlement) to resolve litigation brought against the Company regarding the use of the diet drugs REDUX or PONDIMIN. The settlement covered all claims arising out of the use of REDUX or PONDIMIN, except for PPH claims, and was open to all REDUX or PONDIMIN users in the United States. As originally designed, the settlement was administered by an independent Settlement Trust and comprised of two settlement funds. Fund A (with a value at the time of settlement of $1,000.0 million plus $200.0 million for legal fees) was created to cover refunds, medical screening costs, additional medical services and cash payments, education and research costs, and administration costs. Fund A has been fully funded by contributions by the Company. Fund B (which was to be funded by the Company on an as-needed basis up to a total of $2,550.0 million) would compensate claimants with significant heart valve disease depending upon their age and the severity of their condition according to a five-level settlement matrix. The
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two funds have now been combined into a single fund. Total diet drug litigation payments were $465.1 million for the 2006 first quarter, of which $83.0 million were made in connection with the nationwide settlement (including the proposed Seventh Amendment, as discussed below). Payments under the national settlement may continue, if necessary, until 2018.
In 2004, the Company increased its reserves in connection with the REDUX and PONDIMIN diet drug matters by $4,500.0 million, bringing the total of the charges taken to date to $21,100.0 million. The $5,247.5 million reserve balance at March 31, 2006 represents management’s best estimate, within a range of outcomes, of the aggregate amount required to cover diet drug litigation costs, including payments in connection with the nationwide settlement (as it would be amended by the proposed Seventh Amendment, discussed below), initial opt outs, PPH claims, downstream opt out cases and the Company’s legal fees related to the diet drug litigation. The current reserve takes into account the terms of the proposed Seventh Amendment, the Company’s settlement discussions with plaintiffs’ attorneys representing a number of individuals who have opted out of the nationwide settlement, its experiences with the downstream opt out cases that have been litigated or settled to date and its projected expenses in connection with the diet drug litigation. However, due to the need for final appellate court approval of the proposed Seventh Amendment, the uncertainty of the Company’s ability to consummate settlements with the downstream opt out plaintiffs, the number and amount of any future verdicts that may be returned in downstream opt out and PPH litigation, and the inherent uncertainty surrounding any litigation, it is possible that additional reserves may be required in the future and the amount of such additional reserves may be significant.
The Company intends to vigorously defend itself and believes it can marshal significant resources and legal defenses to limit its ultimate liability in the diet drug litigation. However, in light of the circumstances discussed above, it is not possible to predict the ultimate liability of the Company in connection with its diet drug legal proceedings. It is therefore not possible to predict whether, and if so when, such proceedings will have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows and whether cash flows from operating activities and existing and prospective financing resources will be adequate to fund the Company’s operations, pay all liabilities related to the diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on its outstanding obligations without the disposition of significant strategic core assets and/or reductions in certain cash outflows.
Seventh Amendment to the Nationwide Settlement
During 2004, the Company, counsel for the plaintiff class in the nationwide settlement and counsel for certain individual class members negotiated a proposed Seventh Amendment to the settlement agreement that would create a new claims processing structure, funding arrangement and payment schedule for claims for compensation based on Levels I and II of the five-level settlement matrix. These claims are the most
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numerous, but least serious, of the claims filed for matrix benefits. The total number of currently filed Level I and Level II claims posed the risk that the Settlement Trust’s funds might be exhausted.
On March 15, 2005, United States District Judge Harvey Bartle III, the federal judge of the United States District Court for the Eastern District of Pennsylvania overseeing the national class action settlement, approved the proposed Seventh Amendment as “fair, adequate and reasonable.” Three appeals from Judge Bartle’s decision were filed, although two of those appeals were withdrawn by the appellants who brought them. On November 1, 2005, the United States Court of Appeals for the Third Circuit dismissed the appeal of the remaining appellant and remanded the appellant’s claim to the District Court for the limited purpose of submitting the claim for re-auditing under the terms of the original settlement agreement. The appellant filed a petition for certiorari with the United States Supreme Court on March 14, 2006. The petition was found to be procedurally defective and was rejected, but the appellant was given an additional 60 days to correct the deficiencies. The petition is now due on May 15, 2006. By letter dated April 20, 2006, the appellant advised the Supreme Court that she does not intend to re-file her petition. In the absence of further timely filings with the Supreme Court, the Seventh Amendment will be considered to have achieved final judicial approval and will become effective.
When and if the proposed Seventh Amendment becomes effective, it would include the following key terms:
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On March 29, 2005, as collateral for the Company’s financial obligations under the Seventh Amendment, the Company established a security fund in the amount of $1,250.0 million. As of March 31, 2006, $1,050.0 million was included in Other current assets including deferred taxes and $200.0 million was included in Other assets including deferred taxes. The amounts in the security fund are owned by the Company and will earn interest income for the Company while residing in the security fund.
If the Seventh Amendment becomes effective, only the claims of those class members who opted out of the Seventh Amendment will be processed under the terms of the existing settlement agreement and under the procedures that have been adopted by the Settlement Trust and the District Court. Less than 5% of the class members who would be affected by the proposed Seventh Amendment (approximately 1,900 of the Category One class members and approximately 5,100 of the Category Two class members) elected to opt out of the Seventh Amendment and to remain bound by the current settlement terms. Should the proposed Seventh Amendment not become effective, all of the pending and future matrix claims would be processed under the terms of the existing settlement agreement.
Nationwide Settlement Matrix Claims Data
The settlement agreement grants the Company access to claims data maintained by the Settlement Trust. Based on its review of that data, the Company understands that, as of March 29, 2006, the Trust had recorded approximately 122,215 matrix claim forms. Approximately 33,645 of these forms were so deficient, incomplete or duplicative of other forms filed by the same claimant that, in the Company’s view, it is unlikely that a significant number of these forms will result in further claims processing.
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The Company’s understanding of the status of the remaining approximately 88,570 forms, based on its analysis of data received from the Trust through March 29, 2006 is as follows. Approximately 33,620 of the matrix claims had been processed to completion, with those claims either paid (approximately 4,882 payments, totaling $1,723.3 million, had been made to approximately 4,679 claimants), denied or in show cause proceedings (approximately 27,135) or withdrawn. Approximately 2,120 claims were in some stage of the 100% audit process ordered in late 2002 by the District Court overseeing the national settlement. An additional approximately 17,365 claims alleged conditions that, if true, would entitle the claimant to receive a matrix award; these claims had not yet entered the audit process. Another approximately 23,355 claims with similar allegations have been purportedly substantiated by physicians or filed by law firms whose claims are now subject to the outcome of the Trust’s Claims Integrity Program.1 Approximately 12,080 claim forms did not contain sufficient information even to assert a matrix claim, although some of those claim forms could be made complete by the submission of additional information and could therefore become eligible to proceed to audit in the future. The remaining approximately 30 claims were in the data entry process and could not be assessed.
