e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| |
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
| |
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 1-10269
ALLERGAN, INC.
(Exact name of Registrant as Specified in its Charter)
| |
|
|
| DELAWARE
|
|
95-1622442 |
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.) |
| |
|
|
| 2525 DUPONT DRIVE, IRVINE, CALIFORNIA
|
|
92612 |
| (Address of Principal Executive Offices)
|
|
(Zip Code) |
(714) 246-4500
(Registrant’s Telephone Number,
Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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.
As of May 5, 2006 there were 152,659,430 shares of common stock outstanding (including 3,196,865 shares held in
treasury).
ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Allergan, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in millions, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
Product Sales |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
615.2 |
|
|
$ |
527.2 |
|
Cost of sales |
|
|
101.6 |
|
|
|
94.1 |
|
|
|
|
|
|
|
|
|
|
Product gross margin |
|
|
513.6 |
|
|
|
433.1 |
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
10.5 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
274.0 |
|
|
|
213.2 |
|
Research and development |
|
|
670.1 |
|
|
|
82.0 |
|
Restructuring charge |
|
|
2.8 |
|
|
|
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(422.8 |
) |
|
|
113.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense) |
|
|
|
|
|
|
|
|
Interest income |
|
|
9.2 |
|
|
|
5.5 |
|
Interest expense |
|
|
(7.8 |
) |
|
|
(4.5 |
) |
Unrealized (loss) gain on derivative instruments, net |
|
|
(1.0 |
) |
|
|
0.1 |
|
Other, net |
|
|
(0.7 |
) |
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes and minority interest |
|
|
(423.1 |
) |
|
|
119.0 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
21.9 |
|
|
|
39.2 |
|
Minority interest income |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(444.8 |
) |
|
$ |
79.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(3.29 |
) |
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(3.29 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
Allergan, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in millions, except share data)
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| |
|
2006 |
|
2005 |
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
876.2 |
|
|
$ |
1,296.3 |
|
Trade receivables, net |
|
|
365.2 |
|
|
|
246.1 |
|
Inventories |
|
|
207.2 |
|
|
|
90.1 |
|
Other current assets |
|
|
233.4 |
|
|
|
193.1 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,682.0 |
|
|
|
1,825.6 |
|
Investments and other assets |
|
|
275.0 |
|
|
|
258.9 |
|
Deferred tax assets |
|
|
— |
|
|
|
123.2 |
|
Property, plant and equipment, net |
|
|
564.9 |
|
|
|
494.0 |
|
Goodwill |
|
|
1,922.4 |
|
|
|
9.0 |
|
Intangibles, net |
|
|
816.1 |
|
|
|
139.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,260.4 |
|
|
$ |
2,850.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
952.0 |
|
|
$ |
169.6 |
|
Convertible notes, net of discount |
|
|
427.3 |
|
|
|
520.0 |
|
Accounts payable |
|
|
119.8 |
|
|
|
92.3 |
|
Accrued compensation |
|
|
66.1 |
|
|
|
84.8 |
|
Other accrued expenses |
|
|
320.8 |
|
|
|
177.3 |
|
Income taxes |
|
|
10.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,896.9 |
|
|
|
1,044.0 |
|
Long-term debt |
|
|
57.7 |
|
|
|
57.5 |
|
Deferred tax liabilities |
|
|
41.4 |
|
|
|
— |
|
Other liabilities |
|
|
204.3 |
|
|
|
181.0 |
|
Commitments and contingencies |
|
|
— |
|
|
|
— |
|
Minority interest |
|
|
1.1 |
|
|
|
1.1 |
|
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 152,179,000
shares as of March 31, 2006 and 134,255,000 as of December 31, 2005 |
|
|
1.5 |
|
|
|
1.3 |
|
Additional paid-in capital |
|
|
2,292.9 |
|
|
|
417.7 |
|
