e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2005
Commission File
No. 1-10269
Allergan, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State of Incorporation) |
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95-1622442
(I.R.S. Employer Identification No.) |
2525 Dupont Drive
Irvine, California
(Address of principal executive offices) |
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92612
(Zip Code) |
(714) 246-4500
(Registrants telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on |
Title of each class |
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which each class registered |
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Common Stock, $0.01 par value
Preferred Share Purchase Rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined by rule 405 of the Securities
Act. Yes þ No o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ.
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such
filing requirements for the past
90 days. Yes þ No o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is 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 þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ.
The aggregate market value of the registrants common
equity held by non-affiliates was approximately
$11,170 million on June 24, 2005, based upon the
closing price on the New York Stock Exchange on such date.
Common Stock outstanding as of February 27,
2006 134,659,267 shares (including
1,032,189 shares held in treasury).
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates certain information by
reference from the registrants proxy statement for the
annual meeting of stockholders to be held on May 2, 2006,
which proxy statement will be filed no later than 120 days
after the close of the registrants fiscal year ended
December 31, 2005.
TABLE OF CONTENTS
i
Statements made by us in this report and in other reports and
statements released by us that are not historical facts
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and
Section 21 of the Securities Exchange Act of 1934. These
forward-looking statements are necessarily estimates reflecting
the best judgment of our senior management based on our current
estimates, expectations, forecasts and projections and include
comments that express our current opinions about trends and
factors that may impact future operating results. Disclosures
that use words such as we believe,
anticipate, estimate,
intend, could, plan,
expect, project or the negative of
these, as well as similar expressions, are intended to identify
forward-looking statements. These statements are not guarantees
of future performance, rely on a number of assumptions
concerning future events, many of which are outside of our
control, and involve known and unknown risks and uncertainties
that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
future results, performance or achievements, expressed or
implied by such forward-looking statements. We discuss such
risks, uncertainties and other factors throughout this report
and specifically under the caption Risk Factors in
Part I, Item 1A. below. Any such forward-looking
statements, whether made in this report or elsewhere, should be
considered in the context of the various disclosures made by us
about our businesses including, without limitation, the risk
factors discussed below. Except as required under the federal
securities laws and the rules and regulations of the U.S.
Securities and Exchange Commission, we do not have any intention
or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, changes
in assumptions, or otherwise.
PART I
General Development of Our Business
Allergan, Inc. is a technology-driven, global health care
company that develops and commercializes specialty
pharmaceutical products for the ophthalmic, neurological,
medical aesthetics, medical dermatological and other specialty
markets. We are a pioneer in specialty pharmaceutical research,
targeting products and technologies related to specific disease
areas such as glaucoma, retinal disease, dry eye, psoriasis,
acne and movement disorders. Additionally, we develop and market
aesthetic-related pharmaceuticals and
over-the-counter
products. Within these areas, we are an innovative leader in
therapeutic and other prescription products, and to a limited
degree,
over-the-counter
products that are sold in more than 100 countries around the
world. We are also focusing research and development efforts on
new therapeutic areas, including gastroenterology, neuropathic
pain and genitourinary diseases.
We were originally incorporated in California in 1948 and became
known as Allergan Corporation in 1950. In 1977, we
reincorporated in Delaware. In 1980, we were acquired by
SmithKline Beecham plc (then known as SmithKline Corporation).
From 1980 through 1989, we operated as a wholly-owned subsidiary
of SmithKline and in 1989 we again became a stand-alone public
company through a spin-off distribution by SmithKline.
Our Internet website address is www.allergan.com. We make
our periodic and current reports, together with amendments to
these reports, available on our Internet website, free of
charge, as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and
Exchange Commission. The information on our Internet website is
not incorporated by reference into this Annual Report on
Form 10-K.
In June 2002, we completed the spin-off of our optical medical
device business to our stockholders. The optical medical device
business consisted of two businesses: our ophthalmic surgical
products business and our contact lens care products business.
The spin-off was effected by contributing our optical medical
device business to a newly formed subsidiary, Advanced Medical
Optics, Inc., or AMO, and issuing a dividend of AMOs
common stock to our stockholders.
1
In connection with our spin-off of AMO, we entered into a
manufacturing and supply agreement under which we agreed to
manufacture certain products for AMO for a period of up to three
years ending in June 2005. In October 2004, our board of
directors approved certain restructuring activities related to
the scheduled termination of our manufacturing and supply
agreement. As part of the termination of the manufacturing and
supply agreement, we eliminated certain manufacturing positions
at our Westport, Ireland; Waco, Texas; and Guarulhos, Brazil
manufacturing facilities. As of December 31, 2005, we
substantially completed all activities related to the
termination of our manufacturing and supply agreement with AMO.
In January 2005, our board of directors approved the initiation
and implementation of a restructuring of certain activities
related to our European operations. The restructuring seeks to
optimize operations, improve resource allocation and create a
scalable, lower cost and more efficient operating model for our
European research and development and commercial activities.
Specifically, the restructuring anticipates moving key European
research and development and select commercial functions from
our Mougins, France and other European locations to our Irvine,
California, High Wycombe, U.K. and Dublin, Ireland facilities
and streamlining our European commercial back office functions.
We have incurred and anticipate that we will continue to incur
restructuring charges and charges relating to severance,
relocation and one-time termination benefits, payments to public
employment and training programs, transition and duplicate
operating expenses, contract termination costs and capital and
other asset-related expenses in connection with the
restructuring. We currently estimate that the pre-tax charges
resulting from the restructuring, including transition and
duplicative operating expenses, will be between $46 million
and $51 million, and capital expenditures will be between
$3 million and $4 million.
On December 20, 2005 we entered into a merger agreement
with Inamed Corporation and our wholly owned subsidiary, Banner
Acquisition, Inc., pursuant to which we intend to acquire
Inamed. Inamed is a global healthcare company that develops,
manufactures and markets a diverse line of products to enhance
the quality of peoples lives, including breast implants
for aesthetic augmentation and reconstructive surgery following
a mastectomy, a range of dermal products to correct facial
wrinkles, the
BioEnterics®
LAP-BAND®
System designed to treat severe and morbid obesity and the
BioEnterics®
Intragastric Balloon
(BIB®)
system for the treatment of obesity.
Consistent with the terms of the merger agreement, we have made
an exchange offer for all of the outstanding shares of Inamed
common stock on the terms and conditions set forth in the merger
agreement and to acquire any shares of Inamed common stock not
acquired in the exchange offer in a second step merger. In the
exchange offer, Banner Acquisition has offered to acquire Inamed
shares for either $84.00 in cash or 0.8498 of a share of our
common stock, at the election of the holder, subject to
proration so that 45% of the aggregate Inamed shares tendered
will be exchanged for cash and 55% of the aggregate Inamed
shares tendered will be exchanged for shares of our common
stock. Upon completion of the exchange offer, Banner Acquisition
will be merged with and into Inamed in the second step merger,
with Inamed surviving the merger as our wholly-owned subsidiary.
The merger is intended to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code. The merger
agreement terminates if the exchange offer is not completed by
March 30, 2006.
Inamed had previously executed a merger agreement under which it
would be acquired by Medicis Pharmaceutical Corporation.
Following its receipt of our acquisition proposal and prior to
executing the merger agreement with us, Inamed terminated its
merger agreement with Medicis and, in accordance with the terms
of that merger agreement, paid Medicis a $90 million cash
termination fee.
The exchange offer is currently scheduled to be completed on
March 10, 2006. However, the exchange offer will be
extended if necessary to obtain United States Federal Trade
Commission, or FTC, clearance. Obtaining clearance from the FTC
is the one remaining material condition to closing the exchange
offer.
2
Our Business
The following table sets forth, for the periods indicated, net
sales for each of our specialty pharmaceutical product lines,
net earnings (loss), domestic and international sales as a
percentage of total net sales and domestic and international
long-lived assets:
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Year Ended December 31, |
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2005 |
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2004 |
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2003 |
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(in millions) |
Net Sales by Product Line
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Eye Care Pharmaceuticals
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$ |
1,321.7 |
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$ |
1,137.1 |
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$ |
999.5 |
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Botox®/
Neuromodulator
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830.9 |
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705.1 |
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563.9 |
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Skin Care Products
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120.2 |
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103.4 |
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109.3 |
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Other(1)
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46.4 |
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100.0 |
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82.7 |
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Total
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$ |
2,319.2 |
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$ |
2,045.6 |
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$ |
1,755.4 |
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Net earnings (loss)
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$ |
403.9 |
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$ |
377.1 |
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$ |
(52.5 |
) |
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Sales
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Domestic
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67.5 |
% |
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69.1 |
% |
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70.4 |
% |
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International
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32.5 |
% |
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30.9 |
% |
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29.6 |
% |
Long-Lived Assets
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Domestic
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$ |
470.7 |
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$ |
360.7 |
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$ |
343.0 |
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International
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$ |
199.3 |
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$ |
197.2 |
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$ |
175.8 |
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(1) |
Other sales primarily consist of sales to AMO pursuant to a
manufacturing and supply agreement entered into as part of the
AMO spin-off that terminated in June 2005. |
See Note 14, Business Segment Information, in
the notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for further
information concerning our foreign and domestic operations.
Eye Care Pharmaceutical Product Line
We develop, manufacture and market a broad range of prescription
and non-prescription products designed to treat diseases and
disorders of the eye, including glaucoma, dry eye, inflammation,
infection and allergy.
Glaucoma. The largest segment of the market for
ophthalmic prescription drugs is for the treatment of glaucoma,
a sight-threatening disease typically characterized by elevated
intraocular pressure leading to optic nerve damage. Glaucoma is
currently the worlds second leading cause of blindness,
and we estimate that over 60 million people worldwide have
glaucoma. According to IMS Health Inc., an independent research
firm, our products for the treatment of glaucoma, including
Alphagan®,
Alphagan®
P and
Lumigan®,
captured approximately 17% of the worldwide glaucoma market for
the first nine months of 2005.
Our largest selling eye care pharmaceutical products are the
ophthalmic solutions
Alphagan®
(brimonidine tartrate ophthalmic solution) 0.2% and
Alphagan®
P (brimonidine tartrate ophthalmic solution) 0.15%,
preserved with
Purite®.
Alphagan®
and
Alphagan®
P lower intraocular pressure by reducing aqueous humor
production and increasing uveoscleral outflow.
Alphagan®
P is an improved reformulation of
Alphagan®
containing brimonidine,
Alphagan®s
active ingredient, preserved with
Purite®.
We currently market
Alphagan®
and
Alphagan®
P in over 70 countries worldwide. In September 2001, we
filed a New Drug Application with the U.S. Food and Drug
Administration, or FDA, for a brimonidine and timolol
combination designed to treat glaucoma. In March 2005, the FDA
issued an approvable letter for our brimonidine and timolol
combination. During the fourth quarter of 2003, we received
approval from Health Canada for our
3
brimonidine and timolol combination, which is marketed as
Combigantm.
In December 2004, we received our first European approval of
Combigantm
in Switzerland, and in April 2005, we received marketing
approval for
Combigantm
in the United Kingdom. In September 2005, we received a positive
opinion from the European Union by way of the Mutual Recognition
Process for
Combigantm.
The positive opinion was received in all twenty-one concerned
member states in which we filed. During 2004 and 2005, we also
received approvals in Brazil, Argentina, Mexico, India,
Australia, Taiwan and New Zealand.
Alphagan®
and
Alphagan®
P combined were the third best selling glaucoma products
in the world for the first nine months of 2005, according to IMS
Health Inc. Combined sales of
Alphagan®,
Alphagan®
P and
Combigantm
represented approximately 12% of our total consolidated sales in
2005, 13% of our total consolidated sales in 2004 and 16% of our
total consolidated sales in 2003. In July 2002, based on the
acceptance of
Alphagan®
P, we discontinued the U.S. distribution of
Alphagan®.
In May 2004, we entered into an exclusive licensing agreement
with Kyorin Pharmaceutical Co., Ltd., under which Kyorin became
responsible for the development and commercialization of
Alphagan®
and
Alphagan®
P in Japans ophthalmic specialty area. Kyorin
subsequently sub-licensed its rights under the agreement to
Senju Pharmaceutical Co., Ltd. Under the licensing agreement,
Senju incurs associated costs, makes development and
commercialization milestone payments, and makes royalty-based
payments on product sales. We agreed to work collaboratively
with Senju on overall product strategy and management. The
marketing exclusivity period for
Alphagan®
P expired in the United States in September 2004,
although we have a number of patents covering the
Alphagan®
P technology that extend to 2021 in the United States and
2009 in Europe, with corresponding patents pending in Europe. In
May 2003, the FDA approved the first generic form of
Alphagan®.
Additionally, a generic form of
Alphagan®
is sold in a limited number of other countries, including
Canada, Mexico, India, Brazil, Colombia and Argentina. See
Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and
Contingencies, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report for further information regarding litigation involving
Alphagan®.
Falcon Pharmaceuticals, Ltd., an affiliate of Alcon
Laboratories, Inc., is attempting to obtain FDA approval for and
to launch a brimonidine product to compete with our
Alphagan®
P product. In August 2005, we received FDA approval to
market a new formulation of
Alphagan®
P (brimonidine tartrate ophthalmic solution) 0.1%,
preserved with
Purite®
and launched the product in January 2006.
Lumigan®
(bimatoprost ophthalmic solution) 0.03% is a topical treatment
indicated for the reduction of elevated intraocular pressure in
patients with glaucoma or ocular hypertension who are either
intolerant or insufficiently responsive when treated with other
intraocular pressure-lowering medications. Sales of
Lumigan®
represented approximately 12% of our total consolidated sales in
2005, 11% of our total consolidated sales in 2004 and 10% of our
total consolidated sales in 2003. In March 2002, the European
Commission approved
Lumigan®
through its centralized procedure. In January 2004, the European
Unions Committee for Proprietary Medicinal Products
approved
Lumigan®
as a first-line therapy for the reduction of elevated
intraocular pressure in chronic open-angle glaucoma and ocular
hypertension. We currently sell
Lumigan®
in over 40 countries worldwide. In May 2004, we entered into an
exclusive licensing agreement with Senju Pharmaceutical Co.,
Ltd., under which Senju became responsible for the development
and commercialization of
Lumigan®
in Japans ophthalmic specialty area. Senju incurs
associated costs, makes development and commercialization
milestone payments and makes royalty-based payments on product
sales. We agreed to work collaboratively with Senju on overall
product strategy and management. In November 2003, we filed a
New Drug Application with the FDA for a
Lumigan®
and timolol combination designed to treat glaucoma or ocular
hypertension. In August 2004, we announced that the FDA issued
an approvable letter regarding the
Lumigan®
and timolol combination, setting out the conditions, including
additional clinical investigation, that we must meet in order to
obtain final FDA approval. The
Lumigan®
and timolol combination has been filed in the European Union and
is under evaluation by the European Medicines Evaluation Agency
(EMEA).
Ocular Surface Disease. In December 2002, the FDA
approved
Restasis®
(cyclosporine ophthalmic emulsion) 0.05%, the first and
currently the only prescription therapy for the treatment of
chronic dry eye disease. We launched
Restasis®
in the United States in April 2003 under a license from Novartis
for the ophthalmic use of cyclosporine. Dry eye disease is a
painful and irritating condition involving abnormalities
4
and deficiencies in the tear film initiated by a variety of
causes. The incidence of dry eye disease increases markedly with
age, after menopause in women and in people with systemic
diseases such as Sjogrens syndrome and rheumatoid
arthritis. Until the approval of
Restasis®,
physicians used lubricating tears as a temporary measure to
provide palliative relief of the debilitating symptoms of dry
eye disease. Effective April 19, 2005, we entered into a
royalty buy-out agreement with Novartis related to
Restasis®
and agreed to pay $110 million to Novartis in exchange for
Novartis worldwide rights and obligations, excluding
Japan, for technology, patents and products relating to the
topical ophthalmic use of cyclosporine A, the active ingredient
in
Restasis®.
Under the royalty buy-out agreement, we will no longer be
required to make royalty payments to Novartis in connection with
our sales of
Restasis®.
In October 2005, we entered into an agreement with NPS
Pharmaceuticals to promote
Restasis®
to rheumatologists in the United States. In June 2001, we
entered into a licensing, development and marketing agreement
with Inspire Pharmaceuticals, Inc. under which we obtained an
exclusive license to develop and commercialize Inspires
INS365 Ophthalmic, a treatment to relieve the signs of dry eye
disease by rehydrating conjunctival mucosa and increasing
non-lacrimal tear component production, in exchange for royalty
payments to Inspire on sales of both
Restasis®
and, ultimately, INS365. In December 2003, the FDA issued an
approvable letter for INS365 and also requested additional
clinical data. In February 2005, Inspire announced that INS365
failed to demonstrate statistically significant improvement as
compared to a placebo for the primary endpoint of the incidence
of corneal clearing. Inspire also announced that INS365 achieved
improvement compared to a placebo for a number of secondary
endpoints. Inspire filed a New Drug Application amendment with
the FDA in the second quarter of 2005. In December 2005, Inspire
announced that it had received a second approvable letter from
the FDA in connection with INS365.
Ophthalmic Inflammation. Our leading ophthalmic
anti-inflammatory product is
Acular®
(ketorolac ophthalmic solution) 0.5%.
Acular®
is a registered trademark of and is licensed from its developer,
Syntex (U.S.A.) Inc., a business unit of Hoffmann-LaRoche Inc.
Acular®
is indicated for the temporary relief of itch associated with
seasonal allergic conjunctivitis, the inflammation of the mucus
membrane that lines the inner surface of the eyelids, and for
the treatment of post-operative inflammation in patients who
have undergone cataract extraction. Acular
PF®
was the first, and currently remains the only, unit-dose,
preservative-free topical non-steroidal anti-inflammatory drug
in the United States. Acular
PF®
is indicated for the reduction of ocular pain and photophobia
following incisional refractive surgery. See Item 3 of
Part I of this report, Legal Proceedings and
Note 12, Commitments and Contingencies, in the
notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for information
regarding our successful patent infringement lawsuit against
Apotex, Inc., et al. confirming the validity and
enforceability of our intellectual property covering
Acular®.
Apotex, Inc. subsequently appealed that judgment and the United
States Court of Appeals for the Federal Circuit (the Federal
Circuit) left undisturbed the finding of infringement but
remanded the matter for re-hearing by the district court on one
issue. Subsequently, the Federal Circuit vacated the district
courts permanent injunction barring the sale of the
generic product but indicated that we could request a
preliminary injunction from the district court, which we
obtained in January 2006 and which was extended in February 2006.
In August 2003, we launched Acular
LS®
(ketorolac ophthalmic solution 0.4%), which is a version of
Acular®
that has been reformulated for the reduction of ocular pain,
burning and stinging following corneal refractive surgery.
Our product Pred
Forte®
remains a leading topical steroid worldwide based on 2005 sales.
Pred
Forte®
has no patent protection or marketing exclusivity and faces
generic competition.
Ophthalmic Infection. A leading product in the ophthalmic
anti-infective market is our
Ocuflox®/
Oflox®/
Exocin®
ophthalmic solution.
Ocuflox®
has no patent protection or marketing exclusivity and faces
generic competition.
We launched
Zymar®
(gatifloxacin ophthalmic solution) 0.3% in the United States in
April 2003.
Zymar®
is a fourth-generation fluoroquinilone for the treatment of
bacterial conjunctivitis. Laboratory studies have shown that
Zymar®
kills the most common bacteria that cause eye infections as well
as specific resistant bacteria. According to Verispan, an
independent research firm,
Zymar®
was the number one ophthalmic anti-infective prescribed by
ophthalmologists in the United States in 2005.
5
Allergy. The allergy market is, by its nature, a seasonal
market, peaking during the spring months. We market
Alocril®
ophthalmic solution for the treatment of itch associated with
allergic conjunctivitis. We also co-promote
Elestat®
(epinastine ophthalmic solution) 0.05% in the United States
under an agreement with Inspire within the ophthalmic specialty
area and to allergists.
Elestat®
is used for the prevention of itching associated with allergic
conjunctivitis. Under the terms of the agreement, Inspire
provided us with an up-front payment and we make payments to
Inspire based on
Elestat®
net sales. In addition, the agreement reduced our existing
royalty payment to Inspire for
Restasis®.
Inspire has primary responsibility for selling and marketing
activities in the United States related to
Elestat®.
We have retained all international marketing and selling rights.
We launched
Elestat®
in Europe under the brand names
Relestat®
and
Purivist®
during 2004, and Inspire launched
Elestat®
in the United States during 2004.
Neuromodulator
Our neuromodulator product,
Botox®
(Botulinum Toxin Type A), is used for a wide variety of
treatments which continue to expand.
Botox®
is accepted in many global regions as the standard therapy for
indications ranging from therapeutic neuromuscular disorders and
related pain to cosmetic facial aesthetics. There are currently
in excess of 100 therapeutic and cosmetic uses for
Botox®
reported in medical literature. The versatility of
Botox®
is based on its localized treatment effect and approximately
17 years of safety experience in large patient groups.
Marketed as
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®,
depending on the indication and country of approval, the product
is currently approved in approximately 75 countries for up to 20
unique indications. Sales of
Botox®
represented approximately 36%, 34% and 32% of our total
consolidated sales in 2005, 2004 and 2003, respectively.
Botox®.
Botox®
is used therapeutically for the treatment of certain
neuromuscular disorders which are characterized by involuntary
muscle contractions or spasms. The approved therapeutic
indications for
Botox®
in the United States are as follows:
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blepharospasm, the uncontrollable contraction of the eyelid
muscles which can force the eye closed and result in functional
blindness; |
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strabismus, or misalignment of the eyes, in people 12 years
of age and over; |
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cervical dystonia, or sustained contractions or spasms of
muscles in the shoulders or neck in adults, along with
associated pain; and |
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severe primary axillary hyperhidrosis (underarm sweating) that
is inadequately managed with topical agents. |
In many countries outside of the United States,
Botox®
is also approved for treating hemifacial spasm, pediatric
cerebral palsy, and post-stroke focal spasticity. We are
currently pursuing new indication approvals for
Botox®
in the United States and Europe, including headache, post-stroke
focal spasticity, overactive bladder and benign prostatic
hypertrophy. In April 2005, we announced plans to move forward
with a large Phase III clinical trial program to
investigate the safety and efficacy of
Botox®
as a prophylactic therapy in a subset of migraine patients with
chronic daily headache, and in May 2005, we reached agreement
with the FDA to enter Phase III clinical trials for
Botox®
to treat neurogenic overactive bladder and Phase II
clinical trials for
Botox®
to treat idiopathic overactive bladder. In December 2005, we
initiated Phase II clinical trials for
Botox®
to treat benign prostatic hypertrophy.
Botox®
Cosmetic. The FDA approved
Botox®
in April 2002 for the temporary improvement in the appearance of
moderate to severe glabellar lines in adult men and women
age 65 or younger. Referred to as
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®,
depending on the country of approval, this product is designed
to relax wrinkle-causing muscles to smooth the deep, persistent,
glabellar lines between the brow that often develop during the
aging process. Health Canada approved
Botox®
Cosmetic for similar use in Canada in April 2001 and for upper
facial lines in November 2005. In 2005, we extended our
previously launched
direct-to-consumer
marketing campaigns in Canada and the United States. These
campaigns included television commercials and print advertising
aimed at consumers and aesthetic specialty physicians. Currently,
6
over 30 countries have approved the glabellar line indication
for
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®,
including Australia, Brazil, Canada, Denmark, France, Germany,
Israel, Italy, Mexico, Norway, Poland, Portugal, Spain, Sweden,
Switzerland and the United Kingdom. We continue to sponsor
training of aesthetic specialty physicians in approved countries
to further expand the base of qualified physicians using
Botox®,
Botox®
Cosmetic,
Vistabel®
or
Vistabex®.
In October 2005, we entered into a long-term arrangement with
GlaxoSmithKline (GSK) to develop and promote
Botox®
in Japan and China and to co-promote GSKs products
ImitrexSTATdose
System®
(sumatriptan succinate) and
Amerge®
(naratriptan hydrochloride) in the United States. Under the
terms of the arrangement, we licensed to GSK all clinical
development and commercial rights to
Botox®
in Japan and China, markets in which GSK has extensive
commercial, regulatory and research and development resources,
as well as expertise in neurology. We received an up-front
payment and will receive payments for research and development
and marketing support, and royalties on Japan and China
Botox®
sales. We also will manufacture
Botox®
for GSK as part of a long-term supply agreement and will work
collaboratively to support GSK on new clinical development for
Botox®
and strategic marketing in those markets. In addition, we
obtained the right to co-promote GSKs products
ImitrexSTATdose
System®
and
Amerge®
in the United States to neurologists for a
5-year period.
ImitrexSTATdose
System®
is approved for the treatment of acute migraine in adults and
for the acute treatment of cluster headache episodes.
Amerge®
Tablets are approved for the acute treatment of migraine attacks
with and without an aura in adults. We will receive both fixed
and performance payments from GSK.
Skin Care Product Line
Our skin care product line focuses on the high growth, high
margin segments of the acne and psoriasis markets, particularly
in the United States and Canada.
Tazarotene Products. We market
Tazorac®
gel in the United States for the treatment of plaque psoriasis,
a chronic skin disease characterized by dry red patches, and
acne. We also market the cream formulation of
Tazorac®
in the United States for the treatment of psoriasis and the
topical treatment of acne. We have also engaged Pierre Fabre
Dermatologie as our promotion partner for
Zorac®
in certain parts of Europe, the Middle East and Africa.
Our product
Avage®
is a tazarotene cream indicated for the treatment of facial fine
wrinkling, mottled hypo-and hyperpigmentation (blotchy skin
discoloration) and benign facial lentigines (flat patches of
skin discoloration) in patients using a comprehensive skin care
and sunlight avoidance program. We launched
Avage®
in the United States in January 2003.
In November 2003, we filed a New Drug Application with the FDA
for oral tazarotene for the treatment of moderate to very severe
psoriasis. In July 2004, the FDA Joint Dermatologic &
Opthalmic Drugs and Drug Safety & Risk Management
Advisory Committee recommended against approval of this New Drug
Application, and in September 2004, the FDA issued a
non-approvable letter. In late 2005, we terminated our clinical
program for oral tazarotene for the treatment of moderate to
very severe psoriasis based on a cost benefit and net present
value analysis.
In January 2005, we launched
Prevagetm
cream, containing 1% idebenone, a clinically tested antioxidant
designed to reduce the appearance of fine lines and wrinkles, as
well as provide protection against environmental factors
including sun damage, air pollution and cigarette smoke. In May
2005, we entered into an exclusive co-marketing agreement with
Elizabeth Arden, Inc. to globally market a new formulation of
Prevagetm
containing .5% idebenone, to leading department stores and other
prestige cosmetic retailers. In September 2005, we began
marketing
Prevagetm
MD, containing 1% idebenone, to physicians.
Azelex®.
Azelex®
cream is approved by the FDA for the topical treatment of mild
to moderate inflammatory acne vulgaris. We market
Azelex®
cream primarily in the United States.
M.D.
Forte®.
We also develop and market glycolic acid-based skin care
products. Our M.D.
Forte®
line of alpha hydroxy acid products are marketed to physicians.
7
Finacea®.
Through a collaboration with Intendis, Inc. (formerly known as
Berlex, Inc.) we jointly promote Intendis topical
rosacea treatment,
Finacea®
(azelaic acid gel 15%).
Finacea®
is approved by the FDA for the treatment of rosacea and has
rapidly gained a leading position in the market.
International Operations
Our international sales have represented 32.5%, 30.9% and 29.6%
of our total consolidated product net sales for the years ended
December 31, 2005, 2004 and 2003, respectively. Our
products are sold in over 100 countries. Marketing activities
are coordinated on a worldwide basis, and resident management
teams provide leadership and infrastructure for
customer-focused, rapid introduction of new products in the
local markets.
Sales and Marketing
We maintain a global marketing team, as well as regional sales
and marketing organizations. We also engage contract sales
organizations to promote certain products. Our sales efforts and
promotional activities are primarily aimed at eye care
professionals, neurologists, plastic surgeons and dermatologists
who use, prescribe and recommend our products. We advertise in
professional journals, participate in medical meetings and
utilize direct mail programs to provide descriptive product
literature and scientific information to specialists in the
ophthalmic, dermatological and movement disorder fields. We have
developed training modules and seminars to update physicians
regarding evolving technology in our products. In 2005, we also
utilized
direct-to-consumer
advertising for our
Botox®
Cosmetic and
Restasis®
products.
Our products are sold to drug wholesalers, independent and chain
drug stores, pharmacies, commercial optical chains, opticians,
mass merchandisers, food stores, hospitals, ambulatory surgery
centers and medical practitioners, including ophthalmologists,
neurologists, dermatologists, pediatricians and plastic
surgeons. As of December 31, 2005, we employed
approximately 1,500 sales representatives throughout the world.
We also utilize distributors for our products in smaller
international markets.
U.S. sales, including manufacturing operations, represented
67.5%, 69.1% and 70.4% of our total consolidated product net
sales in 2005, 2004 and 2003, respectively. Sales to Cardinal
Healthcare for the years ended December 31, 2005, 2004 and
2003 were 14.9%, 14.1% and 14.0%, respectively, of our total
consolidated product net sales. Sales to McKesson Drug Company
for the years ended December 31, 2005, 2004 and 2003 were
14.2%, 13.0% and 14.2%, respectively, of our total consolidated
product net sales. No other country, or single customer,
generates over 10% of our total product net sales.
Research and Development
Our global research and development efforts currently focus on
eye care, skin care, neuromodulators, and neurology. We also
have development programs in genitourinary diseases and
gastroenterology. We have a fully integrated pharmaceutical
research and development organization with in-house discovery
programs, including medicinal chemistry, high throughput
screening, and biological sciences. We supplement our own
research and development activities with our commitment to
identify and obtain new technologies through in-licensing,
research collaborations, joint ventures and acquisitions.
As of December 31, 2005, we had approximately 1,100
employees involved in our research and development efforts. Our
research and development expenditures for 2005, 2004 and 2003
were approximately $391.0 million, $345.6 million and
$763.5 million, respectively, including expenditures on
in-process research and development in connection with our 2003
acquisitions of Bardeen Sciences Company, LLC and Oculex
Pharmaceuticals, Inc. Excluding in-process research and
development expenditures, we have increased our annual
investment in research and development by over $225 million
in the past five years, dedicating approximately 20% of our
investment in research and development to the discovery of new
compounds. In 2004, we completed construction of a new
$75 million research and development facility in Irvine,
California, which provides us with approximately
175,000 square feet of additional laboratory space. In
2005, we completed construction of a new biologics facility on
our Irvine, California campus at an aggregate cost of
approximately $50 million.
8
Our strategy is to develop innovative products to address unmet
medical needs. Our top priorities include furthering our
leadership in the field of neuromodulators, identifying new
potential compounds for sight-threatening diseases such as
glaucoma, age-related macular degeneration and macular edema,
and developing novel therapies for pain, gastroenterology, and
genitourinary diseases. We plan to continue to build on our
strong market positions in glaucoma and therapeutic dry eye
products and dermatology products for acne and psoriasis, and to
explore new therapeutic areas that are consistent with our
specialty pharmaceutical focus.
Eye Care Research and Development. Our research and
development efforts for the ophthalmic pharmaceuticals business
focus primarily on new therapeutic products for retinal disease,
glaucoma, and dry eye. As part of our focus on diseases of the
retina, we acquired Oculex Pharmaceuticals, Inc. in 2003. With
this acquisition, we obtained
Posurdex®,
a novel drug delivery technology for use with compounds to treat
diseases, including macular edema and age-related macular
degeneration. We have subsequently begun Phase III studies
for
Posurdex®
for macular edema associated with diabetes and retinal vein
occlusion. In March 2005, we entered into an exclusive licensing
agreement with Sanwa Kagaku Kenkyusho Co., Ltd. (Sanwa) to
develop and commercialize
Posurdex®
for the ophthalmic specialty market in Japan. Under the terms of
the agreement, Sanwa is responsible for the development and
commercialization of
Posurdex®
in Japan and associated costs. Sanwa pays us a royalty based on
net sales of
Posurdex®
in Japan, makes development and commercialization milestone
payments and reimburses us for certain expenses associated with
our continuing Phase III studies outside of Japan. We will
work collaboratively with Sanwa on the clinical development of
Posurdex®,
as well as overall product strategy and management. In September
2005, we entered into a multi-year alliance with Sirna
Therapeutics, Inc. to develop Sirna-027, a novel RNAi-based
therapeutic currently in clinical trials for age-related macular
degeneration, and to discover and develop other novel RNAi-based
therapeutics against select gene targets for ophthalmic diseases.
Neuromodulator Research and Development. We continue to
invest heavily in the research and development of
neuromodulators, primarily
Botox®.
We are focused on both expanding the approved indications for
Botox®
and pursuing new neuromodulator-based therapeutics. This
includes expanding the approved uses for
Botox®
to include treatment for spasticity, headache, brow furrow and
urologic conditions including overactive bladder. In
collaboration with Syntaxin, a newly formed company, whose
technology was contributed by the United Kingdom
governments Health Protection Agency, we are focused on
engineering neuromodulators for the treatment of severe pain. We
are also continuing our investment in the areas of biologic
process development and manufacturing and the next generation of
neuromodulator products.
Skin Care Research and Development. In late 2005, we
terminated our clinical program for oral tazarotene for the
treatment of moderate to very severe psoriasis based on a
comprehensive cost benefit and net present value analysis which
demonstrated that research and development resources should be
directed to more valuable opportunities in our pipeline.
Other Areas of Research and Development. We are also
working to leverage our technologies in therapeutic areas
outside of our current specialties, such as our Phase II
clinical trials for the use of alpha agonists for the treatment
of neuropathic pain. Additionally, we are conducting
Phase II clinical trials for a novel proton pump inhibitor
designed to reduce excess stomach acid secretion.
In December 2002, we entered into a strategic research
collaboration and license agreement with ExonHit Therapeutics.
The goals of this collaboration are to identify new molecular
targets based on ExonHit Therapeutics gene profiling
DATAStm
technology and to work collaboratively developing unique
compounds and commercial products based on these targets. Our
strategic alliance with ExonHit Therapeutics provides us with
the rights to compounds developed in the fields of
neurodegenerative disease, pain and ophthalmology.
The continuing introduction of new products supplied by our
research and development efforts and in-licensing opportunities
are critical to our success. There are intrinsic uncertainties
associated with research and development efforts and the
regulatory process. We cannot assure you that any of the
research projects or pending drug marketing approval
applications will result in new products that we can
commercialize. Delays or failures in one or more significant
research projects and pending drug marketing approval
applications could have a material adverse affect on our future
operations.
9
Manufacturing
We manufacture the majority of our commercial products in our
own plants located in Waco, Texas; Westport, Ireland; and
Guarulhos, Brazil. We maintain sufficient manufacturing capacity
at these facilities to support forecasted demand as well as a
modest safety margin of additional capacity to meet peaks of
demand and sales growth in excess of expectations. We increase
our capacity as required in anticipation of future sales
increases. In the event of a very large or very rapid unforeseen
increase in market demand for a specific product or technology,
supply of that product or technology could be negatively
impacted until additional capacity is brought on line. Third
parties manufacture a small number of commercial products for
us. However, the revenues from these products are not material
to our operating results.
We are vertically integrated into the production of plastic
parts and produce our own bottles, tips and caps for use in the
manufacture of our ophthalmic solutions. Additionally, we
ferment, purify and characterize the botulinum toxin used in our
product
Botox®.
With these two exceptions, we purchase all other raw materials
from qualified domestic and international sources. These raw
materials consist of active pharmaceutical ingredients,
pharmaceutical excipients, and packaging components. Where
practical, we maintain more than one supplier for each material,
and we have an ongoing alternate sourcing endeavor that
identifies additional sources of key raw materials. In some
cases, however, most notably with active pharmaceutical
ingredients, we are a niche purchaser of specialty chemicals,
which, in certain cases, are sole sourced. These sources are
identified in filings with regulatory agencies, including the
FDA, and cannot be changed without prior regulatory approval. In
these cases, we maintain inventories of the raw material itself
and precursor intermediates to mitigate the risk of interrupted
supply. A lengthy interruption of the supply of one of these
materials could adversely affect our ability to manufacture and
supply commercial product. A small number of the raw materials
required to manufacture certain of our products are derived from
biological sources which could be subject to contamination and
recall by their suppliers. We use multiple lots of these raw
materials at any one time in order to mitigate such risks.