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Challenges to the Nationwide Settlement
Counsel representing approximately 8,600 class members have filed a motion with the District Court seeking a ruling that the nationwide settlement agreement is void. The motion asserts that there was inadequate representation of the class when the settlement agreement was negotiated, that the parties and their experts made mutual mistakes in projecting the amount of money that would be needed to pay all valid claims, that the original notice to the class was inadequate and that the Court had lacked subject matter jurisdiction over some of the class members’ claims. The motion seeks an opportunity for all class members to decide a second time whether or not to be included in the class and therefore bound by the settlement agreement. The District Court had stayed briefing and consideration of the motion pending its decision on approval of the Seventh Amendment, which as discussed above would preclude such claims on behalf of all class members except those who have opted out of participation in the Seventh Amendment. Briefing was subsequently completed, oral argument took place in December 2005 and, on March 8, 2006, the District Court denied the motion. Certain of the class members affected by the denial have noticed an appeal with the United States Court of Appeals for the Third Circuit.
Certain other class members also filed a number of other motions and lawsuits attacking the binding effect of the settlement, which were denied or enjoined by the District Court. On November 30, 2005, the United States Court of Appeals for the Third Circuit affirmed the District Court’s orders, finding that the class members who had challenged the binding effect of the settlement had a full and fair opportunity to challenge the adequacy of their representation at the original fairness hearing and that the issues raised at that hearing had covered the various arguments raised by the class members’ motions and lawsuits. Certain of the class members pursuing this relief filed a petition for certiorari with the United States Supreme Court on February 28, 2006, seeking review of the Third Circuit’s decision. The Company cannot predict the outcome of any of these proceedings.
Downstream Opt Out Cases
As of March 31, 2006, approximately 41,000 individuals who had filed Intermediate or Back-End opt out forms had pending lawsuits against the Company, although the Company expects that a significant number of these lawsuits will be dismissed in the coming months as agreements, or agreements in principle, reached with law firms pursuant to the settlement process described below are finalized. As of March 31, 2006, approximately 23,500 Intermediate or Back-End opt out plaintiffs have had their lawsuits dismissed in connection with settlements, for procedural or medical deficiencies or for various other reasons.
The claims of 30 class members who had taken advantage of the Intermediate and Back-End opt out rights created in the nationwide settlement and whose cases were set for trial were adjudicated or resolved from January 1 through March 31, 2006. The claims of eleven plaintiffs were voluntarily dismissed by the plaintiffs themselves; juries returned verdicts in favor of Wyeth with respect to the claims of ten plaintiffs; the claims of three plaintiffs were dismissed by the courts before trial; one case was settled before trial and juries returned verdicts in favor of five plaintiffs. The average value of the five verdicts was $85,000 and those cases were subsequently also settled. Additional Intermediate and Back-End opt out trials are scheduled throughout 2006.
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On January 18, 2005, the Company and counsel representing certain downstream opt out plaintiffs filed a motion with the District Court advising the Court that those parties had developed a proposed process by which large numbers of the downstream opt out cases (as well as the PPH and initial opt out cases handled by plaintiffs’ counsel participating in the process) might be negotiated and settled. The proposed process provides a methodology for valuing different categories of claims and also provides a structure for individualized negotiations between Wyeth and law firms representing diet drug claimants with pending Intermediate and Back End opt out lawsuits against the Company. As a result of settlement discussions to date, as of May 2, 2006, the Company had reached agreements, or agreements in principle, with a significant number of these law firms to settle the claims of approximately 90% of the Intermediate and Back End opt out claimants who have filed lawsuits against the Company. As of May 2, 2006, approximately 20,000 of these claimants had received settlement payments following the dismissal of their cases. The Company cannot predict the total number of cases that ultimately will be settled as a result of this process.
PPH Cases
On April 27, 2004, a jury in Beaumont, Texas hearing the case of Coffey, et al. v. Wyeth, et al., No. E-167,334, 172nd Judicial District Court, Jefferson Cty., TX, returned a verdict in favor of the plaintiffs for $113.4 million in compensatory damages and $900.0 million in punitive damages for the wrongful death of the plaintiffs’ decedent, allegedly as a result of PPH caused by her use of PONDIMIN. On May 17, 2004, the Trial Court entered judgment on behalf of the plaintiffs for the full amount of the jury’s verdict, as well as $4.2 million in pre-judgment interest and $188,737 in guardian ad litem fees. On July 26, 2004, the Trial Court denied in their entirety the Company’s motions for a new trial or for judgment notwithstanding the verdict, including the Company’s request for application of Texas’s statutory cap on punitive damage awards. The Company has filed an appeal from the judgment entered by the Trial Court and believes that it has strong arguments for reversal or reduction of the awards on appeal due to the significant number of legal errors made during trial and in the charge to the jury and due to a lack of evidence to support aspects of the verdict. In connection with its appeal, the Company was required by Texas law to post a bond in the amount of $25.0 million. Prior to April 13, 2006, the date scheduled for oral argument of the Company’s appeal, the Company reached an agreement in principle with the law firm representing the Coffey/Cappel plaintiffs to settle the claims of all of that firm’s diet drug clients, including the plaintiffs in the Coffey/Cappel case. As a result of that agreement, the parties filed a joint motion with the Ninth District Court of Appeals in Beaumont, TX to postpone the scheduled argument in the case, pending finalization of the settlement. That motion was granted by the court.