Accumulated other comprehensive loss |
|
|
(37.4 |
) |
|
|
(50.6 |
) |
Retained earnings |
|
|
844.4 |
|
|
|
1,305.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,101.4 |
|
|
|
1,673.5 |
|
Less — treasury stock, at cost (568,000 and 1,431,000 shares, respectively) |
|
|
(42.4 |
) |
|
|
(106.6 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
3,059.0 |
|
|
|
1,566.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’equity |
|
$ |
5,260.4 |
|
|
$ |
2,850.5 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Allergan, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in millions)
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(444.8 |
) |
|
$ |
79.9 |
|
Non-cash items included in earnings: |
|
|
|
|
|
|
|
|
In-process research and development charge |
|
|
562.8 |
|
|
|
— |
|
Depreciation and amortization |
|
|
19.9 |
|
|
|
17.0 |
|
Amortization of original issue discount and debt issuance costs |
|
|
3.0 |
|
|
|
2.4 |
|
Deferred income taxes |
|
|
16.5 |
|
|
|
1.6 |
|
Loss on investments and disposal of fixed assets |
|
|
2.4 |
|
|
|
— |
|
Unrealized loss (gain) on derivative instruments |
|
|
1.0 |
|
|
|
(0.1 |
) |
Expense of compensation plans |
|
|
15.4 |
|
|
|
3.7 |
|
Minority interest income |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Restructuring charge |
|
|
2.8 |
|
|
|
27.4 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Trade receivables |
|
|
(44.4 |
) |
|
|
(27.3 |
) |
Inventories |
|
|
(3.4 |
) |
|
|
(9.0 |
) |
Other current assets |
|
|
17.8 |
|
|
|
2.9 |
|
Accounts payable |
|
|
(9.5 |
) |
|
|
14.0 |
|
Accrued expenses |
|
|
(12.6 |
) |
|
|
(9.2 |
) |
Other liabilities |
|
|
5.0 |
|
|
|
6.9 |
|
Income taxes |
|
|
0.5 |
|
|
|
(19.1 |
) |
Other non-current assets |
|
|
(15.5 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
116.7 |
|
|
|
90.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisition of Inamed, net of cash acquired |
|
|
(1,215.2 |
) |
|
|
— |
|
Additions to property, plant and equipment |
|
|
(32.7 |
) |
|
|
(11.5 |
) |
Proceeds from sale of property, plant and equipment |
|
|
0.1 |
|
|
|
0.9 |
|
Additions to capitalized software |
|
|
(2.9 |
) |
|
|
(3.3 |
) |
Proceeds from sale of investments |
|
|
0.3 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,250.4 |
) |
|
|
(13.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
(13.3 |
) |
|
|
(13.1 |
) |
Credit facility borrowings |
|
|
825.0 |
|
|
|
— |
|
Conversion of subordinated notes |
|
|
(94.1 |
) |
|
|
— |
|
Net repayments of notes payable |
|
|
(42.6 |
) |
|
|
(4.6 |
) |
Sale of stock to employees |
|
|
27.1 |
|
|
|
3.9 |
|
Payments to acquire treasury stock |
|
|
— |
|
|
|
(94.3 |
) |
Excess tax benefits from share-based compensation |
|
|
10.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
712.3 |
|
|
|
(108.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
1.3 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents |
|
|
(420.1 |
) |
|
|
(30.3 |
) |
|
|
|
|
|
|
|
|
|
Cash and equivalents at beginning of period |
|
|
1,296.3 |
|
|
|
894.8 |
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of period |
|
$ |
876.2 |
|
|
$ |
864.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest (net of capitalization) |
|
$ |
3.0 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
21.4 |
|
|
$ |
55.3 |
|
|
|
|
|
|
|
|
|
|
On March 23, 2006 the Company completed the acquisition of Inamed Corporation. In exchange for the
common stock of Inamed Corporation, the Company issued common stock with a fair value of $1,859.3
million, paid $1,215.2 million in cash and accrued $99.6 million for future cash payments. In
connection with the acquisition, the Company acquired assets with a fair value of $3,554.6 million
and assumed liabilities of $277.8 million.
See accompanying notes to unaudited condensed consolidated financial statements.