However, a shortage, contamination or recall of these products
could disrupt our ability to maintain an uninterrupted
commercial supply of our finished goods.
Competition
The pharmaceutical industry is highly competitive and requires
an ongoing, extensive search for technological innovation. It
also requires, among other things, the ability to effectively
discover, develop, test and obtain regulatory approvals for
products, as well as the ability to effectively commercialize,
market and promote approved products, including communicating
the effectiveness, safety and value of products to actual and
prospective customers and medical professionals. Numerous
companies are engaged in the development, manufacture and
marketing of health care products competitive with those that we
manufacture. Many of our competitors have greater resources than
we have. This enables them, among other things, to make greater
research and development investments and spread their research
and development costs, as well as their marketing and promotion
costs, over a broader revenue base. Our competitors may also
have more experience and expertise in obtaining marketing
approvals from the FDA and other regulatory authorities. In
addition to product development, testing, approval and
promotion, other competitive factors in the pharmaceutical
industry include industry consolidation, product quality and
price, product technology, reputation, customer service and
access to technical information.
Our major eye care competitors include Alcon Laboratories, Inc.,
Bausch & Lomb, Pfizer, Novartis Ophthalmics and
Merck & Co., Inc. For our eye care products to be
successful, we must be able to manufacture and effectively
market those products and persuade a sufficient number of eye
care professionals to use or continue to use our current
products and the new products we may introduce. Glaucoma must be
treated over an extended period and doctors may be reluctant to
switch a patient to a new treatment if the patients
current treatment for glaucoma remains effective.
Our skin care business competes against a number of companies,
including among others, Dermik, a division of Sanofi-Aventis,
Galderma, a joint venture between Nestle and LOreal,
Medicis, Connetics, Novartis, Schering-Plough Corporation and
Johnson & Johnson, most of which have greater resources
than us. With respect to neuromodulators, until December 2000,
Botox®
was the only neuromodulator approved by
10
the FDA. At that time, the FDA approved
Myobloc®,
a neuromodulator formerly marketed by Elan Pharmaceuticals and
now marketed by Solstice Neurosciences Inc. We believe that
Beaufour Ipsen Ltd. intends to seek FDA approval of its
Dysport®
neuromodulator for certain therapeutic indications, and approval
of
Dysport®/Reloxin®
for cosmetic indications. Beaufour Ipsen has marketed
Dysport®
in Europe since 1991, prior to our European commercialization of
Botox®
in 1992. Also, Mentor Corporation is conducting clinical trials
for a competing neuromodulator in the United States. In
addition, we are aware of competing neuromodulators currently
being developed and commercialized in Asia, Europe, South
America and other markets. A Chinese entity received approval to
market a botulinum toxin in China in 1997, and we believe that
it has launched or is planning to launch its botulinum toxin
product in other lightly regulated markets in Asia, South
America and Central America. These lightly regulated markets may
not require adherence to the FDAs current Good
Manufacturing Practice regulations, or cGMPs, or the regulatory
requirements of the European Medical Evaluation Agency or other
regulatory agencies in countries that are members of the
Organization for Economic Cooperation and Development.
Therefore, companies operating in these markets may be able to
produce products at a lower cost than we can. In addition, Merz
Pharmaceuticals received approval from German authorities for a
botulinum toxin and launched its product in July 2005, and a
Korean company is conducting Phase III clinical trials for
a botulinum toxin in Korea. This product received exportation
approval from Korean authorities in early 2005.
In addition, we also face competition from generic drug
manufacturers in the United States and internationally. For
instance, Falcon Pharmaceuticals, Ltd., an affiliate of Alcon
Laboratories, Inc., is currently attempting to obtain FDA
approval for and to launch a brimonidine product to compete with
our
Alphagan®
P product.
Government Regulation
Cosmetics, drugs and biologics are subject to regulation by the
FDA, state agencies and, in varying degrees, by foreign health
agencies. Pharmaceutical products and biologics are subject to
extensive pre- and post-market regulation by the FDA, including
regulations that govern the testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, advertising and
promotion of the products under the Federal Food, Drug, and
Cosmetic Act with respect to drugs and the Public Health
Services Act with respect to biologics, and by comparable
agencies in a number of foreign countries. Failure to comply
with applicable FDA or other requirements may result in civil or
criminal penalties, recall or seizure of products, partial or
total suspension of production or withdrawal of a product from
the market.
The process required by the FDA before a new drug or biologic
may be marketed in the United States generally involves the
following: completion of preclinical laboratory and animal
testing; submission of an Investigational New Drug Application,
which must become effective before clinical trials may begin;
and performance of adequate and well controlled human clinical
trials to establish the safety and efficacy of the proposed drug
or biologic for its intended use. Clinical trials are typically
conducted in three sequential phases, which may overlap, and
must satisfy extensive Good Clinical Practice regulations and
regulations for informed consent. Approval by the FDA of a New
Drug Application, or NDA, is required prior to marketing a new
drug, and approval of a Biologics License Application, or BLA,
is required before a biologic may be legally marketed in the
United States. To satisfy the criteria for approval, an NDA or
BLA must demonstrate the safety and effectiveness of the product
based on results of product development, preclinical studies and
the three phases of clinical trials. Both NDAs and BLAs must
also contain extensive manufacturing information, and the
applicant must pass an FDA pre-approval inspection of the
manufacturing facilities at which the drug or biologic is
produced to assess compliance with cGMPs prior to
commercialization. Satisfaction of FDA pre-market approval
requirements typically takes several years and the actual time
required may vary substantially based on the type, complexity
and novelty of the product, and we cannot be certain that any
approvals for our products will be granted on a timely basis, or
at all.
Once approved, the FDA may withdraw product approval if
compliance with pre- and post-market regulatory standards is not
maintained or if safety problems occur after the product reaches
the marketplace. In addition, the FDA may require post-marketing
clinical studies and surveillance programs to monitor the effect
of approved products. The FDA may limit further marketing of the
product based on the results of these
11
post-market studies and programs. Drugs and biologics may be
marketed only for the approved indications and in accordance
with the provisions of the approved label. Further, any
modifications to the drug or biologic, including changes in
indications, labeling, or manufacturing processes or facilities,
may require the submission of a new or supplemental NDA or BLA,
which may require that we develop additional data or conduct
additional preclinical studies and clinical trials.
Any products manufactured or distributed by us or our
collaborators pursuant to FDA approvals are also subject to
continuing regulation by the FDA, including recordkeeping
requirements and reporting of adverse experiences associated
with the drug. Drug and biologic manufacturers and their
subcontractors are required to register their establishments
with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state
agencies for compliance with ongoing regulatory requirements,
including cGMPs, which regulate all aspects of the manufacturing
process and impose certain procedural and documentation
requirements. Failure to comply with the statutory and legal
requirements can subject a manufacturer to possible legal or
regulatory action, including fines and civil penalties,
suspension or delay in the issuance of approvals, seizure or
recall of products, and withdrawal of approvals, any one or more
of which could have a material adverse effect upon us.
The FDA imposes a number of complex regulatory requirements on
entities that advertise and promote pharmaceuticals and
biologics, including, but not limited to, standards and
regulations for
direct-to-consumer
advertising, off-label promotion, industry sponsored scientific
and educational activities, and promotional activities involving
the Internet. A manufacturer can make only those claims relating
to safety and efficacy that are approved by the FDA. The FDA has
very broad enforcement authority under the Federal Food, Drug,
and Cosmetic Act, and failure to abide by these regulations can
result in penalties, including the issuance of a warning letter
directing us to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be
pre-cleared by the FDA, and state and federal civil and criminal
investigations and prosecutions. Physicians may prescribe
legally available drugs and biologics for uses that are not
described in the products labeling and that differ from
those tested by us and approved by the FDA. Such off-label uses
are common across medical specialties.
Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, impose stringent restrictions
on manufacturers communications regarding off-label use.
We are also subject to various laws and regulations regarding
laboratory practices, the experimental use of animals, and the
use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these
areas, as above, the FDA has broad regulatory and enforcement
powers, including the ability to levy fines and civil penalties,
suspend or delay the issuance of approvals, seize or recall
products, and withdraw approvals, any one or more of which could
have a material adverse effect upon us.
Internationally, the regulation of drugs is also complex. In
Europe, our products are subject to extensive regulatory
requirements. As in the United States, the marketing of
medicinal products has for many years been subject to the
granting of marketing authorizations by medicine agencies.
Particular emphasis is also being placed on more sophisticated
and faster procedures for reporting adverse events to the
competent authorities. The European Union procedures for the
authorization of medicinal products were amended in May 2004 and
are now effective. The amended procedures are intended to
improve the efficiency of operation of both the mutual
recognition and centralized procedures. Additionally, new rules
have been introduced or are under discussion in several areas,
including the harmonization of clinical research laws and the
law relating to orphan drugs and orphan indications. Outside the
United States, reimbursement pricing is typically regulated by
government agencies.
The total cost of providing health care services has been and
will continue to be subject to review by governmental agencies
and legislative bodies in the major world markets, including the
United States, which are faced with significant pressure to
lower health care costs. The Medicare Prescription Drug
Modernization Act of 2003 imposed certain reimbursement
restrictions on our products in the United States. These
reimbursement restrictions or other price reductions or controls
could materially and adversely affect our revenues and financial
condition. Additionally, price reductions and rebates have
recently been mandated in
12
several European countries, principally Germany, Italy, Spain
and the United Kingdom. Certain products are also no longer
eligible for reimbursement in France, Italy and Germany.
Reference pricing is used in several markets around the world to
reduce prices. Furthermore, parallel trade within the European
Union, whereby products flow from relatively low-priced to
high-priced markets, has been increasing.
We cannot predict the likelihood or pace of any significant
regulatory or legislative action in these areas, nor can we
predict whether or in what form health care legislation being
formulated by various governments will be passed. Medicare
reimbursement rates are subject to change at any time. We also
cannot predict with precision what effect such governmental
measures would have if they were ultimately enacted into law.
However, in general, we believe that such legislative activity
will likely continue. If adopted, such measures can be expected
to have an impact on our business.
Patents, Trademarks and Licenses
We own, or are licensed under, numerous U.S. and foreign patents
relating to our products, product uses and manufacturing
processes. We believe that our patents and licenses are
important to our business, but that with the exception of the
U.S. and European patents relating to
Lumigan®,
Acular®
and
Alphagan®
P, no one patent or license is currently of material
importance in relation to our overall sales. The
U.S. compound and ophthalmic use patents covering
Lumigan®
currently expire in 2015. The European patent covering
Lumigan®
expires in various countries between 2013 and 2017. The
U.S. patent covering the commercial formulation of
Acular®
expires in 2009 and in 2008 in Europe. The U.S. patents
covering the commercial formulation of
Alphagan®
P expire in 2012 and 2021 and in 2009 in Europe, with
corresponding patents pending.
Our success depends in part on our ability to obtain patents or
rights to patents, protect trade secrets and other proprietary
technologies and processes, operate without infringing upon the
proprietary rights of others, and prevent others from infringing
on our patents, trademarks, service marks and other intellectual
property rights. Upon the expiration or loss of patent
protection for a product, we can lose a significant portion of
sales of that product in a very short period of time as other
companies manufacture generic forms of our previously protected
product at lower cost, without having had to incur significant
research and development costs in formulating the product. In
addition, the issuance of a patent is not conclusive as to its
validity or as to the enforceable scope of the claims of the
patent. It is impossible to anticipate the breadth or degree of
protection that any such patents will afford, or that any such
patents will not be successfully challenged in the future.
Accordingly, our patents may not prevent other companies from
developing substantially identical products. Hence, if our
patent applications are not approved or, even if approved, such
patents are circumvented, our ability to competitively exploit
our patented products and technologies may be significantly
reduced. Also, such patents may or may not provide competitive
advantages for their respective products, in which case our
ability to commercially exploit these products may be diminished.
Third parties may challenge, invalidate, or circumvent our
patents and patent applications relating to our products,
product candidates and technologies. Challenges may result in
potentially significant harm to our business. The cost of
responding to these challenges and the inherent costs to defend
the validity of our patents, including the prosecution of
infringements and the related litigation, can require a
substantial commitment of our managements time, be costly
and can preclude or delay the commercialization of products. See
Item 3 of Part I of this report, Legal
Proceedings and Note 12, Commitments and
Contingencies, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report for information concerning our current intellectual
property litigation.
From time to time, we may need to obtain licenses to patents and
other proprietary rights held by third parties to develop,
manufacture and market our products. If we are unable to timely
obtain these licenses on commercially reasonable terms, our
ability to commercially exploit such products may be inhibited
or prevented. See Item 1A. Risk Factors of this
report.
We market our products under various trademarks, for which we
have both registered and unregistered trademark protection in
the United States and certain countries outside the United
States. We consider these trademarks to be valuable because of
their contribution to the market identification of our products.
Any failure to adequately protect our rights in our various
trademarks and service marks from infringement, could
13
result in a loss of their value to us. If the marks we use are
found to infringe upon the trademark or service mark of another
company, we could be forced to stop using those marks and, as a
result, we could lose the value of those marks and could be
liable for damages caused by an infringement. In addition to
intellectual property protections afforded to trademarks,
service marks and proprietary know-how by the various countries
in which our proprietary products are sold, we seek to protect
our trademarks, service marks and proprietary know-how through
confidentiality agreements with third parties, including our
partners, customers, employees and consultants. These agreements
may be breached or become unenforceable, and we may not have
adequate remedies for any such breach. It is also possible that
our trade secrets will become known or independently developed
by our competitors, resulting in increased competition for our
products.
Environmental Matters
We are subject to federal, state, local and foreign
environmental laws and regulations. We believe that our
operations comply in all material respects with applicable
environmental laws and regulations in each country where we have
a business presence. Although we continue to make capital
expenditures for environmental protection, we do not anticipate
any significant expenditures in order to comply with such laws
and regulations that would have a material impact on our
earnings or competitive position. We are not aware of any
pending litigation or significant financial obligations arising
from current or past environmental practices that are likely to
have a material adverse effect on our financial position. We
cannot assure you, however, that environmental problems relating
to properties owned or operated by us will not develop in the
future, and we cannot predict whether any such problems, if they
were to develop, could require significant expenditures on our
part. In addition, we are unable to predict what legislation or
regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal.
Seasonality
Our business, taken as a whole, is not materially affected by
seasonal factors, although we have noticed an historical trend
with respect to sales of our
Botox®
product. Specifically, sales of
Botox®
have tended to be lowest during the first fiscal quarter, with
sales during the second and third fiscal quarters being
comparable and marginally higher than sales during the first
fiscal quarter.
Botox®
sales during the fourth fiscal quarter have tended to be the
highest due to patients obtaining their final therapeutic
treatment at the end of the year, presumably to fully utilize
deductibles and to receive additional cosmetic treatments prior
to the holiday season.
Employee Relations
At December 31, 2005, we employed approximately 5,055
persons throughout the world, including approximately 2,789 in
the United States. None of our
U.S.-based employees
are represented by unions. We believe that our relations with
our employees are generally good.
14
Executive Officers
Our executive officers and their ages as of March 1, 2006
are as follows:
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Name |
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Age |
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Principal Position with Allergan |
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David E.I. Pyott
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52 |
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Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
F. Michael Ball
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50 |
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President, Allergan |
James F. Barlow
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47 |
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Senior Vice President, Corporate Controller
(Principal Accounting Officer) |
Raymond H. Diradoorian
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48 |
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Executive Vice President, Global Technical Operations |
Jeffrey L. Edwards
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45 |
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Executive Vice President, Finance and Business Development,
Chief Financial Officer (Principal Financial Officer) |
Douglas S. Ingram, Esq.
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43 |
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Executive Vice President, General Counsel and Secretary |
Scott M. Whitcup, M.D.
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46 |
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Executive Vice President, Research & Development |
Roy J. Wilson
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50 |
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Executive Vice President, Human Resources and Information
Technology |
Officers are appointed by and hold office at the pleasure of the
Board of Directors.
Mr. Pyott has been Allergans Chief Executive Officer
since January 1998 and in 2001 became the Chairman of the Board.
Mr. Pyott also served as Allergans President from
January 1998 until February 2006. Previously, he was head of the
Nutrition Division and a member of the executive committee of
Novartis AG, a publicly-traded company focused on the research
and development of products to protect and improve health and
well-being, from 1995 until December 1997. From 1992 to 1995,
Mr. Pyott was President and Chief Executive Officer of
Sandoz Nutrition Corp., a predecessor to Novartis, Minneapolis,
Minnesota and General Manager of Sandoz Nutrition, Barcelona,
Spain, from 1990 to 1992. Prior to that, Mr. Pyott held
various positions within the Sandoz Nutrition group from 1980.
Mr. Pyott is also a member of the board of directors of
Avery-Dennison Corporation, a publicly-traded company focused on
pressure-sensitive technology and self-adhesive solutions,
Edwards Lifesciences Corporation, a publicly traded company
focused on products and technologies to treat advanced
cardiovascular disease, Pacific Mutual Holding Company, a
leading California-based life insurer, the ultimate parent
company of Pacific Life and Pacific LifeCorp, the parent
stockholding company of Pacific Life. Mr. Pyott is a member
of the Directors Board of the University of California,
Irvine (UCI) The Paul Merage School of Business and is chair of
the Chief Executive Roundtable for UCI. Mr. Pyott serves on
the board of directors and the Executive Committee of the
California Healthcare Institute, and the Directors Board
of the Biotechnology Industry Organization. Mr. Pyott also
serves as a member of the board of directors of the Pan-American
Ophthalmological Foundation, the International Council of
Ophthalmology Foundation, the Cosmetic Surgery Foundation and as
a member of the Advisory Board for the Foundation of the
American Academy of Ophthalmology.
Mr. Ball has been President, Allergan since February 2006.
Mr. Ball was Executive Vice President and President,
Pharmaceuticals from October 2003 until February 2006. Prior to
that, Mr. Ball was Corporate Vice President and President,
North America Region and Global Eye Rx Business since May 1998
and prior to that was Corporate Vice President and President,
North America Region since April 1996. He joined Allergan in
1995 as Senior Vice President, U.S. Eye Care after
12 years with Syntex Corporation, a multinational
pharmaceutical company, where he held a variety of positions
including President, Syntex Inc. Canada and Senior Vice
President, Syntex Laboratories. Mr. Ball serves on the
board of directors of SimpleTech, Inc., a publicly traded
manufacturer and marketer of computer memory and hard drive
storage solutions.
Mr. Barlow has been Senior Vice President, Corporate
Controller since February 2005. Mr. Barlow joined Allergan
in January 2002 as Vice President, Corporate Controller. Prior
to joining Allergan, Mr. Barlow served as Chief Financial
Officer of Wynn Oil Company, a division of Parker Hannifin
Corporation. Prior to Wynn Oil Company, Mr. Barlow was
Treasurer and Controller at Wynns International, Inc., a
supplier of automotive and industrial components and specialty
chemicals, from July 1990 to September 2000. Before
15
working for Wynns International, Inc., Mr. Barlow was
Vice President, Controller from 1986 to 1990 for Ford Equipment
Leasing Company. From 1983 to 1985 Mr. Barlow worked for
the accounting firm Deloitte, Haskins and Sells.
Mr. Diradoorian has served as Allergans Executive
Vice President, Global Technical Operations since February 2006.
From April 2005 to February 2006, Mr. Diradoorian served as
Senior Vice President, Global Technical Operations. From
February 2001 to April 2005, Mr. Diradoorian served as Vice
President, Global Engineering and Technology.
Mr. Diradoorian joined Allergan in July 1981. Prior to
joining Allergan, Mr. Diradoorian held positions at
American Hospital Supply and with the Los Angeles Dodgers
baseball team.
Mr. Edwards has been Executive Vice President, Finance and
Business Development, Chief Financial Officer since September
2005. Prior to that, Mr. Edwards was Corporate Vice
President, Corporate Development since March 2003 and previously
served as Senior Vice President Treasury, Tax, and Investor
Relations. He joined Allergan in 1993. Prior to joining
Allergan, Mr. Edwards was with Banque Paribas and Security
Pacific National Bank, where he held various senior level
positions in the credit and business development functions.
Mr. Ingram has been Executive Vice President, General
Counsel and Secretary, as well as our Chief Ethics Officer,
since October 2003 and currently manages the Global Legal
Affairs organization, the Regulatory Affairs organization,
Compliance and Internal Audit, Corporate Communications and
Global Trade Compliance. Prior to that, Mr. Ingram served
as Corporate Vice President, General Counsel and Secretary, as
well as our Chief Ethics Officer, since July 2001. Prior thereto
he was Senior Vice President and General Counsel since January
2001, and Assistant Secretary since November 1998. Prior to
that, Mr. Ingram was Associate General Counsel from August
1998, Assistant General Counsel from January 1998 and Senior
Attorney and Chief Litigation Counsel from March 1996, when he
first joined Allergan. Prior to joining Allergan,
Mr. Ingram was, from August 1988 to March 1996, an attorney
with the law firm of Gibson, Dunn & Crutcher.
Mr. Ingram serves as a member of the board of directors of
Volcom, Inc. a publicly traded designer and distributor of
clothing and accessories, and a member of the board of directors
of ECC Capital Corporation, the parent company of Encore Credit
Corporation, a publicly traded mortgage finance company.
Dr. Whitcup has been Executive Vice President, Research and
Development since July 2004. Dr. Whitcup joined Allergan in
January 2000 as Vice President, Development, Ophthalmology. In
January 2004, Dr. Whitcup became Allergans Senior
Vice President, Development, Ophthalmology. From 1993 until
2000, Dr. Whitcup served as the Clinical Director of the
National Eye Institute at the National Institutes of Health. As
Clinical Director, Dr. Whitcups leadership was vital
in building the clinical research program and promoting new
ophthalmic therapeutic discoveries. Dr. Whitcup is a
faculty member at the Jules Stein Eye Institute/ David Geffen
School of Medicine at the University of California at Los
Angeles. Dr. Whitcup serves on the board of directors of
Avanir Pharmaceuticals, a publicly traded pharmaceutical company.
Mr. Wilson joined Allergan in April 2004 as Executive Vice
President Human Resources, and became Executive Vice President,
Human Resources and Information Technology in September 2005.
Prior to joining Allergan, Mr. Wilson held positions with
Texas Instruments, a publicly traded manufacturer and
distributor of semiconductors and electronic equipment,
Schlumberger Ltd., a publicly traded oilfield services company,
and Pearle Vision, a retail optical products and services
company, where he served as Senior Vice President and Chief
Administrative Officer, Compaq Computer, a manufacturer and
distributor of computers and other electronic equipment, where
he served as Vice President of Human Resources, and at BMC
Software, a publicly traded software company, where he served as
Senior Vice President of Human Resources and Administration.
From April 2001 to April 2004, Mr. Wilson managed a human
capital consulting firm centered on executive compensation and
organization effectiveness. Mr. Wilson previously served on
the boards of Texas A&M University Mays Business
School, TEXCHANGE, University of Houston.
We operate in a rapidly changing environment that involves a
number of risks. The following discussion highlights some of
these risks and others are discussed elsewhere in this report.
These and other risks could
16
materially and adversely affect our business, financial
condition, prospects, operating results or cash flows. The
following risk factors are not an exhaustive list of the risks
associated with our business. New factors may emerge or changes
to these risks could occur that could materially affect our
business.
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We operate in a highly competitive business. |
The pharmaceutical industry is highly competitive and requires
an ongoing, extensive search for technological innovation. It
also requires, among other things, the ability to effectively
discover, develop, test and obtain regulatory approvals for
products, as well as the ability to effectively commercialize,
market and promote approved products, including communicating
the effectiveness, safety and value of products to actual and
prospective customers and medical professionals.
Many of our competitors have greater resources than we have.
This enables them, among other things, to make greater research
and development investments and spread their research and
development costs, as well as their marketing and promotion
costs, over a broader revenue base. Our competitors may also
have more experience and expertise in obtaining marketing
approvals from the FDA and other regulatory authorities. In
addition to product development, testing, approval and
promotion, other competitive factors in the pharmaceutical
industry include industry consolidation, product quality and
price, product technology, reputation, customer service and
access to technical information.
It is possible that developments by our competitors could make
our products or technologies less competitive or obsolete. Our
future growth depends, in part, on our ability to develop
products which are more effective. For instance, for our eye
care products to be successful, we must be able to manufacture
and effectively market those products and persuade a sufficient
number of eye care professionals to use or continue to use our
current products and the new products we may introduce. Glaucoma
must be treated over an extended period and doctors may be
reluctant to switch a patient to a new treatment if the
patients current treatment for glaucoma remains effective.
Sales of our existing products may decline rapidly if a new
product is introduced by one of our competitors or if we
announce a new product that, in either case, represents a
substantial improvement over our existing products. Similarly,
if we fail to make sufficient investments in research and
development programs, our current and planned products could be
surpassed by more effective or advanced products developed by
our competitors.
Until December 2000,
Botox®
was the only neuromodulator approved by the FDA. At that time,
the FDA approved
Myobloc®,
a neuromodulator formerly marketed by Elan Pharmaceuticals and
now marketed by Solstice Neurosciences, Inc. Beaufour Ipsen Ltd.
is seeking FDA approval of its
Dysport®
neuromodulator for certain therapeutic indications and approval
of
Dysport®/Reloxin®
for cosmetic indications. While Beaufour Ipsen previously
licensed
Dysport®/Reloxin®
to Inamed for the cosmetic indication in the United States, it
will regain its licensed rights from Inamed in connection with
our acquisition of Inamed. It is our belief that Beaufour Ipsen
will likely relicense its rights to a partner in the United
States, which license could include other geographic regions and
indications. Beaufour Ipsen has marketed
Dysport®
in Europe since 1991, prior to our European commercialization of
Botox®
in 1992. Also, Mentor Corporation is conducting clinical trials
for a competing neuromodulator in the United States. In
addition, we are aware of competing neuromodulators currently
being developed and commercialized in Asia, Europe, South
America and other markets. A Chinese entity received approval to
market a botulinum toxin in China in 1997, and we believe that
it has launched or is planning to launch its botulinum toxin
product in other lightly regulated markets in Asia, South
America and Central America. These lightly regulated markets may
not require adherence to the FDAs current Good
Manufacturing Practice, or cGMP, regulations, or the regulatory
requirements of the European Medical Evaluation Agency or other
regulatory agencies in countries that are members of the
Organization for Economic Cooperation and Development.
Therefore, companies operating in these markets may be able to
produce products at a lower cost than we can. In addition, Merz
Pharmaceuticals received approval from German authorities for a
botulinum toxin and launched its product in July 2005, and a
Korean company is conducting Phase III clinical trials for
a botulinum toxin in Korea. This product received exportation
approval from Korean authorities in early 2005. Our sales of
Botox®
could be materially and negatively impacted by this competition
or competition from other companies that might obtain FDA
approval or approval from other regulatory authorities to market
a neuromodulator.
17
If our acquisition of Inamed is consummated, our principal
competitor in the United States for breast implants will be
Mentor Corporation. Mentor announced that it received an
approvable letter from the FDA for its silicone
breast implants in July 2005. If Mentor receives approval to
market and sell silicone breast implants in the United States
before we do, their silicone breast implants would be the only
approved silicone breast implants in the United States, giving
Mentor a competitive advantage over us in the United States
breast implant market, at least in the short term. In addition,
Medicis Corporation began marketing
Restylane®,
a dermal filler, in January 2004. Through our purchase of
Inamed, we will acquire
Juvéderm®,
a non-animal, hyaluronic acid-based dermal filler.
Juvéderm®
is not yet approved by the FDA for sale in the United States.
Inamed began a clinical study of
Juvéderm®
in the United States during in the fourth quarter of 2004 and
completed the filing of a premarket approval application with
the FDA in December 2005. We cannot assure you that Inamed will
receive approval to market
Juvéderm®
in the United States, or if
Juvéderm®
is approved, that
Juvéderm®
will offer equivalent or greater facial aesthetic benefits to
competitive dermal filler products, that it will be competitive
in price or gain acceptance in the marketplace.
We also face competition from generic drug manufacturers in the
United States and internationally. For instance, Falcon
Pharmaceuticals, Ltd., an affiliate of Alcon Laboratories, Inc.,
is currently attempting to obtain FDA approval for and to launch
a brimonidine product to compete with our
Alphagan®P
product.
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Changes in the consumer marketplace and economic
conditions may adversely affect sales or product margins of
Botox®
or
Botox®
Cosmetic. |
Botox®
Cosmetic is a consumer product. If we fail to anticipate,
identify or to react to competitive products or if consumer
preferences in the cosmetic marketplace shift to other
treatments for the temporary improvement in the appearance of
moderate to severe glabellar lines, we may experience a decline
in demand for
Botox®
Cosmetic. In addition, the popular media has at times in the
past produced, and may continue in the future to produce,
negative reports and publicity regarding the efficacy, safety or
side effects of
Botox®
Cosmetic. Consumer perceptions of
Botox®
Cosmetic may be negatively impacted by these reports and for
other reasons, including the use of unapproved botulinum toxins
that result in injury, which may cause demand to decline.
Demand for
Botox®
Cosmetic may also be materially adversely affected by changing
economic conditions. Generally, the costs of cosmetic procedures
are borne by individuals without reimbursement from their
medical insurance providers or government programs. Individuals
may be less willing to incur the costs of these procedures in
weak or uncertain economic environments, and demand for
Botox®
Cosmetic could be adversely affected.
Changes in applicable tax laws may adversely affect sales or
product margins of
Botox®
or
Botox®
Cosmetic. Because
Botox®
and
Botox®
Cosmetic are pharmaceutical products, we generally do not
collect or pay state sales or other tax on sales of
Botox®
or
Botox®
Cosmetic. We could be required to collect and pay state sales or
other tax associated with prior, current or future years on
sales of
Botox®
or
Botox®
Cosmetic. In addition to any retroactive taxes and corresponding
interest and penalties that could be assessed, if we were
required to collect or pay state sales or other tax associated
with current or future years on sales of
Botox®
or
Botox®
Cosmetic, our sales of, or our product margins on,
Botox®
or
Botox®
Cosmetic could be adversely affected due to the increased cost
associated with those products.
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We could experience difficulties obtaining or creating the
raw material needed to produce our products and interruptions in
the supply of raw materials could disrupt our manufacturing and
cause our sales and profitability to decline. |
The loss of a material supplier or the interruption of our
manufacturing processes could adversely affect our ability to
manufacture or sell many of our products. We obtain the
specialty chemicals that are the active pharmaceutical
ingredients in certain of our products from single sources, who
must maintain compliance with the FDAs cGMP regulations.
If we experience difficulties acquiring sufficient quantities of
these materials
18
from our existing suppliers, or if our suppliers are found to be
non-compliant with the cGMPs, obtaining the required regulatory
approvals, including from the FDA, to use alternative suppliers
may be a lengthy and uncertain process. A lengthy interruption
of the supply of one or more of these materials could adversely
affect our ability to manufacture and supply products, which
could cause our sales and profitability to decline. In addition,
the manufacturing process to create the raw material necessary
to produce
Botox®
is technically complex and requires significant lead-time. Any
failure by us to forecast demand for, or to maintain an adequate
supply of, the raw material and finished product could result in
an interruption in the supply of
Botox®
and a resulting decrease in sales of the product.
If we consummate the Inamed acquisition, we will rely on a
single supplier for silicone raw materials used in some of our
products. We will also depend on third party manufacturers for
silicone molded components and facial aesthetics product lines,
with the exclusion of the bovine and human-based collagen
products. These third party manufacturers must maintain
compliance with FDAs Quality System Regulation, or QSR,
which sets forth the current good manufacturing practice
requirements for medical devices. Any material reduction in our
raw material supply or a failure by our third party
manufacturers to maintain compliance with the QSR could result
in decreased sales of our products and a decease in our revenues.
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Our future success depends upon our ability to develop new
products, and new indications for existing products, that
achieve regulatory approval for commercialization. |
For our business model to be successful, we must continually
develop, test and manufacture new products or achieve new
indications for the use of our existing products. Prior to
marketing, these new products and product indications must
satisfy stringent regulatory standards and receive requisite
approvals or clearances from regulatory authorities in the
United States and abroad. The development, regulatory review and
approval, and commercialization processes are time consuming,
costly and subject to numerous factors that may delay or prevent
the development, approval or clearance, and commercialization of
new products, including legal actions brought by our
competitors. To obtain approval or clearance of new indications
or products in the United States, we must submit, among other
information, the results of preclinical and clinical studies on
the new indication or product candidate to the FDA. The number
of preclinical and clinical studies that will be required for
FDA approval varies depending on the new indication or product
candidate, the disease or condition for which the new indication
or product candidate is in development and the regulations
applicable to that new indication or product candidate. Even if
we believe that the data collected from clinical trials of new
indications for our existing products or for our product
candidates are promising, the FDA may find such data to be
insufficient to support approval of the new indication or
product. The FDA can delay, limit or deny approval of a new
indication or product candidate for many reasons, including:
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a determination that the new indication or product candidate is
not safe and effective; |
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the FDA may interpret our preclinical and clinical data in
different ways than we do; |
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the FDA may not approve our manufacturing processes or
facilities; |
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the FDA may require us to perform post-marketing clinical
studies; or |
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the FDA may change its approval policies or adopt new
regulations. |
Products that we are currently developing, other future product
candidates or new indications for our existing products may or
may not receive the regulatory approvals necessary for marketing
or may receive such approvals only after delay or unanticipated
costs. Delays or unanticipated costs in any part of the process
or our inability to obtain timely regulatory approval for our
products, including those attributable to, among other things,
our failure to maintain manufacturing facilities in compliance
with all applicable regulatory requirements, including cGMPs and
QSR, could cause our operating results to suffer and our stock
price to decrease. We are also required to pass pre-approval
reviews and plant inspections of our and our suppliers
facilities to demonstrate our compliance with cGMPs and QSR.
Further, even if we receive FDA and other regulatory approvals
for a new indication or product, the product may later exhibit
adverse effects that limit or prevent its widespread use or that
force us to withdraw the product from the market or to revise
our labeling to limit the indications for which the product may
be prescribed. In addition, even if we receive the necessary
regulatory approvals, we cannot assure you that new
19
products or indications will achieve market acceptance. Our
future performance will be affected by the market acceptance of
products such as
Lumigan®,
Alphagan®
P,
Combigantm,
Restasis®,
Acular
LS®,
Zymar®,
Botox®
and, if we consummate our acquisition of Inamed and, if approved
by the FDA,
Juvéderm®
and breast implant products, as well as FDA approval of new
indications for
Botox®,
and new products such as our
Lumigan®/timolol
combination,
Posurdex®
and memantine. We cannot assure you that these or any other
compounds or products that we are developing for
commercialization will be approved by the FDA for marketing or
that we will be able to commercialize them on terms that will be
profitable, or at all. If any of our products cannot be
successfully or timely commercialized, our operating results
could be materially adversely affected.
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Our product development efforts may not result in
commercial products. |
We intend to continue an aggressive research and development
program. Successful product development in the pharmaceutical
industry is highly uncertain, and very few research and
development projects produce a commercial product. Product
candidates that appear promising in the early phases of
development, such as in early human clinical trials, may fail to
reach the market for a number of reasons, such as:
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the product candidate did not demonstrate acceptable clinical
trial results even though it demonstrated positive preclinical
trial results; |
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the product candidate was not effective in treating a specified
condition or illness; |
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the product candidate had harmful side effects in humans or
animals; |
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the necessary regulatory bodies, such as the FDA, did not
approve the product candidate for an intended use; |
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the product candidate was not economical for us to manufacture
and commercialize; |
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other companies or people have or may have proprietary rights to
the product candidate, such as patent rights, and will not let
us sell it on reasonable terms, or at all; |
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the product candidate is not cost effective in light of existing
therapeutics; and |
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certain of our licensors or partners may fail to effectively
conduct clinical development or clinical manufacturing
activities. |
Several of our product candidates have failed or been
discontinued at various stages in the product development
process, including, but not limited to, our oral formulation of
tazarotene for the treatment of moderate to very severe
psoriasis. Of course, there may be other factors that prevent us
from marketing a product. We cannot guarantee we will be able to
produce commercially successful products. Further, clinical
trial results are frequently susceptible to varying
interpretations by scientists, medical personnel, regulatory
personnel, statisticians, and others, which may delay, limit, or
prevent further clinical development or regulatory approvals of
a product candidate. Also, the length of time that it takes for
us to complete clinical trials and obtain regulatory approval
for product marketing has in the past varied by product and by
the intended use of a product. We expect that this will likely
be the case with future product candidates and we cannot predict
the length of time to complete necessary clinical trials and
obtain regulatory approval.