As of March 31, 2006, the Company was a defendant in approximately 169 pending lawsuits (excluding those lawsuits that have been settled in principle pursuant to the settlement process described above) in which the plaintiff alleges a claim of PPH, alone
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or with other alleged injuries. In approximately 39 additional lawsuits pleaded as valvular regurgitation cases, plaintiffs’ attorneys participating in the settlement process described above have now advised the Company that the plaintiffs will allege a claim of PPH. Almost all of these claimants must meet the definition of PPH set forth in the national settlement agreement in order to pursue their claims outside of the national settlement (payment of such claims, by settlement or judgment, would be made by the Company and not by the Trust). Approximately 75 of these cases appear to be eligible to pursue a PPH lawsuit under the terms of the national settlement. In approximately 60 of these cases, the Company has filed or expects to file motions under the terms of the national settlement to preclude plaintiffs from proceeding with their PPH claims. For the balance of these cases, the Company currently has insufficient medical information to assess whether or not the plaintiffs meet the definition of PPH under the national settlement. The Company is aware of approximately two additional claims, which are not currently the subject of a lawsuit but which appear to meet the settlement’s PPH definition. During the course of settlement discussions, certain plaintiffs’ attorneys have informed the Company that they represent additional individuals who claim to have PPH, but the Company is unable to evaluate whether any such additional purported cases of PPH would meet the national settlement agreement’s definition of PPH. The Company continues to work toward resolving the claims of individuals who allege that they have developed PPH as a result of their use of the diet drugs and intends to vigorously defend those PPH cases that cannot be resolved prior to trial.
HT Litigation
In addition to the class actions filed on behalf of current or former PREMARIN or PREMPRO users described in the Company’s 2005 Annual Report on Form 10-K, one additional class action has been filed in state court in West Virginia. The plaintiffs in White v. Wyeth Inc., et al., No. 05-C-429, Cir. Ct., Putnam Cty., WV., seek to recover personal injury damages and medical monitoring costs on behalf of a statewide class of PREMARIN and PREMPRO users. Also, as of May 1, 2006, the Company is defending approximately 4,500 actions brought on behalf of approximately 6,500 women in various state and federal courts throughout the United States (including in particular the United States District Court for the Eastern District of Arkansas and the Pennsylvania Court of Common Pleas, Philadelphia County) for personal injuries, including claims for breast cancer, stroke, ovarian cancer and heart disease allegedly resulting from their use ofPREMARIN or PREMPRO. The first of these personal injury cases is likely to proceed to trial in mid-2006.
PPA Litigation
With respect to the lawsuits seeking damages for alleged personal injuries from phenylpropanolamine (PPA) described in the Company’s 2005 Annual Report on Form 10-K, as of May 1, 2006, the Company is currently a named defendant in approximately 190 individual PPA lawsuits on behalf of approximately 300 plaintiffs in federal and state courts throughout the United States seeking such damages.
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DURACT Litigation
As discussed in the Company’s 2005 Annual Report on Form 10-K, the Company is a defendant in a putative class action for economic damages with respect to DURACT (Blue Cross and Blue Shield of Alabama, et al. v. Wyeth, CV-03-6046, Cir. Ct. Jefferson Cty., Ala.). On February 27, 2006, the Circuit Court of Alabama, Jefferson County, certified the nationwide class of third-party payers seeking such economic damages and the recovery of monies paid by such entities for DURACT that was not used by their insureds as of the date DURACT was withdrawn from the market. The Company is appealing the Circuit Court’s decision.
PROHEART Litigation
An additional PROHEART 6 putative class action, Dinah Jones v. Fort Dodge Animal Health, No. 01 2005 CA 00761, Cir. Ct., Alachua Cty., FL, has been filed in which plaintiff seeks to recover economic damages on behalf of herself and all other United States residents who purchased PROHEART 6 and administered it to their pet.
Patent Litigation
EFFEXORLitigation
On April 5, 2006, the Company filed suit in the United States District Court for the District of Delaware against Impax Laboratories, Inc. (Impax), alleging that the filing reported in the Company’s 2005 Annual Report on Form 10-K of an Abbreviated New Drug Application (ANDA) by Impax seeking FDA approval to market 37.5 mg, 75 mg and 150 mg venlafaxine HCl (the active ingredient in EFFEXOR XR) extended release capsules infringes the same patents at issue in the recently settled Wyeth v. Teva Pharmaceuticals USA, Inc., Docket No. 03-CV-1293 (KSH), U.S.D.C., D. N.J. suit. On April 12, 2006, the Company filed suit in the United States District Court for the Central District of California against Anchen Pharmaceuticals, Inc. (Anchen) and related parties, alleging that the filing of an ANDA by Anchen seeking FDA approval to market 150 mg venlafaxine HCl extended release capsules infringes the same Company patents discussed above. Under the 30-month stay provision of the Hatch-Waxman Act, any FDA approval of the Impax and Anchen ANDAs may not be made effective before August 2008 unless there is an earlier court decision holding each of the patents at issue invalid or not infringed. Because neither Impax nor Anchen has, to date, made any allegations as to the Company’s patent covering the compound venlafaxine itself, these ANDAs may not be approved until the expiration of that patent, and its associated pediatric exclusivity period, on June 13, 2008.
Commercial Litigation
Other Pricing Matters
In connection with the investigation by the United States Attorney’s Office, District of Massachusetts into Average Manufacturer Price (AMP) and Best Price issues relating to PROTONIX oral tablets and I.V. products, four current or former employees of the Company have been served with grand jury subpoenas seeking to compel testimony before the grand jury on PROTONIX pricing and marketing. Two of those employees were granted immunity and have testified before the grand jury. The Company is continuing to cooperate with the investigation.
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Regulatory Proceedings
ZOSYN Proceeding
In April 2006, the Company filed a petition with the U.S. Food and Drug Administration (FDA) asking the FDA to refrain from approving any application for a generic product that references ZOSYN (piperacillin and tazobactam for injection) unless the generic product complies with the U.S. Pharmacopeia standards on particulate matter in injectable drugs and exhibits the same compatibility profile as ZOSYN, particularly with respect to compatibility with Lactated Ringer’s Solution and the aminoglycoside antibiotics amikacin and gentamicin. The Company further requested that in the event the FDA chose to approve a generic product that did not exhibit the same compatibility profile as ZOSYN, FDA condition such approval upon the applicant’s implementation of a risk minimization action plan to address the confusion that would necessarily arise as a result of such difference. The matter is pending before the FDA.
Environmental Matters
MPA Matter
In connection with the litigation and other proceedings arising out of the alleged contamination with medroxyprogesterone acetate (MPA) of sugar water recovered from a sugar water process stream from the Company’s Wyeth Medica Ireland (WMI) subsidiary, the Company has been served with an additional lawsuit. The lawsuit, filed in Düsseldorf, Germany on behalf of Allianz Versicherung AG, the liability insurer of the German molasses trade company, Peter Cremer GmbH, seeks to recover payments made by Allianz to its insured for damages allegedly caused by the forced disposal of MPA-contaminated molasses.