5
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary (consisting only of normal recurring accruals) to
present fairly the financial information contained therein. These statements do not include all
disclosures required by accounting principles generally accepted in the United States of America
(GAAP) for annual periods and should be read in conjunction with the Company’s audited consolidated
financial statements and related notes for the year ended December 31, 2005. The Company prepared
the condensed consolidated financial statements following the requirements of the Securities and
Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by GAAP can be condensed or omitted. The
results of operations for the three months ended March 31, 2006 are not necessarily indicative of
the results to be expected for the year ending December 31, 2006 or any other period(s).
Reclassifications
Certain reclassifications of prior year amounts have been made to conform with the current
year presentation.
Share-Based Payments
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised), Share-Based Payment (SFAS 123R), which requires measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors. Under SFAS
No 123R the fair value of share-based payment awards is estimated at grant date using an option
pricing model and the portion that is ultimately expected to vest is recognized as compensation
cost over the requisite service period. Prior to the adoption of SFAS 123R, the Company accounted
for share-based awards using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), as allowed under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under
the intrinsic value method no share-based compensation cost was recognized for awards to employees
or directors if the exercise price of the award was equal to the fair market value of the
underlying stock on the date of grant.
The Company adopted SFAS 123R using the modified prospective application method. Under the
modified prospective application method prior periods are not revised for comparative purposes. The
valuation provisions of SFAS 123R apply to new awards and awards that are outstanding on the
adoption effective date that are subsequently modified or cancelled. Estimated compensation expense
for awards outstanding and unvested on the adoption effective date will be recognized over the remaining service
period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123.
Pre-tax share-based compensation expense recognized under SFAS 123R for the three months ended
March 31, 2006 was $15.3 million, which consisted of compensation related to employee and director
stock options of $10.1 million, employee and director restricted share awards of $1.8 million, and
$3.4 million related to stock contributed to employee benefit plans. Pre-tax share-based
compensation expense recognized under APB 25 for the three months ended March 25, 2005 was $3.6
million, which consisted of compensation related to employee and director restricted share awards
of $0.9 million and $2.7 million related to stock contributed to employee benefit plans. There was no share-based
compensation expense recognized during the three months ended March 25, 2005 related to employee or
director stock options. The income tax benefit related to recognized share-based compensation was
$5.5 million and $1.4 million for the three months ended March 31, 2006 and March 25, 2005,
respectively.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of
share-based awards. The determination of fair value using the Black-Scholes model is affected by
the Company’s stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, the Company’s expected stock
price volatility over the term of the awards and projected employee stock
6
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
option exercise behaviors. Prior to the adoption of SFAS 123R the Company used an estimated
stock price volatility based on the Company’s five year historical average. Upon adoption of SFAS
123R the Company changed its estimated volatility calculation to an equal weighting of the
Company’s ten year historical average and the average implied volatility of at-the-money options
traded in the open market. The Company believes this method provides a more accurate estimate of
stock price volatility over the expected life of the share-based awards. Employee stock option
exercise behavior is estimated based on actual historical exercise activity and assumptions
regarding future exercise activity of unexercised, outstanding options.
The Company recognizes share-based compensation cost over the requisite service period using
the straight-line single option method. Since share-based compensation under SFAS 123R is
recognized only for those awards that are ultimately expected to vest, an estimated forfeiture rate
has been applied to unvested awards for the purpose of calculating compensation cost. SFAS 123R
requires these estimates to be revised, if necessary, in future periods if actual forfeitures
differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period
in which the change in estimate occurs. In the Company’s pro forma information required under SFAS
123 prior to January 1, 2006, the Company accounted for forfeitures as they occurred.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. FAS 123(R)-3, Transitional Election Related to Accounting for Tax Effects of
Share-Based Payment Awards. The Company has elected to adopt the alternative transition method
provided in this FASB Staff Position for calculating the tax effects of share-based compensation
pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish
the beginning balance additional paid-in capital pool (APIC Pool) related to tax effects of
employee share-based compensation, which is available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS 123R.