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If we are unable to obtain and maintain adequate
protection for our intellectual property rights associated with
the technologies incorporated into our products, our business
and results of operations could suffer. |
Our success depends in part on our ability to obtain patents or
rights to patents, protect trade secrets and other proprietary
technologies and processes, operate without infringing upon the
proprietary rights of others, and prevent others from infringing
on our patents, trademarks, service marks and other intellectual
property rights. Upon the expiration or loss of patent
protection for a product, we can lose a significant portion of
sales of that product in a very short period of time as other
companies manufacture generic forms of our previously protected
product at lower cost, without having had to incur significant
research and development costs in formulating the product.
Therefore, our future financial success may depend in part on
obtaining patent protection for technologies incorporated into
our products. We cannot assure you that such patents will be
issued, or that any existing or future patents will be of
commercial benefit. In addition, it is impossible to anticipate
the breadth or degree of protection that any such patents will
afford, and we cannot assure you that
20
any such patents will not be successfully challenged in the
future. If we are unsuccessful in obtaining or preserving patent
protection, or if any of our products rely on unpatented
proprietary technology, we cannot assure you that others will
not commercialize products substantially identical to those
products. Generic drug manufacturers are currently challenging
the patents covering certain of our products and we expect that
they will continue to do so in the future.
We believe that the protection of our trademarks and service
marks is an important factor in product recognition and in our
ability to maintain or increase market share. If we do not
adequately protect our rights in our various trademarks and
service marks from infringement, their value to us could be lost
or diminished. If the marks we use are found to infringe upon
the trademark or service mark of another company, we could be
forced to stop using those marks and, as a result, we could lose
the value of those marks and could be liable for damages caused
by an infringement. In addition to intellectual property
protections afforded to trademarks, service marks and
proprietary know-how by the various countries in which our
proprietary products are sold, we seek to protect our
trademarks, service marks and proprietary know-how through
confidentiality agreements with third parties, including our
partners, customers, employees and consultants. It is possible
that these agreements will be breached or that they will not be
enforceable in every instance, and that we will not have
adequate remedies for any such breach. It is also possible that
our trade secrets will become known or independently developed
by our competitors.
Third parties may challenge, invalidate, or circumvent our
patents and patent applications relating to our products,
product candidates and technologies. Challenges may result in
potentially significant harm to our business. The cost of
responding to these challenges and the inherent costs to defend
the validity of our patents, including the prosecution of
infringements and the related litigation, could be substantial
and can preclude or delay commercialization of products. Such
litigation also could require a substantial commitment of our
managements time. For certain of our product candidates,
third parties may have patents or pending patents that they
claim prevent us from commercializing certain product candidates
in certain territories. Our success depends in part on our
ability to obtain and defend patent rights and other
intellectual property rights that are important to the
commercialization of our products and product candidates. For
additional information on our material patents see
Patents, Trademarks and Licenses in Item 1 of Part I
of this report, Business.
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Importation of products from Canada and other countries
into the United States may lower the prices we receive for our
products. |
In the United States, some of our products are subject to
competition from lower priced versions of our products and
competing products from Canada, Mexico and other countries where
government price controls or other market dynamics result in
lower prices. Our products that require a prescription in the
United States are often available to consumers in these markets
without a prescription, which may cause consumers to further
seek out our products in these lower priced markets. The ability
of patients and other customers to obtain these lower priced
imports has grown significantly as a result of the Internet, an
expansion of pharmacies in Canada and elsewhere targeted to
American purchasers, the increase in
U.S.-based businesses
affiliated with Canadian pharmacies marketing to American
purchasers, and other factors. These foreign imports are illegal
under current U.S. law, with the sole exception of limited
quantities of prescription drugs imported for personal use.
However, the volume of imports continues to rise due to the
limited enforcement resources of the FDA and the
U.S. Customs Service, and there is increased political
pressure to permit the imports as a mechanism for expanding
access to lower priced medicines.
In December 2003, Congress enacted the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003. This law
contains provisions that may change U.S. import laws and
expand consumers ability to import lower priced versions
of our products and competing products from Canada, where there
are government price controls. These changes to U.S. import
laws will not take effect unless and until the Secretary of
Health and Human Services certifies that the changes will lead
to substantial savings for consumers and will not create a
public health safety issue. The former Secretary of Health and
Human Services did not make such a certification. However, it is
possible that the current Secretary or a subsequent Secretary
could make the certification in the future. As directed by
Congress, a task force on drug importation
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recently conducted a comprehensive study regarding the
circumstances under which drug importation could be safely
conducted and the consequences of importation on the health,
medical costs and development of new medicines for
U.S. consumers. The task force issued its report in
December 2004, finding that there are significant safety and
economic issues that must be addressed before importation of
prescription drugs is permitted, and the current Secretary has
not yet announced any plans to make the required certification.
In addition, federal legislative proposals have been made to
implement the changes to the U.S. import laws without any
certification, and to broaden permissible imports in other ways.
Even if the changes to the U.S. import laws do not take
effect, and other changes are not enacted, imports from Canada
and elsewhere may continue to increase due to market and
political forces, and the limited enforcement resources of the
FDA, the U.S. Customs Service and other government
agencies. For example, state and local governments have
suggested that they may import drugs from Canada for employees
covered by state health plans or others, and some already have
implemented such plans.
The importation of foreign products adversely affects our
profitability in the United States. This impact could become
more significant in the future, and the impact could be even
greater if there is a further change in the law or if state or
local governments take further steps to import products from
abroad.
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Our business will continue to expose us to risks of
environmental liabilities. |
Our product development programs and manufacturing processes
involve the controlled use of hazardous materials, chemicals and
toxic compounds. These programs and processes expose us to risks
that an accidental contamination could lead to noncompliance
with environmental laws, regulatory enforcement actions and
claims for personal injury and property damage. If an accident
occurs, or if we discover contamination caused by prior
operations, including by prior owners and operators of
properties we acquire, we could be liable for cleanup
obligations, damages and fines. The substantial unexpected costs
we may incur could have a significant and adverse effect on our
business and results of operations.
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We may experience losses due to product liability claims,
product recalls or corrections. |
The design, development, manufacture and sale of our products
involve an inherent risk of product liability or other claims by
consumers and other third parties. We have in the past been, and
continue to be, subject to various product liability claims and
lawsuits. In addition, we have in the past and may in the future
recall or issue field corrections related to our products due to
manufacturing deficiencies, labeling errors or other safety or
regulatory reasons. We cannot assure you that we will not in the
future experience material losses due to product liability
claims, lawsuits, product recalls or corrections.
If we consummate our acquisition of Inamed, we will assume
Inameds product liability risks. Inamed has in the past
and continues to be a manufacturer of breast implant products.
The manufacture and sale of breast implant products entails risk
of product liability claims. Historically, other breast implant
manufacturers that suffered such claims in the 1990s were
forced to cease operations or even to declare bankruptcy.
Additionally, Inamed is seeking to reintroduce silicone breast
implants in the United States. If it obtains FDA approval to
market silicone breast implants for breast augmentation, such
approval may come with significant restrictions and
requirements, including the need for a patient registry, follow
up MRIs, and substantial Phase IV clinical trial
commitments. We also face a substantial risk of product
liability claims from our current eye care, neuromodulator and
skin care products and, upon our acquisition of Inamed, may face
similar risks associated with Inameds obesity intervention
and facial aesthetics products.
Additionally, our pharmaceutical and aesthetic products may
cause, or may appear to cause, serious adverse side effects or
potentially dangerous drug interactions if misused or improperly
prescribed. We are subject to adverse event reporting
regulations that require us to report to the FDA or similar
bodies in other countries if our products are associated with a
death or serious injury. These adverse events, among others,
could result in additional regulatory controls, such as the
performance of costly post-approval clinical studies or
revisions to our approved labeling, which could limit the
indications or patient population for our products or could even
lead to the withdrawal of a product from the market.
Furthermore, any adverse publicity associated with such an event
could cause consumers to seek alternatives to our products,
which may cause
22
our sales to decline, even if our products are ultimately
determined not to have been the primary cause of the event.
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Negative publicity concerning the safety of our products
may harm our sales and we may be forced to withdraw
products. |
Physicians and potential and existing patients may have a number
of concerns about the safety of our products, including
Botox®,
eye care pharmaceuticals, skin care products, and, if we
consummate our acquisition of Inamed, breast implants, obesity
intervention products and facial dermal fillers, whether or not
such concerns have a basis in generally accepted science or
peer-reviewed scientific research. Negative
publicity whether accurate or inaccurate
about our products, based on, for example, news about
Botox®,
breast implant litigation or regulatory activities and
developments, whether involving us or a competitor, or new
government regulation, could materially reduce market acceptance
of our products and could result in product withdrawals. In
addition, significant negative publicity could result in an
increased number of product liability claims, whether or not
these claims have a basis in scientific fact. Furthermore, any
adverse publicity associated with such an event could cause
consumers to seek alternatives to our products, which may cause
our sales to decline, even if our products are ultimately
determined not to have been the primary cause of the event.
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Health care initiatives and other cost-containment
pressures could cause us to sell our products at lower prices,
resulting in decreased revenues. |
Some of our products are purchased or reimbursed by state and
federal government authorities, private health insurers and
other organizations, such as health maintenance organizations,
or HMOs, and managed care organizations, or MCOs. Third party
payors increasingly challenge pharmaceutical product pricing.
The trend toward managed healthcare in the United States, the
growth of organizations such as HMOs and MCOs, and various
legislative proposals and enactments to reform healthcare and
government insurance programs, including the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003,
or MMA, could significantly influence the manner in which
pharmaceutical products are prescribed and purchased, which
could result in lower prices and/or a reduction in demand for
our products. For example, effective January 1, 2006, the
MMA established a new Medicare outpatient prescription drug
benefit under Part D. The MMA also established a
competitive acquisition program, or CAP, in which physicians who
administer drugs in their offices will be offered an option to
acquire drugs covered under the Medicare Part B benefit
from vendors who are selected in a competitive bidding process.
Winning vendors have been selected based on criteria that
include their bid price. Such cost containment measures and
healthcare reforms could adversely affect our ability to sell
our products. Under a new rule, implementation of the CAP will
begin in July 2006.
Furthermore, individual states have become increasingly
aggressive in passing legislation and implementing regulations
designed to control pharmaceutical product pricing, including
price or patient reimbursement constraints, discounts,
restrictions on certain product access, importation from other
countries and bulk purchasing. Legally mandated price controls
on payment amounts by third party payors or other restrictions
could negatively and materially impact our revenues and
financial condition. We encounter similar regulatory and
legislative issues in most countries outside the United States.
We expect there will continue to be federal and state laws
and/or regulations, proposed and implemented, that could limit
the amounts that international, federal and state governments
will pay for health care products and services. The extent to
which future legislation or regulations, if any, relating to the
health care industry or third-party coverage and reimbursement
may be enacted or what effect such legislation or regulation
would have on our business remains uncertain. Such measures or
other health care system reforms that are adopted could have a
material adverse effect on our ability to commercialize
successfully our products or could limit or eliminate our
spending on development projects and affect our ultimate
profitability.
In addition, regional healthcare authorities and individual
hospitals are increasingly using bidding procedures to determine
what pharmaceutical products and which suppliers will be
included in their
23
prescription drug and other healthcare programs. This can reduce
demand for our products or put pressure on our product pricing,
which could negatively affect our revenues and profitability.
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We are subject to risks arising from currency exchange
rates, which could increase our costs and may cause our
profitability to decline. |
We collect and pay a substantial portion of our sales and
expenditures in currencies other than the U.S. dollar.
Therefore, fluctuations in foreign currency exchange rates
affect our operating results. We cannot assure you that future
exchange rate movements, inflation or other related factors will
not have a material adverse effect on our sales, gross profit or
operating expenses.
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We are subject to risks associated with doing business
internationally. |
Our business is subject to certain risks inherent in
international business, many of which are beyond our control.
These risks include, among other things:
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adverse changes in tariff and trade protection measures; |
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unexpected changes in foreign regulatory requirements, including
quality standards and other certification requirements; |
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potentially negative consequences from changes in or
interpretations of tax laws; |
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differing labor regulations; |
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changing economic conditions in countries where our products are
sold or manufactured or in other countries; |
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differing local product preferences and product requirements; |
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exchange rate risks; |
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restrictions on the repatriation of funds; |
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political unrest and hostilities; |
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differing degrees of protection for intellectual
property; and |
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difficulties in coordinating and managing foreign operations. |
Any of these factors, or any other international factors, could
have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that
we can successfully manage these risks or avoid their effects.
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We may be subject to intellectual property litigation and
infringement claims, which could cause us to incur significant
expenses and losses or prevent us from selling our
products. |
We cannot assure you that our products will not infringe patents
or other intellectual property rights held by third parties. In
the event we discover that we may be infringing third party
patents or other intellectual property rights, we may not be
able to obtain licenses from those third parties on commercially
attractive terms or at all. We may have to defend, and have
recently defended, against charges that we violated patents or
the proprietary rights of third parties. Litigation is costly
and time-consuming, and diverts the attention of our management
and technical personnel. In addition, if we infringe the
intellectual property rights of others, we could lose our right
to develop, manufacture or sell products or could be required to
pay monetary damages or royalties to license proprietary rights
from third parties. An adverse determination in a judicial or
administrative proceeding or a failure to obtain necessary
licenses could prevent us from manufacturing or selling our
products, which could harm our business, financial condition,
prospects, results of operations and cash flows. See Item 3
of Part I of this report, Legal Proceedings and
Note 12, Commitments and Contingencies, in the
notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for information
concerning our current intellectual property litigation.
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The consolidation of drug wholesalers and other wholesaler
actions could increase competitive and pricing pressures on
pharmaceutical manufacturers, including us. |
We sell our pharmaceutical products primarily through
wholesalers. These wholesale customers comprise a significant
part of the distribution network for pharmaceutical products in
the United States. This
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distribution network is continuing to undergo significant
consolidation marked by mergers and acquisitions. As a result, a
smaller number of large wholesale distributors control a
significant share of the market. We expect that consolidation of
drug wholesalers will increase competitive and pricing pressures
on pharmaceutical manufacturers, including us. In addition,
wholesalers may apply pricing pressure through fee-for-service
arrangements, and their purchases may exceed customer demand,
resulting in reduced wholesaler purchases in later quarters. We
cannot assure you that we can manage these pressures or that
wholesaler purchases will not decrease as a result of this
potential excess buying.
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We may acquire companies in the future and these
acquisitions could disrupt our business. |
As part of our business strategy, we regularly consider and, as
appropriate, make acquisitions of technologies, products and
businesses that we believe are complementary to our business.
Acquisitions typically entail many risks and could result in
difficulties in integrating the operations, personnel,
technologies and products of the companies acquired, some of
which may result in significant charges to earnings. If we are
unable to successfully integrate our acquisitions with our
existing business, we may not obtain the advantages that the
acquisitions were intended to create, which may materially
adversely affect our business, results of operations, financial
condition and cash flows, our ability to develop and introduce
new products and the market price of our stock. In connection
with acquisitions, we could experience disruption in our
business or employee base, or key employees of companies that we
acquire may seek employment elsewhere, including with our
competitors. Furthermore, the products of companies we acquire
may overlap with our products or those of our customers,
creating conflicts with existing relationships or with other
commitments that are detrimental to the integrated businesses.
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Compliance with the extensive government regulations to
which we are subject is expensive and time consuming, and may
result in the delay or cancellation of product sales,
introductions or modifications. |
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our
product development and manufacturing capabilities. All
companies that manufacture, market and distribute
pharmaceuticals and medical devices, including Allergan, are
subject to extensive, complex, costly and evolving regulation by
federal governmental authorities, principally by the FDA and the
U.S. Drug Enforcement Administration, or DEA, and similar
foreign and state government agencies. Failure to comply with
the regulatory requirements of the FDA, DEA and other U.S. and
foreign regulatory agencies may subject a company to
administrative or judicially imposed sanctions, including, among
others, a refusal to approve a pending application to market a
new product or a new indication for an existing product. The
Federal Food, Drug, and Cosmetic Act, the Controlled Substances
Act and other domestic and foreign statutes and regulations
govern or influence the research, testing, manufacturing,
packing, labeling, storing, record keeping, safety,
effectiveness, approval, advertising, promotion, sale and
distribution of our products. Under certain of these
regulations, we are subject to periodic inspection of our
facilities, production processes and control operations and/or
the testing of our products by the FDA, the DEA and other
authorities, to confirm that we are in compliance with all
applicable regulations, including the cGMPs and QSR regulations.
The FDA conducts pre-approval and post-approval reviews and
plant inspections of us and our suppliers to determine whether
our record keeping, production processes and controls, personnel
and quality control are in compliance with the cGMPs, the QSR
and other FDA regulations. We are also required to perform
extensive audits of our vendors, contract laboratories and
suppliers to ensure that they are compliant with these
requirements. In addition, in order to commercialize our
products or new indications for an existing product, we must
demonstrate that the product or new indication is safe and
effective, and that our and our suppliers manufacturing
facilities are compliant with applicable regulations, to the
satisfaction of the FDA and other regulatory agencies.
The process for obtaining governmental approval to manufacture
and to commercialize pharmaceutical and medical device products
is rigorous, typically takes many years and is costly, and we
cannot predict the extent to which we may be affected by
legislative and regulatory developments. We are dependent on
receiving FDA and other governmental approvals prior to
manufacturing, marketing and distributing our products. We
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may fail to obtain approval from the FDA or other governmental
authorities for our product candidates, or we may experience
delays in obtaining such approvals, due to varying
interpretations of data or our failure to satisfy rigorous
efficacy, safety and manufacturing quality standards.
Consequently, there is always a risk that the FDA or other
applicable governmental authorities will not approve our
products, or will take post-approval action limiting or revoking
our ability to sell our products, or that the rate, timing and
cost of such approvals will adversely affect our product
introduction plans, results of operations and stock price.
Despite the time and expense exerted, regulatory approval is
never guaranteed.
Even after we obtain regulatory approval for a product candidate
or new indication, we are subject to extensive regulation,
including ongoing compliance with the FDAs cGMP
regulations, completion of post-marketing clinical studies
mandated by the FDA, and compliance with regulations relating to
labeling, advertising, marketing and promotion. In addition, we
are subject to adverse event reporting regulations that require
us to report to FDA if our products are associated with a death
or serious injury. If we or any third party that we involve in
the testing, packing, manufacture, labeling, marketing and
distribution of our products fail to comply with any such
regulations, we may be subject to, among other things, warning
letters, product seizures, recalls, fines or other civil
penalties, injunctions, suspension or revocation of approvals,
operating restrictions and/or criminal prosecution. The FDA
recently has increased its enforcement activities related to the
advertising and promotion of pharmaceutical and biological
products. In particular, the FDA has expressed concern regarding
the pharmaceutical industrys compliance with the
agencys regulations and guidance governing
direct-to-consumer
advertising, and has increased its scrutiny of such promotional
materials. The FDA may limit or, with respect to certain
products, terminate our dissemination of
direct-to-consumer
advertisements in the future, which could cause sales of those
products to decline. Physicians may prescribe pharmaceutical,
biologic and medical device products for uses that are not
described in a products labeling or differ from those
tested by us and approved by the FDA. While such
off-label uses are common and the FDA does not
regulate a physicians choice of treatment, the FDA does
restrict a manufacturers communications on the subject of
off-label use. Companies cannot actively
promote FDA-approved pharmaceutical, biologic or medical
device products for off-label uses, but they may disseminate to
physicians articles published in peer-reviewed journals. To the
extent allowed by law, we disseminate peer-reviewed articles on
our products to targeted physicians. If, however, our
promotional activities fail to comply with the FDAs
regulations or guidelines, we may be subject to warnings from,
or enforcement action by, the FDA or another enforcement agency.
From time to time, legislative or regulatory proposals are
introduced that could alter the review and approval process
relating to our products. It is possible that the FDA or other
governmental authorities will issue additional regulations
further restricting the sale of our present or proposed
products. Any change in legislation or regulations that govern
the review and approval process relating to our current and
future products could make it more difficult and costly to
obtain approval for new products, or to produce, market, and
distribute existing products.
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If we market products in a manner that violates health
care fraud and abuse laws, we may be subject to civil or
criminal penalties. |
The Federal health care program anti-kickback statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting, or receiving remuneration to induce or in return for
purchasing, leasing, ordering, or arranging for the purchase,
lease or order of any health care item or service reimbursable
under Medicare, Medicaid or other federally financed health care
programs. This statute has been interpreted to apply to
arrangements between pharmaceutical manufacturers on one hand
and prescribers, purchasers and formulary managers on the other.
Although there are a number of statutory exemptions and
regulatory safe harbors protecting certain common activities
from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to
induce prescribing, purchases or recommendations may be subject
to scrutiny if they do not qualify for an exemption or safe
harbor.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Pharmaceutical companies have been prosecuted under these laws
for a
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variety of alleged promotional and marketing activities, such as
allegedly providing free product to customers with the
expectation that the customers would bill federal programs for
the product; reporting to pricing services inflated average
wholesale prices that were then used by federal programs to set
reimbursement rates; engaging in off-label promotion that caused
claims to be submitted to Medicaid for non-covered off-label
uses; and submitting inflated best price information to the
Medicaid Rebate Program. The majority of states also have
statutes or regulations similar to the federal anti-kickback law
and false claims laws, which apply to items and services
reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. In addition, some
states have laws that require pharmaceutical companies to adopt
comprehensive compliance programs. For example, under California
law, pharmaceutical companies must comply with both the April
2003 Office of Inspector General Compliance Program Guidance for
Pharmaceutical Manufacturers and the July 2002 PhRMA Code on
Interactions with Healthcare Professionals.
Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturers products
from reimbursement under government programs, criminal fines and
imprisonment. Because of the breadth of these laws and the
narrowness of the safe harbors, it is possible that some of our
business activities could be subject to challenge under one or
more of such laws. For example, we and several other
pharmaceutical companies are currently subject to suits by
governmental entities in several jurisdictions, including
Massachusetts, New York and Alabama alleging that we and these
other companies, through promotional, discounting and pricing
practices reported false and inflated average wholesale prices
or wholesale acquisition costs and failed to report best prices
as required by federal and state rebate statutes, resulting in
the plaintiffs overpaying for certain medications. If our past
or present operations are found to be in violation of any of the
laws described above or other similar governmental regulations
to which we are subject, we may be subject to the applicable
penalty associated with the violation which could adversely
affect our ability to operate our business and our financial
results.
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If our collaborative partners do not perform, we will be
unable to develop and market products as anticipated. |
We have entered into collaborative arrangements with third
parties to develop and market certain products, including our
partnership with GlaxoSmithKline to market
Botox®
in Japan and China and certain other products in the United
States. We cannot assure you that these collaborations will be
successful, lead to significant sales of our products in our
partners territories or lead to the creation of additional
products. If we fail to maintain our existing collaborative
arrangements or fail to enter into additional collaborative
arrangements, our licensing revenues and/or the number of
products from which we could receive future revenues could
decline.
Our dependence on collaborative arrangements with third parties
subjects us to a number of risks. These collaborative
arrangements may not be on terms favorable to us. Agreements
with collaborative partners typically allow partners significant
discretion in marketing our products or electing whether or not
to pursue any of the planned activities. We cannot fully control
the amount and timing of resources our collaborative partners
may devote to products based on the collaboration, and our
partners may choose to pursue alternative products to the
detriment of our collaboration. In addition, our partners may
not perform their obligations as expected. Business
combinations, significant changes in a collaborative
partners business strategy, or its access to financial
resources may adversely affect a partners willingness or
ability to complete its obligations. Moreover, we could become
involved in disputes with our partners, which could lead to
delays or termination of the collaborations and time-consuming
and expensive litigation or arbitration. Even if we fulfill our
obligations under a collaborative agreement, our partner can
terminate the agreement under certain circumstances. If any
collaborative partners were to terminate or breach our
agreements with them, or otherwise fail to complete their
obligations in a timely manner, we could be materially and
adversely affected.
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Changes in financial accounting standards to share-based
payments are expected to have a significant effect on our
reported results. |
The Financial Accounting Standards Board recently issued a
revised standard that requires that we record compensation
expense in the statement of operations for share-based payments,
such as employee stock
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options, using the fair value method. The adoption of the new
standard is expected to have a significant effect on our
reported earnings, although it will not affect our cash flows,
and could adversely impact our ability to provide accurate
guidance on our future reported financial results due to the
variability of the factors used to estimate the values of
share-based payments. As a result, our adoption of the new
standard in the first quarter of fiscal 2006 could negatively
affect our stock price and our stock price volatility. In
addition, although we have historically provided in the notes to
our financial statements pro forma earnings information
showing what our results would have been had we been recording
compensation expense for such awards, the amount of such expense
was not reflected in our financial results. Consequently, when
we begin recording such compensation expense in 2006, the period
over period comparisons will be significantly affected by the
inclusion of such expense in 2006 and the absence of such
expense from prior periods. If investors do not appropriately
consider these changes in accounting rules, the price at which
our stock is traded could be adversely affected.
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Unanticipated changes in our tax rates or exposure to
additional income tax liabilities could affect our
profitability. |
We are subject to income taxes in both the United States and
numerous foreign jurisdictions. Our effective tax rate could be
adversely affected by changes in the mix of earnings in
countries with different statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in or
interpretations of tax laws including pending tax law changes
(such as the research and development credit), changes in our
manufacturing activities and changes in our future levels of
research and development spending. In addition, we are subject
to the continuous examination of our income tax returns by the
Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of outcomes resulting from these
examinations to determine the adequacy of our provision for
income taxes. There can be no assurance that the outcomes from
these continuous examinations will not have an adverse effect on
our provision for income taxes and estimated income tax
liabilities.
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Our merger with Inamed may not be consummated, may not
have the benefits we expect or may disrupt our business. |
The impact of our pending acquisition of Inamed, including our
ability to obtain governmental approvals for the acquisition on
the terms and schedule agreed to in the agreement and plan of
merger executed on December 20, 2005 between Inamed and us
may result in any or all of the following risks: the businesses
will not be integrated successfully; the anticipated synergies
from the acquisition may not be fully realized or may take
longer to realize than expected; and disruption from the
acquisition, which could harm relationships with our current
customers, employees or suppliers and effect our pricing,
spending, third-party relationships and revenues.
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Antitrust authorities may attempt to delay or prevent our
acquisition of Inamed. |
We made a premerger filing under the Hart Scott Rodino Act, or
the HSR Act, with the Federal Trade Commission, or FTC, and the
Antitrust Division of the Department of Justice, or DOJ, on
November 15, 2005. On December 15, 2005, we received a
request for additional information and documentary material,
referred to as a second request, from the FTC, pursuant to the
HSR Act, in connection with the Inamed acquisition. The effect
of the second request is to extend the waiting period imposed by
the HSR Act until thirty days after we have substantially
complied with such request. Until the applicable waiting period
under the HSR Act expires or is terminated, we may not purchase
any shares of Inamed.
In order to minimize any potential antitrust issues, we agreed
to immediately divest
Reloxin®,
Inameds neuromodulator licensed from Beaufour Ipsen, in
connection with the merger. Inamed and Beaufour Ipsen have
entered into a termination agreement pursuant to which, subject
to the consummation of our acquisition of Inamed and certain
other conditions, all rights related to
Reloxin®
previously granted by Beaufour Ipsen to Inamed would be returned
to Beaufour Ipsen, and all worldwide rights in the
Reloxin®
trademark would be assigned to Beaufour Ipsen. However, we
cannot provide any assurance that the necessary approvals will
be obtained or that there will not be any adverse consequences
to our business or the business of Inamed resulting
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from conditions that could be imposed in connection with
obtaining these approvals, including other divestitures or
operating restrictions upon Inamed or on us following
consummation of the merger. The merger is conditioned upon the
receipt of all required antitrust approvals or clearances for
our acquisition of Inamed, without our, Inameds or any of
our subsidiaries being required to meet any condition or
restriction that would be materially adverse to the combined
company, other than the divestiture of
Reloxin®,
and no court or other authority prohibiting the consummation of
the merger.
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Uncertainties exist in integrating Inameds business
and operations into our own. |
We intend to integrate certain of Inameds functions and
operations into our own. Although we believe the integration
will be efficiently completed, there can be no assurance that we
will be successful. There will be inherent challenges in
integrating our operations that could result in a delay or the
failure to achieve the anticipated synergies and, therefore, any
potential cost savings and increases in earnings. Issues that
must be addressed in integrating the operations of Inamed into
our own include, among other things:
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|
|
|
conforming standards, controls, procedures and policies,
business cultures and compensation structures between the
companies; |
|
|
conforming information technology systems; |
|
|
consolidating corporate and administrative infrastructures; |
|
|
consolidating sales and marketing operations; |
|
|
retaining existing customers and attracting new customers; |
|
|
retaining key employees; |
|
|
identifying and eliminating redundant and underperforming
operations and assets; |
|
|
minimizing the diversion of managements attention from
ongoing business concerns; |
|
|
coordinating geographically dispersed organizations; |
|
|
managing tax costs or inefficiencies associated with integrating
the operations of the combined company; and |
|
|
making any necessary modifications to operating control
standards to comply with the Sarbanes-Oxley Act of 2002 and the
rules and regulations promulgated thereunder. |
If we are not able to adequately address these challenges, we
may be unable to successfully integrate Inameds operations
into our own, or to realize the anticipated benefits of the
integration of the two companies. Actual cost and sales
synergies, if achieved at all, may be lower than we expect and
may take longer to achieve than we anticipate.
|
|
Item 1B. |
Unresolved Staff Comments |
None.
Our operations are conducted in owned and leased facilities
located throughout the world. We believe our present facilities
are adequate for our current needs. Our headquarters and primary
administrative and research facilities, which we own, are
located in Irvine, California. We have two additional facilities
located in California. One such facility is leased to provide
raw material support and the other facility is leased to provide
administrative support. We own one facility in Texas for
manufacturing and warehousing.
Outside of the United States, we own and operate two facilities
for manufacturing and warehousing. One such facility is located
in Brazil and the other facility is located in Ireland. Other
material facilities include leased facilities for administration
in Australia, Brazil, Canada, Germany, Hong Kong, Ireland,
Italy, Japan, Spain and the United Kingdom; and owned facilities
for administration and research and development in France.
29
|
|
Item 3. |
Legal Proceedings |
We are involved in various lawsuits and claims arising in the
ordinary course of business.
On June 6, 2001, after receiving paragraph 4
invalidity and noninfringement Hatch-Waxman Act certifications
from Apotex indicating that Apotex had filed an Abbreviated New
Drug Application with the FDA for a generic form of
Acular®,
we and Roche Palo Alto, LLC, formerly known as Syntex (U.S.A.)
LLC, the holder of the
Acular®
patent, filed a lawsuit entitled Syntex (U.S.A.) LLC and
Allergan, Inc. v. Apotex, Inc., et al. in the
United States District Court for the Northern District of
California. Following a trial, the court entered final judgment
in our favor on January 27, 2004, holding that the patent
at issue is valid, enforceable and infringed by Apotexs
proposed generic drug. On February 17, 2004, Apotex filed a
Notice of Appeal with the United States Court of Appeals for the
Federal Circuit. On May 18, 2005, the Court of Appeals for
the Federal Circuit issued an opinion affirming the lower
courts ruling on inequitable conduct and claim
construction and reversing and remanding the issue of
obviousness. The court did not address the issue of
infringement. On August 13, 2005, Apotex filed a motion to
vacate the injunction pending resolution of the remand from the
United States Court of Appeals for the Federal Circuit on the
obviousness. On October 28, 2005, the court denied
Apotexs motion. On November 4, 2005, Apotex filed a
Notice of Appeal on the courts ruling regarding the motion
to vacate injunction. On November 16, 2005, Apotex filed
with the United States Court of Appeals for the Federal Circuit
an Emergency Motion for Stay of Plaintiffs Injunction
Pending Appeal. On December 15, 2005, the United States
Court of Appeals for the Federal Circuit granted Apotexs
motion, ruling that the permanent injunction had been vacated by
its remand to the district court. Accordingly, on
December 16, 2005, we filed a motion for temporary
restraining order and preliminary injunction with the United
States District Court for the Northern District of California.
On December 29, 2005, the court granted our motion for a
temporary restraining order. In its order, the court ruled that
the defendants are restrained and enjoined, pending the
courts decision as to whether a preliminary injunction
should issue, from commercially manufacturing, using, offering
to sell, or selling within the United States or importing into
the United States, the generic version of
Acular®.
On February 23, 2006, the court held a hearing on our
motion for preliminary injunction and on the defendants
obviousness challenge to the validity of the patent at issue.
The court extended the temporary restraining order currently in
place until the court issues its order regarding the
defendants challenge to the validity of the patent at
issue based on obviousness. On June 29, 2001, we filed a
separate lawsuit in Canada against Apotex similarly relating to
a generic version of
Acular®.
A mediation in the Canadian lawsuit was held on January 4,
2005 and a settlement conference previously scheduled for
April 6, 2005 was continued to July 21, 2006.
On June 2, 2003, a complaint entitled Klein-Becker
usa, LLC v. Allergan, Inc. was filed in the United
States District Court for the District of Utah
Central Division. The complaint, as later amended, contained
claims against us for intentional interference with contractual
and economic relations and unfair competition under federal and
Utah law. The complaint sought declaratory and injunctive
relief, based on allegations that we interfered with
Klein-Beckers contractual and economic relations by
dissuading certain magazines from running Klein-Beckers
advertisements for its anti-wrinkle cream. On July 30,
2003, we filed a reply and counterclaims against Klein-Becker,
asserting, as later amended, claims for false advertising,
unfair competition under federal and Utah law, trade libel,
trademark infringement and dilution, and seeking declaratory
relief in connection with Klein-Beckers advertisements for
its anti-wrinkle cream that use the heading Better than
BOTOX®?
On July 31, 2003, the court denied Klein-Beckers
application for a temporary restraining order to restrain us
from, among other things, contacting magazines regarding
Klein-Beckers advertisements. On October 7, 2003, the
court granted in part and denied in part our motion to dismiss
Klein-Beckers complaint, dismissing Klein-Beckers
claims for unfair competition under federal and Utah law and its
motion for injunctive relief. On August 14, 2004, the court
denied in its entirety Klein-Beckers motion to dismiss our
claims. On March 2, 2005, Klein-Becker filed a motion to
amend the scheduling order and a motion for leave to amend the
first amended complaint. On August 4, 2005, Klein-Becker
filed a Motion for Partial Summary Judgment. On August 24,
2005, the court granted Klein-Beckers motion to amend the
scheduling order and Klein-Beckers motion for leave to
amend the first amended complaint. On September 16, 2005,
Klein-Becker filed its second amended complaint asserting claims
for cancellation of registered trademark, false advertising and
unfair competition, intentional interference with potential and
existing contractual relations, and seeking
30
declaratory relief. On October 7, 2005, we filed our
response to the second amended complaint and a motion to dismiss
certain claims in Klein-Beckers second amended complaint.
On October 25, 2005, we filed a Motion for Partial Summary
Judgment and a Motion for Preliminary Injunction. In response to
our Motion for Partial Summary Judgment, Klein-Becker requested
that it be permitted to take additional discovery, which request
was granted. The hearing on Klein-Beckers Motion for
Partial Summary Judgment was heard on December 19, 2005 and
the court took the motion under submission, but denied our
motion for Preliminary Injunction. Subsequently, the court
granted our motion to submit additional evidence in response to
Klein-Beckers Motion for Partial Summary Judgment. On
February 22, 2006, the court granted our motion to dismiss
Klein-Beckers claims for cancellation of registered
trademark and unfair competition under state law. The court
denied our motion to dismiss as to Klein-Beckers federal
false advertising and unfair competition claim. The court also
denied Klein-Beckers motion to file a Third Amended
Complaint, in which Klein-Becker attempted to add Elizabeth
Arden as a party and include a claim against Elizabeth Arden and
us regarding the Prevage product. The court granted our motion
as to a separate Motion for Partial Summary Judgment that
Klein-Becker filed. Trial is scheduled for May 8, 2006, but
Klein-Becker has filed a motion to continue the trial date to
October 2006.