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The Company has four reportable segments: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare), Fort Dodge Animal Health (Animal Health) and Corporate. The Company’s Pharmaceuticals, Consumer Healthcare and Animal Health reportable segments are strategic business units that offer different products and services. The reportable segments are managed separately because they manufacture, distribute and sell distinct products and provide services that require differing technologies and marketing strategies. The Company’s Corporate segment is responsible for the treasury, tax and legal operations of the Company’s businesses and maintains and/or incurs certain assets, liabilities, income, expense, gains and losses related to the overall management of the Company which are not allocated to the other reportable segments.
Segment
Pharmaceuticals(1)
Consumer Healthcare(1)
Animal Health(1)
Corporate(1)(2)
Total(3)
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2006
The following commentary should be read in conjunction with the consolidated condensed financial statements and notes to consolidated condensed financial statements on pages 3 to 28 of this report. When reviewing the commentary below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in Item 1A. RISK FACTORS in our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business; we encourage you to review the examples of our forward-looking statements under the heading “Cautionary Note Regarding Forward-Looking Statements” on pages 49 to 50 of this report. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Our Business
Wyeth is one of the world’s largest research-based pharmaceutical and health care products companies and is a leader in the discovery, development, manufacturing and marketing of pharmaceuticals, biotechnology products, vaccines, non-prescription medicines and animal health products.
Our principal strategy for success is creation of innovative products through research and development. We strive to produce first-in-class and best-in-class therapies for significant unmet medical needs by leveraging our breadth of knowledge and our resources across three principal scientific development platforms: small molecules, biopharmaceuticals and vaccines.
We also strive to innovate commercially and change the way we approach our business in response to the challenging global health care environment. During 2006, we will continue with our long-term global productivity initiatives, which were launched in 2005, to adapt to the changing pharmaceutical environment. These initiatives, which we refer to as Project Springboard, are aimed at encouraging innovation, improving processes and increasing cost efficiencies. During 2006, we expect to implement a new operating model for our drug development efforts aimed at further increasing research and development productivity, as well as improve the efficiency of our global operational support functions. Our ultimate goal from Project Springboard is to move beyond specific initiatives and create a culture where we continually look for new ways to become more productive in everything we do as a company.
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We have three principal operating segments: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare) and Fort Dodge Animal Health (Animal Health), which we manage separately because they develop, manufacture, distribute and sell distinct products and provide services that require differing technologies and marketing strategies. These segments reflect how senior management reviews the business, makes investing and resource allocation decisions and assesses operating performance. The following table provides an overview of the business operations of each of these segments:
Pharmaceuticals
Consumer
Healthcare
Animal Health
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We also have a reportable Corporate segment primarily responsible for the treasury, tax and legal operations of our businesses. It maintains and/or incurs certain assets, liabilities, income, expense, gains and losses related to our overall management that are not allocated to the other reportable segments.
2006 First Quarter Financial Highlights
Our Principal Products
Set forth below is a summary of the 2006 first quarter net revenue performance of our principal products:
(Dollars in millions)
2006 First Quarter
Net Revenue
% Increase over
2005 First Quarter
EFFEXOR
PROTONIX
PREVNAR
ENBREL (outside of the U.S. and Canada)(1)
Nutrition
PREMARIN family
Alliance revenue(2)
ZOSYN/TAZOCIN
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antidepressant both in terms of dollar sales and unit volume. We are continuing to receive additional approvals of the panic indication from global registrations. We have already launched sales and promotional activities for this new indication in several key markets to strengthen our position in the anxiety market.
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For a full description of our principal products, the preceding summary should be read in conjunction with our principal product summary in the overview section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2005 Financial Report as incorporated in our 2005 Annual Report on Form 10-K.
Our Product Pipeline
In April 2006, we received marketing approval in the European Union for TYGACIL, our innovative broad-spectrum I.V. antibiotic for serious, hospital-based infections, which we launched in the U.S. in July 2005.
Our 2005 NDA filings with the FDA for DVS-233 (desvenlafaxine succinate), a serotonin norepinephrine reuptake inhibitor (SNRI), for the treatment of major depressive disorder, and LYBREL (levonorgestrel/ethinyl estradiol), a new oral contraceptive with a unique continuous dosing regimen, remain under regulatory review.
We anticipate five additional NDA filings for new products in the next 12 months: bazedoxifene for osteoporosis; DVS-233 for vasomotor symptoms; bifeprunox for schizophrenia; temsirolimus for renal cell carcinoma; and methylnaltrexone for the treatment of opioid-induced side effects in patients with advanced illness. Completing these major NDA filings and preparing for these new product launches over this relatively short time frame is one of the most ambitious product introduction objectives in our history and will present significant operational challenges.
In March 2006, we terminated our Phase 3 clinical program evaluating our investigational drug, temsirolimus, for the treatment of metastatic breast cancer in post-menopausal women following the recommendation of a committee of independent experts. While this outcome reflects the uncertainties inherent in the research, development and commercialization of our product pipeline, we remain committed to studying temsirolimus in other cancer indications.
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We continue to actively pursue in-licensing opportunities and strategic collaborations to supplement our internal research and development efforts, such as the collaborations we entered into in 2005 with Progenics Pharmaceuticals, Inc. and with Trubion Pharmaceuticals, Inc. We face heavy competition from our peers in securing these relationships but believe that the excellence of our research and development and commercial organizations and the breadth of our expertise across traditional pharmaceuticals, biopharmaceuticals and vaccines position us well. We intend to continue to aggressively pursue these kinds of opportunities in 2006.
Our Diet Drug Litigation
We continue to address the challenges of our diet drug litigation. As discussed in more detail in our 2005 Annual Report on Form 10-K and Note 7 to our consolidated condensed financial statements contained in this report, on March 15, 2005, the United States District Court for the Eastern District of Pennsylvania approved the proposed Seventh Amendment to the Nationwide Settlement (the Settlement) as “fair, adequate and reasonable.” The Seventh Amendment creates a new claims processing structure, funding arrangement and payment schedule for the least serious but most numerous claims in the Settlement. The amendment ensures that these claims are processed on a streamlined basis while preserving funds in the existing Settlement trust for more serious claims. Three appeals were filed challenging the approval of the Seventh Amendment. Two of those appeals were withdrawn by the appellants who brought them. On November 1, 2005, the United States Court of Appeals for the Third Circuit dismissed the appeal of the remaining appellant and remanded the appellant’s claim to the District Court for the limited purpose of submitting the claim for re-auditing under the terms of the original settlement agreement. The appellant filed a petition for certiorari with the United States Supreme Court on March 14, 2006. The petition was found to be procedurally defective and was rejected, but the appellant was given an additional 60 days to correct the deficiencies. The petition is now due on May 15, 2006. By letter dated April 20, 2006, the appellant advised the Supreme Court that she does not intend to re-file her petition. In the absence of further timely filings with the Supreme Court, the Seventh Amendment will be considered to have achieved final judicial approval and will become effective.