Recently Adopted Accounting Standards
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. The Company adopted the provision of SFAS No. 154 in its first fiscal
quarter of 2006. The adoption did not have a material effect on the Company’s consolidated
financial statements.
7
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
New Accounting Standards Not Yet Adopted
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155,
Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and
140 (SFAS No. 155). SFAS No. 155 permits an entity to measure at fair value any financial
instrument that contains an embedded derivative that otherwise would require bifurcation. This
statement is effective for all financial instruments acquired, issued, or subject to a
remeasurement event occurring after the beginning of an entity’s first fiscal year that begins
after September 15, 2006, which is the Company’s fiscal year 2007. The Company does not expect the
adoption of SFAS No. 155 to have a material impact on its consolidated financial statements.
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 Company’s
Botox®
product 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 Company’s 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 $2.0 million and $3.0 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.
As of March 31, 2006, the Company recorded cumulative pre-tax restructuring charges of $1.9
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 64 were severed as of March 31, 2006.
The following table presents the cumulative restructuring activities through March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.8 |
|
Net charge (reversal) during the first quarter of 2006 |
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
(0.4 |
) |
Spending |
|
|
(0.9 |
) |
|
|
(0.1 |
) |
|
|
(1.0 |
) |
Reduction in accrued pension liability included in
net charges (reversal) during the first quarter of
2006 |
|
|
— |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Restructuring and Streamlining of European Operations
Effective January 2005, the Company’s Board of Directors approved the initiation and
implementation of a restructuring of certain activities related to the Company’s European
operations. The restructuring seeks to optimize operations, improve resource allocation and create
a scalable, lower cost and more efficient operating model for the Company’s European research and
development (R&D) and commercial activities. Specifically, the restructuring involves moving key
European R&D and select commercial functions from the Company’s Mougins, France and other European
locations to the Company’s Irvine, California, High Wycombe, U.K. and Dublin, Ireland facilities
and streamlining functions in the Company’s 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/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/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 151 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 Company’s Mougins
facility. The Company began to record these costs in the fourth quarter of 2005 and expects to
continue to incur them 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/duplicate operating expenses are currently
estimated to total approximately $5 million to $7 million. The Company began to record these costs
in the first quarter of 2005 and expects to continue to incur them 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 expects to continue
to incur them up through and including the second quarter of 2006.
9
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
As of March 31, 2006, the Company recorded cumulative pre-tax restructuring charges of $31.8
million related to the restructuring of the Company’s 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 March
31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
15.2 |
|
|
|
— |
|
|
|
15.2 |
|
Net charge during the first quarter of 2006 |
|
|
— |
|
|
|
2.9 |
|
|
|
2.9 |
|
Spending |
|
|
(5.6 |
) |
|
|
(2.9 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 (included in Other accrued expenses) |
|
$ |
9.6 |
|
|
$ |
— |
|
|
$ |
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance in the preceding table relates to 151 employees, of which 107 were severed
as of March 31, 2006. Employee severance charges were based on social plans in France and Italy,
and the Company’s severance practices for employees in the other affected European countries.
During the first quarter of 2006, the Company recorded a $2.6 million impairment charge related to
its Mougins, France facility and reported $11.9 million of assets held for sale included in Other
current assets. During the first quarters of 2006 and 2005, the Company also recorded $1.9 million
and $0.3 million, respectively, of transition/duplicate operating expenses associated with the
European restructuring activities. Transition/duplicate operating expenses for the three months
ended March 31, 2006 consisted of $0.1 million in cost of sales, $1.6 million in selling, general
and administrative expenses and $0.2 million in research and development expenses.
Transition/duplicate operating expenses for the three months ended March 25, 2005 consisted of $0.2
million in selling, general and administrative expenses and $0.1 million in research and
development expenses.
Termination of Manufacturing and Supply Agreement with Advanced Medical Optics
In October 2004, the Company’s Board of Directors approved certain restructuring activities
related to the scheduled termination in June 2005 of the Company’s manufacturing and supply agreement with
Advanced Medical Optics (AMO), which the Company spun-off in June 2002. 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 Company’s
Westport, Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing facilities.