On July 13, 2004, we received a paragraph 4
Hatch-Waxman Act certification from Alcon, Inc. indicating that
Alcon had filed a New Drug Application with the FDA for a drug
containing brimonidine tartrate ophthalmic solution in a 0.15%
concentration. In the certification, Alcon contends that
U.S. Patent Nos. 5,424,078; 6,562,873; 6,627,210;
6,641,834; and 6,673,337, all of which are assigned to us or our
wholly-owned subsidiary, Allergan Sales, LLC, and are listed in
the Orange Book under
Alphagan®
P, are invalid and/or not infringed by the proposed Alcon
product. On August 24, 2004, we filed a complaint, entitled
Allergan, Inc. and Allergan Sales, LLC v. Alcon,
Inc., Alcon Laboratories, Inc., and Alcon Research, Ltd.,
against Alcon for patent infringement in the United States
District Court for the District of Delaware. On
September 3, 2004, Alcon filed an answer to the complaint
and a counterclaim against us. On September 23, 2004, we
filed a reply to Alcons counterclaim. On May 2, 2005,
Alcon filed a Motion for Summary Judgment of Non-Infringement of
U.S. Patent No. 6,673,337 and Invalidity of
U.S. Patent No. 6,641,834. The court took the Motion
for Summary Judgment under submission without oral argument. On
July 25, 2005, Alcon filed a motion for leave to amend its
answer to the complaint and counterclaim. On July 26, 2005,
the court adopted our proposed claim construction. On
December 8, 2005, the court denied Alcons Motion for
Summary Judgment. On January 17, 2006, the court denied
Alcons motion for leave to amend its answer to the
complaint and counterclaim. On January 31, 2006, Alcon
filed a motion for reargument or reconsideration of its motion
for leave to amend its answer to the complaint and counterclaim.
On February 14, 2006, the court denied Alcons motion.
Trial is scheduled for March 6, 2006. Pursuant to the
Hatch-Waxman Act, approval of Alcons generic New Drug
Application is stayed until the earlier of
(1) 30 months from the date of the paragraph 4
certification, or (2) a ruling in the patent infringement
litigation in Alcons favor.
On August 26, 2004, a complaint entitled Clayworth,
et al. v. Allergan, Inc., et al. was filed
in the Superior Court of the State of California for the County
of Alameda. The complaint, as amended, names us and 12 other
defendants and alleges unfair business practices based upon a
price fixing conspiracy in connection with the reimportation of
pharmaceuticals from Canada. The complaint seeks damages,
equitable relief, attorneys fees and costs. On
November 22, 2004, the pharmaceutical defendants jointly
filed a demurrer to the first amended complaint. On
February 4, 2005, the court issued an order sustaining the
pharmaceutical defendants demurrer and granting plaintiffs
leave to further amend the first amended complaint. On
February 22, 2005, the plaintiffs filed a second amended
complaint to which the pharmaceutical defendants filed a
demurrer. On April 19, 2005, the court sustained the
pharmaceutical defendants demurrer and granted the
plaintiffs leave to further amend the second amended complaint.
On May 6, 2005, the plaintiffs filed a third amended
complaint. On May 27, 2005, the pharmaceutical defendants
filed a demurrer. On July 1, 2005, the court overruled in
part and sustained without leave to amend in part the
pharmaceutical defendants demurrer, dismissing the portion
of plaintiffs third amended complaint alleging that the
pharmaceutical defendants violated Californias Unfair
Competition Law by charging plaintiffs more for pharmaceuticals
than they charged others outside of the United States for the
same pharmaceuticals. The court overruled the pharmaceutical
defendants demurrer with respect to plaintiffs claim
under the Cartwright Law that the pharmaceutical defendants
conspired to maintain high, non-competitive prices for
pharmaceuti-
31
cals in the United States and sought to restrict the importation
of lower-priced pharmaceuticals into the United States. The
pharmaceutical defendants response to the third amended
complaint was filed on July 15, 2005. Trial is scheduled
for September 25, 2006.
On May 24, 2005, after receiving paragraph 4
invalidity and noninfringement Hatch-Waxman Act certifications
from Apotex indicating that Apotex had filed an Abbreviated New
Drug Application with the FDA for a generic form of Acular
LS®,
we and Roche Palo Alto, LLC, formerly known as Syntex
(U.S.A.) LLC, the holder of the
Acular LS®
patent, filed a lawsuit entitled Roche Palo Alto LLC,
formerly known as Syntex (U.S.A.) LLC and Allergan, Inc. v.
Apotex, Inc., et al. in the United States District
Court for the Northern District of California. In the complaint,
we and Roche asked the court to find that the
Acular LS®
patent is valid, enforceable and infringed by Apotexs
proposed generic drug. On July 25, 2005, Apotex filed an
answer to the complaint and a counterclaim against us and Roche.
On August 26, 2005, we filed our response to Apotexs
counterclaim. On August 30, 2005, the court ordered this
case related to the action entitled Syntex (U.S.A.) LLC
and Allergan, Inc. v. Apotex, Inc., et al. noted
above.
We are involved in various other lawsuits and claims arising in
the ordinary course of business. These other matters are, in the
opinion of management, immaterial both individually and in the
aggregate with respect to our consolidated financial position,
liquidity or results of operations.
Because of the uncertainties related to the incurrence, amount
and range of loss on any pending litigation, investigation or
claim, management is currently unable to predict the ultimate
outcome of any litigation, investigation or claim, determine
whether a liability has been incurred or make an estimate of the
reasonably possible liability that could result from an
unfavorable outcome. We believe, however, that the liability, if
any, resulting from the aggregate amount of uninsured damages
for any outstanding litigation, investigation or claim will not
have a material adverse effect on our consolidated financial
position, liquidity or results of operations. However, an
adverse ruling in a patent infringement lawsuit involving us
could materially affect our ability to sell one or more of our
products or could result in additional competition. In view of
the unpredictable nature of such matters, we cannot provide any
assurances regarding the outcome of any litigation,
investigation or claim to which we are a party or the impact on
us of an adverse ruling in such matters.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
We did not submit any matter during the fourth quarter of the
fiscal year covered by this report to a vote of security
holders, through the solicitation of proxies or otherwise.
PART II
|
|
Item 5. |
Market For Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The following table shows the quarterly price range of our
common stock and the cash dividends declared per share of common
stock during the periods listed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Calendar Quarter |
|
Low |
|
High |
|
Div. |
|
Low |
|
High |
|
Div. |
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
69.60 |
|
|
$ |
81.16 |
|
|
$ |
0.10 |
|
|
$ |
75.65 |
|
|
$ |
90.21 |
|
|
$ |
0.09 |
|
Second
|
|
|
69.01 |
|
|
|
86.29 |
|
|
|
0.10 |
|
|
|
83.13 |
|
|
|
92.61 |
|
|
|
0.09 |
|
Third
|
|
|
83.36 |
|
|
|
95.43 |
|
|
|
0.10 |
|
|
|
69.05 |
|
|
|
90.36 |
|
|
|
0.09 |
|
Fourth
|
|
|
85.90 |
|
|
|
110.50 |
|
|
|
0.10 |
|
|
|
66.78 |
|
|
|
82.10 |
|
|
|
0.09 |
|
Our common stock is listed on the New York Stock Exchange and is
traded under the symbol AGN. In newspapers, stock
information is frequently listed as Alergn.
The approximate number of stockholders of record was 5,900 as of
February 8, 2006.
On January 31, 2006, our board of directors declared a cash
dividend of $0.10 per share, payable March 14, 2006 to
stockholders of record on February 17, 2006.
32
Securities Authorized for Issuance Under Equity Compensation
Plans
The information included under Item 12 of Part III of
this report is hereby incorporated by reference into this
Item 5 of Part II of this report.
Issuer Purchases of Equity Securities
The following table discloses the purchases of our equity
securities during the fourth fiscal quarter of 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number (or |
|
|
|
|
|
|
Shares Purchased |
|
Approximate Dollar |
|
|
Total Number |
|
|
|
as Part of Publicly |
|
Value) of Shares that may |
|
|
of Shares |
|
Average Price |
|
Announced Plans |
|
yet be Purchased Under |
Period |
|
Purchased(1) |
|
Paid per Share |
|
or Programs |
|
the Plans or Programs(2) |
|
|
|
|
|
|
|
|
|
October 1, 2005 to October 31, 2005
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
6,553,073 |
|
November 1, 2005 to November 30, 2005
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
7,403,091 |
|
December 1, 2005 to December 31, 2005
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
7,769,078 |
|
Total
|
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
N/A |
|
|
|
(1) |
The Company maintains an evergreen stock repurchase program,
which was first announced on September 28, 1993. Under the
stock repurchase program, the Company may maintain up to
9.2 million repurchased shares in its treasury account at
any one time. As of December 31, 2005, the Company held
approximately 1.4 million treasury shares under this
program. |
|
(2) |
The following share numbers reflect the maximum number of shares
that may be purchased under the Companys stock repurchase
program and are as of the end of each of the respective periods. |
33
|
|
Item 6. |
Selected Financial Data |
SELECTED CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales
|
|
$ |
2,319.2 |
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
|
$ |
1,385.0 |
|
|
$ |
1,142.1 |
|
Research service revenues (primarily from a related party
through April 16, 2001)
|
|
|
|
|
|
|
|
|
|
|
16.0 |
|
|
|
40.3 |
|
|
|
60.3 |
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
399.6 |
|
|
|
386.7 |
|
|
|
320.3 |
|
|
|
221.7 |
|
|
|
198.1 |
|
|
Cost of research services
|
|
|
|
|
|
|
|
|
|
|
14.5 |
|
|
|
36.6 |
|
|
|
56.1 |
|
|
Selling, general and administrative
|
|
|
913.9 |
|
|
|
778.9 |
|
|
|
697.2 |
|
|
|
623.8 |
|
|
|
481.0 |
|
|
Research and development
|
|
|
391.0 |
|
|
|
345.6 |
|
|
|
763.5 |
|
|
|
233.1 |
|
|
|
227.5 |
|
|
Technology fees from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
Legal settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118.7 |
|
|
|
|
|
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
43.8 |
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
|
62.4 |
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
570.9 |
|
|
|
527.4 |
|
|
|
(23.7 |
) |
|
|
129.0 |
|
|
|
242.1 |
|
Non-operating income (loss)
|
|
|
28.3 |
|
|
|
4.7 |
|
|
|
(5.8 |
) |
|
|
(39.2 |
) |
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before income taxes
and minority interest
|
|
|
599.2 |
|
|
|
532.1 |
|
|
|
(29.5 |
) |
|
|
89.8 |
|
|
|
260.3 |
|
Earnings (loss) from continuing operations
|
|
|
403.9 |
|
|
|
377.1 |
|
|
|
(52.5 |
) |
|
|
64.0 |
|
|
|
171.2 |
|
Earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
|
|
54.9 |
|
Net earnings (loss)
|
|
$ |
403.9 |
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
$ |
75.2 |
|
|
$ |
224.9 |
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
3.08 |
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
$ |
1.30 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.09 |
|
|
|
0.42 |
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
3.01 |
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
$ |
0.49 |
|
|
$ |
1.29 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.08 |
|
|
|
0.40 |
|
|
Cash dividends per share
|
|
$ |
0.40 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
1,825.6 |
|
|
$ |
1,376.0 |
|
|
$ |
928.2 |
|
|
$ |
1,200.2 |
|
|
$ |
1,114.8 |
|
Working capital
|
|
|
781.6 |
|
|
|
916.4 |
|
|
|
544.8 |
|
|
|
796.6 |
|
|
|
710.4 |
|
Total assets
|
|
|
2,850.5 |
|
|
|
2,257.0 |
|
|
|
1,754.9 |
|
|
|
1,806.6 |
|
|
|
2,046.2 |
|
Long-term debt
|
|
|
57.5 |
|
|
|
570.1 |
|
|
|
573.3 |
|
|
|
526.4 |
|
|
|
444.8 |
|
Total stockholders equity
|
|
|
1,566.9 |
|
|
|
1,116.2 |
|
|
|
718.6 |
|
|
|
808.3 |
|
|
|
977.4 |
|
The financial data above has been recast to reflect the results
of operations and financial positions of our ophthalmic surgical
and contact lens care businesses as a discontinued operation.
The results of operations for our discontinued operations
include allocations of certain Allergan expenses to those
operations. These amounts have been allocated on the basis that
is considered by management to reflect most fairly or reasonably
the utilization of the services provided to, or the benefit
obtained by, those operations.
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
This financial review presents our operating results for each of
the three years in the period ended December 31, 2005, and
our financial condition at December 31, 2005. Except for
the historical information contained herein, the following
discussion contains forward-looking statements which are subject
to known and unknown risks, uncertainties and other factors that
may cause our actual results to differ materially from those
expressed or implied by such forward-looking statements. We
discuss such risks, uncertainties and other factors throughout
this report and specifically under Item 1A. Risk
Factors of this report. In addition, the following review
should be read in connection with the information presented in
our consolidated financial statements and the related notes to
our consolidated financial statements.
34
Critical Accounting Policies
We believe that the estimates, assumptions and judgments
involved in the accounting policies described below have the
greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters,
actual results could differ from the estimates we use in
applying the critical accounting policies.
We recognize revenue from product sales when goods are shipped
and title and risk of loss transfer to the customer. We have a
policy to attempt to maintain average U.S. wholesaler
inventory levels of our products at an amount less than eight
weeks of our net sales. We generally offer cash discounts to
customers for the early payment of receivables. Those discounts
are recorded as a reduction of revenue and accounts receivable
in the same period that the related sale is recorded. The
amounts reserved for cash discounts were $1.8 million and
$1.3 million at December 31, 2005 and 2004,
respectively. Provisions for cash discounts deducted from
consolidated sales in 2005, 2004 and 2003 were
$26.6 million, $22.5 million and $20.0 million,
respectively. We permit returns of product from any product line
by any class of customer if such product is returned in a timely
manner, in good condition and from normal distribution channels.
Return policies in certain international markets provide for
more stringent guidelines in accordance with the terms of
contractual agreements with customers. Allowances for returns
are provided for based upon our historical patterns of returns
matched against the sales from which they originated, and
managements evaluation of specific factors that increase
the risk of returns. The amount of allowances for sales returns
accrued at December 31, 2005 and 2004 were
$5.1 million and $5.8 million, respectively.
Provisions for sales returns deducted from consolidated sales
were $30.6 million, $25.4 million and
$28.2 million in 2005, 2004 and 2003, respectively.
Historical allowances for cash discounts and product returns
have been within the amounts reserved or accrued, respectively.
Additionally, we participate in various managed care sales
rebate and other incentive programs, the largest of which
relates to Medicaid. Sales rebate and other incentive programs
also include chargebacks, which are contractual discounts given
primarily to federal government agencies, health maintenance
organizations, pharmacy benefits managers and group purchasing
organizations. Sales rebates and incentive accruals reduce
revenue in the same period that the related sale is recorded and
are included in Other accrued expenses in our
consolidated balance sheets. The amounts accrued for sales
rebates and other incentive programs at December 31, 2005
and 2004 were $71.9 million and $61.4 million,
respectively. The $10.5 million increase in the amount
accrued for sales rebates and other incentive programs is
primarily due to a difference in the timing of when payments
were made against accrued amounts at December 31, 2005
compared to December 31, 2004 and an increase in the ratio
of U.S. pharmaceutical product sales, principally eye care
pharmaceutical products, which are subject to such rebate and
incentive programs. Provisions for sales rebates and other
incentive programs deducted from consolidated sales were
$167.4 million, $144.7 million and $123.5 million
in 2005, 2004 and 2003, respectively. The increase in the
provision for sales rebates and other incentive programs during
2005 and 2004 compared to the corresponding prior year is
primarily due to an increase in the ratio of
U.S. pharmaceutical product sales, principally eye care
pharmaceutical products, which are subject to such rebates and
incentive programs. In addition, an increase in our published
list prices in the United States for pharmaceutical products
generally results in a higher ratio of provisions for sales
rebates and other incentive programs deducted from consolidated
sales. Our procedures for estimating amounts accrued for sales
rebates and other incentive programs at the end of any period
are based on available quantitative data and are supplemented by
managements judgment with respect to many factors,
including, but not limited to, current market place dynamics,
changes in contract terms, changes in sales trends, an
evaluation of current laws and regulations and product pricing.
Quantitatively, we use historical sales, product utilization and
rebate data and apply forecasting techniques in order to
estimate our liability amounts. Qualitatively, managements
judgment is applied to these items to modify, if appropriate,
the estimated liability amounts. There are inherent risks in
this process. For example, customers may not achieve assumed
utilization levels; customers may misreport their utilization to
us; and actual movements of the U.S. Consumer Price
Index Urban
(CPI-U), which affect
our rebate programs with U.S. federal and state
35
government agencies, may differ from those estimated. On a
quarterly basis, adjustments to our estimated liabilities for
sales rebates and other incentive programs related to sales made
in prior periods have not been material and have generally been
less than 0.5% of consolidated net sales. An adjustment to our
estimated liabilities of 0.5% of consolidated net sales on a
quarterly basis would result in an increase or decrease to net
sales and earnings before income taxes of approximately
$3 million to $4 million. The sensitivity of our
estimates can vary by program and type of customer.
Additionally, there is a significant time lag between the date
we determine the estimated liability and when we actually pay
the liability. Due to this time lag, we record adjustments to
our estimated liabilities over several periods, which can result
in a net increase to earnings or a net decrease to earnings in
those periods. Material differences may result in the amount of
revenue we recognize from product sales if the actual amount of
rebates and incentives differ materially from the amounts
estimated by management.
We recognize license fees as other income based on the facts and
circumstances of each licensing agreement. In general, we
recognize income upon the signing of a license agreement that
grants rights to products or technology to a third party if we
have no further obligation to provide products or services to
the third party after granting the license. We defer income
under license agreements when we have further obligations that
indicate that a separate earnings process has not culminated.
We sponsor various pension plans in the United States and abroad
in accordance with local laws and regulations. Our pension plans
in the United States account for a large majority of our pension
plans net periodic benefit costs and projected benefit
obligations. In connection with these plans, we use certain
actuarial assumptions to determine the plans net periodic
benefit costs and projected benefit obligations, the most
significant of which are the expected long-term rate of return
on assets and the discount rate.
Our assumption for the expected long-term rate of return on
assets in our U.S. pension plan for determining the net
periodic benefit cost is 8.25% for 2005, which is the same rate
used for 2004 and 2003. We determine, based upon recommendations
from our pension plans investment advisors, the expected
rate of return using a building block approach that considers
diversification and rebalancing for a long-term portfolio of
invested assets. Our investment advisors study historical market
returns and preserve long-term historical relationships between
equities and fixed income in a manner consistent with the
widely-accepted capital market principle that assets with higher
volatility generate a greater return over the long run. They
also evaluate market factors such as inflation and interest
rates before long-term capital market assumptions are
determined. The expected rate of return is applied to the
market-related value of plan assets. As a sensitivity measure,
the effect of a 0.25% decline in the rate of return on assets
assumption would increase our expected 2006 U.S. pre-tax
pension benefit cost by approximately $0.8 million.
The discount rate used to calculate our U.S. pension
benefit obligations at December 31, 2005 is 5.60%, which
represents a 0.35 percentage point decline from our
December 31, 2004 rate of 5.95%. We determine the discount
rate largely based upon an index of high-quality fixed income
investments (U.S. Moodys Aa Corporate Long Bond Yield
Average) and a constructed hypothetical portfolio of high
quality fixed income investments with maturities that mirror the
pension benefit obligations at the plans measurement date.
As a sensitivity measure, the effect of a 0.25% decline in the
discount rate assumption would increase our expected 2006
U.S. pre-tax pension benefit costs by approximately
$1.9 million and increase our U.S. pension plans
projected benefit obligations at December 31, 2005 by
approximately $15.7 million.
Income taxes are determined using an estimated annual effective
tax rate, which is generally less than the U.S. federal
statutory rate, primarily because of lower tax rates in certain
non-U.S. jurisdictions
and research and development, or R&D, tax credits available
in the United States. Our effective tax rate may be subject to
fluctuations during the fiscal year as new information is
obtained, which may affect the assumptions we use to estimate
our annual effective tax rate, including factors such as our mix
of pre-tax earnings in the various tax jurisdictions in which we
operate, valuation allowances against deferred tax assets,
reserves for tax contingen-
36
cies, utilization of R&D tax credits and changes in or
interpretation of tax laws in jurisdictions where we conduct
operations. We recognize deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of our assets and liabilities, along with net
operating loss and credit carryforwards. We record a valuation
allowance against our deferred tax assets to reduce the net
carrying value to an amount that we believe is more likely than
not to be realized. When we establish or reduce the valuation
allowance against our deferred tax assets, our income tax
expense will increase or decrease, respectively, in the period
such determination is made.
Valuation allowances against our deferred tax assets were
$44.1 million and $51.9 million at December 31,
2005 and 2004, respectively. Changes in the valuation allowances
are a component of the estimated annual effective tax rate. The
decrease in the amount of valuation allowances at
December 31, 2005 compared to December 31, 2004 is
primarily due to a decrease in the valuation allowance due to a
change in the estimate of the amount of realizable deferred tax
assets in Japan stemming from the recent licensing agreement
with GlaxoSmithKline, partially offset by an increase in the
valuation allowance related to deferred tax assets for certain
capitalized intangible assets. Material differences in the
estimated amount of valuation allowances may result in an
increase or decrease in the provision for income taxes if the
actual amounts for valuation allowances required against
deferred tax assets differ from the amounts estimated by us.
We have not provided for withholding and U.S. taxes for the
unremitted earnings of certain
non-U.S. subsidiaries
because we have currently reinvested these earnings indefinitely
in such operations. At December 31, 2005, we had
approximately $299.5 million in unremitted earnings outside
the United States for which withholding and U.S. taxes were
not provided. Tax expense would be incurred if these funds were
remitted to the United States. It is not practicable to estimate
the amount of the deferred tax liability on such unremitted
earnings. Upon remittance, certain foreign countries impose
withholding taxes that are then available, subject to certain
limitations, for use as credits against our U.S. tax
liability, if any.
During 2005, in connection with the American Jobs Creation Act
of 2004, or the Act, we repatriated $674.0 million in
extraordinary dividends, as defined by the Act, from unremitted
foreign earnings that were previously considered permanently
reinvested by certain
non-U.S. subsidiaries.
The $674.0 million amount of extraordinary dividends is the
qualified amount above a $53.4 million base amount
determined based on our historical repatriation levels, as
defined by the Act. The tax effect of the base amount of
dividends is included in our estimated annual effective tax
rate. Also during 2005, we decided to repatriate approximately
$85.8 million in additional dividends above the base and
extraordinary dividend amounts from prior and current
years unremitted foreign earnings that were previously
considered indefinitely reinvested. Based upon our repatriation
activities during 2005, we recorded estimated tax liabilities of
$29.9 million and $19.7 million associated with the
repatriation of the $674.0 million in extraordinary
dividends and the $85.8 million in additional dividends
above the base and extraordinary dividend amounts, respectively.
During 2005, we reduced our reserves for uncertain tax positions
and related provision for income taxes by $24.1 million
primarily due to a change in estimate resulting from the
resolution of several significant uncertain income tax audit
issues, including transfer prices, the deductibility of
transaction costs associated with the 2002 spin-off of AMO and
intangible asset issues related to certain assets of Allergan
Specialty Therapeutics, Inc. and Bardeen Sciences Company, LLC,
which we acquired in 2001 and 2003, respectively. The change in
estimate relates to tax years currently under examination or not
yet settled through expiry of the statute of limitations.
|
|
|
Purchase Price Allocation |
The allocation of purchase price for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the identifiable tangible and intangible
assets acquired, including in-process research and development,
and liabilities assumed based on their respective fair values.
Additionally, we must determine whether an acquired entity is
considered to be a business or a set of net assets, because a
portion of the purchase price can only be allocated to goodwill
in a business combination.
During 2003, we acquired Oculex Pharmaceuticals, Inc., or
Oculex, and Bardeen Sciences Company, LLC, or Bardeen, for
aggregate purchase prices of approximately $223.8 million
and $264.6 million,
37
respectively. The prices were allocated to identified assets
acquired and liabilities assumed based on their estimated fair
values as of the respective transaction dates. The Oculex
transaction was determined to be a business combination, while
the Bardeen transaction was considered to be an asset
acquisition and not a business combination. Accordingly, we have
provided pro forma financial information in our financial
statements to reflect the effect of the Oculex transaction on
our historical operating results, but have not done so for the
Bardeen transaction. See Note 3, Acquisitions,
in the notes to the consolidated financial statements listed
under Item 15(a) of Part IV of this report.
We determined that the assets acquired from Oculex and Bardeen
consisted principally of incomplete
in-process research and
development and that these projects had no alternative future
uses in their current state. We reached this conclusion based on
discussions with our business development and research and
development personnel, our review of long-range product plans
and our review of a valuation report prepared by an independent
valuation specialist. The valuation specialists report
reached a conclusion with regard to the fair value of the
in-process research and development assets in a manner
consistent with principles prescribed in the AICPA practice aid,
Assets Acquired in a Business Combination to Be Used in
Research and Development Activities: A Focus on Software,
Electronic Devices and Pharmaceutical Industries. In
connection with the acquisition of Oculex, we determined that
the assets acquired also included a proprietary technology drug
delivery platform which was separately valued and capitalized as
core technology. We reached this conclusion based on our
determination that the acquired technology had alternative
future uses in its current state. We believe the fair values
assigned to the assets acquired and liabilities assumed are
based on reasonable assumptions.
Operations
Headquartered in Irvine, California, we are a technology-driven,
global health care company that develops and commercializes
specialty pharmaceutical products for the ophthalmic,
neurological, dermatological and other specialty markets. We
employ approximately 5,055 persons around the world. We are
an innovative leader in therapeutic and
over-the-counter
products that are sold in more than 100 countries. Our
principal markets are the United States, Europe, Latin America
and Asia Pacific.
Results of Operations
We currently operate our business on the basis of a single
reportable segment specialty pharmaceuticals. We
produce a broad range of ophthalmic products for glaucoma
therapy, ocular inflammation, infection, allergy and dry eye;
skin care products for acne, psoriasis and other prescription
and over-the-counter
dermatological products; and
Botox®
for certain therapeutic and cosmetic indications. We provide
global marketing strategy teams to ensure development and
execution of a consistent marketing strategy for our products in
all geographic regions that share similar distribution channels
and customers.
Management evaluates its various global product portfolios on a
revenue basis, which is presented below. We also report sales
performance using the
non-GAAP financial
measure of constant currency sales. Constant currency sales
represent current period reported sales, adjusted for the
translation effect of changes in average foreign exchange rates
between the current period and the corresponding period in the
prior year. We calculate the currency effect by comparing
adjusted current period reported amounts, calculated using the
monthly average foreign exchange rates for the corresponding
period in the prior year, to the actual current period reported
amounts. We routinely evaluate our net sales performance at
constant currency so that sales results can be viewed without
the impact of changing foreign currency exchange rates, thereby
facilitating
period-to-period
comparisons of our sales. Generally, when the U.S. dollar
either strengthens or weakens against other currencies, the
growth at constant currency rates will be higher or lower,
respectively, than growth reported at actual exchange rates.
38
The following tables compare net sales by product line and
certain selected products for the years ended December 31,
2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
Change in Net Sales |
|
Percent Change in Net Sales |
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Total |
|
Performance |
|
Currency |
|
Total |
|
Performance |
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$ |
1,321.7 |
|
|
$ |
1,137.1 |
|
|
$ |
184.6 |
|
|
$ |
170.3 |
|
|
$ |
14.3 |
|
|
|
16.2 |
% |
|
|
15.0 |
% |
|
|
1.2 |
% |
Botox/Neuromodulator
|
|
|
830.9 |
|
|
|
705.1 |
|
|
|
125.8 |
|
|
|
118.1 |
|
|
|
7.7 |
|
|
|
17.8 |
% |
|
|
16.7 |
% |
|
|
1.1 |
% |
Skin Care
|
|
|
120.2 |
|
|
|
103.4 |
|
|
|
16.8 |
|
|
|
16.7 |
|
|
|
0.1 |
|
|
|
16.2 |
% |
|
|
16.2 |
% |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,272.8 |
|
|
|
1,945.6 |
|
|
|
327.2 |
|
|
|
305.1 |
|
|
|
22.1 |
|
|
|
16.8 |
% |
|
|
15.7 |
% |
|
|
1.1 |
% |
Other*
|
|
|
46.4 |
|
|
|
100.0 |
|
|
|
(53.6 |
) |
|
|
(53.8 |
) |
|
|
0.2 |
|
|
|
(53.6 |
)% |
|
|
(53.8 |
)% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
2,319.2 |
|
|
$ |
2,045.6 |
|
|
$ |
273.6 |
|
|
$ |
251.3 |
|
|
$ |
22.3 |
|
|
|
13.4 |
% |
|
|
12.3 |
% |
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
67.5 |
% |
|
|
69.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
32.5 |
% |
|
|
30.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$ |
277.2 |
|
|
$ |
268.9 |
|
|
$ |
8.3 |
|
|
$ |
6.1 |
|
|
$ |
2.2 |
|
|
|
3.1 |
% |
|
|
2.3 |
% |
|
|
0.8 |
% |
Lumigan
|
|
|
267.6 |
|
|
|
232.9 |
|
|
|
34.7 |
|
|
|
32.5 |
|
|
|
2.2 |
|
|
|
14.9 |
% |
|
|
13.9 |
% |
|
|
1.0 |
% |
Other Glaucoma
|
|
|
18.0 |
|
|
|
19.1 |
|
|
|
(1.1 |
) |
|
|
(1.6 |
) |
|
|
0.5 |
|
|
|
(5.9 |
)% |
|
|
(8.5 |
)% |
|
|
2.6 |
% |
Restasis
|
|
|
190.9 |
|
|
|
99.8 |
|
|
|
91.1 |
|
|
|
90.9 |
|
|
|
0.2 |
|
|
|
91.2 |
% |
|
|
91.0 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
Change in Net Sales |
|
Percent Change in Net Sales |
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
Total |
|
Performance |
|
Currency |
|
Total |
|
Performance |
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
Net Sales by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals
|
|
$ |
1,137.1 |
|
|
$ |
999.5 |
|
|
$ |
137.6 |
|
|
$ |
111.1 |
|
|
$ |
26.5 |
|
|
|
13.8 |
% |
|
|
11.1 |
% |
|
|
2.7 |
% |
Botox/Neuromodulator
|
|
|
705.1 |
|
|
|
563.9 |
|
|
|
141.2 |
|
|
|
126.2 |
|
|
|
15.0 |
|
|
|
25.0 |
% |
|
|
22.4 |
% |
|
|
2.7 |
% |
Skin Care
|
|
|
103.4 |
|
|
|
109.3 |
|
|
|
(5.9 |
) |
|
|
(6.0 |
) |
|
|
0.1 |
|
|
|
(5.4 |
)% |
|
|
(5.5 |
)% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,945.6 |
|
|
|
1,672.7 |
|
|
|
272.9 |
|
|
|
231.3 |
|
|
|
41.6 |
|
|
|
16.3 |
% |
|
|
13.8 |
% |
|
|
2.5 |
% |
Other*
|
|
|
100.0 |
|
|
|
82.7 |
|
|
|
17.3 |
|
|
|
17.0 |
|
|
|
0.3 |
|
|
|
20.9 |
% |
|
|
20.6 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
|
$ |
290.2 |
|
|
$ |
248.3 |
|
|
$ |
41.9 |
|
|
|
16.5 |
% |
|
|
14.1 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
69.1 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
30.9 |
% |
|
|
29.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and Combigan
|
|
$ |
268.9 |
|
|
$ |
286.8 |
|
|
$ |
(17.9 |
) |
|
$ |
(23.2 |
) |
|
$ |
5.3 |
|
|
|
(6.2 |
)% |
|
|
(8.1 |
)% |
|
|
1.8 |
% |
Lumigan
|
|
|
232.9 |
|
|
|
181.3 |
|
|
|
51.6 |
|
|
|
45.7 |
|
|
|
5.9 |
|
|
|
28.5 |
% |
|
|
25.2 |
% |
|
|
3.3 |
% |
Other Glaucoma
|
|
|
19.1 |
|
|
|
22.7 |
|
|
|
(3.6 |
) |
|
|
(4.8 |
) |
|
|
1.2 |
|
|
|
(15.9 |
)% |
|
|
(21.1 |
)% |
|
|
5.3 |
% |
Restasis
|
|
|
99.8 |
|
|
|
38.3 |
|
|
|
61.5 |
|
|
|
61.5 |
|
|
|
|
|
|
|
160.6 |
% |
|
|
160.6 |
% |
|
|
n/a |
|
|
|
* |
Other sales primarily consist of sales to Advanced Medical
Optics, Inc., or AMO, pursuant to a manufacturing and supply
agreement entered into as part of the AMO spin-off that
terminated as scheduled in June 2005. |
The $22.3 million increase in net sales from the impact of
foreign currency changes in 2005 compared to 2004 was due
primarily to the strengthening of the Brazilian real, Canadian
dollar, British pound, Australian
39
dollar, Mexican peso, the euro and other Latin American
currencies compared to the U.S. dollar. The
$41.9 million increase in net sales from the impact of
foreign currency changes in 2004 compared to 2003 was due
primarily to the strengthening of the euro, Japanese yen,
Australian dollar, British pound, Canadian dollar and Brazilian
real compared to the U.S. dollar.
The $273.6 million increase in net sales in 2005 compared
to 2004 was primarily the result of increases in sales of our
eye care pharmaceuticals,
Botox®
and skin care product lines, partially offset by a decrease in
other non-pharmaceutical sales. Eye care pharmaceuticals sales
increased in 2005 compared to 2004 primarily because of strong
growth in sales in the United States of
Restasis®,
our drug for the treatment of chronic dry eye disease, an
increase in sales of our glaucoma drug
Lumigan®,
growth in sales of our
Alphagan®
franchise, primarily from our international operations and new
product sales from
Combigantm
which is in the launch phase in Canada and Brazil, a strong
increase in sales of eye drop products, primarily
Refresh®,
growth in sales of
Zymar®,
a newer anti-infective, an increase in sales of
Elestat®,
our topical antihistamine used for the prevention of itching
associated with allergic conjunctivitis, and an increase in
sales of
Acular LS®,
our newer non-steroidal
anti-inflammatory. This increase in sales was partially offset
by a decrease in sales of
Ocuflox®,
our older generation anti-infective that is experiencing generic
competition in the United States,
Acular®,
our older generation anti-inflammatory, and other glaucoma
products. We continue to believe that generic formulations of
Alphagan®
will have a negative impact on future net sales of our
Alphagan®
franchise. We estimate the majority of the change in our eye
care pharmaceutical sales was due to mix and volume changes;
however, we increased the published list prices for certain eye
care pharmaceutical products in the United States, ranging from
three and one-half percent to nine percent, effective
February 5, 2005. We increased the published U.S. list
price for
Lumigan®
by seven percent,
Restasis®
by three and one-half percent and
Alphagan® P
by five percent. This increase in prices had a subsequent
positive net effect on our U.S. sales during 2005 compared
to 2004, but the actual net effect is difficult to determine due
to the various managed care sales rebate and other incentive
programs in which we participate. Wholesaler buying patterns and
the change in dollar value of prescription product mix also
affected our reported net sales dollars. We have a policy to
attempt to maintain average U.S. wholesaler inventory
levels of our products at an amount less than eight weeks of our
net sales. At December 31, 2005, based on available
external and internal information, we believe the amount of
average U.S. wholesaler inventories of our products was
near the lower end of our stated policy levels.
Botox®
sales increased in 2005 compared to 2004 primarily as a result
of strong growth in demand in the United States and in
international markets for both therapeutic and cosmetic uses.