In January 2005, we announced that we were in discussions with plaintiffs’ attorneys representing a number of individuals who opted out of the National Diet Drug Settlement regarding a proposed process for settling downstream opt out cases (as well as the primary pulmonary hypertension (PPH) and initial opt out cases handled by plaintiffs’ counsel participating in the process). The proposed process provides a methodology for valuing different categories of claims and also provides a structure for individualized negotiations between us and law firms representing diet drug claimants with pending Intermediate and Back End opt out lawsuits against the Company. As a result of the discussions to date, as of May 2, 2006, we had reached agreements, or agreements in principle, with a significant number of these law firms to settle the claims of approximately 90% of the Intermediate and Back End opt out claimants who have filed lawsuits against us. As of May 2, 2006, approximately 20,000 of these claimants had received settlement payments following the dismissal of their cases. We will continue to try those cases where attorneys are not willing to participate in this settlement process. We cannot predict the number of cases that ultimately will be settled as a result of this process.
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Change in Accounting for Share-Based Payments
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment(Statement 123R), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. The 2006 first quarter results included stock option expense, which reduced diluted earnings per share by approximately $0.03. The 2005 first quarter results, which have not been restated to include the impact of expensing stock options, would have been lower by approximately $0.05 per share had we expensed stock options. See Note 6 to the Consolidated Condensed Financial Statements for further discussion related to stock-based compensation. The impact of expensing stock options for 2006 is projected to be approximately $0.12 to $0.15 per share-diluted. The actual amount of compensation expense to be recorded is highly dependent on the number of options granted and fluctuations in our stock price.
Our Challenging Business Environment
Generally, we face the same difficult challenges that all research-based pharmaceutical companies are confronting. Pressure from government agencies, insurers, employers and consumers to lower prices through leveraged purchasing plans, use of formularies, importation, reduced reimbursement for prescription drugs and other means poses significant challenges for us. Generic products, which Wyeth no longer markets, are growing as a percentage of total prescriptions. Insurers and employers are increasingly demanding that patients start with a generic product before switching to a branded product if necessary, meaning that our products increasingly compete with generic versions of competitive branded products. Health care providers and the general public want more information about our products, and they want it delivered efficiently and effectively. Regulatory burdens and safety concerns are increasing the demands on us, and they increase both the cost and time it takes to bring new drugs to market. Post-marketing regulatory and media scrutiny of product safety also are increasing, as well as product liability litigation.
Additionally, we are faced with the moderating rate of growth of some of our major products, principally EFFEXOR. In 2004, the FDA recommended new class labeling for antidepressants, including ourEFFEXOR family of products, that would, among
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other things, more prominently highlight the already labeled risk of suicide in children and adolescents in a boxed warning. In 2005, we implemented these labeling changes for our EFFEXOR family of products. The FDA also has requested that all antidepressant manufacturers re-examine data regarding suicidality from clinical trials in adults using the same approach developed for evaluating the pediatric data. The Company has responded to the FDA’s request. The FDA has announced that it will hold an advisory committee meeting on this topic later in 2006. EFFEXOR has never been recommended for use in children and continues to be an appropriate and important therapy in treating adult patients.
In addition, in 2004, the United Kingdom Committee on the Safety of Medicines (CSM) completed a review of the safety and efficacy of the selective serotonin reuptake inhibitor (SSRI) class of antidepressants as well as our EFFEXOR family of products, which are SNRIs. As a result of this review, the United Kingdom Medicines and Healthcare Products Regulatory Agency (MHRA) implemented new class labeling for these antidepressants, including our EFFEXOR family of products, and imposed additional restrictions on the use of our EFFEXOR products in the United Kingdom because it concluded that these products carried additional risks. We appealed the EFFEXOR - specific additional restrictions to the CSM and the United Kingdom’s Medicines Commission because we believe that the imposed labeling changes are not supported by the available scientific data. We have been advised that the MHRA is reviewing all available scientific data relating toEFFEXOR. We are currently awaiting new labeling from the MHRA and withdrew our appeal in April 2006.
Late in 2005, we reached agreement with Teva Pharmaceutical Industries Ltd. (Teva) on a settlement of the U.S. patent litigation pertaining to Teva’s generic version of our EFFEXOR XR (extended release capsules) antidepressant. Under the terms of the settlement, Teva will be permitted to launch generic versions of EFFEXOR XR (extended release capsules) and EFFEXOR (immediate release tablets) in the U.S. pursuant to certain licenses effective beginning on July 1, 2010 and June 15, 2006, respectively, subject to earlier launch based on specified events. Teva also will be permitted to launch a generic version of EFFEXOR XR (extended release capsules) in Canada pursuant to a license effective beginning on December 1, 2006, subject to earlier launch based on specified events. In connection with these licenses, Teva will pay us specified percentages of gross profit from sales of each of the Teva generic versions. We expect that Teva’s anticipated launch of generic versions of EFFEXOR (immediate release tablets) in the U.S. in June 2006 and EFFEXOR XR (extended release capsules) in Canada in December 2006 will decrease our sales of these products significantly in the relevant market, beginning with, or shortly prior to, the launch of the generic versions. It is also possible that Teva’s introduction of a generic version of EFFEXOR (immediate release tablets) in the U.S. could adversely impact our U.S. sales of EFFEXOR XR (extended release capsules), although we anticipate that any impact will be modest given the significant differences in product profiles.
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Our Productivity Initiatives
During 2006, we will continue with our long-term global productivity initiatives, collectively called “Project Springboard,” which were launched in 2005 to adapt to the changing pharmaceutical industry environment. The guiding principles of these initiatives include innovation, cost savings, process excellence and accountability, with an emphasis on improving productivity. We are reviewing our production network to achieve optimal efficiencies and to reduce production costs for our global core products. As a result of these and other related initiatives, we recorded pre-tax charges of $35.1 million in the 2006 first quarter. As of March 31, 2006, total net charges of $225.7 million have been recorded in connection with the productivity initiatives since inception. Additional costs associated with these initiatives are expected to continue for several years as further strategic decisions are made; costs are projected to total approximately $750.0 million to $1,000.0 million, on a pre-tax basis. Throughout 2006 and in future years, we will continue with our long-term productivity initiatives with the objective of making Wyeth more efficient and more effective so that we may continue to thrive in this increasingly challenging industry environment.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are detailed in the Company’s Financial Report on Form 10-K for the year ended December 31, 2005. With the exception of the Company’s accounting for stock-based compensation in connection with the adoption of SFAS No. 123R, there were no changes in the Company’s critical accounting policies from the year ended December 31, 2005.
SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. The Company determines the fair value of share-based awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. Determining these assumptions are subjective and complex, and therefore, actual results could differ from those estimates. Prior to adopting SFAS No. 123R, the Company applied APB Opinion No. 25, and related interpretations, in accounting for its stock incentive plans. Under APB No. 25, no stock-based employee compensation cost was reflected in net income, other than for the Company’s restricted stock and performance-based restricted stock awards, as options granted under all other plans had an exercise price equal to the market price value of the underlying common stock at the date of the grant.
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Results of Operations
Worldwide net revenue increased 6% for the 2006 first quarter compared with prior year levels. The increase in worldwide net revenue in the 2006 first quarter was due to increases in the Pharmaceuticals and Animal Health segments, offset, in part, by a decrease in the Consumer Healthcare segment. Excluding the unfavorable impact of foreign exchange, worldwide net revenue increased 7% for the 2006 first quarter.
The following table sets forth worldwide net revenue results by reportable segment together with the percentage changes from the comparable periods in the prior year:
% Increase/
(Decrease)
Consumer Healthcare
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The following table sets forth the percentage changes in worldwide net revenue by reportable segment and geographic area from the comparable period in the prior year, including the effect volume, price and foreign exchange had on these percentage changes:
% Increase (Decrease)
Foreign
Exchange
United States
International
Worldwide Pharmaceuticals net revenue increased 9% for the 2006 first quarter due primarily to higher sales of ENBREL (internationally),EFFEXOR, PROTONIX, the PREMARIN family of products and PREVNAR offset, in part, by lower sales of ZOTON which is currently experiencing generic competition in the United Kingdom and other European countries and will experience generic competition in the near future in other countries as patent protection expires in those countries. The increase in EFFEXOR net revenue reflects price increases and reduced rebates. Higher sales of PROTONIX reflect the impact of an inventory reduction in the wholesale channel in the 2005 first quarter, as well as a slight inventory build in the 2006 first quarter. The increase in sales of the PREMARIN family of products reflects the impact of wholesaler destocking in the 2005 first quarter. In addition, alliance revenue increased 30% to $254.1 million for the 2006 first quarter. Excluding the unfavorable impact of foreign exchange, worldwide Pharmaceuticals net revenue increased 10% for the 2006 first quarter.
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Worldwide Consumer Healthcare net revenue decreased 10% for the 2006 first quarter. The decrease was primarily attributable to the absence of 2006 first quarter sales of SOLGAR products, which were divested in the 2005 third quarter. Additionally, lower sales of ROBITUSSIN, DIMETAPP and ADVIL COLD & SINUS were reported as a result of retailer actions and state and federal legislation related to pseudoephedrine (PSE)-containing products. These results included a reserve of $31.5 million recorded in the 2006 first quarter for anticipated returns in connection with the PSE-containing products. The impact of foreign exchange on Consumer Healthcare net revenue was immaterial for the 2006 first quarter.
Worldwide Animal Health net revenue increased 1% for the 2006 first quarter due primarily to higher sales of livestock and poultry products, partially offset by lower sales of equine products. Excluding the unfavorable impact of foreign exchange, worldwide Animal Health net revenue increased 2% for the 2006 first quarter.
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The following tables set forth the significant worldwide Pharmaceuticals, Consumer Healthcare and Animal Health net revenue by product for the three months ended March 31, 2006 compared with the same period in the prior year:
(In millions)
ENBREL(1)
Oral Contraceptives
BENEFIX
RAPAMUNE
REFACTO
rhBMP-2
ZOTON
Total Pharmaceuticals
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CENTRUM
ADVIL(1)
CALTRATE
ROBITUSSIN
PREPARATION H
CHAPSTICK
ALAVERT
ADVIL COLD & SINUS(1)
DIMETAPP
SOLGAR(2)
Total Consumer Healthcare
Livestock products
Companion animal products
Equine products
Poultry products
Total Animal Health
Sales Deductions
We deduct certain items from gross revenue, which primarily consist of provisions for product returns, cash discounts, chargebacks/rebates, customer allowances and consumer sales incentives. The provision for chargebacks/rebates relates primarily to U.S. sales of pharmaceutical products provided to wholesalers and managed care organizations under contractual agreements or to certain governmental agencies that administer benefit programs, such as Medicaid. While different programs and methods are utilized to determine the chargeback or rebate provided to the customer, we consider both to be a form
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of price reduction. Chargebacks/rebates are the only deductions from gross revenue that we consider significant and approximated $553.7 million for the 2006 first quarter compared with $612.7 million for the 2005 first quarter.
Except for chargebacks/rebates, provisions for each of the other components of sales deductions, including product returns, are individually less than 2% of gross sales. The provisions charged against gross sales for product returns were $65.2 million for the 2006 first quarter compared with $56.9 million for the 2005 first quarter.
Operating Expenses
Stock-based compensation expense for the 2006 first quarter has been recorded in accordance with SFAS No. 123R, which the Company adopted as of January 1, 2006. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. The 2006 first quarter included stock-based compensation expense for stock options, restricted stock and performance share awards. The 2005 first quarter included stock-based compensation expense for restricted stock and performance share awards only. Prior to the adoption of SFAS No. 123R, no expense was recorded for stock options. For the three months ended March 31, 2006 and 2005, stock-based compensation expense was recorded as follows:
Total stock-based compensation expense
See Note 6 to the Consolidated Condensed Financial Statements for further discussion related to stock-based compensation.
Cost of goods sold, as a percentage of Net revenue, decreased to 27.6% for the 2006 first quarter compared with 29.5% for the 2005 first quarter. The decrease was due to lower inventory adjustments and lower cost of goods sold associated with ENBREL validation batches and Grange Castle pre-operating costs which occurred in 2005. For the 2006 first quarter, gross margin also increased due to an increase in alliance revenue, lower royalty cost attributable to the decline in sales of ZOTON in the U.K. and a more favorable product mix in Consumer Healthcare due to the absence of first quarter sales of lower margin SOLGAR products, which were divested in the 2005 third quarter. The increases in gross margin were partially offset by a $31.5 million reserve for anticipated returns
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and a $6.0 million inventory adjustment for costs associated with shifting PSE-containing products to behind-the-pharmacy counter (required beginning September 2006 pursuant to newly-enacted federal legislation) as well as the 2006 first quarter charges associated with our productivity initiatives.