As of March 31, 2006, the Company recorded cumulative pre-tax restructuring charges of $21.9
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 Company’s 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
$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.
10
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table presents the cumulative restructuring activities through March 31, 2006
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 |
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
Net charge during the first quarter of 2006 |
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
Spending |
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Inamed Acquisition
On March 23, 2006, the Company completed the acquisition of Inamed Corporation (Inamed), a
global healthcare company that develops, manufactures, and markets a diverse line of products,
including breast implants, a range of dermal products to correct facial wrinkles and products for
the treatment of obesity.
The acquisition was completed pursuant to an agreement and plan of merger, dated as of
December 20, 2005, by and among the Company, its wholly-owned subsidiary Banner Acquisition, Inc.,
and Inamed and an exchange offer made by Banner Acquisition to acquire Inamed shares for either
$84.00 in cash or 0.8498 of a share of the Company’s common stock, subject to proration so that 45%
of the aggregate Inamed shares tendered were exchanged for cash and 55% of the aggregate Inamed
shares tendered were exchanged for shares of the Company’s common stock. In the exchange offer the
Company paid approximately $1.31 billion in cash and issued 16,194,045 shares of common stock
through Banner Acquisition, acquiring approximately 93.86% of Inamed’s outstanding common stock.
Following the exchange offer, the remaining outstanding shares of Inamed common stock were acquired
for approximately $81.7 million in cash and 1,010,576 shares of Allergan common stock through the
merger of Banner Acquisition with and into Inamed in a merger in which Inamed survived
as Allergan’s wholly-owned subsidiary. As a final step in the plan of reorganization, the Company is planning to merge Inamed into Inamed, LLC, a
wholly-owned subsidiary of the Company. The consideration paid in the merger does not include shares
of the Company’s common stock and cash that were paid to former Inamed option holders for
outstanding options to purchase shares of Inamed common stock, which were cancelled in the merger
and converted into the right to receive an amount of cash equal to 45% of the “in the money”
value of the option and a number of shares of the Company’s common stock with a value equal to 55%
of the “in the money” value of the option. Subsequent to the merger, the Company issued 236,992
shares of common stock and paid $17.9 million in cash to satisfy its obligation to the option
holders. The fair value of these shares of Company common stock and cash paid to option holders of
Inamed common stock were included in the calculation of the purchase price detailed below.
The following table summarizes the components of the Inamed purchase price:
| |
|
|
|
|
| |
|
(in millions) |
Fair value of Allergan shares issued |
|
$ |
1,859.3 |
|
Cash consideration ($1,317.9 paid as of March 31, 2006) |
|
|
1,409.3 |
|
Transaction costs |
|
|
8.2 |
|
|
|
|
|
|
|
|
$ |
3,276.8 |
|
|
|
|
|
|
11
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The value of the shares of Company common stock used in determining the purchase price was
$106.60 per share, based on the closing price of the Company’s common stock on December 20, 2005,
the date of the agreement and plan of merger among the Company,
Banner Acquisition and Inamed.
Because of the late timing of the Inamed acquisition,
the Company did not report any revenue and profit or loss from
Inamed’s operations in the first quarter ended March 31, 2006, as these amounts are considered immaterial.
Purchase Price Allocation
The purchase price was allocated on a preliminary basis to tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values at the acquisition date. The excess of the purchase
price over the fair value of net assets acquired was allocated to goodwill. The Company expects
that all such goodwill will not be deductible for tax purposes.