Based on internal information, we estimate that in 2005
Botox®
therapeutic sales accounted for approximately 57% of total
consolidated
Botox®
net sales and cosmetic sales accounted for approximately 43% of
total consolidated
Botox®
net sales. Therapeutic and cosmetic net sales grew approximately
16% and 21%, respectively, in 2005 compared to 2004. Effective
January 4, 2005, we increased the published price for
Botox®
and
Botox®
Cosmetic in the United States by approximately four percent,
which we believe had a positive effect on our U.S. sales
growth in 2005. International
Botox®
sales also benefited from strong sales growth in Europe,
especially in Germany, the United Kingdom, Spain, Italy and the
Nordics, growth in sales in smaller distribution markets
serviced by our European export sales group, and an increase in
sales in Canada, Mexico, Japan and Australia. We believe our
worldwide market share for neuromodulators, including
Botox®,
is currently over 85%.
Skin care sales increased in 2005 compared to 2004 primarily due
to higher sales of
Tazorac®
in the United States and new product sales generated from
Prevagetm
antioxidant cream, which we launched in January 2005. Net sales
of
Tazorac®,
Zorac®
and
Avage®
increased $11.8 million, or 15.7%, to $86.9 million in
2005 compared to $75.1 million in 2004. We increased the
published U.S. list price for
Tazorac®
by nine percent effective February 5, 2005.
The $290.2 million increase in net sales in 2004 compared
to 2003 was primarily the result of an increase in sales of our
eye care pharmaceuticals and
Botox®
product lines and an increase in other non-pharmaceutical sales,
partially offset by a decline in sales of our skin care
products. Eye care pharmaceuticals sales increased in 2004
compared to 2003 primarily because of strong growth in sales of
our glaucoma drug,
Lumigan®,
especially in the U.S. and Europe, growth in sales of
Restasis®,
our drug for the treatment of chronic dry eye
40
disease, growth in sales of eye drop products, primarily
Refresh®,
an increase in sales of
Zymar®,
a newer anti-infective, new product sales generated from
Elestattm,
our topical antihistamine used for the prevention of itching
associated with allergic conjunctivitis that was launched in the
United States in the first quarter of 2004 by our co-promotion
partner, Inspire Pharmaceuticals, Inc., and an increase in sales
of
Acular LS®,
our newer generation non-steroidal anti-inflammatory. This
increase in sales was partially offset by a decrease in sales of
Ocuflox®
and
Acular®.
Our
Alphagan®
franchise sales also decreased in 2004 compared to 2003 due to a
general decline in U.S. wholesaler demand for
Alphagan® P,
market share erosion from generic
Alphagan®
competition and an increase in the ratio of
Alphagan® P
sales subject to Medicaid rebates in the United States. We
estimate the majority of the change in our eye care
pharmaceutical sales was due to mix and volume changes; however,
we increased the published list prices for certain eye care
pharmaceutical products in the United States, ranging from zero
to nine percent, effective January 10, 2004. We increased
the published U.S. list price for
Lumigan®
by five percent, and we left the price of
Restasis®
unchanged as of the same effective date. On May 29, 2004,
we increased the published U.S. list price for
Restasis®
by five percent. This increase in prices had a subsequent
positive net effect on our U.S. sales, but the actual net
effect is difficult to determine due to the various managed care
sales rebate and other incentive programs in which we
participate. Wholesaler buying patterns and the change in dollar
value of prescription product mix also affected our reported net
sales dollars. During 2004, we had a policy to attempt to
maintain average U.S. wholesaler inventory levels of our
products at an amount between one to two months of our net
sales. At December 31, 2004, based on available external
and internal information, we believe the amount of average
U.S. wholesaler inventories of our products was below our
stated policy levels.
Botox®
sales increased in 2004 compared to 2003 primarily as a result
of strong growth in demand in the United States and
international markets for both therapeutic and cosmetic uses.
Based on internal information, we estimate that in 2004
Botox®
therapeutic sales accounted for approximately 58% of total
consolidated
Botox®
net sales and cosmetic sales accounted for approximately 42% of
total consolidated
Botox®
net sales. Therapeutic and cosmetic net sales grew approximately
20% and 30%, respectively, in 2004 compared to 2003. Effective
December 22, 2003, we increased the published list price
for
Botox®
and
Botox®
Cosmetic in the United States by approximately seven percent,
which we believe had a corresponding positive effect on our
U.S. sales growth in 2004. International
Botox®
sales also benefited from strong sales growth in Europe,
especially in France, Spain and Italy, as a result of the March
2003 launch in France of
Vistabel®
and the second quarter 2004 launches of
Vistabel®
in Spain and certain Scandinavian countries and
Vistabextm
in Italy, as well as an increase in sales of
Botox®
in smaller distributor markets serviced by our European export
sales group.
Vistabel®
and
Vistabextm
are the trade names for
Botox®
Cosmetic in Europe and Italy, respectively. We believe our
worldwide market share as of December 31, 2004 for
neuromodulators, including
Botox®,
was over 85%.
Skin care sales declined in 2004 compared to 2003 primarily due
to a decrease in sales of
Tazorac®
in the United States, where it is FDA approved to treat both
psoriasis and acne, and lower sales of
Avage®,
which we launched in the U.S. in the first quarter of 2003.
Tazorac®
sales declined primarily due to excess in-channel inventory at
the end of 2003, which we believe was principally at the retail
pharmacy level. This type of excess in-channel inventory is
difficult to detect from all sources of available market data.
We increased the published U.S. list price for
Tazorac®
and
Avage®
by nine percent effective January 10, 2004 and by an
additional five percent effective July 31, 2004.
The percentage of U.S. sales in 2005 as a percentage of
total product net sales declined 1.6 percentage points to
67.5% compared to U.S. sales of 69.1% in 2004, due
primarily to a decrease in U.S. other
non-pharmaceutical
sales and an increase in international
Botox®
and eye care pharmaceutical sales, principally in Europe, as a
percentage of total product net sales. The percentage of
U.S. sales in 2004 as a percentage of total product net
sales declined 1.3 percentage points to 69.1% compared to
U.S. sales of 70.4% in 2003, due primarily to an increase
in international eye care pharmaceutical sales, principally in
Europe and Asia Pacific, as a percentage of total product net
sales, and a decrease in U.S. sales of skin care products,
partially offset by an increase in U.S. sales of
Botox®
as a percentage of total product net sales.
41
The following table sets forth the relationship to sales of
various income statement items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Product net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales
|
|
|
17.2 |
|
|
|
18.9 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
|
82.8 |
|
|
|
81.1 |
|
|
|
81.8 |
|
Research services margin
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Other operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
39.4 |
|
|
|
38.1 |
|
|
|
39.7 |
|
|
Research and development
|
|
|
16.9 |
|
|
|
16.9 |
|
|
|
43.5 |
|
|
Restructuring charge (reversal), net
|
|
|
1.9 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
24.6 |
|
|
|
25.8 |
|
|
|
(1.3 |
) |
Other, net
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes and minority interest
|
|
|
25.8 |
% |
|
|
26.0 |
% |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
17.4 |
% |
|
|
18.4 |
% |
|
|
(3.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross margin percentage increased by 1.7 percentage
points to 82.8% in 2005 compared to 81.1% in 2004 and decreased
by 0.7 percentage points from 81.8% in 2003 to 81.1% in
2004. Our gross margin percentage increased in 2005 compared to
2004 primarily as a result of the $53.6 million decrease in
other
non-pharmaceutical
sales, primarily contract manufacturing sales, which have a
significantly lower gross margin percentage than our
pharmaceutical sales. Pharmaceutical sales increased by
$327.2 million in 2005 compared to 2004. This included a
small increase in the percentage mix of
Botox®
net sales as a percentage of total net sales, which generally
have a higher gross margin percentage than our other
pharmaceutical product lines. The increase in gross margin
percentage in 2005 was partially offset by a small decrease in
the gross margin percentage of our eye care pharmaceuticals,
Botox®
and skin care product lines. The gross margin percentage for eye
care pharmaceuticals declined slightly in 2005 compared to 2004
due primarily to an increase in the mix of international sales,
which generally have a lower gross margin percentage than
U.S. sales, a higher ratio of U.S. sales subject to
sales rebates and other incentive programs and a negative impact
from renegotiating our distribution services arrangements with
our major U.S. wholesalers during 2005. The small decline
in gross margin percentage for our
Botox®
product line in 2005 compared to 2004 was due primarily to an
increase in the mix of international sales, which generally have
a lower gross margin percentage than
U.S. Botox®
net sales, partially offset by the published price increase in
January 2005 for
Botox®
and
Botox®
Cosmetic in the United States. The decline in gross margin
percentage for skin care net sales in 2005 compared to 2004 is
primarily due to new product sales of
Prevagetm,
which have a lower gross margin percentage than our other
prescription skin care products. Gross margin in dollars
increased in 2005 compared to 2004 by $260.7 million, or
15.7%, as a result of the 13.4% increase in net sales and
the 1.7 percentage point increase in gross margin
percentage.
Our gross margin percentage decreased in 2004 compared to 2003
primarily as a result of a decrease in gross margin percentage
for eye care pharmaceuticals, the
Botox®
product line and skin care products, partially offset by an
increase in gross margin percentage for contract manufacturing
sales to AMO and an increase in the mix of
Botox®
sales. Net sales of
Botox®,
which generally have a higher gross margin percentage than our
other pharmaceutical product lines, represented a greater
percentage of 2004 net sales compared to 2003. The gross
margin percentage for eye care pharmaceuticals declined in 2004
compared to 2003 due to an increase in the percentage of net
sales derived from international sales, which generally have a
lower gross margin percentage than U.S. sales, a higher
ratio of U.S. sales subject to sales rebates and other
42
incentive programs, especially Medicaid, and products with
higher royalty rates payable to third parties. The gross margin
percentage for our
Botox®
product line experienced a small decline in 2004 compared to
2003 due primarily to lower gross margins in Latin America
resulting from less favorable foreign exchange transactions that
affected cost of sales in 2004 compared to 2003. The gross
margin percentage for contract manufacturing sales improved
primarily due to an increase in U.S. dollar denominated
pricing allowed under the manufacturing and supply agreement
with AMO at the beginning of our 2004 fiscal year and certain
annual contract manufacturing cost recoveries allowed under the
manufacturing and supply agreement with AMO.
We have historically recognized research service revenues and
costs associated with various contract research and development
arrangements. Research service revenues and costs declined in
2004 compared to 2003 as a result of our acquisition of Bardeen
in 2003. Prior to the Bardeen acquisition, we performed research
and development services on compounds owned by Bardeen pursuant
to a research and development services agreement between us and
Bardeen. Since May 16, 2003, we have not been a party to
any contract research and development arrangements similar to
those previously reported. See Note 3,
Acquisitions, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report for further disclosure regarding
research service revenues and related research costs associated
with our research and development services agreements with
Bardeen.
|
|
|
Selling, General and Administrative |
Selling, general and administrative, or SG&A, expenses
increased 17.3% in 2005 to $913.9 million, or 39.4% of net
sales, compared to $778.9 million, or 38.1% of net sales,
in 2004 and by 11.7% in 2004 to $778.9 million, or 38.1% of
net sales, compared to $697.2 million, or 39.7% of net
sales, in 2003. SG&A expenses increased $135.0 million
in 2005 compared to 2004. The increase in SG&A expenses in
2005 compared to 2004 was primarily a result of an increase in
promotion costs associated with
direct-to-consumer
advertising in the United States for
Restasis®,
Botox®
Cosmetic and to a lesser extent the hyperhidrosis indication for
Botox®,
an increase in selling expenses, principally personnel costs,
and marketing expenses supporting the increase in consolidated
sales, especially for
Restasis®,
Botox®
and
Botox®
Cosmetic, a small increase in costs of providing product
samples, and higher general and administrative expenses,
primarily incentive compensation, legal costs, information
services, corporate development expenses and charitable
donations. We made a $2.0 million contribution to the
Allergan Foundation in the third fiscal quarter of 2005.
SG&A expenses also increased due to an increase in
co-promotion costs related to sales of
Elestat®,
costs associated with expanding our
Botox®
sales force in Europe and our eye care pharmaceuticals and
Botox®
sales forces in the United States, and the non-recurrence of a
favorable settlement of a patent dispute amounting to
$2.4 million in the first quarter of 2004. SG&A
expenses were also negatively impacted in 2005 by implementation
and transition related expenses and duplicate operating expenses
associated with the restructuring and streamlining of our
European operations, which totaled $3.8 million, and by an
increase in the translated U.S. dollar value of foreign
currency denominated expenses, especially in Europe and Latin
America. This increase in SG&A expenses during 2005 compared
to 2004 was partially offset by a $7.9 million pre-tax gain
on the sale of our contact lens care and surgical products
distribution business in India to a subsidiary of AMO, a
$5.7 million pre-tax gain on the sale of assets primarily
used for contract manufacturing and the former distribution of
AMO related products at our manufacturing facility in Ireland
and $7.6 million of reimbursement income earned from
services provided in connection with contractual agreements
related to the development of
Posurdex®
for the ophthalmic specialty market in Japan and the development
and promotion of
Botox®
in Japan and China.
SG&A expenses increased $81.7 million in 2004 compared
to 2003. The increase in SG&A expenses in 2004 compared to
2003 was primarily a result of higher selling and marketing
expenses, principally personnel costs, supporting the increase
in consolidated sales, especially for
Botox®,
Restasis®,
Lumigan®
and
Zymar®
in the United States and
Botox®,
Vistabel®,
Vistabextm
and
Lumigan®
sales in Europe, an increase in promotion costs primarily
associated with
direct-to-consumer
advertising for
Restasis®
in the United States, an increase
43
in co-promotion costs related to sales of
Elestattm,
and higher general and administrative expenses, primarily
corporate insurance, Sarbanes-Oxley compliance, personnel and
facilities costs. These increases were partially offset by a
favorable $2.4 million settlement during the first quarter
of 2004 relating to a patent dispute covering the use of
botulinum toxin type B for cervical dystonia and higher
miscellaneous co-promotion and royalty income. SG&A expenses
in 2004 were also negatively impacted by an increase in the
translated U.S. dollar value of foreign currency
denominated expenses, especially in Europe, compared to the same
periods in 2003.
As a percentage of net sales, SG&A expenses increased in
2005 compared to 2004 due primarily to higher promotion and
marketing expenses, and general and administrative expenses as a
percentage of net sales, partially offset by lower selling
expenses, higher miscellaneous operating income and the pre-tax
gains from the sale of assets as a percentage of net sales.
SG&A expenses as a percentage of net sales declined in 2004
compared to 2003, due primarily to lower promotion, product
samples and marketing expenses, as a percentage of net sales,
despite the aggregate increase in expense dollars. General and
administrative expenses and selling expenses as a percentage of
net sales were approximately the same in 2004 compared to 2003.
Based on the achievement of actual 2005 performance metrics as
measured against pre-established performance targets specified
in our 2005 Management Bonus Plan, approximately 300 of our
participating 8E employees and above became eligible to
receive grants in February 2006 of service-vested restricted
stock and/or restricted stock units of our Company, each
generally with two year cliff vesting requirements from the date
of grant. On February 2, 2006, we granted a total of
52,599 shares of restricted stock and restricted stock
units with a fair value of $5.9 million to the eligible
employees. We recognized estimated compensation costs of
$1.9 million in 2005 related to these restricted stock and
restricted unit grants, and we expect to amortize the remaining
fair value of $4.0 million over the requisite future
service period.
Research and development expenses increased in 2005 by
$45.4 million to $391.0 million, or 16.9% of net
sales, compared to $345.6 million, or 16.9% of net sales,
in 2004. Research and development expenses decreased in 2004 by
$417.9 million to $345.6 million, or 16.9% of net
sales, compared to $763.5 million, or 43.5% of net sales,
in 2003. Research and development expenses do not include
research and development spending performed under contract with
Bardeen in 2003. See Note 3, Acquisitions, in
the notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report. Research and
development expenses in 2003 include charges totaling
$458.0 million related to acquired in-process research and
development assets associated with the 2003 purchases of Bardeen
and Oculex, which we determined were not yet complete and had no
alternative future uses in their current state. A further
discussion of the acquisitions of Bardeen and Oculex is provided
under Liquidity and Capital Resources Bardeen
Sciences Company, LLC and Oculex Pharmaceuticals, Inc. and
Note 3, Acquisitions, in the notes to the
consolidated financial statements listed under Item 15(a)
of Part IV of this report. Excluding the effect of the
$458.0 million
in-process research and
development charges in 2003, research and development spending
increased in 2004 by $40.1 million to $345.6 million,
or 16.9% of net sales, compared to $305.5 million, or 17.4%
of net sales, in 2003.
Research and development spending increased in 2005 compared to
2004 primarily as a result of higher rates of investment in our
eye care pharmaceuticals and
Botox®
product lines and new technologies, partially offset by lower
spending for our skin care product line. Spending increases in
2005 compared to 2004 were primarily driven by an increase in
clinical trial costs associated with our
Posurdex®
technology and certain
Botox®
indications for overactive bladder and migraine headache. Also
included in our spending for research and development in 2005 is
$7.4 million in costs associated with two new third party
technology license and development agreements associated with
in-process technologies and $3.0 million related to the
buy-out of a license agreement with Johns Hopkins University
associated with ongoing
Botox®
research activities. Research and development spending increased
in 2004 compared to 2003, excluding the effect of the in-process
research and development charges in 2003, primarily as a result
of higher rates of investment in our eye care pharmaceuticals
and
Botox®
product lines and new technologies, partially offset by a
decline in spending for our skin care product line. Research and
development spending in 2004 compared to 2003
44
increased most significantly in eye care pharmaceuticals due to
increased spending for technologies not currently commercialized
by us, including technologies acquired in 2003 from the
acquisitions of Oculex and Bardeen.
Restructuring Charges and Transition/Duplicate Operating
Expenses
|
|
|
Restructuring and Streamlining of Operations in
Japan |
On September 30, 2005 we entered into a long-term agreement
with GlaxoSmithKline (GSK) to develop and promote
Botox®
in Japan and China. Under the terms of this agreement, we
licensed to GSK all clinical development and commercial rights
to
Botox®
in Japan and China. As a result of entering into this agreement,
we initiated a plan in October 2005 to restructure and
streamline our operations in Japan. The restructuring seeks to
optimize the efficiencies of a third party license and
distribution business model and align our operations in Japan
with our reduced role in research and development and
commercialization activities under the agreement with GSK.
We have incurred, and anticipate that we will continue to incur,
restructuring charges relating to one-time termination benefits,
contract termination costs and other asset-related expenses in
connection with the restructuring. We currently estimate that
the pre-tax charges resulting from the restructuring will be
between $3.0 million and $5.0 million. We began to
incur these amounts in the fourth quarter of 2005 and expect to
continue to incur them up through and including the second
quarter of 2006. Substantially all of the pre-tax charges are
expected to be cash expenditures.
During the fourth quarter of 2005, we recorded pre-tax
restructuring charges of $2.3 million. The restructuring
charges primarily consist of one-time termination benefits,
contract termination costs and other asset-related expenses.
Cumulative charges for employee severance as shown in the table
below relate to 65 employees of which 55 were severed as of
December 31, 2005.
The following table presents the cumulative restructuring
activities through December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2005
|
|
$ |
2.0 |
|
|
$ |
0.3 |
|
|
$ |
2.3 |
|
Spending
|
|
|
(1.3 |
) |
|
|
(0.2 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
0.7 |
|
|
$ |
0.1 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2005 is comprised of
accrued one-time termination benefits and lease termination
charges.
|
|
|
Restructuring and Streamlining of European
Operations |
Effective January 2005, our Board of Directors approved the
initiation and implementation of a restructuring of certain
activities related to our European operations. The restructuring
seeks to optimize operations, improve resource allocation and
create a scalable, lower cost and more efficient operating model
for our European research and development (R&D) and
commercial activities. Specifically, the restructuring involves
moving key European R&D and select commercial functions from
our Mougins, France and other European locations to our Irvine,
California, High Wycombe, U.K. and Dublin, Ireland facilities
and streamlining functions in our European management services
group.
We have incurred, and anticipate that we will continue to incur,
restructuring charges and charges relating to severance,
relocation and one-time termination benefits, payments to public
employment and training programs, transition and duplicate
operating expenses, contract termination costs and capital and
other asset-related expenses in connection with the
restructuring. We currently estimate that the pre-tax charges
resulting from the restructuring, including transition and
duplicate operating expenses, will be between $46 million
and $51 million and capital expenditures will be between
$3 million and $4 million. Of the total
45
amount of pre-tax charges and capital expenditures,
approximately $43 million to $48 million are expected
to be cash expenditures.
The foregoing estimates are based on assumptions relating to,
among other things, a reduction of approximately 155 positions,
principally R&D and selling, general and administrative
positions in the affected European locations. These workforce
reduction activities began in the first quarter of 2005 and are
expected to be substantially completed by the close of the
second quarter of 2006. Charges associated with the workforce
reduction, including severance, relocation and one-time
termination benefits, and payments to public employment and
training programs, are currently expected to total approximately
$30 million to $31 million.
Estimated charges include approximately $11 million to
$13 million for contract and lease termination costs and
asset write-offs (primarily for accelerated amortization related
to leasehold improvements in facilities to be exited) and a loss
on the possible sale of our Mougins facility. We began to record
these costs in the fourth quarter of 2005 and expect them to
continue up through and including the second quarter of 2006.
Estimated transition related expenses include, among other
things, legal, consulting, recruiting, information system
implementation costs and taxes. We also expect to incur
duplicate operating expenses during the transition period to
ensure that job knowledge and skills are properly transferred to
new employees. Transition and duplicate operating expenses are
currently estimated to total approximately $5 million to
$7 million. We began to record these costs in the first
quarter of 2005 and expect them to continue up through and
including the second quarter of 2006.
We expect to incur additional capital expenditures for leasehold
improvements (primarily at a new facility in the United Kingdom
to accommodate increased headcount). These capital expenditures
are currently estimated to be between approximately
$3 million and $4 million. We began to record these
expenditures in the third quarter of 2005 and expect them to
continue up through and including the second quarter of 2006.
During the year ended December 31, 2005, we recorded
pre-tax restructuring charges of $28.9 million related to
the restructuring of our European operations. The restructuring
charges primarily consist of employee severance, one-time
termination benefits, employee relocation and other costs. The
following table presents the cumulative restructuring activities
through December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2005
|
|
$ |
25.9 |
|
|
$ |
3.0 |
|
|
$ |
28.9 |
|
Assets written off
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Spending
|
|
|
(10.7 |
) |
|
|
(2.8 |
) |
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
15.2 |
|
|
$ |
|
|
|
$ |
15.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance in the preceding table relates to
155 employees, of which 67 were severed as of
December 31, 2005. Employee severance charges were based on
social plans in France and Italy, and our severance practices
for employees in the other affected European countries. During
2005, we also recorded $5.6 million of transition/duplicate
operating expenses associated with the European restructuring
activities. Transition/duplicate operating expenses consisted
primarily of salaries, travel, communications, recruitment and
consulting costs. Transition/duplicate operating expenses of
$0.3 million in cost of sales, $3.8 million in
selling, general and administrative expenses and
$1.5 million in research and development expenses have been
included in our consolidated statements of operations for the
year ended December 31, 2005.
|
|
|
Termination of Manufacturing and Supply Agreement with
Advanced Medical Optics |
In October 2004, our Board of Directors approved certain
restructuring activities related to the termination in June 2005
of our manufacturing and supply agreement with AMO. Under the
manufacturing and supply agreement, which was entered into in
connection with the AMO spin-off, we agreed to
46
manufacture certain contact lens care products and VITRAX, a
surgical viscoelastic, for AMO for a period of up to three years
ending in June 2005. As part of the termination of the
manufacturing and supply agreement, we eliminated certain
manufacturing positions at our Westport, Ireland; Waco, Texas;
and Guarulhos, Brazil manufacturing facilities.
As of December 31, 2005, we recorded cumulative pre-tax
restructuring charges of $21.6 million related to the
termination of the manufacturing and supply agreement. These
charges primarily include statutory severance and one-time
termination benefits related to the reduction in our workforce
of 323 employees and the write-off of assets previously used for
contract manufacturing. The pre-tax charges are net of tax
credits received under qualifying government-sponsored
employment programs.
As of December 31, 2005, we had completed substantially all
activities related to the termination of the manufacturing and
supply agreement. We expect to record an additional
$2.0 million to $3.0 million in pre-tax restructuring
charges during the first three quarters of 2006 to complete the
refurbishment of facilities previously used for contract
manufacturing. Approximately $21.0 million of the total
restructuring charges are expected to be cash expenditures.
The following table presents the cumulative restructuring
activities through December 31, 2005 resulting from the
scheduled termination of the manufacturing and supply agreement
with AMO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2004
|
|
$ |
7.1 |
|
|
|
|
|
|
$ |
7.1 |
|
Spending
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
7.0 |
|
|
|
|
|
|
|
7.0 |
|
Net charge during 2005
|
|
|
11.5 |
|
|
|
3.0 |
|
|
|
14.5 |
|
Assets written off
|
|
|
|
|
|
|
(2.4 |
) |
|
|
(2.4 |
) |
Spending (net of employment tax credits received)
|
|
|
(18.4 |
) |
|
|
(0.6 |
) |
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2005 is comprised of
accrued one-time termination benefits of $0.1 million.
Included in other costs within the table above is
$0.2 million of inventory write-offs that have been
recorded as a component of Cost of sales in the
consolidated statements of operations.
During the year ended December 31, 2005, we reduced by
$1.6 million the remaining balance of other accrued costs
associated with restructuring costs and asset write-offs
previously recorded in connection with the spin-off of AMO in
2002. This reduction in other accrued costs was included in
Restructuring charge (reversal), net for the year
ended December 31, 2005. At December 31, 2005, there
were no remaining accrued costs associated with the 2002
spin-off of AMO.
Our operating income was $570.9 million, or 24.6% of
product net sales in 2005, compared to operating income of
$527.4 million, or 25.8% of product net sales in 2004, and
an operating loss of $23.7 million, or (1.3)% of product
net sales in 2003. The $43.5 million increase in operating
income in 2005 compared to 2004 was due primarily to the
$260.7 million increase in gross margin, partially offset
by the $135.0 million increase in SG&A expenses, the
$45.4 million increase in research and development expenses
and the $36.8 million increase in restructuring charges.
The $551.1 million increase in operating income in 2004
compared to 2003 was due primarily to the $223.8 million
increase in gross margin and the $417.9 million decrease in
research and development expenses, partially offset by the
increase in SG&A expenses of $81.7 million and an
increase in restructuring charges of $7.4 million.
47
|
|
|
Non-Operating
Income and Expenses |
Total net non-operating income in 2005 was $28.3 million
compared to net non-operating income of $4.7 million in
2004 and net non-operating expenses of $5.8 million in
2003. Interest income in 2005 was $35.4 million compared to
interest income of $14.1 million in 2004. Interest income
in 2004 was $14.1 million compared to interest income of
$13.0 million in 2003. The increase in interest income in
2005 compared to 2004 was primarily due to higher average cash
equivalent balances earning interest of approximately
$323 million and an increase in average interest rates
earned on all cash equivalent balances earning interest of
approximately 1.82% in 2005 compared to 2004. Interest income in
2005 also benefited from the recognition of $2.1 million of
statutory interest income related to the expected recovery of
previously paid state income taxes, which became recoverable due
to a favorable state court decision that became final during
2004. The increase in interest income in 2004 compared to 2003
was primarily due to higher average cash equivalent balances
earning interest of approximately $246 million, partially
offset by lower average interest rates earned on all cash
equivalent balances earning interest of approximately 0.42% in
2004 compared to 2003. Interest income also increased in 2004
compared to 2003 due to statutory interest income accrued in
2004 related to a refund claim for previously paid state income
taxes. Interest expense decreased to $12.4 million in 2005
compared to interest expense of $18.1 million in 2004,
primarily due to a reversal during 2005 of $7.3 million of
previously accrued statutory interest expense associated with a
reduction in accrued income taxes payable related to the
resolution of several significant uncertain income tax audit
issues, and the non-recurrence in 2005 of a $3.1 million
adjustment to interest expense recorded in 2004 related to the
accelerated amortization of certain debt issuance costs as
discussed below in the analysis of interest expense in 2004
compared to 2003. This decrease in interest expense in 2005 was
partially offset by an increase in interest expense related to
additional foreign borrowings in Ireland required to effectuate
the repatriation of dividends that occurred during the third
quarter of 2005. Interest expense increased $2.5 million to
$18.1 million in 2004 compared to $15.6 million in
2003, primarily due to an increase in the amortization of
deferred debt issuance costs related to our outstanding zero
coupon convertible senior notes due 2022, or Senior Notes,
partially offset by lower other statutory interest expense.
During the third quarter of 2004, we accelerated our
amortization of debt issuance costs to a more conservative view,
electing to amortize such costs related to our Senior Notes over
the five year period from date of issuance in November 2002 to
the first noteholder put date in November 2007 instead of over
the 20 year life of the Senior Notes. As a result, we
recorded an adjustment for the cumulative difference in
amortized debt issuance costs as of the beginning of the third
quarter of 2004 of $3.1 million. The impact of this
adjustment is immaterial to our consolidated financial
statements for the year ended December 31, 2004.
Gains on investments of $0.8 million in 2005 and
$0.3 million in 2004 resulted from the sale of
miscellaneous third party equity investments. At
December 31, 2005, we had a carrying amount of
$8.3 million (with a cost basis of $5.3 million) in
third party equity investments with public and privately held
companies. These investments are subject to review for other
than temporary declines in fair value on a quarterly basis.
During 2005, we recorded a net unrealized gain on derivative
instruments of $1.1 million compared to net unrealized
losses of $0.4 million during 2004 and net unrealized
losses of $0.3 million in 2003. Other net income was
$3.4 million in 2005 compared to other net income of
$8.8 million in 2004 and other net expenses of
$2.9 million in 2003. In 2005, Other, net primarily
includes a gain of $3.5 million for the receipt of a
technology transfer fee related to the assignment of a third
party patent licensing arrangement covering the use of botulinum
toxin type B for cervical dystonia and net realized losses
from foreign currency transactions of $1.0 million. In
2004, Other, net primarily includes a realized gain of
$6.5 million related to an agreement with ISTA
Pharmaceuticals, Inc. to revise their previous
Vitrase®
product collaboration agreement and a realized gain of
$5.0 million for the receipt of a technology transfer fee
related to the assignment of a third party patent licensing
arrangement covering the use of botulinum toxin type B for
cervical dystonia. In 2003, Other, net primarily includes
$1.8 million of expenses related to accruals for the
settlement of
non-income foreign tax
compliance matters in Latin America and Europe, and
$0.9 million of expenses related to the write-off of
unamortized debt origination fees associated with the retirement
of the remaining balance of our zero coupon
48
convertible subordinated notes due 2020 in the fourth quarter of
2003, which were not previously redeemed in December 2002.
Our effective tax rate in 2005 was 32.1% compared to the
effective tax rate of 28.9% in 2004. Included in our operating
income in 2005 are pre-tax restructuring charges of
$43.8 million, transition/duplicate operating expenses
associated with the European restructuring activities of
$5.6 million, a gain of $7.9 million on the sale of
our distribution business in India and a gain of
$5.7 million on the sale of assets used primarily for
contract manufacturing of AMO products. In 2005, we recorded
income tax benefits of $7.6 million related to the pre-tax
restructuring charges and $1.1 million related to
transition/duplicate operating expenses, and a provision for
income taxes of $1.7 million on the gain on sale of the
distribution business in India and $0.6 million on the gain
on sale of assets used primarily for contract manufacturing.
Included in the provision for income taxes in 2005 is an
estimated $29.9 million income tax provision associated
with our decision to repatriate $674.0 million in
extraordinary dividends as defined by the American Jobs Creation
Act of 2004, or the Act, from unremitted foreign earnings that
were previously considered indefinitely reinvested by certain
non-U.S. subsidiaries.
Also included in the provision for income taxes in 2005 is an
estimated provision of $19.7 million associated with our
decision to repatriate approximately $85.8 million in
additional dividends above the base and extraordinary dividend
amounts, as defined by the Act, from unremitted foreign earnings
that were previously considered indefinitely reinvested. Also
included in the provision for income taxes in 2005 is a
$1.4 million beneficial change in estimate for the expected
income tax benefit for previously paid state income taxes, which
became recoverable due to a favorable state court decision that
became final during 2004, and an estimated $24.1 million
reduction in estimated income taxes payable primarily due to the
resolution of several significant previously uncertain income
tax audit issues, including the resolution of certain transfer
pricing issues for which an Advance Pricing Agreement, or APA,
was executed with the Internal Revenue Service in the
U.S. during the third quarter of 2005. The APA covers tax
years 2002 through 2008. The $24.1 million reduction in
estimated income taxes payable also includes beneficial changes
associated with other transfer price settlements for a
discontinued product line, which was not covered by the APA, the
deductibility of transaction costs associated with the 2002
spin-off of AMO and intangible asset issues related to certain
assets of Allergan Specialty Therapeutics, Inc. and Bardeen
Sciences Company, LLC, which we acquired in 2001 and 2003,
respectively. This change in estimate relates to tax years
currently under examination or not yet settled through expiry of
the statute of limitations.
Excluding the impact of the pre-tax restructuring charges,
transition/duplicate operating expenses and gains from the sale
of the distribution business in India and the sale of assets
used for contract manufacturing, and the related income tax
provision (benefit) associated with these pre-tax amounts, the
provision for income taxes due to the extraordinary dividends
and additional dividends above the base and extraordinary
dividend amounts, the decrease in the provision for income taxes
resulting from the additional income tax benefit for previously
paid state income taxes which became recoverable, and reduction
in estimated income taxes payable due to the resolution of
several significant uncertain income tax audit issues, our
adjusted effective tax rate for 2005 was 27.5%. We believe that
the use of an adjusted effective tax rate, which excludes the
impact of certain discrete items, provides a more meaningful
measure of the impact of income taxes on our results of
operations.
49
The calculation of our 2005 adjusted effective tax rate is
summarized below:
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
(in millions) |
Earnings before income taxes and minority interest, as reported
|
|
$ |
599.2 |
|
Restructure charge
|
|
|
43.8 |
|
Transition/duplicate operating expenses associated with the
European restructuring
|
|
|
5.6 |
|
Gain on sale of distribution business in India
|
|
|
(7.9 |
) |
Gain on sale of assets used for contract manufacturing
|
|
|
(5.7 |
) |
|
|
|
|
|
|
|
$ |
635.0 |
|
|
|
|
|
|
|
Provision for income taxes, as reported
|
|
$ |
192.4 |
|
Income tax (provision) benefit for:
|
|
|
|
|
|
Restructure charge
|
|
|
7.6 |
|
|
Transition/duplicate operating expenses associated with the
European restructuring
|
|
|
1.1 |
|
|
Gain on sale of distribution business in India
|
|
|
(1.7 |
) |
|
Gain on sale of assets used for contract manufacturing
|
|
|
(0.6 |
) |
|
Recovery of previously paid state income taxes
|
|
|
1.4 |
|
|
Resolution of uncertain income tax audit issues
|
|
|
24.1 |
|
|
Extraordinary dividend of $674.0 million under the American
Jobs Creation Act of 2004
|
|
|
(29.9 |
) |
|
Additional dividends of $85.8 million above the base and
extraordinary dividend amounts
|
|
|
(19.7 |
) |
|
|
|
|
|
|
|
$ |
174.7 |
|
|
|
|
|
|
Adjusted effective tax rate
|
|
|
27.5 |
% |
|
|
|
|
|
Included in our operating income in 2004 are pre-tax
restructuring charges of $7.0 million primarily associated
with the scheduled termination of our manufacturing and supply
agreement with AMO. We recorded an income tax benefit of
$0.8 million related to these pre-tax restructuring
charges. Included in our provision for income taxes in 2004 is
an estimated $6.1 million income tax benefit for previously
paid state income taxes, which became recoverable due to a
favorable state court decision that became final during the
second quarter of 2004. Excluding the impact of the
$7.0 million pre-tax restructuring charges and related tax
benefit of $0.8 million, and the $6.1 million income
tax benefit from the state court decision, our adjusted
effective tax rate for 2004 was 29.8%. Included in our operating
loss in 2003 are pre-tax charges of $278.8 million and
$179.2 million for in-process research and development
associated with our acquisitions of Bardeen and Oculex,
respectively. We recorded an income tax benefit of
$100.8 million related to the Bardeen charge because the
acquisition was considered to be an asset acquisition for tax
purposes whereas no income tax benefit was recorded for the
Oculex charge because the acquisition was considered to be an
acquisition of stock for tax purposes. Excluding the impact of
the total $458.0 million of in-process research and
development charges and related tax benefit of
$100.8 million, our adjusted effective tax rate for 2003
was 28.7%.