Selling, general and administrative expenses, as a percentage of Net revenue, decreased 1.4% for the 2006 first quarter compared with the 2005 first quarter. The 2006 first quarter decrease was due, in part, to lower selling expenses as a result of the productivity initiatives, lower marketing costs relating to Consumer Healthcare products, lower general expenses due to the sale of the SOLGAR business during the 2005 third quarter and lower insurance costs. These decreases were partially offset by the impact of expensing stock options and pre-and post-launch marketing costs for TYGACIL and LYBREL.
Research and development expenses increased 13% for the 2006 first quarter as compared with the 2005 first quarter. The 2006 first quarter increases were primarily due to higher salary-related expenses, including the impact of expensing stock options, and higher cost-sharing expenditures related to pharmaceutical collaborations.
Interest Expense and Other Income
Interest expense, net for the three months ended March 31, 2006 and 2005 consisted of the following:
Interest expense
Interest income
Less: amount capitalized for capital projects
Total interest expense, net
Interest expense, net decreased 82% for the 2006 first quarter due primarily to higher interest income and higher capitalized interest offset by higher interest expense. Weighted average debt outstanding during the 2006 first quarter was $9,198.3 million compared with prior year levels of $7,912.8 million. The impact of higher weighted average debt outstanding on interest expense was offset, in part, by increased interest income earned on higher cash balances in 2006 versus 2005. The higher capitalized interest resulted from increased spending for long-term capital projects in process.
Other income, net decreased by approximately $120.0 million for the 2006 first quarter primarily as a result of lower gains from product divestitures. Pre-tax gains from the divestiture of certain Pharmaceuticals and Consumer Healthcare products were
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approximately $17.6 million in the 2006 first quarter compared with $138.5 million in the 2005 first quarter. The 2006 divestitures included product rights to MINOCIN in the United States. The 2005 divestitures included product rights to SYNVISC and EPOCLER (in Brazil). The sales, profits and net assets of these divested products, individually or in the aggregate, were not material to either business segment or our consolidated financial position or results of operations.
Income (Loss) Before Income Taxes
The following table sets forth worldwide income (loss) before income taxes by reportable segment together with the percentage changes from the comparable periods in the prior year:
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Worldwide Pharmaceuticals income before income taxes increased 12% for the 2006 first quarter. The increase was due primarily to higher net revenue, higher gross margins earned on worldwide sales of Pharmaceuticals products, and lower selling and general expenses, as a percentage of net revenue, offset by higher research and development expenses and lower other income, net.
Worldwide Consumer Healthcare income before income taxes for the 2006 first quarter decreased 51% due primarily to lower net revenue, lower gross profit margins earned on worldwide sales of Consumer Healthcare products, higher selling and general expense, as a percentage of net revenue, higher research and development expenses and lower other income, net. The 2006 first quarter was impacted by the absence of net revenue from SOLGAR products, which were divested in the 2005 third quarter, as well as the impact of retailer actions and state and federal legislation in connection with pseudoephedrine (PSE)-containing products.
Worldwide Animal Health income before income taxes for the 2006 first quarter increased approximately 6% due primarily to higher gross profit margins earned on worldwide sales of Animal Health products and lower selling and general expenses, as a percentage of net revenue.
Corporate expenses, net for the 2006 first quarter were $43.3 million compared with $37.4 million for the 2005 first quarter. Corporate expenses, net for the 2006 first quarter were impacted by a charge of $35.1 million related to our productivity initiatives, as well as lower interest expense, net.
Income Taxes
The effective tax rates were 23.4% and 21.5% for the 2006 and 2005 first quarters, respectively. The increase in the 2006 first quarter tax rate reflects the impact of higher sales of certain Pharmaceuticals products (i.e., ENBREL, PREVNAR) that are manufactured in less favorable tax jurisdictions, compared to other products (i.e., PREMARIN), that are manufactured in more favorable tax jurisdictions. The 2006 first quarter rate does not assume the benefit of certain research and development tax credits since they have not yet been renewed for 2006.
Consolidated Net Income and Diluted Earnings Per Share Results
Net income and diluted earnings per share for the 2006 first quarter were $1,119.6 million and $0.82, respectively, compared with net income and diluted earnings per share of $1,078.2 million and $0.80, respectively, in the prior year, which represent increases of 4% and 3%, respectively.
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Our management uses various measures to manage and evaluate our performance and believes it is appropriate to specifically identify certain significant items included in net income and diluted earnings per share to assist investors with analyzing ongoing business performance and trends. In particular, our management believes that comparisons between first quarter 2006 and 2005 results of operations are impacted by the 2006 first quarter net charges of $35.1 million ($24.2 million after-tax or $0.02 per share-diluted) related to our productivity initiatives. The productivity initiatives charges, which include costs of closing certain manufacturing facilities and the elimination of certain positions, have been identified as significant items by our management as these charges are not considered to be indicative of continuing operating results.
In addition, effective January 1, 2006; we adopted Statement of Financial Accounting Standards (SFAS) No. 123R which requires the expensing of stock options. As a result, the 2006 first quarter results included stock option expense, which reduced diluted earnings per share by approximately $0.03. The 2005 first quarter results, which have not been restated to include the impact of stock options, would have included a charge of $81.7 million ($65.2 million after-tax or $0.05 per share-diluted) had we expensed stock options. Our management believes that including this expense as part of the 2005 first quarter provides a more meaningful comparison of our operations for these accounting periods.
Excluding the 2006 first quarter productivity initiative charges and assuming the expensing of stock options for the 2005 first quarter, the increases in net income and diluted earnings per share for the 2006 first quarter were due primarily to higher net revenue, lower costs of goods sold and selling, general and administrative expenses, both as a percentage of net revenue, and lower interest expense, net, offset, in part, by higher research and development spending and lower other income, net as well as the impact of a higher effective tax rate compared with the 2005 first quarter.
Gains from product divestitures constitute an integral part of our analysis of divisional performance and are important to understanding changes in our reported net income. Gains from product divestitures for the 2006 first quarter were $17.6 million ($11.5 million after-tax or $0.01 per share-diluted) compared with $138.5 million ($90.1 million after-tax or $0.07 per share-diluted) for the 2005 first quarter.