The Company believes the fair values assigned to the assets acquired and liabilities assumed
are based on reasonable assumptions. The following table summarizes the estimated fair values of
net assets acquired:
| |
|
|
|
|
| |
|
(in millions) |
Current assets |
|
$ |
310.0 |
|
Property, plant & equipment |
|
|
64.3 |
|
Identifiable intangible assets |
|
|
681.5 |
|
In-process research and development |
|
|
562.8 |
|
Goodwill |
|
|
1,913.1 |
|
Other non-current assets, primarily deferred tax assets |
|
|
22.9 |
|
Accounts payable and accrued liabilities |
|
|
(74.0 |
) |
Deferred tax liabilities |
|
|
(185.4 |
) |
Other non-current liabilities |
|
|
(18.4 |
) |
|
|
|
|
|
|
|
$ |
3,276.8 |
|
|
|
|
|
|
In-process research and development
In conjunction with the Inamed acquisition, the Company recorded a charge to in-process
research and development expense of $562.8 million during the first quarter of 2006 for acquired
in-process research and development assets that the Company determined were not yet complete and
had no alternative future uses in their current state. These assets are composed of Inamed’s
silicone breast implant technology for use primarily in the United States, Inamed’s Juvederm®
dermal filler technology for use in the United States, and Inamed’s BioEnterics Intragastric
Balloon (BIB®) technology for use primarily in the United States, which are all subject to approval
by the FDA in the United States.
The estimated fair value of the in-process research and development assets was determined
based on the use of a discounted cash flow model using an income approach for the acquired
technologies. Estimated revenues were probability adjusted to take into account the stage of
completion and the risks surrounding the successful development and commercialization. The
estimated after-tax cash flows were then discounted to a present value using a discount rate of
11%. Material net cash inflows were estimated to begin in 2006 for the silicone breast implants and
Juvederm® and in 2008 for the BIB® system. Gross margin and expense levels were estimated to be
consistent with Inamed’s historical results.
The major risks and uncertainties associated with the timely and successful completion of the
acquired in-process projects consist of the ability to confirm the safety and efficacy of the
technology based on the data from clinical trials and obtaining necessary regulatory approvals. The
major risks and uncertainties associated with the core technology consist of the Company’s ability
to successfully utilize the technology in future research projects. No assurance can be given that
the underlying assumptions used to forecast the cash flows or the timely and successful completion
of the projects will materialize, as estimated. For these reasons, among others, actual results may
vary significantly from the estimated results.
12
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Identifiable Intangible Assets
Acquired identifiable intangible assets include product rights for approved indications of
currently marketed products, customer relationships and core technology for saline-filled and
silicone-filled breast implants, dermal fillers, and obesity intervention products. The amounts
assigned to each class of intangible assets and the related weighted average amortization periods
are summarized in the following table:
| |
|
|
|
|
|
|
| |
|
Value of |
|
|
| |
|
intangible assets |
|
Weighted-average |
| |
|
acquired |
|
amortization period |
| |
|
(in millions) |
|
|
Developed technology |
|
$ |
600.8 |
|
|
11.0 years |
Core technology |
|
|
33.7 |
|
|
16.0 years |
Customer relationships |
|
|
42.9 |
|
|
3.1 years |
Other |
|
|
4.1 |
|
|
n/a |
|
|
|
|
|
|
|
Total |
|
$ |
681.5 |
|
|
|
|
|
|
|
|
|
|
Pro Forma Results of Operations
Unaudited pro forma operating results for the Company, assuming the acquisition of Inamed
occurred January 1, 2006 and 2005 and excluding any pro forma charge for in-process research and
development costs, Inamed share-based compensation expense in 2006 and transaction costs are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
| |
|
(in millions, except |
| |
|
per share amounts) |
Product net sales |
|
$ |
714.6 |
|
|
$ |
632.4 |
|
Net earnings |
|
$ |
84.0 |
|
|
$ |
52.8 |
|
Basic earnings per share |
|
$ |
0.56 |
|
|
$ |
0.36 |
|
Diluted earnings per share |
|
$ |
0.54 |
|
|
$ |
0.35 |
|
The pro forma information is not necessarily indicative of actual operating results that would
have been achieved had the acquisition occurred as of January 1, 2006 and 2005, or results that may
be achieved in the future.