The decrease in the adjusted effective tax rate to 27.5% in 2005
compared to the adjusted effective tax rate in 2004 of 29.8% is
primarily due to a tax rate benefit related to an increase in
the mix of our earnings generated in
non-U.S. jurisdictions
with low tax rates in 2005 compared to 2004, a decrease in the
valuation allowance related to a change in estimate of the
amount of realizable deferred tax assets in Japan stemming from
the recent licensing agreement with GlaxoSmithKline and an
increase in the expected income tax benefit from utilizing
available foreign tax credits, partially offset by a net
increase in the estimate for income taxes payable for certain
contingent income tax liabilities.
50
The increase in the adjusted effective tax rate to 29.8% in 2004
compared to the adjusted effective tax rate in 2003 of 28.7% was
primarily attributable to the fact that our 2003 rate reflected
the benefit of reserves for tax audit settlements, which were
released in 2003, partially offset by a positive tax rate effect
from changes in the mix of our earnings during 2004 compared to
2003.
Net earnings in 2005 were $403.9 million compared to net
earnings of $377.1 million in 2004. The $26.8 million
increase in net earnings was primarily the result of the
$43.5 million increase in operating income and a
$23.6 million increase in total net non-operating income,
partially offset by an increase in the provision for income
taxes of $38.4 million.
Net earnings were $377.1 million in 2004 compared to a net
loss of $52.5 million in 2003. The increase of
$429.6 million in net earnings was primarily the result of
the $551.1 million increase in operating income and a
$10.5 million increase in total net non-operating income,
partially offset by an increase in the provision for income
taxes of $131.8 million.
Liquidity and Capital Resources
We assess our liquidity by our ability to generate cash to fund
our operations. Significant factors in the management of
liquidity are: funds generated by operations; levels of accounts
receivable, inventories, accounts payable and capital
expenditures; the extent of our stock repurchase program; funds
required for acquisitions; adequate credit facilities; and
financial flexibility to attract long-term capital on
satisfactory terms.
Historically, we have generated cash from operations in excess
of working capital requirements. The net cash provided by
operating activities was $424.6 million in 2005 compared to
$548.5 million in 2004 and $435.3 million in 2003.
Cash flow from operating activities decreased in 2005 compared
to 2004, primarily as a result of higher income taxes paid, an
increase in contributions to our pension plans and an increase
in cash required to fund the growth in other current assets,
partially offset by an increase in earnings from operations,
including the effect of adjusting for non-cash items, and an
increase in other liabilities, primarily for deferred income
related to an up-front payment received in connection with our
licensing arrangement with GlaxoSmithKline. The increase in
income taxes paid is primarily due to payments for the estimated
U.S. income tax liability for the repatriation of certain
foreign earnings and advance payments in anticipation of income
tax audit settlements. We paid pension contributions of
$49.6 million in 2005 compared to $16.9 million in
2004. The increase in the amount of pension contributions in
2005 compared to 2004 is primarily due to the negative impact of
lower discount rates on the calculation of our accumulated
benefit obligations as of September 30, 2005, the
measurement date for our pension plans, and our desire to
maintain plan assets in excess of accumulated benefit
obligations in our funded pension plans. In 2006, we expect to
pay pension contributions of between approximately
$14.0 million and $16.0 million.
At December 31, 2005, we had consolidated unrecognized net
actuarial losses of $178.4 million which were included in
our reported net prepaid benefit costs. The unrecognized net
actuarial losses resulted primarily from lower than expected
investment returns on pension plan assets in 2002 and 2001 and
decreases in the discount rates used to measure projected
benefit obligations that occurred over the past five years.
Assuming constant actuarial assumptions estimated as of our
pension plans measurement date of September 30, 2005,
we expect the amortization of these unrecognized net actuarial
losses to increase our total pension costs by approximately
$3.4 million in 2006 compared to the amortization of
approximately $9.5 million of unrecognized net actuarial
losses included in pension costs expensed in 2005. The
amortization of unrecognized net actuarial losses included in
pension costs in 2004 and 2003 was $6.7 million and
$3.1 million, respectively. The future amortization of the
unrecognized net actuarial losses is not expected to materially
affect future pension contribution requirements.
Cash flow from operating activities increased in 2004 compared
to 2003, primarily as a result of the increase in earnings from
operations, including the effect of adjusting for non-cash
items, an increase in other accrued expenses, other liabilities
and income taxes payable, partially offset by an increase in
cash required to
51
fund trade receivables, principally in North America, and growth
in inventories, primarily finished goods for eye care
pharmaceuticals and
Botox®,
and higher income taxes paid. We paid pension contributions of
$16.9 million in 2004 compared to $14.7 million in
2003.
Net cash used in investing activities was $182.1 million in
2005, compared to $106.8 million in 2004 and
$594.9 million in 2003. Excluding net cash paid of
$469.5 million for the acquisitions of Bardeen and Oculex
in 2003, cash used in investing activities in 2003 would have
been $125.4 million. We invested $78.5 million in new
facilities and equipment during 2005 compared to
$96.4 million in 2004 and $109.6 million in 2003.
During 2005 and 2004, the additions to property, plant and
equipment included costs to construct an expansion of our
Botox®
manufacturing facilities in Ireland and a new biologics facility
in Irvine, California, which we completed in 2005. Capital
expenditures during 2005 also included the purchase of
approximately four acres of additional real property contiguous
to our main facility in Irvine, California. During 2003, the
additions to property, plant and equipment included costs to
construct a new research and development facility in Irvine,
California, which we completed in 2004. Net cash used in
investing activities also includes $13.6 million,
$10.5 million and $12.3 million to acquire software
during 2005, 2004 and 2003, respectively. In 2005, we paid
$110.0 million in connection with a royalty buyout
agreement relating to
Restasis®,
our drug for the treatment of chronic dry eye disease, of which
$99.3 million was capitalized as an intangible licensing
asset, and $10.7 million was used to pay previously accrued
net royalty obligations.
Net cash provided by financing activities was
$160.3 million in 2005, composed primarily of a
$157.0 million increase in notes payable and
$149.9 million of cash provided by the sale of stock to
employees, partially offset by $94.3 million of cash used
for the purchase of treasury stock and $52.3 million for
payment of dividends. On January 31, 2006, our Board of
Directors declared a quarterly cash dividend of $0.10 per
share, payable on March 14, 2006 to stockholders of record
on February 17, 2006. Net cash used in financing activities
was $51.9 million in 2004, composed primarily of
$65.2 million for purchases of treasury stock,
$47.3 million for payment of dividends and
$23.0 million for net repayments of debt, partially offset
by $83.6 million of cash provided by the sale of stock to
employees. Net cash used in financing activities was
$116.8 million in 2003, composed primarily of
$90.6 million for purchases of treasury stock,
$46.9 million for payment of dividends and
$46.7 million for repayments of convertible borrowings and
long-term debt. Cash was provided by the sale of stock to
employees of $47.0 million and an increase in notes payable
and commercial paper borrowings of $20.4 million. We
maintain an evergreen stock repurchase program. Our evergreen
stock repurchase program authorizes us to repurchase our common
stock for the primary purpose of funding our stock-based benefit
plans. Under the stock repurchase program, we may maintain up to
9.2 million repurchased shares in our treasury account at
any one time. As of December 31, 2005, we held
approximately 1.4 million treasury shares under this
program. We are uncertain as to the level of stock repurchases,
if any, to be made in the future.
In December 2005, we entered into a definitive merger agreement
to acquire Inamed Corporation, or Inamed. Under the terms of the
agreement, we have made a tender offer to acquire each
outstanding common share of Inamed for either $84.00 in cash or
0.8498 of a share of our common stock, at the election of the
holder. Elections of Inamed stockholders with respect to the
form of consideration they will receive are subject to proration
such that we will pay 45% of the aggregate consideration in cash
and 55% of the aggregate consideration in shares of our common
stock. We expect the cash portion of the purchase price to be
approximately $1.4 billion. In order to finance part of the
cash portion of the purchase price, we executed a commitment
letter pertaining to a $1.1 billion bridge credit facility
in December 2005. Subsequent to the closing of the transaction
to acquire Inamed, we expect to replace the bridge financing
with conventional long-term financing. As of December 31,
2005 there were no borrowings outstanding under the committed
bridge credit facility.
At December 31, 2005, we had a committed long-term credit
facility, a committed foreign line of credit in Japan, a
commercial paper program, a medium term note program, an unused
debt shelf registration statement that we may use for a new
medium term note program and other issuances of debt securities,
and various foreign bank facilities. The committed long-term
credit facility allows for borrowings of up to $400 million
through May 2009. The committed foreign line of credit allows
for borrowings of up to three billion Japanese yen
(approximately $25.5 million) through July 2006. The
commercial paper program also
52
provides for up to $300 million in borrowings. The current
medium term note program allows us to issue up to an additional
$7.5 million in registered notes on a non-revolving basis.
The debt shelf registration statement provides for up to
$350 million in additional debt securities. Borrowings
under the committed long-term credit facility and medium-term
note program are subject to certain financial and operating
covenants that include, among other provisions, maintaining
minimum debt to capitalization ratios and minimum consolidated
net worth. Certain covenants also limit subsidiary debt and
restrict dividend payments. We were in compliance with these
covenants at December 31, 2005 and had approximately
$1.2 billion available for dividends at December 31,
2005. As of December 31, 2005, we had no borrowings under
our committed foreign line of credit or commercial paper
program, $164.0 million in borrowings under our committed
long-term credit facility, $5.6 million in borrowings under
various foreign bank loans and $57.5 million in borrowings
outstanding under the medium term note program.
On November 6, 2002, we issued zero coupon convertible
senior notes due 2022, or Senior Notes, in a private placement
with an aggregate principal amount at maturity of
$641.5 million. The Senior Notes, which were issued at a
discount of $141.5 million, are unsecured, accrue interest
at 1.25% annually and mature on November 6, 2022. The
Senior Notes are convertible into 11.41 shares of our
common stock for each $1,000 principal amount at maturity if the
closing price of our common stock exceeds certain levels, the
credit ratings assigned to the Senior Notes are reduced below
specified levels, or we call the Senior Notes for redemption,
make specified distributions to our stockholders or become a
party to certain consolidation, merger or binding share exchange
agreements. On July 28, 2004, we, together with Wells Fargo
Bank, as trustee, executed a supplemental indenture with respect
to the Senior Notes to amend the redemption and conversion
provisions to restrict our ability to issue common stock in lieu
of cash to holders of the Senior Notes upon any redemption or
conversion. Upon any redemption, we are now required to pay the
entire redemption amount in cash. In addition, upon any
conversion, we will pay cash up to the accreted value of the
Senior Notes converted and will have the option to pay any
amounts due in excess of the accreted value in either cash or
common stock. The rights of the holders of the Senior Notes were
not affected or limited by the supplemental indenture. As of
December 31, 2005, the conversion criteria were met, and
holders may elect to convert the Senior Notes between
January 1, 2006 and March 31, 2006. See Note 7,
Convertible Notes, in the notes to the consolidated
financial statements listed under Item 15(a) of
Part IV of this report for a description of the conversion
features. Based on the terms of the Senior Notes, an assessment
of the conversion criteria is performed each fiscal quarter, the
result of which affects the holders ability to convert the
Senior Notes in the immediately succeeding fiscal quarter. If
the conversion criteria are not met in our fiscal quarter ending
March 31, 2006, the holders ability to convert the
Senior Notes will be restricted until the conversion criteria
are again met.
We include the dilutive effect from the assumed conversion of
the Senior Notes, if any, in our computation of diluted earnings
per share, assuming amounts due in excess of the accreted value
will be paid in common stock. As a sensitivity measure, a $5.00
increase in the average price of our common stock would have
resulted in an increase of approximately 0.3 million shares
of common stock to the total number of diluted shares used to
compute diluted earnings per share for the year ended
December 31, 2005.
Holders of the Senior Notes may require us to purchase the
Senior Notes on any of the following dates at the following
prices: $829.51 per Senior Note on November 6, 2007;
$882.84 per Senior Note on November 6, 2012; and
$939.60 per Senior Note on November 6, 2017. Pursuant
to the supplemental indenture, we are required to pay cash for
any Senior Notes purchased by us on any of these three dates.
Prior to November 6, 2007 we may redeem all or a portion of
Senior Notes for cash in an amount equal to their accreted value
only if the price of our common stock reaches certain thresholds
for a specified period of time. On or after November 6,
2007, we may redeem all or a portion of the Senior Notes for
cash in an amount equal to their accreted value.
A significant amount of our existing cash and equivalents are
held by
non-U.S. subsidiaries.
We currently plan to use these funds in our operations outside
the United States. Withholding and U.S. taxes have not been
provided for unremitted earnings of certain
non-U.S. subsidiaries
because we have reinvested these earnings indefinitely in such
operations. As of December 31, 2005 we had approximately
$299.5 million in unremitted
53
earnings outside the United States for which withholding and
U.S. taxes were not provided. Tax costs would be incurred
if these funds were remitted to the United States.
During 2005, we repatriated a total of $759.8 million in
cash previously held by certain
non-U.S. subsidiaries,
primarily in connection with the American Jobs Creation Act of
2004. See Note 8, Income Taxes, in the notes to
the consolidated financial statements listed under
Item 15(a) of Part IV of this report for a discussion
of our repatriation of certain unremitted foreign earnings and
the estimated income tax costs of such repatriation activities.
Our manufacturing and supply agreement with AMO terminated as
scheduled in June 2005. As of December 31, 2005, we
recorded cumulative pre-tax restructuring charges of
$21.6 million. We expect to record an additional
$2.0 million to $3.0 million in pre-tax restructuring
charges during the first three quarters of 2006 to complete the
refurbishment of facilities previously used for contract
manufacturing.
We currently estimate that the pre-tax charges resulting from
the restructuring or our European operations, including
transition and duplicate operating expenses, will be between
$46 million and $51 million and capital expenditures
will be between $3 million and $4 million. We began to
incur these amounts in the first quarter of 2005 and expect to
continue to incur them up through and including the second
quarter of 2006. Of the total amount of pre-tax charges and
capital expenditures, approximately $43 million to
$48 million are expected to be cash expenditures. During
the year ended December 31, 2005, we recorded pre-tax
restructuring charges of $28.9 million and
transition/duplicate operating expenses of $5.6 million
related to the implementation of this restructuring of our
European operations. We expect to complete the additional
restructuring activities by the end of the second quarter of
2006.
We currently estimate that the pre-tax charges resulting from
the restructuring of our operations in Japan will be between
$3.0 million and $5.0 million, substantially all of
which are expected to be cash expenditures. During 2005, we
recorded pre-tax restructuring charges of $2.3 million, and
we expect to continue to incur additional charges up through and
including the second quarter of 2006.
We believe that the net cash provided by operating activities,
supplemented as necessary with borrowings available under our
existing credit facilities and existing cash and equivalents,
will provide us with sufficient resources to meet our expected
obligations under the definitive merger agreement with Inamed,
working capital requirements, debt service and other cash needs
over the next year.
Although at reduced levels in recent years, inflation continues
to apply upward pressure on the cost of goods and services that
we use. The competitive and regulatory environments in many
markets substantially limit our ability to fully recover these
higher costs through increased selling prices. We continually
seek to mitigate the adverse effects of inflation through cost
containment and improved productivity and manufacturing
processes.
|
|
|
Foreign Currency Fluctuations |
Approximately 32.5% of our revenues in 2005 were derived from
operations outside the United States, and a portion of our
international cost structure is denominated in currencies other
than the U.S. dollar. As a result, we are subject to
fluctuations in sales and earnings reported in U.S. dollars
due to changing currency exchange rates. We routinely monitor
our transaction exposure to currency rates and implement certain
economic hedging strategies to limit such exposure, as
appropriate. The net impact of foreign currency fluctuations on
our sales was as follows: a $22.3 million increase in 2005,
a $41.9 million increase in 2004, and a $45.9 million
increase in 2003. The 2005 sales increase included
$1.1 million related to the euro, $5.2 million related
to the Canadian dollar, $1.3 million related to the
Australian dollar, $10.9 million related to the Brazilian
real, $1.2 million related to the Mexican peso and
$2.3 million related to other Latin American currencies.
The 2004 sales increase included $23.9 million related to
the euro, $4.5 million related to the British pound,
$4.2 million related to the Canadian dollar,
$4.0 million related to the Australian dollar,
$2.0 million related to the Japanese yen and
$1.8 million related to the Brazilian real. The 2003 sales
increase
54
included increases of $38.7 million related to the euro,
$5.4 million related to the Canadian dollar,
$4.6 million related to the Australian dollar and
$2.1 million related to the Japanese yen, partially offset
by decreases of $3.1 million related to the Mexican peso,
$1.7 million related to the Brazilian real and
$1.5 million related to other Latin American currencies.
See Note 1, Summary of Significant Accounting
Policies, in the notes to the consolidated financial
statements listed under Item 15(a) of Part IV of this
report for a description of our accounting policy on foreign
currency translation.
|
|
|
Oculex Pharmaceuticals, Inc. |
On November 20, 2003, we purchased all of the outstanding
equity interests of Oculex Pharmaceuticals, Inc., or Oculex, a
privately owned company, for an aggregate purchase price of
approximately $223.8 million, net of cash acquired,
including transaction costs of $1.6 million and
$6.1 million in other assets related to Oculex. The
acquisition was accounted for by the purchase method of
accounting and accordingly, the consolidated statements of
operations include the results of Oculex beginning
November 20, 2003. In conjunction with the acquisition, we
recorded a charge to research and development for in-process
research and development expense of $179.2 million during
2003 for an acquired in-process research and development asset
which we determined was not yet complete and had no alternative
future uses in its current state. This asset is Oculexs
lead investigational product,
Posurdex®,
which is a proprietary, bioerodable, sustained release implant
that delivers dexamethasone to the targeted disease site at the
back of the eye. We have begun Phase 3 clinical trials for
macular edema associated with diabetes and vein occlusions.
Additionally, we determined that the assets acquired also
included a proprietary technology drug delivery platform which
had alternative future uses in its current state, which we
separately valued and capitalized as core technology. The core
technology is a versatile bioerodable polymer drug delivery
technology which can be used for sustained local delivery of
compounds to the eye. See Note 3, Acquisitions,
in the notes to the consolidated financial statements listed
under Item 15(a) of Part IV of this report for a
discussion of the acquisition of Oculex.
We believe the fair values assigned to the assets acquired and
liabilities assumed are based on reasonable assumptions. A
summary of the net assets acquired follows:
|
|
|
|
|
|
|
(in millions) |
Current assets
|
|
$ |
0.6 |
|
Property, plant and equipment
|
|
|
1.0 |
|
Capitalized intangible core technology (straight-line
amortization over a 15 year useful life)
|
|
|
29.6 |
|
In-process research and development
|
|
|
179.2 |
|
Other non-current assets, primarily deferred tax assets
|
|
|
19.3 |
|
Accounts payable and accrued liabilities
|
|
|
(5.9 |
) |
|
|
|
|
|
|
|
$ |
223.8 |
|
|
|
|
|
|
During 2004, we adjusted the fair value of certain net assets
acquired by $0.6 million, which resulted in a decrease in
the amount of capitalized core technology and in-process
research and development of $0.1 million and
$0.5 million, respectively. The $0.5 million decrease
in in-process research and development was included in research
and development expenses in 2004.
|
|
|
Bardeen Sciences Company, LLC |
On May 16, 2003, we completed an acquisition of all of the
outstanding equity interests of Bardeen Sciences Company, LLC,
or Bardeen, from Farallon Pharma Investors, LLC, or Farallon,
for an aggregate purchase price of approximately
$264.6 million, including transaction costs of
$1.1 million and $12.8 million in certain intangible
contract-based product marketing and other rights, net of cash
acquired. We acquired all of Bardeens assets, which
consisted of the rights to certain pharmaceutical compounds
under development and research projects, including memantine,
androgen tears, tazarotene in oral form for the treatment of
acne, AGN 195795, AGN 196923, AGN 197075, a hypotensive
lipid/timolol combination, a photodynamic therapy
55
project, tyrosine kinase inhibitors for the treatment of ocular
neovascularization, a vision-sparing project and a retinal
disease project.
Bardeen was formed in April 2001 upon our contribution of a
portfolio of pharmaceutical compounds and research projects and
the commitment of a $250 million capital investment by
Farallon. In return for our contribution of the portfolio, we
received certain commercialization rights to market products
developed from the compounds comprising the portfolio. In
addition, we acquired an option to purchase rights to any one
product and a separate option to purchase all of the outstanding
equity interests of Bardeen at an option price based on the
amount of research and development funds expended by Bardeen on
the portfolio and the time elapsed since the effective date of
the option agreement. We acquired Bardeen upon the exercise of
our option to purchase all the outstanding equity interests of
Bardeen at the option price. Neither we nor any of our officers
or directors owned any interest in Bardeen or Farallon prior to
the acquisition of the outstanding interests.
We determined that the assets acquired consisted entirely of
incomplete in-process research and development assets and that
these assets had no alternative future uses in their current
state.
The estimated fair value of assets acquired and liabilities
assumed are as follows:
|
|
|
|
|
|
|
(in millions) |
Intangible assets In-process research and development
|
|
$ |
278.8 |
|
Accounts payable
|
|
|
(14.2 |
) |
|
|
|
|
|
|
|
$ |
264.6 |
|
|
|
|
|
|
From the time of Bardeens formation until the acquisition
date, we performed research and development on the compounds
comprising the portfolio on Bardeens behalf pursuant to a
research and development services agreement between us and
Bardeen under which all such activities were fully funded by
Bardeen and services were performed on a cost plus 10% basis.
Because the financial risk associated with the research and
development was transferred to Bardeen, we recognized revenues
and related costs as services were performed under such
agreements as required under SFAS No. 68, Research
and Development Arrangements. These amounts are included in
research service revenues in the accompanying consolidated
statements of operations. For the year ended December 31,
2003, we recognized $16.0 million in research revenues and
$14.5 million in research costs under the research and
development services agreement with Bardeen.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
In the normal course of business, our operations are exposed to
risks associated with fluctuations in foreign currency exchange
rates. We address these risks through controlled risk management
that includes the use of derivative financial instruments to
economically hedge or reduce these exposures. We do not enter
into financial instruments for trading or speculative purposes.
See Note 11, Financial Instruments, in the
notes to the consolidated financial statements listed under
Item 15(a) of Part IV of this report for activities
relating to foreign currency risk management.
To ensure the adequacy and effectiveness of our foreign exchange
hedge positions, we continually monitor our foreign exchange
forward and option positions both on a stand-alone basis and in
conjunction with our underlying foreign currency exposures, from
an accounting and economic perspective.
However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, we
cannot assure you that such programs will offset more than a
portion of the adverse financial impact resulting from
unfavorable movements in foreign exchange rates. In addition,
the timing of the accounting for recognition of gains and losses
related to
mark-to-market
instruments for any given period may not coincide with the
timing of gains and losses related to the underlying economic
exposures and, therefore, may adversely affect our consolidated
operating results and financial position.
We record current changes in the fair value of open foreign
currency option contracts as Unrealized gain (loss) on
derivative instruments, net, and we record the gains and
losses realized from settled option
56
contracts in Other, net in the accompanying
consolidated statements of operations. The premium costs of
purchased foreign exchange option contracts are recorded in
Other current assets and are amortized to
Other, net over the life of the options. We have
recorded all unrealized and realized gains and losses from
foreign currency forward contracts through Other,
net in the accompanying consolidated statements of
operations.
Our interest income and expense is more sensitive to
fluctuations in the general level of U.S. interest rates
than to changes in rates in other markets. Changes in
U.S. interest rates affect the interest earned on our cash
and equivalents, interest expense on our debt as well as costs
associated with foreign currency contracts.
At December 31, 2005, we had approximately
$169.6 million of variable rate debt. If the interest rates
on the variable rate debt were to increase or decrease by 1% for
the year, annual interest expense would increase or decrease by
approximately $1.7 million.
The tables below present information about certain of our
investment portfolio and our debt obligations at
December 31, 2005 and 2004:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
Maturing in |
|
|
|
Fair |
|
|
|
|
|
|
Market |
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates) |
ASSETS |
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$ |
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50.0 |
|
|
$ |
50.0 |
|
Weighted Average Interest Rate
|
|
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.44 |
% |
|
|
|
|
Commercial Paper
|
|
|
656.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656.0 |
|
|
|
656.0 |
|
Weighted Average Interest Rate
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.28 |
% |
|
|
|
|
Foreign Time Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Cash Equivalents
|
|
|
554.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
554.6 |
|
|
|
554.6 |
|
Weighted Average Interest Rate
|
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.41 |
% |
|
|
|
|
Total Cash Equivalents
|
|
$ |
1,260.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,260.6 |
|
|
$ |
1,260.6 |
|
Weighted Average Interest Rate
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.34 |
% |
|
|
|
|
|
LIABILITIES |
Debt Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
$ |
520.0 |
|
|
|
|
|
|
$ |
32.5 |
|
|
|
|
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
577.5 |
|
|
$ |
851.2 |
|
Weighted Average Interest Rate
|
|
|
1.25 |
% |
|
|
|
|
|
|
3.56 |
% |
|
|
|
|
|
|
|
|
|
|
7.47 |
% |
|
|
1.65 |
% |
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
169.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.6 |
|
|
|
169.6 |
|
Weighted Average Interest Rate
|
|
|
4.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.63 |
% |
|
|
|
|
Total Debt Obligations
|
|
$ |
689.6 |
|
|
|
|
|
|
$ |
32.5 |
|
|
|
|
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
747.1 |
|
|
$ |
1,020.8 |
|
Weighted Average Interest Rate
|
|
|
2.08 |
% |
|
|
|
|
|
|
3.56 |
% |
|
|
|
|
|
|
|
|
|
|
7.47 |
% |
|
|
2.33 |
% |
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
Maturing in |
|
|
|
Fair |
|
|
|
|
|
|
Market |
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Thereafter |
|
Total |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except interest rates) |
ASSETS |
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$ |
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100.0 |
|
|
$ |
100.0 |
|
Weighted Average Interest Rate
|
|
|
2.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.37 |
% |
|
|
|
|
Commercial Paper
|
|
|
648.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648.9 |
|
|
|
648.9 |
|
Weighted Average Interest Rate
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.23 |
% |
|
|
|
|
Foreign Time Deposits
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0 |
|
|
|
26.0 |
|
Weighted Average Interest Rate
|
|
|
2.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
Other Cash Equivalents
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.9 |
|
|
|
54.9 |
|
Weighted Average Interest Rate
|
|
|
2.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.18 |
% |
|
|
|
|
Total Cash Equivalents
|
|
$ |
829.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
829.8 |
|
|
$ |
829.8 |
|
Weighted Average Interest Rate
|
|
|
2.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.25 |
% |
|
|
|
|
|
LIABILITIES |
Debt Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
|
|
|
|
|
|
|
|
$ |
513.6 |
|
|
$ |
31.5 |
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
570.1 |
|
|
$ |
690.7 |
|
Weighted Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
1.25 |
% |
|
|
3.56 |
% |
|
|
|
|
|
|
7.47 |
% |
|
|
1.65 |
% |
|
|
|
|
Other Fixed Rate (non-US$)
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
1.4 |
|
Weighted Average Interest Rate
|
|
|
13.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.32 |
% |
|
|
|
|
Other Variable Rate (non-US$)
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.7 |
|
|
|
11.7 |
|
Weighted Average Interest Rate
|
|
|
1.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.46 |
% |
|
|
|
|
Total Debt Obligations
|
|
$ |
13.1 |
|
|
|
|
|
|
$ |
513.6 |
|
|
$ |
31.5 |
|
|
|
|
|
|
$ |
25.0 |
|
|
$ |
583.2 |
|
|
$ |
703.8 |
|
Weighted Average Interest Rate
|
|
|
2.73 |
% |
|
|
|
|
|
|
1.25 |
% |
|
|
3.56 |
% |
|
|
|
|
|
|
7.47 |
% |
|
|
1.67 |
% |
|
|
|
|
|
|
|
Contractual Obligations and Commitments |
The table below presents information about our contractual
obligations and commitments at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
More |
|
|
|
|
Less than |
|
|
|
than Five |
|
|
|
|
One Year |
|
1-3 Years |
|
3-5 Years |
|
Years |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
Notes payable, convertible notes and long-term debt obligations
|
|
$ |
689.6 |
|
|
$ |
32.5 |
|
|
$ |
|
|
|
$ |
25.0 |
|
|
$ |
747.1 |
|
Operating lease obligations
|
|
|
22.7 |
|
|
|
30.5 |
|
|
|
19.3 |
|
|
|
23.5 |
|
|
|
96.0 |
|
Purchase obligations
|
|
|
82.9 |
|
|
|
43.8 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
129.8 |
|
Other long-term liabilities (excluding deferred income)
reflected on our balance sheet under GAAP
|
|
|
|
|
|
|
5.2 |
|
|
|
5.6 |
|
|
|
96.5 |
|
|
|
107.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
795.2 |
|
|
$ |
112.0 |
|
|
$ |
26.3 |
|
|
$ |
146.7 |
|
|
$ |
1,080.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Certificate of Incorporation, as amended, provides that we
will indemnify, to the fullest extent permitted by the Delaware
General Corporation Law, each person that is involved in or is,
or is threatened to be, made a party to any action, suit or
proceeding by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director
or officer of Allergan or was serving at our request as a
director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise. We
have also entered into contractual indemnity agreements with
each of our directors and certain
58
officers pursuant to which we have agreed to indemnify such
directors and officers against any payments they are required to
make as a result of a claim brought against such officer or
director in such capacity, excluding claims (i) relating to
the action or inaction of a director or officer that resulted in
such director or officer gaining personal profit or advantage,
(ii) for an accounting of profits made from the purchase or
sale of our securities within the meaning of Section 16(b)
of the Securities Exchange Act of 1934 or similar provisions of
any state law or (iii) that are based upon or arise out of
such directors or officers knowingly fraudulent,
deliberately dishonest or willful misconduct. The maximum
potential amount of future payments that we could be required to
make under these indemnification provisions is unlimited.
However, we have purchased directors and officers
liability insurance policies intended to reduce our monetary
exposure and to enable us to recover a portion of any future
amounts paid. We have not previously paid any material amounts
to defend lawsuits or settle claims as a result of these
indemnification provisions. As a result, we believe the
estimated fair value of these indemnification arrangements is
minimal.
We customarily agree in the ordinary course of our business to
indemnification provisions in agreements with clinical trials
investigators in our drug development programs, in sponsored
research agreements with academic and not-for-profit
institutions, in various comparable agreements involving parties
performing services for us in the ordinary course of business,
and in our real estate leases. We also customarily agree to
certain indemnification provisions in our drug discovery and
development collaboration agreements. With respect to our
clinical trials and sponsored research agreements, these
indemnification provisions typically apply to any claim asserted
against the investigator or the investigators institution
relating to personal injury or property damage, violations of
law or certain breaches of our contractual obligations arising
out of the research or clinical testing of our compounds or drug
candidates. With respect to lease agreements, the
indemnification provisions typically apply to claims asserted
against the landlord relating to personal injury or property
damage caused by us, to violations of law by us or to certain
breaches of our contractual obligations. The indemnification
provisions appearing in our collaboration agreements are
similar, but in addition provide some limited indemnification
for the collaborator in the event of third party claims alleging
infringement of intellectual property rights. In each of the
above cases, the term of these indemnification provisions
generally survives the termination of the agreement. The maximum
potential amount of future payments that we could be required to
make under these provisions is generally unlimited. We have
purchased insurance policies covering personal injury, property
damage and general liability intended to reduce our exposure for
indemnification and to enable us to recover a portion of any
future amounts paid. We have not previously paid any material
amounts to defend lawsuits or settle claims as a result of these
indemnification provisions. As a result, we believe the
estimated fair value of these indemnification arrangements is
minimal.
Overall, we are a net recipient of currencies other than the
U.S. dollar and, as such, benefit from a weaker dollar and
are adversely affected by a stronger dollar relative to major
currencies worldwide. Accordingly, changes in exchange rates,
and in particular a strengthening of the U.S. dollar, may
negatively affect our consolidated sales, gross margins or
operating expenses as expressed in U.S. dollars.
From time to time, we enter into foreign currency option and
forward contracts to reduce earnings and cash flow volatility
associated with foreign exchange rate changes to allow
management to focus its attention on our core business issues
and challenges. Accordingly, we enter into contracts which
change in value as foreign exchange rates change to economically
offset the effect of changes in value of foreign currency assets
and liabilities, commitments and anticipated foreign currency
denominated sales and operating expenses. We enter into foreign
currency forward and option contracts in amounts between minimum
and maximum anticipated foreign exchange exposures, generally
for periods not to exceed one year.
We use foreign currency option contracts, which provide for the
sale or purchase of foreign currencies to offset foreign
currency exposures expected to arise in the normal course of our
business. While these instruments are subject to fluctuations in
value, such fluctuations are anticipated to offset changes in
the value of the underlying exposures. The principal currencies
subject to this process are the Canadian dollar, Mexican peso,
Australian dollar, Brazilian real, euro, Japanese yen and the
U.K. Pound.
59
All of our outstanding foreign exchange forward contracts are
entered into to protect the value of intercompany receivables
denominated in currencies other than the lenders
functional currency. The realized and unrealized gains and
losses from foreign currency forward contracts and revaluation
of the foreign denominated intercompany receivables are recorded
through Other, net in the accompanying consolidated
statements of operations.
All of our outstanding foreign currency options are entered into
to reduce the volatility of earnings generated in currencies
other than the U.S. dollar, primarily earnings denominated
in the Canadian dollar, Mexican peso, Australian dollar,
Brazilian real, euro, Japanese yen and the U.K. Pound. Current
changes in the fair value of open foreign currency option
contracts are recorded through earnings as Unrealized gain
(loss) on derivative instruments, net while any realized
gains (losses) on settled contracts are recorded through
earnings as Other, net in the accompanying
consolidated statements of operations. The premium costs of
purchased foreign exchange option contracts are recorded in
Other current assets and amortized to Other,
net over the life of the options.
The following table provides information about our foreign
currency derivative financial instruments outstanding as of
December 31, 2005 and 2004. The information is provided in
U.S. dollars, as presented in our consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Average Contract |
|
|
|
Average Contract |
|
|
Notional |
|
Rate or Strike |
|
Notional |
|
Rate or Strike |
|
|
Amount |
|
Amount |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
(in millions) |
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Receive US$/Pay Foreign Currency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$ |
12.6 |
|
|
|
1.20 |
|
|
$ |
13.2 |
|
|
|
1.32 |
|
|
Canadian Dollar
|
|
|
6.9 |
|
|
|
1.15 |
|
|
|
|
|
|
|
|
|
|
Australian Dollar
|
|
|
2.6 |
|
|
|
0.75 |
|
|
|
|
|
|
|
|
|
|
U.K. Pound
|
|
|
16.5 |
|
|
|
1.77 |
|
|
|
3.4 |
|
|
|
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38.6 |
|
|
|
|
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
0.7 |
|
|
|
|
|
|
$ |
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Average Contract |
|
|
|
Average Contract |
|
|
Notional |
|
Rate or Strike |
|
Notional |
|
Rate or Strike |
|
|
Amount |
|
Amount |
|
Amount |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
(in millions) |
|
|
Foreign currency purchased put options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Dollar
|
|
$ |
26.0 |
|
|
|
1.15 |
|
|
$ |
22.0 |
|
|
|
1.22 |
|
|
Mexican Peso
|
|
|
11.7 |
|
|
|
10.78 |
|
|
|
10.1 |
|
|
|
11.75 |
|
|
Australian Dollar
|
|
|
12.1 |
|
|
|
0.75 |
|
|
|
11.0 |
|
|
|
0.74 |
|
|
Brazilian Real
|
|
|
9.3 |
|
|
|
2.40 |
|
|
|
6.6 |
|
|
|
3.06 |
|
|
Euro
|
|
|
39.4 |
|
|
|
1.20 |
|
|
|
22.4 |
|
|
|
1.32 |
|
|
Japanese Yen
|
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
102.21 |
|
|
U.K. Pound
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
98.5 |
|
|
|
|
|
|
$ |
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
2.9 |
|
|
|
|
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sold call options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Pound
|
|
$ |
17.0 |
|
|
|
1.76 |
|
|
$ |
1.0 |
|
|
|
1.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$ |
0.2 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
Recently Adopted Accounting Standards |
In March 2005, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarifies that conditional obligations meet the
definition of an asset retirement obligation in SFAS
No. 143, Accounting for Asset Retirement
Obligations, and therefore should be recognized if their
fair value is reasonably estimable. We adopted the provisions of
FIN 47 in our fourth fiscal quarter of 2005. The adoption
did not have a material effect on our consolidated financial
statements.