Liquidity, Financial Condition and Capital Resources
Cash flows provided by operating activities totaling $234.0 million during the 2006 first quarter were generated primarily by net earnings of $1,119.6 million, offset, in part, by payments of $465.1 million related to the diet drug litigation (see Note 7 to the consolidated condensed financial statements.) The cash flow impact of the change in working capital, which used $928.9 million of cash as of March 31, 2006, excluding the effects of foreign exchange, was offset, in part, by non-cash depreciation and amortization expense and stock-based compensation included in net earnings. The change in working capital primarily consisted of a decrease in accounts payable and
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accrued expenses of $776.2 million relating to timing of payments, an increase in inventory of $73.1 million due to increased inventory levels to support higher sales and a decrease in accrued taxes of $69.6 million due to timing of payments. The change in working capital, which used $303.8 million of cash as of March 31, 2005, excluding the effects of foreign exchange, primarily consisted of a decrease in accounts payable and accrued expenses of $263.7 million relating to timing of payments and an increase in accounts receivable of $70.8 million relating to increased sales.
During the 2006 first quarter, we used $225.8 million of cash for investments in property, plant and equipment and $186.9 million of cash for purchases of marketable securities. In addition, we received investment proceeds through the sales and maturities of marketable securities of $52.2 million and the sales of assets totaling $23.0 million.
Our financing activities in the 2006 first quarter included dividend payments of $336.0 million and purchases of common stock for treasury of $142.9 million.
Included in Accrued Expenses is the current portion of the reserves for diet drug litigation in the amount of $4,438.0 million. Based on progress to date with various aspects of the diet drug litigation, a substantial portion of this balance is likely to be paid during the remainder of 2006.
At March 31, 2006, we had outstanding $9,108.8 million in total debt, which consisted of notes payable and other debt. Maturities of our obligations as of March 31, 2006 are set forth below.
Total debt
The following represents our credit ratings as of March 31, 2006:
Moody’s
S&P
Fitch
Short-term debt
P-2
A-1
F-2
Baa1
A
A-
Outlook
Developing
Stable
Negative
Last rating update
November 9, 2005
May 3, 2006
In light of the circumstances discussed in Note 7 to the consolidated condensed financial statements, including the unknown number of valid matrix claims and the unknown number and merits of valid downstream opt outs, it is not possible to predict our ultimate liability in connection with our diet drug legal proceedings. It is therefore not possible to predict whether, and if so when, such proceedings will have a material adverse effect on our financial condition, results of operations and/or cash flows and whether cash flows from operating activities and existing and prospective financing resources will be
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adequate to fund our operations, pay all liabilities related to the diet drug litigation, pay dividends, maintain the ongoing programs of capital expenditures, and repay both the principal and interest on our outstanding obligations without the disposition of significant strategic core assets and/or reductions in certain cash outflows.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements. These forward-looking statements generally can be identified by the use of words such as “anticipate,” “expect,” “plan,” “could,” “may,” “will,” “believe,” “estimate,” “forecast,” “project” and other words of similar meaning. These forward-looking statements address various matters, including:
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Each forward-looking statement contained in this report is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. These risks and uncertainties include risks associated with the inherent uncertainty of the timing and success of product research; development and commercialization (including with respect to our pipeline products); drug pricing and payment for our products by government and third party-payors; manufacturing; data generated on the safety and efficacy of our products; economic conditions including interest and currency exchange rate fluctuations; changes in generally accepted accounting principles; the impact of competitive or generic products; trade buying patterns; product liability, intellectual property and other types of litigation; the impact of legislation and regulatory compliance; intellectual property rights; strategic relationships with third parties; environmental liabilities; and other risks and uncertainties, including those detailed from time to time in our periodic reports filed with the Securities and Exchange Commission, including our Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. In particular, we refer you to Item 1A. RISK FACTORS of our 2005 Annual Report on Form 10-K for additional information regarding the risks and uncertainties discussed above as well as additional risks and uncertainties that may affect our actual results. The forward-looking statements in this report are qualified by these risk factors.
We caution investors not to place considerable reliance on the forward-looking statements contained in this report. Each statement speaks only as of the date of this report (or any earlier date indicated in the statement), and we undertake no obligation to update or revise any of these statements, whether as a result of new information, future developments or otherwise. From time to time, we also may provide oral or written forward-looking statements in other materials. You should consider this cautionary statement and the risk factors identified under Item 1A. RISK FACTORS of our 2005 Annual Report on Form 10-K when evaluating those statements as well. Our business is subject to substantial risks and uncertainties, including those identified in this report. Investors, potential investors and others should give careful consideration to these risks and uncertainties.
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The market risk disclosures appearing on page 64 of the Company’s 2005 Financial Report as incorporated by reference in our 2005 Annual Report on Form 10-K have not materially changed from December 31, 2005. At March 31, 2006, the fair values of our financial instruments were as follows:
Description
Forward contracts(1)
Option contracts(1)
Interest rate swaps
Outstanding debt(2)
The estimated fair values approximate amounts at which these financial instruments could be exchanged in a current transaction between willing parties. Therefore, fair values are based on estimates using present value and other valuation techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. The fair value of forward contracts, currency option contracts and interest rate swaps reflects the present value of the contracts at March 31, 2006 and the fair value of outstanding debt instruments reflects a current yield valuation based on observed market prices as of March 31, 2006.
As of March 31, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. During the 2006 first quarter, there were no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II — Other Information
The information set forth in Note 7 to the Company’s consolidated condensed financial statements, Contingencies and Commitments, in this report is incorporated herein by reference.
Information regarding risk factors appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward Looking Statements in this report and in Item 1A. RISK FACTORS of the Company’s 2005 Annual Report on Form 10-K. There have been no material changes from the risk factors previously disclosed in the Company’s 2005 Annual Report on Form 10-K.
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The following table provides certain information with respect to the Company’s repurchases of shares of its common stock during the 2006 first quarter:
Period
Number
of SharesPurchased(1)(2)
Price
Paid
per
Share (1)(2)
January 1, 2006 through January 31, 2006
February 1, 2006 through February 28, 2006
March 1, 2006 throughMarch 31, 2006
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Amendment to Restricted Stock Trust Agreement under the 1993 Stock Incentive Plan.
Computation of Ratio of Earnings to Fixed Charges.
Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
(Registrant)
By: /s/
Vice President and Controller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: May 9, 2006
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Certification of disclosure as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
EX-1