In December 2004, Financial Accounting Standards Board Position
109-2 (FASB Staff Position 109-2) was issued and was effective
upon issuance. FASB Staff Position 109-2 establishes standards
for how an issuer accounts for a special one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer pursuant to the American Jobs
Creation Act of 2004 (the Act). The Financial Accounting
Standards Board (FASB) staff believes that the lack of
clarification of certain provisions within the Act and the
timing of the enactment necessitate a practical exception to the
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109),
requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the
effect of the Act on its plan for reinvestment or repatriation
of foreign earnings for purposes of applying
SFAS No. 109. We determined during our second fiscal
quarter 2005 that we had sufficient information to make an
informed decision on the impact of the Act on our repatriation
plans and recorded a $32.8 million tax liability based on a
plan to repatriate approximately $674.0 million in
extraordinary dividends as defined by the Act. Upon the
subsequent execution of the divided repatriation plan in 2005,
we repatriated $674.0 million in extraordinary dividends
and adjusted our estimate of the tax liability on the
extraordinary dividends to $29.9 million.
In December 2004, Financial Accounting Standards Board Position
109-1 (FASB Staff Position 109-1) was issued and was effective
upon issuance. FASB Staff Position 109-1 requires us to treat
the effect of a newly enacted U.S. tax deduction, beginning
in 2005, for income attributable to United States production
activities as a special deduction, and not a tax rate reduction,
in accordance with SFAS No. 109. We adopted the
provisions of FASB Staff Position 109-1 in our first fiscal
quarter of 2005. The adoption did not have a material effect on
our consolidated financial statements.
In October 2004, the FASB ratified the consensuses reached by
the Emerging Issues Task Force (EITF) in EITF Issue
No. 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share
(EITF 04-8),
which became effective for reporting periods ending after
December 15, 2004. EITF No. 04-8 requires all
instruments that have embedded conversion features, including
contingently convertible debt, that are contingent on market
conditions indexed to an issuers share price to be
included in diluted earnings per share computations, if
dilutive, regardless of whether the market conditions have been
met. We adopted the provisions of EITF No. 04-8 in our
fourth fiscal quarter of 2004 and restated all prior period
diluted earnings per share amounts to conform to the guidance in
EITF No. 04-8.
|
|
|
New Accounting Standards Not Yet Adopted |
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (SFAS No. 154). SFAS No. 154
requires retrospective application to prior-period financial
statements of changes in accounting principles, unless a new
accounting pronouncement provides specific transition provisions
to the contrary or it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 also redefines restatement as
the revising of previously issued financial statements to
reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
In December 2004, Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), was issued and is effective for
entities that do not file as small business issuers as of the
beginning of the first interim reporting period of fiscal years
that begin after June 15, 2005, which is our first fiscal
quarter of 2006. SFAS No. 123R requires companies to
recognize in the income statement the
61
grant-date fair value of stock options and other equity-based
compensation issued to employees. SFAS No. 123R sets
accounting requirements for measuring, recognizing and reporting
share-based compensation, including income tax considerations.
Upon adoption of SFAS No. 123R, we will begin
recognizing the cost of stock options using the modified
prospective application method whereby the cost of new awards
and awards modified, repurchased or cancelled after the required
effective date and the portion of awards for which the requisite
service has not been rendered (unvested awards) that are
outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the
required effective date. Because we historically accounted for
share-based payment arrangements under the intrinsic value
method of accounting, we will continue to provide the
disclosures required by Statement of Financial Accounting
Standards No. 123 until the effective date of
SFAS No. 123R, regarding pro forma net earnings
and basic and diluted earnings per share, had compensation
expense for our stock options been recognized based upon the
fair value for awards granted. We will adopt the provisions of
SFAS No. 123R in our first fiscal quarter of 2006. For
fiscal year 2006, we estimate the incremental increase to
compensation costs related to the expensing of stock options
will be approximately $28.0 million, net of tax.
|
|
Item 8. |
Financial Statements and Supplementary Data |
The information required by this Item is incorporated herein by
reference to the financial statements set forth in
Item 15(a) of Part IV of this report.
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
|
|
|
Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Principal Executive Officer and our Principal
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Our management, including our
Principal Executive Officer and our Principal Financial Officer,
does not expect that our disclosure controls or procedures will
prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within Allergan have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the control. The design of any system of controls is also based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected. Also, we have investments
in certain unconsolidated entities. As we do not control or
manage these entities, our disclosure controls and procedures
with respect to such entities are necessarily substantially more
limited than those we maintain with respect to our consolidated
subsidiaries.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Principal
Executive Officer and our Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2005, the end of
the annual period covered by this report. The evaluation of our
disclosure controls and procedures included a review of the
disclosure controls and procedures objectives,
design, implementation and the effect of the controls and
procedures on the information generated for use in this report.
In the course of our evaluation, we sought to
62
identify data errors, control problems or acts of fraud and to
confirm the appropriate corrective actions, including process
improvements, were being undertaken.
Based on the foregoing, our Principal Executive Officer and our
Principal Financial Officer concluded that, as of the period
covered by this report, our disclosure controls and procedures
were effective and were operating at the reasonable assurance
level.
Further, management determined that, as of December 31,
2005, there were no changes in our internal control over
financial reporting that occurred during the fourth fiscal
quarter that have materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
Our management report on internal control over financial
reporting and the attestation report on managements
assessment of our internal control over financial reporting are
contained in Item 15(a)(1) of Part IV of this report.
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of Allergan, Inc. |
For information required by this Item regarding the
Companys executive officers, see Item 1 of Part I of
this report, General.
The information to be included in the sections entitled
Election of Directors and Information
Regarding the Board of Directors in the Proxy Statement to
be filed by us with the Securities and Exchange Commission no
later than 120 days after the close of our fiscal year
ended December 31, 2005 (the Proxy Statement)
is incorporated herein by reference.
The information to be included in the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement is incorporated herein
by reference.
The information to be included in the section entitled
Code of Business Conduct and Ethics in the Proxy
Statement is incorporated herein by reference.
The Company has filed, as exhibits to this Annual Report on
Form 10-K for the
year ended December 31, 2005, the certifications of its
Principal Executive Officer and Principal Financial Officer
required pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
On May 16, 2005, the Company submitted to the New York
Stock Exchange the Annual CEO Certification required pursuant to
Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual.
|
|
Item 11. |
Executive Compensation |
The information to be included in the sections entitled
Executive Compensation and Director
Compensation in the Proxy Statement is incorporated herein
by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information to be included in the section entitled
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters in the Proxy
Statement is incorporated herein by reference.
63
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information to be included in the sections entitled
Certain Relationships and Related Transactions and
Compensation Committee Interlocks and Insider
Participation in the Proxy Statement is incorporated
herein by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information to be included in the section entitled
Independent Registered Public Accounting Firm Fees
in the Proxy Statement is incorporated herein by reference.
64
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) 1. Consolidated
Financial Statements and Supplementary Data:
|
|
|
The following financial statements are included herein under
Item 8: |
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
|
|
|
F-1 |
|
|
|
|
F-2 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
|
|
|
F-9 |
|
|
|
|
F-49 |
|
(a) 2. Financial Statement
Schedules:
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
F-50 |
|
All other schedules have been omitted for the reason that the
required information is presented in financial statements or
notes thereto, the amounts involved are not significant or the
schedules are not applicable.
(a) 3. Exhibits:
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
3.1 |
|
|
Restated Certificate of Incorporation of the Company as filed
with the State of Delaware on May 22, 1989 (incorporated by
reference to Exhibit 3.1 to Registration Statement on
Form S-1 No. 33-28855, filed May 24, 1989) |
|
|
3.2 |
|
|
Certificate of Amendment of Certificate of Incorporation of
Allergan, Inc. (incorporated by reference to Exhibit 3 the
Companys Report on Form 10-Q for the Quarter ended
June 30, 2000) |
|
|
3.3 |
|
|
Allergan, Inc. Bylaws (incorporated by reference to
Exhibit 3 to the Companys Report on Form 10-Q
for the Quarter ended June 30, 1995) |
|
|
3.4 |
|
|
First Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.1 to the Companys Report on
Form 10-Q for the Quarter ended September 24, 1999) |
|
|
3.5 |
|
|
Second Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.5 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002) |
|
|
3.6 |
|
|
Third Amendment to Allergan, Inc. Bylaws (incorporated by
reference to Exhibit 3.6 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2003) |
|
|
4.1 |
|
|
Certificate of Designations of Series A Junior
Participating Preferred Stock as filed with the State of
Delaware on February 1, 2000 (incorporated by reference to
Exhibit 4.1 to the Companys Report on Form 10-K
for the Fiscal Year ended December 31, 1999) |
65
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
4.2 |
|
|
Rights Agreement, dated January 25, 2000, between Allergan,
Inc. and First Chicago Trust Company of New York (Rights
Agreement) (incorporated by reference to Exhibit 4 to
the Companys Current Report on Form 8-K filed on
January 28, 2000) |
|
|
4.3 |
|
|
Amendment to Rights Agreement dated as of January 2, 2002
between First Chicago Trust Company of New York, the Company and
EquiServe Trust Company, N.A., as successor Rights Agent
(incorporated by reference to Exhibit 4.3 of the
Companys Annual Report on Form 10-K for the year
ended December 31, 2001) |
|
|
4.4 |
|
|
Second Amendment to Rights Agreement dated as of
January 30, 2003 between First Chicago Trust Company of New
York, the Company and EquiServe Trust Company, N.A., as
successor Rights Agent (incorporated by reference to
Exhibit 1 of the Companys amended Form 8-A filed
on February 14, 2003) |
|
|
4.5 |
|
|
Third Amendment to Rights Agreement dated as of October 7,
2005 between Wells Fargo Bank, National Association and the
Company, as successor Right Agent (incorporated by reference to
Exhibit 4.11 to the Companys Report on Form 10-Q
for the Quarter ended September 30, 2005) |
|
|
4.6 |
|
|
Amended and Restated Indenture, dated as of July 28, 2004,
between the Company and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 4.11 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 2004) |
|
|
4.7 |
|
|
Form of Zero Coupon Convertible Senior Note Due 2022
(incorporated by reference to Exhibit 4.2 (included in
Exhibit 4.1) of the Companys Registration Statement
on Form S-3 dated January 9, 2003, Registration
No. 333-102425) |
|
|
4.8 |
|
|
Registration Rights Agreement dated as of November 6, 2002,
by and between Allergan, Inc. and Banc of America Securities
LLC, Salomon Smith Barney Inc., J.P. Morgan Securities Inc.
and Banc One Capital Markets, Inc. (incorporated by reference to
Exhibit 4.3 of the Companys Registration Statement on
Form S-3 dated January 9, 2003, Registration
No. 333-102425) |
|
|
10.1 |
|
|
Form of director and executive officer Indemnity Agreement
(incorporated by reference to Exhibit 10.4 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 1992) |
|
|
10.2 |
|
|
Form of Allergan, Inc. Change in Control Agreement (incorporated
by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on January 28,
2000)* |
|
|
10.3 |
|
|
Allergan, Inc. 2003 Nonemployee Director Equity Incentive Plan
(incorporated by reference to Appendix A to the
Companys Proxy Statement filed on March 14, 2003)* |
|
|
10.4 |
|
|
Form of Restricted Stock Award Agreement under the
Companys 2003 Nonemployee Director Equity Incentive Plan |
|
|
10.5 |
|
|
Form of Non-Qualified Stock Option Award Agreement under the
Companys 2003 Nonemployee Director Equity Incentive Plan |
|
|
10.6 |
|
|
Allergan, Inc. Deferred Directors Fee Program amended and
restated as of November 15, 1999 (incorporated by reference
to Exhibit 4 to the Companys Registration Statement
on Form S-8 dated January 6, 2000, Registration
No. 333-94155)* |
|
|
10.7 |
|
|
Allergan, Inc. 1989 Incentive Compensation Plan, as amended and
restated, November 2000 and as adjusted for 1999 split
(incorporated by reference to Exhibit 10.5 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2000) |
|
|
10.8 |
|
|
First Amendment to Allergan, Inc. 1989 Incentive Compensation
Plan (as amended and restated November 2000) (incorporated by
reference to Exhibit 10.51 to the Companys Report on
Form 10-Q for the Quarter ended September 26, 2003) |
|
|
10.9 |
|
|
Second Amendment to Allergan, Inc. 1989 Incentive Compensation
Plan (as amended and restated November 2000) (incorporated by
reference to Exhibit 10.7 to the Companys Report on Form
10-K for the Fiscal Year ended December 31, 2004) |
|
|
10.10 |
|
|
Form of Certificate of Restricted Stock Award Terms and
Conditions under the Companys 1989 Incentive Compensation
Plan (as amended and restated November 2000) (incorporated by
reference to Exhibit 10.8 to the Companys Report on Form
10-K for the Fiscal Year ended December 31, 2004) |
66
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10.11 |
|
|
Form of Restricted Stock Units Terms and Conditions under the
Companys 1989 Incentive Compensation Plan (as amended and
restated November 2000) (incorporated by reference to Exhibit
10.9 to the Companys Report on Form 10-K for the Fiscal
Year ended December 31, 2004) |
|
|
10.12 |
|
|
Allergan, Inc. Employee Stock Ownership Plan (Restated 2003)
(incorporated by reference to Exhibit 10.6 the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002) |
|
|
10.13 |
|
|
First Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) (incorporated by reference to
Exhibit 10.52 to the Companys Report on
Form 10-Q for the Quarter ended September 26, 2003) |
|
|
10.14 |
|
|
Second Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) (incorporated by reference to
Exhibit 10.9 to the Companys Report on Form 10-K
for the Fiscal Year ended December 31, 2003) |
|
|
10.15 |
|
|
Third Amendment to Allergan, Inc. Employee Stock Ownership Plan
(as Restated 2003) (incorporated by reference to Exhibit 10.13
to the Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2004) |
|
|
10.16 |
|
|
Allergan, Inc. Employee Savings and Investment Plan (Restated
2003) (incorporated by reference to Exhibit 10.7 to the
Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002) |
|
|
10.17 |
|
|
First Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) (incorporated by reference to Exhibit 10.53
to the Companys Report on Form 10-Q for the Quarter
ended September 26, 2003) |
|
|
10.18 |
|
|
Second Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) (incorporated by reference to Exhibit 10.12
to the Companys Report on Form 10-K for the Fiscal
Year ended December 31, 2003) |
|
|
10.19 |
|
|
Third Amendment to Allergan, Inc. Savings and Investment Plan
(Restated 2003) (incorporated by reference to Exhibit 10.17 to
the Companys Report on Form 10-K for the Fiscal Year ended
December 31, 2004) |
|
|
10.20 |
|
|
Allergan, Inc. Pension Plan (Restated 2003) (incorporated by
reference to Exhibit 10.8 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002) |
|
|
10.21 |
|
|
First Amendment to Allergan, Inc. Pension Plan (Restated 2003)
(incorporated by reference to Exhibit 10.50 to the
Companys Report on Form 10-Q for the Quarter ended
September 26, 2003) |
|
|
10.22 |
|
|
Second Amendment to Allergan, Inc. Pension Plan (Restated 2003)
(incorporated by reference to Exhibit 10.20 to the
Companys Report on Form 10-K for the Fiscal Year ended
December 31, 2004) |
|
|
10.23 |
|
|
Restated Allergan, Inc. Supplemental Retirement Income Plan
(incorporated by reference to Exhibit 10.5 to the
Companys Report on Form 10-Q for the Quarter ended
March 31, 1996)* |
|
|
10.24 |
|
|
First Amendment to Allergan, Inc. Supplemental Retirement Income
Plan (incorporated by reference to Exhibit 10.4 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 1999)* |
|
|
10.25 |
|
|
Second Amendment to Allergan, Inc. Supplemental Retirement
Income Plan (incorporated by reference to Exhibit 10.12 to
the Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
|
10.26 |
|
|
Third Amendment to Allergan, Inc. Supplemental Retirement Income
Plan (incorporated by reference to Exhibit 10.46 to the
Companys Report on Form 10-Q for the Quarter ended
June 28, 2002)* |
|
|
10.27 |
|
|
Fourth Amendment to Allergan, Inc. Supplemental Retirement
Income Plan (Restated 1996) (incorporated by reference to
Exhibit 10.13 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002)* |
|
|
10.28 |
|
|
Restated Allergan, Inc. Supplemental Executive Benefit Plan
(incorporated by reference to Exhibit 10.6 to the
Companys Report on Form 10-Q for the Quarter ended
March 31, 1996)* |
67
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10.29 |
|
|
First Amendment to Allergan, Inc. Supplemental Executive Benefit
Plan (incorporated by reference to Exhibit 10.3 to the
Companys Report on Form 10-Q for the Quarter ended
September 24, 1999)* |
|
|
10.30 |
|
|
Second Amendment to Allergan, Inc. Supplemental Executive
Benefit Plan (incorporated by reference to Exhibit 10.11 to
the Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
|
10.31 |
|
|
Third Amendment to Allergan, Inc. Supplemental Executive Benefit
Plan (incorporated by reference to Exhibit 10.45 to the
Companys Report on Form 10-Q for the Quarter ended
June 28, 2002)* |
|
|
10.32 |
|
|
Fourth Amendment to Allergan, Inc. Supplemental Executive
Benefit Plan (incorporated by reference to Exhibit 10.18 to
the Companys Report on Form 10-K for the Fiscal Year
ended December 31, 2002)* |
|
|
10.33 |
|
|
Allergan, Inc. Executive Bonus Plan (incorporated by reference
to Exhibit C to the Companys Proxy Statement dated
March 23, 1999, filed in definitive form on March 22,
1999)* |
|
|
10.34 |
|
|
First Amendment to Allergan, Inc. Executive Bonus Plan
(incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on
January 28, 2000)* |
|
|
10.35 |
|
|
Allergan, Inc. 2006 Management Bonus Plan* |
|
|
10.36 |
|
|
Allergan, Inc. Executive Deferred Compensation Plan (amended and
restated effective January 1, 2003) (incorporated by
reference to Exhibit 10.22 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2002)* |
|
|
10.37 |
|
|
First Amendment to Allergan, Inc. Executive Deferred
Compensation Plan (amended and restated effective
January 1, 2003) (incorporated by reference to
Exhibit 10.29 to the Companys Report on
Form 10-K for the Fiscal Year ended December 31, 2003)* |
|
|
10.38 |
|
|
Allergan, Inc. Premium Priced Stock Option Plan (incorporated by
reference to Exhibit B to the Companys Proxy
Statement filed on March 23, 2001)* |
|
|
10.39 |
|
|
Acceleration of Vesting of Premium Priced Stock Options
(incorporated by reference to Exhibit 10.57 the
Companys Report on Form 10-Q for the Quarter ended
March 25, 2005) |
|
|
10.40 |
|
|
Distribution Agreement dated March 4, 1994 between
Allergan, Inc. and Merrill Lynch & Co. and
J.P. Morgan Securities Inc. (incorporated by reference to
Exhibit 10.14 to the Companys Report on
Form 10-K for the fiscal year ended December 31, 1993) |
|
|
10.41 |
|
|
Credit Agreement, dated as of October 11, 2002, among the
Company, as Borrower and Guarantor, the Eligible Subsidiaries
Referred to Therein, the Banks Listed Therein, JPMorgan Chase
Bank, as Administrative Agent, Citicorp USA Inc., as Syndication
Agent and Bank of America, N.A., as Documentation Agent
(incorporated by reference to Exhibit 10.47 to the
Companys Report on Form 10-Q for the Quarter ended
September 27, 2002) |
|
|
10.42 |
|
|
First Amendment to Credit Agreement, dated as of
October 30, 2002, among the Company, as Borrower and
Guarantor, the Eligible Subsidiaries Referred to Therein, the
Banks Listed Therein, JPMorgan Chase Bank, as Administrative
Agent, Citicorp USA Inc., as Syndication Agent and Bank of
America, N.A., as Documentation Agent (incorporated by reference
to Exhibit 10.48 to the Companys Report on
Form 10-Q for the Quarter ended September 27, 2002) |
|
|
10.43 |
|
|
Second Amendment to Credit Agreement, dated as of May 16,
2003, among the Company, as Borrower and Guarantor, the Banks
listed Therein, JPMorgan Chase Bank, as Administrative Agent,
Citicorp USA Inc., as Syndication Agent and Bank of America,
N.A., as Documentation Agent (incorporated by reference to
Exhibit 10.49 to the Companys Report on
Form 10-Q for the Quarter ended June 27, 2003) |
|
|
10.44 |
|
|
Third Amendment to Credit Agreement, dated as of
October 15, 2003, among the Company, as Borrower and
Guarantor, the Banks Listed Therein, JPMorgan Chase Bank, as
Administrative Agent, Citicorp USA Inc., as Syndication Agent
and Bank of America, N.A., as Documentation Agent (incorporated
by reference to Exhibit 10.54 to the Companys Report
on Form 10-Q for the Quarter ended September 26, 2003) |
68
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
10.45 |
|
|
Fourth Amendment to Credit Agreement, dated as of May 26,
2004, among the Company, as Borrower and Guarantor, the Banks
Listed Therein, JPMorgan Chase Bank, as Administrative Agent,
Citicorp USA Inc., as Syndication Agent and Bank of America,
N.A., as Document Agent (incorporated by reference to
Exhibit 10.56 to the Companys Report on
Form 10-Q for the Quarter ended June 25, 2004) |
|
|
10.46 |
|
|
Contribution and Distribution Agreement by and among Allergan,
Inc. and Advanced Medical Optics, Inc. (incorporated by
reference to Exhibit 10.35 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
|
10.47 |
|
|
Transitional Services Agreement between Allergan, Inc. and
Advanced Medical Optics, Inc. (incorporated by reference to
Exhibit 10.36 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
|
10.48 |
|
|
Employee Matters Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.37 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
|
10.49 |
|
|
Tax Sharing Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.38 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
|
10.50 |
|
|
Manufacturing Agreement between Allergan, Inc. and Advanced
Medical Optics, Inc. (incorporated by reference to
Exhibit 10.39 to the Companys Report on
Form 10-Q for the Quarter ended June 28, 2002) |
|
|
10.51 |
|
|
Agreement and Plan of Merger dated as of December 20, 2005,
by and among Allergan, Inc., Banner Acquisition, Inc., a
wholly-owned subsidiary of Allergan, and Inamed Corporation
(incorporated by reference to Exhibit 99.2 to the
Companys Current Report on Form 8-K filed on
December 13, 2005) |
|
|
10.52 |
|
|
Transition and General Release Agreement effective as of
August 6, 2004, by and between Allergan, Inc. and Lester J.
Kaplan (incorporated by reference to Exhibit 10.55 to the
Companys Report on Form 10-Q for the Quarter ended
March 26, 2004) |
|
|
10.53 |
|
|
Transfer Agent Services Agreement dated as of October 7,
2005, by and among Allergan, Inc. and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 10.57 to
the Companys Report on Form 10-Q for the Quarter
ended September 30, 2005) |
|
|
10.54 |
|
|
Botox®
China License Agreement dated as of September 30, 2005, by
and among Allergan, Inc. Allergan Sales, LLC and Glaxo Group
Limited (incorporated by reference to Exhibit 10.51** to
the Companys Report on Form 10-Q for the Quarter
ended September 30, 2005) |
|
|
10.55 |
|
|
Botox®
Japan License Agreement, dated as of September 30, 2005, by
and among Allergan, Inc. Allergan Sales, LLC and Glaxo Group
Limited (incorporated by reference to Exhibit 10.52** to
the Companys Report on Form 10-Q for the Quarter
ended September 30, 2005) |
|
|
10.56 |
|
|
Co-Promotion Agreement, dated as of September 30, 2005, by
and among Allergan, Inc., Allergan Sales, LLC and SmithKline
Beecham Corporation d/b/a GlaxoSmithKline (incorporated by
reference to Exhibit 10.53** to the Companys Report
on Form 10-Q for the Quarter ended September 30, 2005) |
|
|
10.57 |
|
|
Botox®
Global Strategic Support Agreement, dated as of
September 30, 2005, by and among Allergan, Inc., Allergan
Sales, LLC and Glaxo Group Limited (incorporated by reference to
Exhibit 10.54** to the Companys Report on
Form 10-Q for the Quarter ended September 30, 2005) |
|
|
10.58 |
|
|
China
Botox®
Supply Agreement, dated as of September 30, 2005, by and
among Allergan Sales, LLC and Glaxo Group Limited (incorporated
by reference to Exhibit 10.55** to the Companys
Report on Form 10-Q for the Quarter ended
September 30, 2005) |
|
|
10.59 |
|
|
Japan
Botox®
Supply Agreement, dated as of September 30, 2005, by and
between Allergan Pharmaceuticals Ireland and Glaxo Group Limited
(incorporated by reference to Exhibit 10.56** to the
Companys Report on Form 10-Q for the Quarter ended
September 30, 2005) |
|
|
21 |
|
|
List of Subsidiaries of Allergan, Inc. |
|
|
23.1 |
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm. |
69
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
23.2 |
|
|
Report and consent of KPMG LLP, independent registered public
accounting firm. |
|
|
31.1 |
|
|
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended |
|
|
31.2 |
|
|
Certification of Principal Financial Officer Required Under
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended |
|
|
32 |
|
|
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350 |
|
|
* |
Management contract or compensatory plan or arrangement. |
|
** |
Confidential treatment was requested with respect to the omitted
portions of this Exhibit, which portions have been filed
separately with the Securities and Exchange Commission and which
portions were granted confidential treatment on
December 13, 2005. |
|
|
|
|
|
All current directors and executive officers of the Company have
entered into the Indemnity Agreement with the Company. |
|
|
|
All vice president level employees and above of the Company,
including the executive officers, have entered into the
Allergan, Inc. Change in Control Agreement. |
(b) Item 601 Exhibits
|
|
|
Reference is hereby made to the Index of Exhibits under
Item 15(a)(3) of Part IV of this report. |
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
David E.I. Pyott |
|
Chairman of the Board and |
|
Chief Executive Officer |
Date: March 2, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
Date: March 2, 2006
|
|
By /s/ David E.I.
Pyott
David E.I. Pyott
Chairman of the Board and
Chief Executive Officer |
|
Date: March 2, 2006 |
|
By /s/ Jeffrey L.
Edwards
Jeffrey L. Edwards
Executive Vice President, Finance and
Business Development, Chief Financial Officer
(Principal Financial Officer) |
|
Date: March 2, 2006 |
|
By /s/ James F.
Barlow
James F. Barlow
Senior Vice President, Corporate Controller
(Principal Accounting Officer) |
|
Date: March 2, 2006 |
|
By /s/ Herbert W.
Boyer
Herbert W. Boyer, Ph.D.,
Vice Chairman of the Board |
|
Date: March 2, 2006 |
|
By /s/ Handel E.
Evans
Handel E. Evans, Director |
|
Date: March 1, 2006 |
|
By /s/ Michael R.
Gallagher
Michael R. Gallagher, Director |
|
Date: March 2, 2006 |
|
By /s/ Gavin S.
Herbert
Gavin S. Herbert,
Director and Chairman Emeritus |
|
Date: March 2, 2006 |
|
By /s/ Robert A.
Ingram
Robert A. Ingram, Director |
71
|
|
|
|
Date: March 2, 2006 |
|
By /s/ Trevor M.
Jones
Trevor M. Jones, Director |
|
Date: March 2, 2006 |
|
By /s/ Louis J.
Lavigne, Jr.
Louis J. Lavigne, Jr.,
Director |
|
Date: March 1, 2006 |
|
By /s/ Russell T.
Ray
Russell T. Ray, Director |
|
Date: March 2, 2006 |
|
By /s/ Stephen J.
Ryan
Stephen J. Ryan, M.D.,
Director |
|
Date: March 2, 2006 |
|
By /s/ Leonard D.
Schaeffer
Leonard D. Schaeffer, Director |
72
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Internal control over financial reporting, as such term is
defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended, refers to
the process designed by, or under the supervision of, our
Principal Executive Officer and Principal Financial Officer, and
effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those
policies and procedures that:
|
|
|
(1) Pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of Allergan; |
|
|
(2) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Allergan are
being made only in accordance with authorizations of management
and directors of Allergan; and |
|
|
(3) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of Allergans assets that could have a material effect on
the financial statements. |
Managements assessment of the effectiveness of
Allergans internal control over financial reporting has
been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report on
managements assessment and on the effectiveness of
Allergans internal control over financial reporting as of
December 31, 2005. Internal control over financial
reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a
process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate,
this risk. Management is responsible for establishing and
maintaining adequate internal control over financial reporting
for Allergan.
Management has used the framework set forth in the report
entitled Internal Control Integrated
Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the
effectiveness of Allergans internal control over financial
reporting. Management has concluded that Allergans
internal control over financial reporting was effective as of
the end of the most recent fiscal year, based on those criteria.
David E.I. Pyott
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Jeffrey L. Edwards
Executive Vice President, Finance and
Business Development, Chief Financial Officer
(Principal Financial Officer)
March 2, 2006
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Allergan, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Allergan, Inc. (the
Company) maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Allergan,
Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness
of the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Allergan, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
Allergan, Inc. maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Allergan, Inc. as of
December 31, 2005, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended and our report dated March 2, 2006
expressed an unqualified opinion thereon.
Orange County, California
March 2, 2006
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Allergan, Inc.
We have audited the consolidated balance sheet of Allergan, Inc.
(the Company) as of December 31, 2005, and the
related consolidated statements of operations,
stockholders equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule
listed in the Index at Item 15(a)2. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audit. The consolidated
financial statements and financial statement schedule of the
Company at December 31, 2004 and for the years ended
December 31, 2004 and 2003, were audited by other auditors
whose report dated March 4, 2005, expressed an unqualified
opinion on those statements and schedule and included an
explanatory paragraph that disclosed the adoption of Emerging
Issues Task Force No. 04-08, The Effect of Contingently
Convertible Instruments on Diluted Earning Per Share, in the
fiscal fourth quarter of 2004 discussed in Note 1 to these
financial statements.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Allergan, Inc. at
December 31, 2005, and the consolidated results of its
operations and its cash flows for the year then ended, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 2005,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 2, 2006
expressed an unqualified opinion thereon.
Orange County, California
March 2, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited the accompanying consolidated balance sheet of
Allergan, Inc. and subsidiaries (the Company) as of
December 31, 2004, and the related consolidated statements
of operations, stockholders equity and cash flows for each
of the years in the two-year period ended December 31,
2004. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Allergan, Inc. and subsidiaries as of
December 31, 2004 and the results of their operations and
their cash flows for each of the years in the two-year period
ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Emerging Issues Task Force
(EITF) No. 04-08, The Effect of Contingently
Convertible Instruments on Diluted Earnings Per Share, in
the fiscal fourth quarter of 2004 and restated all prior period
diluted earnings per share amounts.
/s/ KPMG LLP
Costa Mesa, California
March 4, 2005
F-4
ALLERGAN, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
(in millions, except |
|
|
share data) |
ASSETS |
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$ |
1,296.3 |
|
|
$ |
894.8 |
|
|
Trade receivables, net
|
|
|
246.1 |
|
|
|
243.5 |
|
|
Inventories
|
|
|
90.1 |
|
|
|
89.9 |
|
|
Other current assets
|
|
|
193.1 |
|
|
|
147.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,825.6 |
|
|
|
1,376.0 |
|
Investments and other assets
|
|
|
258.9 |
|
|
|
230.0 |
|
Deferred tax assets
|
|
|
123.2 |
|
|
|
115.7 |
|
Property, plant and equipment, net
|
|
|
494.0 |
|
|
|
468.5 |
|
Goodwill
|
|
|
9.0 |
|
|
|
8.7 |
|
Intangibles, net
|
|
|
139.8 |
|
|
|
58.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,850.5 |
|
|
$ |
2,257.0 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$ |
169.6 |
|
|
$ |
13.1 |
|
|
Convertible notes, net of discount
|
|
|
520.0 |
|
|
|
|
|
|
Accounts payable
|
|
|
92.3 |
|
|
|
97.9 |
|
|
Accrued compensation
|
|
|
84.8 |
|
|
|
77.1 |
|
|
Other accrued expenses
|
|
|
177.3 |
|
|
|
178.5 |
|
|
Income taxes
|
|
|
|
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,044.0 |
|
|
|
459.6 |
|
Long-term debt
|
|
|
57.5 |
|
|
|
56.5 |
|
Long-term convertible notes, net of discount
|
|
|
|
|
|
|
513.6 |
|
Other liabilities
|
|
|
181.0 |
|
|
|
108.6 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
1.1 |
|
|
|
2.5 |
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; authorized
300,000,000 shares; issued 134,255,000 shares
|
|
|
1.3 |
|
|
|
1.3 |
|
|
Additional paid-in capital
|
|
|
417.7 |
|
|
|
387.1 |
|
|
Accumulated other comprehensive loss
|
|
|
(50.6 |
) |
|
|
(45.7 |
) |
|
Retained earnings
|
|
|
1,305.1 |
|
|
|
982.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,673.5 |
|
|
|
1,325.2 |
|
|
Less treasury stock, at cost (1,431,000 and
2,838,000 shares, respectively)
|
|
|
(106.6 |
) |
|
|
(209.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,566.9 |
|
|
|
1,116.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
2,850.5 |
|
|
$ |
2,257.0 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(in millions, |
|
|
except per share data) |
Product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,319.2 |
|
|
$ |
2,045.6 |
|
|
$ |
1,755.4 |
|
Cost of sales
|
|
|
399.6 |
|
|
|
386.7 |
|
|
|
320.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
|
1,919.6 |
|
|
|
1,658.9 |
|
|
|
1,435.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research services
|
|
|
|
|
|
|
|
|
|
|
|
|
Research service revenues
|
|
|
|
|
|
|
|
|
|
|
16.0 |
|
Cost of research services
|
|
|
|
|
|
|
|
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research services margin
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
913.9 |
|
|
|
778.9 |
|
|
|
697.2 |
|
Research and development
|
|
|
391.0 |
|
|
|
345.6 |
|
|
|
763.5 |
|
Restructuring charge (reversal), net
|
|
|
43.8 |
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
570.9 |
|
|
|
527.4 |
|
|
|
(23.7 |
) |
Interest income
|
|
|
35.4 |
|
|
|
14.1 |
|
|
|
13.0 |
|
Interest expense
|
|
|
(12.4 |
) |
|
|
(18.1 |
) |
|
|
(15.6 |
) |
Gain on investments, net
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
|
|
Unrealized gain (loss) on derivative instruments, net
|
|
|
1.1 |
|
|
|
(0.4 |
) |
|
|
(0.3 |
) |
Other, net
|
|
|
3.4 |
|
|
|
8.8 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes and minority interest
|
|
|
599.2 |
|
|
|
532.1 |
|
|
|
(29.5 |
) |
Provision for income taxes
|
|
|
192.4 |
|
|
|
154.0 |
|
|
|
22.2 |
|
Minority interest
|
|
|
2.9 |
|
|
|
1.0 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
403.9 |
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
3.08 |
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$ |
3.01 |
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional |
|
|
|
Other |
|
|
|
Treasury Stock |
|
|
|
Comprehensive |
|
|
|
|
Paid-In |
|
Unearned |
|
Comprehensive |
|
Retained |
|
|
|
|
|
Income |
|
|
Shares |
|
Par Value |
|
Capital |
|
Compensation |
|
Loss |
|
Earnings |
|
Shares |
|
Amount |
|
Total |
|
(Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) |
Balance December 31, 2002
|
|
|
134.3 |
|
|
$ |
1.3 |
|
|
$ |
337.4 |
|
|
$ |
(1.1 |
) |
|
$ |
(73.4 |
) |
|
$ |
871.7 |
|
|
|
(4.8 |
) |
|
$ |
(327.6 |
) |
|
$ |
808.3 |
|
|
|
|
|
Comprehensive income (loss)
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52.5 |
) |
|
|
|
|
|
|
|
|
|
|
(52.5 |
) |
|
$ |
(52.5 |
) |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.4 |
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(34.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to distribution of Advanced Medical Optics, Inc.
common stock to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46.9 |
) |
|
|
|
|
|
|
|
|
|
|
(46.9 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
26.1 |
|
|
|
|
|
|
|
|
|
|
|
(75.5 |
) |
|
|
1.7 |
|
|
|
122.9 |
|
|
|
73.5 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
(1.4 |
) |
|
|
0.2 |
|
|
|
11.3 |
|
|
|
6.0 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(90.6 |
) |
|
|
(90.6 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
|
134.3 |
|
|
|
1.3 |
|
|
|
363.5 |
|
|
|
(3.0 |
) |
|
|
(54.9 |
) |
|
|
695.7 |
|
|
|
(4.1 |
) |
|
|
(284.0 |
) |
|
|
718.6 |
|
|
|
|
|
Comprehensive income
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377.1 |
|
|
|
|
|
|
|
|
|
|
|
377.1 |
|
|
$ |
377.1 |
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9 |
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.2 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
386.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47.3 |
) |
|
|
|
|
|
|
|
|
|
|
(47.3 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
28.2 |
|
|
|
|
|
|
|
|
|
|
|
(45.8 |
) |
|
|
1.9 |
|
|
|
129.4 |
|
|
|
111.8 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
|
|
|
|
2.8 |
|
|
|
0.2 |
|
|
|
10.8 |
|
|
|
9.7 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(65.2 |
) |
|
|
(65.2 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
134.3 |
|
|
|
1.3 |
|
|
|
391.7 |
|
|
|
(4.6 |
) |
|
|
(45.7 |
) |
|
|
982.5 |
|
|
|
(2.8 |
) |
|
|
(209.0 |
) |
|
|
1,116.2 |
|
|
|
|
|
Comprehensive income
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403.9 |
|
|
|
|
|
|
|
|
|
|
|
403.9 |
|
|
$ |
403.9 |
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.6 |
) |
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
399.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends ($0.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52.6 |
) |
|
|
|
|
|
|
|
|
|
|
(52.6 |
) |
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
(30.8 |
) |
|
|
2.4 |
|
|
|
180.4 |
|
|
|
183.5 |
|
|
|
|
|
Activity under other stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
|
|
2.1 |
|
|
|
0.3 |
|
|
|
16.3 |
|
|
|
10.1 |
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
|
|
(94.3 |
) |
|
|
(94.3 |
) |
|
|
|
|
Expense of compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
134.3 |
|
|
$ |
1.3 |
|
|
$ |
425.6 |
|
|
$ |
(7.9 |
) |
|
$ |
(50.6 |
) |
|
$ |
1,305.1 |
|
|
|
(1.4 |
) |
|
$ |
(106.6 |
) |
|
$ |
1,566.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
ALLERGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(in millions) |
Cash flows provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
403.9 |
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
Non-cash items included in net earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
458.0 |
|
|
Depreciation and amortization
|
|
|
78.9 |
|
|
|
68.3 |
|
|
|
57.9 |
|
|
Amortization of original issue discount and debt issuance costs
|
|
|
9.8 |
|
|
|
11.8 |
|
|
|
8.6 |
|
|
Write-off of deferred convertible debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
Deferred income tax benefit
|
|
|
(25.0 |
) |
|
|
(34.5 |
) |
|
|
(61.6 |
) |
|
Gain on investments
|
|
|
(0.8 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
(Gain) loss on sale/abandonment of assets
|
|
|
(5.8 |
) |
|
|
4.1 |
|
|
|
3.7 |
|
|
Unrealized (gain) loss on derivative instruments, net
|
|
|
(1.1 |
) |
|
|
0.4 |
|
|
|
0.3 |
|
|
Expense of compensation plans
|
|
|
15.1 |
|
|
|
11.5 |
|
|
|
10.3 |
|
|
Minority interest
|
|
|
2.9 |
|
|
|
1.0 |
|
|
|
0.8 |
|
|
Restructuring charge (reversal) and asset write-offs, net
|
|
|
43.8 |
|
|
|
7.0 |
|
|
|
(0.4 |
) |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(11.2 |
) |
|
|
(15.8 |
) |
|
|
12.5 |
|
|
|
Inventories
|
|
|
1.1 |
|
|
|
(11.8 |
) |
|
|
(3.3 |
) |
|
|
Other current assets
|
|
|
(31.9 |
) |
|
|
14.7 |
|
|
|
(7.6 |
) |
|
|
Other non-current assets
|
|
|
(34.4 |
) |
|
|
(26.0 |
) |
|
|
(49.2 |
) |
|
|
Accounts payable
|
|
|
(3.8 |
) |
|
|
9.2 |
|
|
|
(4.4 |
) |
|
|
Accrued expenses
|
|
|
(27.7 |
) |
|
|
27.7 |
|
|
|
35.1 |
|
|
|
Income taxes
|
|
|
(61.8 |
) |
|
|
72.3 |
|
|
|
15.3 |
|
|
|
Other liabilities
|
|
|
72.6 |
|
|
|
31.8 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
424.6 |
|
|
|
548.5 |
|
|
|
435.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(78.5 |
) |
|
|
(96.4 |
) |
|
|
(109.6 |
) |
Additions to capitalized software
|
|
|
(13.6 |
) |
|
|
(10.5 |
) |
|
|
(12.3 |
) |
Additions to intangible assets
|
|
|
(99.3 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
7.8 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of investments
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(469.5 |
) |
Other, net
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(182.1 |
) |
|
|
(106.8 |
) |
|
|
(594.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders
|
|
|
(52.3 |
) |
|
|
(47.3 |
) |
|
|
(46.9 |
) |
Net increase (decrease) in notes payable
|
|
|
157.0 |
|
|
|
(12.6 |
) |
|
|
10.0 |
|
Net (repayments) borrowings under commercial paper
obligations
|
|
|
|
|
|
|
(10.4 |
) |
|
|
10.4 |
|
Repayments of convertible borrowings
|
|
|
|
|
|
|
|
|
|
|
(46.2 |
) |
Repayments of long-term debt
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
Sale of stock to employees
|
|
|
149.9 |
|
|
|
83.6 |
|
|
|
47.0 |
|
Payments to acquire treasury stock
|
|
|
(94.3 |
) |
|
|
(65.2 |
) |
|
|
(90.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
160.3 |
|
|
|
(51.9 |
) |
|
|
(116.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and equivalents
|
|
|
(1.3 |
) |
|
|
(2.6 |
) |
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents
|
|
|
401.5 |
|
|
|
387.2 |
|
|
|
(266.4 |
) |
Cash and equivalents at beginning of year
|
|
|
894.8 |
|
|
|
507.6 |
|
|
|
774.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$ |
1,296.3 |
|
|
$ |
894.8 |
|
|
$ |
507.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (net of amount capitalized)
|
|
$ |
11.5 |
|
|
$ |
13.5 |
|
|
$ |
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$ |
279.4 |
|
|
$ |
110.0 |
|
|
$ |
72.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes in 2005 includes amounts related to
the Companys repatriation of foreign earnings in
connection with the American Jobs Creation Act of 2004.
For 2003, non-cash activities included the allocation of
$6.1 million of other assets and $12.8 million in
certain intangible contract-based product marketing and other
rights to the purchase price for the acquisitions of Oculex
Pharmaceuticals, Inc. and Bardeen Sciences Company, LLC,
respectively.
See accompanying notes to consolidated financial statements.
F-8
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1: |
Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
Allergan, Inc. (Allergan or the Company)
and all of its subsidiaries. All significant transactions among
the consolidated entities have been eliminated from the
financial statements.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed
estimates and judgments of management. Actual results could
differ from those estimates.
|
|
|
Foreign Currency Translation |
The financial position and results of operations of the
Companys foreign subsidiaries are generally determined
using local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange
rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the
year. Adjustments arising from the use of differing exchange
rates from period to period are included in accumulated other
comprehensive loss in stockholders equity. Gains and
losses resulting from foreign currency transactions are included
in earnings and have not been material in any year presented.
(See Note 11, Financial Instruments.)
The Company considers cash in banks, repurchase agreements,
commercial paper and deposits with financial institutions with
maturities of three months or less and that can be liquidated
without prior notice or penalty, to be cash and equivalents.
The Company has both marketable and non-marketable equity
investments in conjunction with its various collaboration
arrangements. The Company classifies its marketable equity
investments as available-for-sale securities with net unrealized
gains or losses recorded as a component of accumulated other
comprehensive loss. The non-marketable equity investments
represent investments in
start-up technology
companies or partnerships that invest in
start-up technology
companies and are recorded at cost. Marketable and
non-marketable equity investments are evaluated periodically for
impairment. If it is determined that a decline of any investment
is other than temporary, then the investment basis would be
written down to fair value and the write-down would be included
in earnings as a loss.
Inventories are valued at the lower of cost or market (net
realizable value). Cost is determined by the
first-in, first-out
method.
Property, plant and equipment are stated at cost. Additions,
major renewals and improvements are capitalized, while
maintenance and repairs are expensed. Upon disposition, the net
book value of assets is relieved and resulting gains or losses
are reflected in earnings. For financial reporting purposes,
depreciation is generally provided on the straight-line method
over the useful life of the related asset. The useful lives for
buildings, including building improvements, range from seven
years to 40 years and, for machinery and equipment, three
years to 15 years. Leasehold improvements are amortized
over the shorter of their economic lives or lease terms.
Accelerated depreciation methods are generally used for income
tax purposes.
F-9
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All long-lived assets are reviewed for impairment in value when
changes in circumstances dictate, based upon undiscounted future
operating cash flows, and appropriate losses are recognized and
reflected in current earnings, to the extent the carrying amount
of an asset exceeds its estimated fair value determined by the
use of appraisals, discounted cash flow analyses or comparable
fair values of similar assets.
|
|
|
Goodwill and Intangible Assets |
Goodwill represents the excess of acquisition cost over the fair
value of the net assets of acquired businesses. Goodwill has an
indefinite useful life and is not amortized, but instead tested
for impairment annually. Intangible assets include licensing
agreements, trademarks, core technology and other rights, which
are being amortized over their estimated useful lives ranging
from four to 15 years, and a foreign business license with
an indefinite useful life that is not amortized, but instead
tested for impairment annually.
Treasury stock is accounted for by the cost method. The Company
maintains an evergreen stock repurchase program. The evergreen
stock repurchase program authorizes management to repurchase the
Companys common stock for the primary purpose of funding
its stock-based benefit plans. Under the stock repurchase
program, the Company may maintain up to 9.2 million
repurchased shares in its treasury account at any one time. As
of December 31, 2005 and 2004, the Company held
approximately 1.4 million and 2.8 million treasury
shares, respectively, under this program.
The Company recognizes revenue from product sales when goods are
shipped and title and risk of loss transfer to the customer. The
Company generally offers cash discounts to customers for the
early payment of receivables. Those discounts are recorded as a
reduction of revenue and accounts receivable in the same period
that the related sale is recorded. The amounts reserved for cash
discounts were $1.8 million and $1.3 million at
December 31, 2005 and 2004, respectively. The Company
permits returns of product from any product line by any class of
customer if such product is returned in a timely manner, in good
condition and from the normal distribution channels. Return
policies in certain international markets provide for more
stringent guidelines in accordance with the terms of contractual
agreements with customers. Allowances for returns are provided
for based upon the Companys historical patterns of returns
matched against the sales from which they originated, and
managements evaluation of specific factors that increase
the risk of returns. The amount of allowances for sales returns
accrued at December 31, 2005 and 2004 were
$5.1 million and $5.8 million, respectively.
Historical allowances for cash discounts and product returns
have been within the amounts reserved or accrued, respectively.
Additionally, the Company participates in various managed care
sales rebate and other incentive programs, the largest of which
relates to Medicaid. Sales rebate and other incentive programs
also include chargebacks, which are contractual discounts given
primarily to federal government agencies, health maintenance
organizations, pharmacy benefits managers and group purchasing
organizations. Sales rebates and incentive accruals reduce
revenue in the same period that the related sale is recorded and
are included in Other accrued expenses in the
Companys consolidated balance sheets. The amounts accrued
for sales rebates and other incentive programs at
December 31, 2005 and 2004 were $71.9 million and
$61.4 million, respectively. The Companys procedures
for estimating amounts accrued for sales rebates and other
incentive programs at the end of any period are based on
available quantitative data and are supplemented by
managements judgment with respect to many factors
including, but not limited to, current market place dynamics,
changes in contract terms, changes in sales trends, an
evaluation of current laws and regulations and product pricing.
Quantitatively, the Company uses historical sales, product
utilization and rebate data and applies forecasting techniques
in order to estimate the Companys liability amounts.
Qualitatively, manage-
F-10
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ments judgment is applied to these items to modify, if
appropriate, the estimated liability amounts. Additionally,
there is a significant time lag between the date the Company
determines the estimated liability and when the Company actually
pays the liability. Due to this time lag, the Company records
adjustments to its estimated liabilities over several periods,
which can result in a net increase to earnings or a net decrease
to earnings in those periods. Material differences may result in
the amount of revenue the Company recognizes from the product
sales if the actual amount of rebates and incentives differs
materially from the amounts estimated by management.
Research service revenue is recognized and related costs are
recorded as services are performed under research service
agreements. At such time, the research service customers are
obligated to pay, and such obligation is not refundable.
The Company recognizes license fees as other income based on the
facts and circumstances of each licensing agreement. In general,
the Company recognizes income upon the signing of a license
agreement that grants rights to products or technology to a
third party if the Company has no further obligation to provide
products or services to the third party after granting the
license. The Company defers income under license agreements when
it has further obligations that indicate that a separate
earnings process has not culminated.
As allowed by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation,
the Company has elected to continue to apply the
intrinsic-value-based method of accounting. Under this method,
the Company measures stock-based compensation for option grants
to employees assuming that options granted at market price at
the date of grant have no intrinsic value. The Companys
contributions of common stock related to the Companys
savings and investment plans are measured at market price at the
date of contribution. Restricted stock awards, including
restricted stock units, are valued based on the market price of
a share of nonrestricted stock on the grant date. No
compensation expense has been recognized for stock-based
incentive compensation plans other than for the contributions of
common stock to the Companys savings and investment plans
and the restricted stock awards under both the incentive
compensation plan and the non-employee director equity incentive
plan. (See Note 10, Employee Stock Plans.) Had compensation
expense for the Companys stock options under the incentive
compensation plan and the non-employee director equity incentive
plan been recognized based upon the fair value of awards
granted, the Companys net earnings (loss) would have been
reduced (increased) to the following pro forma
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(in millions, except |
|
|
per share data) |
Net earnings (loss), as reported
|
|
$ |
403.9 |
|
|
$ |
377.1 |
|
|
$ |
(52.5 |
) |
|
Add stock-based compensation expense included in reported net
earnings (loss), net of tax
|
|
|
8.7 |
|
|
|
7.6 |
|
|
|
7.2 |
|
|
Deduct stock-based compensation expense determined under fair
value based method, net of tax
|
|
|
(42.4 |
) |
|
|
(45.4 |
) |
|
|
(43.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss)
|
|
$ |
370.2 |
|
|
$ |
339.3 |
|
|
$ |
(88.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic
|
|
$ |
3.08 |
|
|
$ |
2.87 |
|
|
$ |
(0.40 |
) |
|
As reported diluted
|
|
$ |
3.01 |
|
|
$ |
2.82 |
|
|
$ |
(0.40 |
) |
|
Pro forma basic
|
|
$ |
2.82 |
|
|
$ |
2.58 |
|
|
$ |
(0.68 |
) |
|
Pro forma diluted
|
|
$ |
2.76 |
|
|
$ |
2.53 |
|
|
$ |
(0.68 |
) |
F-11
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These pro forma effects are not indicative of future
amounts. The Company expects to grant additional awards in
future years. See New Accounting Standards Not Yet Adopted below
for a discussion of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R).
|
|
|
Acceleration of Vesting of Premium Priced Stock
Options |
On July 30, 2001, the Company granted non-qualified stock
options to purchase up to 2,500,000 shares of its common
stock to participants, including the Companys executive
officers, under the Allergan, Inc. 2001 Premium Priced Stock
Option Plan. Each option was issued with three tranches:
|
|
|
|
|
The first tranche has an exercise price equal to $88.55; |
|
|
The second tranche has an exercise price equal to
$106.26; and |
|
|
The third tranche has an exercise price equal to $127.51. |
The 2001 Premium Priced Stock Option Plan provided that each
tranche of an option would vest and become exercisable upon the
earlier of (i) the date on which the fair value of a share
of the Companys common stock equals or exceeds the
applicable exercise price or (ii) five years from the grant
date (July 30, 2006). The options expire six years from the
grant date (July 30, 2007). The first tranche of the
options vested and became exercisable on March 1, 2004 as a
result of the fair value of the Companys common stock
exceeding $88.55.
In response to SFAS No. 123R, on April 25, 2005,
the Organization and Compensation Committee of the
Companys Board of Directors approved an acceleration of
the vesting of the options issued under the Allergan, Inc. 2001
Premium Priced Stock Option Plan that are held by the
Companys current employees, including the Companys
executive officers, and certain former employees of the Company
who received grants while employees prior to the June 2002
spin-off of Advanced Medical Optics, Inc. (AMO). The former
employees of the Company are current employees of AMO. As a
result of the acceleration, the second tranche and third
tranche of each option became immediately vested and exercisable
effective as of May 10, 2005. Unlike typical stock options
that vest over a predetermined period, the options automatically
vest as soon as they are in the money. Consequently, as soon as
the options have any value to the participant, they vest
according to their terms. Therefore, early vesting does not
provide any immediate benefit to participants, including the
Companys executive officers.
The acceleration of the options eliminated future compensation
expense that the Company would otherwise recognize in its income
statement with respect to the vesting of such options following
the effectiveness of SFAS No. 123R. The future expense
that was eliminated is approximately $1.0 million, net of
tax (of which approximately $0.1 million, net of tax, is
attributable to options held by executive officers). This amount
was reflected in the Companys pro forma footnote
disclosure under Stock-Based Compensation for the
year ended December 31, 2005. This treatment is permitted
under the transition guidance provided by
SFAS No. 123R.
Advertising expenses relating to production costs are expensed
as incurred and the costs of television time, radio time and
space in publications are expensed when the related advertising
occurs. Advertising expenses were approximately
$100.5 million, $54.0 million and $45.9 million
in 2005, 2004 and 2003, respectively.
The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities,
along with net operating loss and credit carryforwards. The
Company records a valuation allowance against its deferred tax
assets to reduce
F-12
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the net carrying value to an amount that it believes is more
likely than not to be realized. When the Company establishes or
reduces the valuation allowance against its deferred tax assets,
its income tax expense will increase or decrease, respectively,
in the period such determination is made.
Valuation allowances against the Companys deferred tax
assets were $44.1 million and $51.9 million at
December 31, 2005 and 2004, respectively. Material
differences in the estimated amount of valuation allowances may
result in an increase or decrease in the provision for income
taxes if the actual amounts for valuation allowances required
against deferred tax assets differ from the amounts estimated by
management.
The Company has not provided for withholding and U.S. taxes
for the unremitted earnings of certain
non-U.S. subsidiaries
because the Company has currently reinvested these earnings
indefinitely in such operations. At December 31, 2005, the
Company had approximately $299.5 million in unremitted
earnings outside the United States for which withholding and
U.S. taxes were not provided. Tax expense would be incurred
if these funds were remitted to the United States. It is not
practicable to estimate the amount of the deferred tax liability
on such unremitted earnings. Upon remittance, certain foreign
countries impose withholding taxes that are then available,
subject to certain limitations, for use as credits against the
Companys U.S. tax liability, if any.
|
|
|
Purchase Price Allocation |
The allocation of purchase price for acquisitions requires
extensive use of accounting estimates and judgments to allocate
the purchase price to the identifiable tangible and intangible
assets acquired, including in-process research and development,
and liabilities assumed based on their respective fair values.
Additionally, the Company must determine whether an acquired
entity is considered to be a business or a set of net assets,
because a portion of the purchase price can only be allocated to
goodwill in a business combination.
During 2003, the Company acquired Oculex Pharmaceuticals, Inc.
(Oculex) and Bardeen Sciences Company, LLC (Bardeen) for
aggregate purchase prices of approximately $223.8 million
and $264.6 million, respectively. The prices were allocated
to identified assets acquired and liabilities assumed based on
their estimated fair values as of the acquisition dates. The
Oculex transaction was determined to be a business combination,
while the Bardeen transaction was considered to be an asset
acquisition and not a business combination.
The Company determined that the assets acquired from Oculex and
Bardeen consisted principally of incomplete in-process research
and development and that these projects had no alternative
future uses in their current state. The Company reached this
conclusion based on discussions with its business development
and research and development personnel, its review of long-range
product plans and its review of a valuation report prepared by
an independent valuation specialist. The valuation
specialists report reached a conclusion with regard to the
fair value of the in-process research and development assets in
a manner consistent with principles prescribed in the AICPA
practice aid, Assets Acquired in a Business Combination to Be
Used in Research and Development Activities: A Focus on
Software, Electronic Devices and Pharmaceutical Industries.
In connection with the acquisition of Oculex, the Company
determined that the assets acquired also included a proprietary
technology drug delivery platform which was separately valued
and capitalized as core technology. The Company reached this
conclusion based on its determination that the acquired
technology had alternative future uses in its current state. The
Company believes the fair values assigned to the assets acquired
and liabilities assumed are based on reasonable assumptions.
|
|
|
Comprehensive Income (Loss) |
Comprehensive income (loss) encompasses all changes in equity
other than those with stockholders and consists of net earnings
(losses), foreign currency translation adjustments, minimum
pension liability adjustments and unrealized gains or losses on
marketable equity investments. The Company does not provide
F-13
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for U.S. income taxes on foreign currency translation
adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Certain reclassifications of prior year amounts have been made
to conform with the current year presentation.
|
|
|
Recently Adopted Accounting Standards |
In March 2005, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarifies that conditional obligations meet the
definition of an asset retirement obligation in SFAS
No. 143, Accounting for Asset Retirement
Obligations, and therefore should be recognized if their
fair value is reasonably estimable. The Company adopted the
provisions of FIN 47 in its fourth fiscal quarter of 2005.
The adoption did not have a material effect on the
Companys consolidated financial statements.
In December 2004, Financial Accounting Standards Board Position
109-2 (FASB Staff Position 109-2) was issued and was effective
upon issuance. FASB Staff Position 109-2 establishes standards
for how an issuer accounts for a special one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer pursuant to the American Jobs
Creation Act of 2004 (the Act). The Financial Accounting
Standards Board (FASB) staff believes that the lack of
clarification of certain provisions within the Act and the
timing of the enactment necessitate a practical exception to the
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109),
requirement to reflect in the period of enactment the effect of
a new tax law. Accordingly, an enterprise is allowed time beyond
the financial reporting period of enactment to evaluate the
effect of the Act on its plan for reinvestment or repatriation
of foreign earnings for purposes of applying
SFAS No. 109. The Company determined during its second
fiscal quarter 2005 that it had sufficient information to make
an informed decision on the impact of the Act on the
Companys repatriation plans and recorded a
$32.8 million tax liability based on a plan to repatriate
approximately $674.0 million in extraordinary dividends as
defined by the Act. Upon the subsequent execution of the divided
repatriation plan in 2005, the Company repatriated
$674.0 million in extraordinary dividends and adjusted its
estimate of the tax liability on the extraordinary dividends to
$29.9 million.
In December 2004, Financial Accounting Standards Board Position
109-1 (FASB Staff Position 109-1) was issued and was effective
upon issuance. FASB Staff Position 109-1 requires the Company to
treat the effect of a newly enacted U.S. tax deduction,
beginning in 2005, for income attributable to United States
production activities as a special deduction, and not a tax rate
reduction, in accordance with SFAS No. 109. The
Company adopted the provisions of FASB Staff Position 109-1 in
its first fiscal quarter of 2005. The adoption did not have a
material effect on the Companys consolidated financial
statements.
In October 2004, the FASB ratified the consensuses reached by
the Emerging Issues Task Force (EITF) in EITF Issue
No. 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share
(EITF 04-8),
which became effective for reporting periods ending after
December 15, 2004. EITF No. 04-8 requires all
instruments that have embedded conversion features, including
contingently convertible debt, that are contingent on market
conditions indexed to an issuers share price to be
included in diluted earnings per share computations, if
dilutive, regardless of whether the market conditions have been
met. The Company adopted the provisions of EITF No. 04-8 in
its fourth fiscal quarter of 2004 and restated all prior period
diluted earnings per share amounts to conform to the guidance in
EITF No. 04-8.
F-14
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
New Accounting Standards Not Yet Adopted |
In May 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
Corrections (SFAS No. 154). SFAS No. 154
requires retrospective application to prior-period financial
statements of changes in accounting principles, unless a new
accounting pronouncement provides specific transition provisions
to the contrary or it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 also redefines restatement as
the revising of previously issued financial statements to
reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
In December 2004, Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), was issued and is effective for
entities that do not file as small business issuers as of the
beginning of the first interim reporting period of fiscal years
that begin after June 15, 2005, which is the Companys
first fiscal quarter of 2006. SFAS No. 123R requires
companies to recognize in the income statement the grant-date
fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R sets accounting
requirements for measuring, recognizing and reporting
share-based compensation, including income tax considerations.
Upon adoption of SFAS No. 123R, the Company will begin
recognizing the cost of stock options using the modified
prospective application method whereby the cost of new awards
and awards modified, repurchased or cancelled after the required
effective date and the portion of awards for which the requisite
service has not been rendered (unvested awards) that are
outstanding as of the required effective date shall be
recognized as the requisite service is rendered on or after the
required effective date. Because the Company historically
accounted for share-based payment arrangements under the
intrinsic value method of accounting, the Company will continue
to provide the disclosures required by Statement of Financial
Accounting Standards No. 123 until the effective date of
SFAS No. 123R, regarding pro forma net earnings
and basic and diluted earnings per share, had compensation
expense for the Companys stock options been recognized
based upon the fair value for awards granted. The Company will
adopt the provisions of SFAS No. 123R in its first fiscal
quarter of 2006. For fiscal year 2006, the Company estimates the
incremental increase to compensation costs related to the
expensing of stock options will be approximately
$28.0 million, net of tax.
|
|
Note 2: |
Restructuring Charges and Transition/ Duplicate Operating
Expenses |
|
|
|
Restructuring and Streamlining of Operations in
Japan |
On September 30, 2005 the Company entered into a long-term
agreement with GlaxoSmithKline (GSK) to develop and promote the
Companys
Botox®
in Japan and China. Under the terms of this agreement, the
Company licensed to GSK all clinical development and commercial
rights to
Botox®
in Japan and China. As a result of entering into this agreement,
the Company initiated a plan in October 2005 to restructure and
streamline operations in Japan. The restructuring seeks to
optimize the efficiencies of a third party license and
distribution business model and align the Companys
operations in Japan with its reduced role in research and
development and commercialization activities under the agreement
with GSK.
The Company has incurred, and anticipates that it will continue
to incur, restructuring charges relating to one-time termination
benefits, contract termination costs and other asset-related
expenses in connection with the restructuring. The Company
currently estimates that the pre-tax charges resulting from the
restructuring will be between $3.0 million and
$5.0 million. The Company began to incur these amounts in
the fourth quarter of 2005 and expects to continue to incur them
up through and including the second quarter of 2006.
Substantially all of the pre-tax charges are expected to be cash
expenditures.
During the fourth quarter of 2005, the Company recorded pre-tax
restructuring charges of $2.3 million. The restructuring
charges primarily consist of one-time termination benefits,
contract termination costs and
F-15
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
other asset-related expenses. Cumulative charges for employee
severance as shown in the table below relate to 65 employees of
which 55 were severed as of December 31, 2005.
The following table presents the cumulative restructuring
activities through December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2005
|
|
$ |
2.0 |
|
|
$ |
0.3 |
|
|
$ |
2.3 |
|
Spending
|
|
|
(1.3 |
) |
|
|
(0.2 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
0.7 |
|
|
$ |
0.1 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2005 is comprised of
accrued one-time termination benefits and lease termination
charges.
|
|
|
Restructuring and Streamlining of European
Operations |
Effective January 2005, the Companys Board of Directors
approved the initiation and implementation of a restructuring of
certain activities related to the Companys European
operations. The restructuring seeks to optimize operations,
improve resource allocation and create a scalable, lower cost
and more efficient operating model for the Companys
European research and development (R&D) and commercial
activities. Specifically, the restructuring involves moving key
European R&D and select commercial functions from the
Companys Mougins, France and other European locations to
the Companys Irvine, California, High Wycombe, U.K. and
Dublin, Ireland facilities and streamlining functions in the
Companys European management services group.
The Company has incurred, and anticipates that it will continue
to incur, restructuring charges and charges relating to
severance, relocation and one-time termination benefits,
payments to public employment and training programs, transition
and duplicate operating expenses, contract termination costs and
capital and other asset-related expenses in connection with the
restructuring. The Company currently estimates that the pre-tax
charges resulting from the restructuring, including transition
and duplicate operating expenses, will be between
$46 million and $51 million and capital expenditures
will be between $3 million and $4 million. Of the
total amount of pre-tax charges and capital expenditures,
approximately $43 million to $48 million are expected
to be cash expenditures.
The foregoing estimates are based on assumptions relating to,
among other things, a reduction of approximately 155 positions,
principally R&D and selling, general and administrative
positions in the affected European locations. These workforce
reduction activities began in the first quarter of 2005 and are
expected to be substantially completed by the close of the
second quarter of 2006. Charges associated with the workforce
reduction, including severance, relocation and one-time
termination benefits, and payments to public employment and
training programs, are currently expected to total approximately
$30 million to $31 million.
Estimated charges include approximately $11 million to
$13 million for contract and lease termination costs and
asset write-offs (primarily for accelerated amortization related
to leasehold improvements in facilities to be exited) and a loss
on the possible sale of the Companys Mougins facility. The
Company began to record these costs in the fourth quarter of
2005 and they are expected to continue up through and including
the second quarter of 2006.
Estimated transition related expenses include, among other
things, legal, consulting, recruiting, information system
implementation costs and taxes. The Company also expects to
incur duplicate operating expenses during the transition period
to ensure that job knowledge and skills are properly transferred
to new employees. Transition and duplicate operating expenses
are currently estimated to total approximately $5 million to
F-16
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$7 million. The Company began to record these costs in the
first quarter of 2005 and they are expected to continue up
through and including the second quarter of 2006.
The Company expects to incur additional capital expenditures for
leasehold improvements (primarily at a new facility in the
United Kingdom to accommodate increased headcount). These
capital expenditures are currently estimated to be between
approximately $3 million and $4 million. The Company
began to record these expenditures in the third quarter of 2005
and they are expected to continue up through and including the
second quarter of 2006.
During the year ended December 31, 2005, the Company
recorded pre-tax restructuring charges of $28.9 million
related to the restructuring of the Companys European
operations. The restructuring charges primarily consist of
employee severance, one-time termination benefits, employee
relocation and other costs. The following table presents the
cumulative restructuring activities through December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2005
|
|
$ |
25.9 |
|
|
$ |
3.0 |
|
|
$ |
28.9 |
|
Assets written off
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Spending
|
|
|
(10.7 |
) |
|
|
(2.8 |
) |
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
15.2 |
|
|
$ |
|
|
|
$ |
15.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance in the preceding table relates to 155
employees, of which 67 were severed as of December 31,
2005. Employee severance charges were based on social plans in
France and Italy, and the Companys severance practices for
employees in the other affected European countries. During 2005,
the Company also recorded $5.6 million of
transition/duplicate operating expenses associated with the
European restructuring activities. Transition/duplicate
operating expenses consisted primarily of salaries, travel,
communications, recruitment and consulting costs.
Transition/duplicate operating expenses of $0.3 million in
cost of sales, $3.8 million in selling, general and
administrative expenses and $1.5 million in research and
development expenses have been included in the Companys
consolidated statements of operations for the year ended
December 31, 2005.
|
|
|
Termination of Manufacturing and Supply Agreement with
Advanced Medical Optics |
In October 2004, the Companys Board of Directors approved
certain restructuring activities related to the termination in
June 2005 of the Companys manufacturing and supply
agreement with AMO. Under the manufacturing and supply
agreement, which was entered into in connection with the AMO
spin-off, the Company agreed to manufacture certain contact lens
care products and VITRAX, a surgical viscoelastic, for AMO for a
period of up to three years ending in June 2005. As part of the
termination of the manufacturing and supply agreement, the
Company eliminated certain manufacturing positions at the
Companys Westport, Ireland; Waco, Texas; and Guarulhos,
Brazil manufacturing facilities.
As of December 31, 2005, the Company recorded cumulative
pre-tax restructuring charges of $21.6 million related to
the termination of the manufacturing and supply agreement. These
charges primarily include statutory severance and one-time
termination benefits related to the reduction in the
Companys workforce of 323 employees and the write-off of
assets previously used for contract manufacturing. The pre-tax
charges are net of tax credits received under qualifying
government-sponsored employment programs.
As of December 31, 2005, the Company had completed
substantially all activities related to the termination of the
manufacturing and supply agreement. The Company expects to
record an additional
F-17
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.0 million to $3.0 million in pre-tax restructuring
charges during the first three quarters of 2006 to complete the
refurbishment of facilities previously used for contract
manufacturing.
The following table presents the cumulative restructuring
activities through December 31, 2005 resulting from the
scheduled termination of the manufacturing and supply agreement
with AMO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|
|
Severance |
|
Costs |
|
Total |
|
|
|
|
|
|
|
|
|
(in millions) |
Net charge during 2004
|
|
$ |
7.1 |
|
|
|
|
|
|
$ |
7.1 |
|
Spending
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
7.0 |
|
|
|
|
|
|
|
7.0 |
|
Net charge during 2005
|
|
|
11.5 |
|
|
|
3.0 |
|
|
|
14.5 |
|
Assets written off
|
|
|
|
|
|
|
(2.4 |
) |
|
|
(2.4 |
) |
Spending (net of employment tax credits received)
|
|
|
(18.4 |
) |
|
|
(0.6 |
) |
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (included in Other accrued
expenses)
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining balance at December 31, 2005 is comprised of
accrued one-time termination benefits of $0.1 million.
Included in other costs within the table above is
$0.2 million of inventory write-offs that have been
recorded as a component of Cost of sales in the
consolidated statements of operations.
During the year ended December 31, 2005, the Company
reduced by $1.6 million the remaining balance of other
accrued costs associated with restructuring costs and asset
write-offs previously recorded in connection with the spin-off
of AMO in 2002. This reduction in other accrued costs was
included in Restructuring charge (reversal), net for
the year ended December 31, 2005. At December 31,
2005, there were no remaining accrued costs associated with the
2002 spin-off of AMO.
|
|
|
Oculex Pharmaceuticals, Inc. |
On November 20, 2003, the Company purchased all of the
outstanding equity interests of Oculex Pharmaceuticals, Inc.
(Oculex), a privately held company, for an aggregate purchase
price of approximately $223.8 million, net of cash
acquired, including transaction costs of $1.6 million and
$6.1 million in other assets, comprised principally of
notes receivable, an equity investment and certain deferred tax
assets related to Oculex. The acquisition was accounted for by
the purchase method of accounting and accordingly, the
consolidated statements of operations include the results of
Oculex beginning November 20, 2003. In conjunction with the
acquisition, the Company recorded a charge to in-process
research and development expense of $179.2 million during
2003 for an acquired in-process research and development asset
which the Company determined was not yet complete and had no
alternative future uses in its current state. This asset is
Oculexs lead investigational product,
Posurdex®,
which is a proprietary, bioerodable, sustained release implant
that delivers dexamethasone to the targeted disease site at the
back of the eye. Phase 2 clinical trials for
Posurdex®
have already been completed, and the Company has initiated
Phase 3 clinical trials for macular edema associated with
diabetes and vein occlusions. Additionally, the Company
determined that the assets acquired also included a proprietary
technology drug delivery platform which had alternative future
uses in its current state, which the Company separately valued
and capitalized as core technology. The core technology is a
versatile bioerodable polymer drug delivery technology which can
be used for sustained local delivery of compounds to the eye.
F-18
ALLERGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL
S