13
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
4. Intangibles and Goodwill
At March 31, 2006 and December 31, 2005, the components of amortizable and unamortizable
intangibles and goodwill and certain other related information were as follows:
Intangibles
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2006 |
|
December 31, 2005 |
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
| |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Amortization |
| |
|
Gross |
|
Accumulated |
|
Period |
|
Gross |
|
Accumulated |
|
Period |
| |
|
Amount |
|
Amortization |
|
(in years) |
|
Amount |
|
Amortization |
|
(in years) |
| |
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
Amortizable Intangible
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed Technology |
|
$ |
600.8 |
|
|
$ |
— |
|
|
|
11.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
Customer Relationships |
|
|
42.9 |
|
|
|
— |
|
|
|
3.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Licensing |
|
|
137.8 |
|
|
|
(30.1 |
) |
|
|
8.0 |
|
|
|
137.8 |
|
|
|
(25.5 |
) |
|
|
8.0 |
|
Trademarks |
|
|
3.5 |
|
|
|
(2.4 |
) |
|
|
15.1 |
|
|
|
3.5 |
|
|
|
(2.3 |
) |
|
|
15.0 |
|
Core Technology |
|
|
63.0 |
|
|
|
(4.6 |
) |
|
|
15.5 |
|
|
|
29.3 |
|
|
|
(4.1 |
) |
|
|
15.0 |
|
Other |
|
|
1.1 |
|
|
|
(0.9 |
) |
|
|
4.8 |
|
|
|
1.1 |
|
|
|
(0.9 |
) |
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849.1 |
|
|
|
(38.0 |
) |
|
|
10.5 |
|
|
|
171.7 |
|
|
|
(32.8 |
) |
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable Intangible
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Licenses and
Trade Names |
|
|
5.0 |
|
|
|
— |
|
|
|
|
|
|
|
0.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
854.1 |
|
|
$ |
(38.0 |
) |
|
|
|
|
|
$ |
172.6 |
|
|
$ |
(32.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology consists primarily of current product offerings acquired in connection
with the acquisition of Inamed, primarily saline and silicone breast implants, obesity intervention
products and dermal fillers. Customer relationship assets consist of the estimated value of
relationships with customers acquired through the acquisition of Inamed, primarily in the breast
implant market in the United States. Licensing assets consist primarily of capitalized payments to
third party licensors related to the achievement of regulatory approvals to commercialize products
in specified markets and up-front payments associated with royalty obligations for products that
have achieved regulatory approval for marketing. Core technology consists of proprietary technology
associated with silicone breast implants and intragastric balloon systems acquired in connection
with the acquisition of Inamed, and a drug delivery technology acquired in connection with the 2003
Oculex acquisition. The increase in developed technology, customer relationships, core technology
and unamortizable intangible assets at March 31, 2006 compared to December 31, 2005 was primarily
due to the acquisition of Inamed.
Aggregate amortization expense for amortizable intangible assets was $5.1 million and $2.0
million for the quarters ended March 31, 2006 and March 25, 2005, respectively.
Estimated amortization expense is $78.3 million for 2006, $96.5 million for 2007, $94.7
million for 2008, $84.3 million for 2009, $79.4 million for 2010 and $78.9 million for 2011.
Goodwill
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| (in millions) |
|
2006 |
|
2005 |
Goodwill: |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,917.7 |
|
|
$ |
4.6 |
|
Latin America |
|
|
3.9 |
|
|
|
3.6 |
|
Europe and Other |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,922.4 |
|
|
$ |
9.0 |
|
|
|
|
|
|
|
|
|
|
The increase in goodwill at March 31, 2006 compared to December 31, 2005 was primarily due to
the Inamed acquisition. Goodwill related to the Inamed
acquisition is reflected in the United States balance above. The
Company’s management has not completed its analysis of goodwill. Once the analysis is complete, goodwill will be reflected in the geographical locations
to which it relates.
14
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
5. Inventories
Components of inventories were:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
December 31, |
| (in millions) |
|
2006 |
|
2005 |
Finished goods |
|
$ |
123.8 |
|
|
$ |
52.9 |
|
Work in process |
|
|
48.6 |
|
|
|
24.8 |
|
Raw materials |
|
|
34.8 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
207.2 |
|
|
$ |
90.1 |
|
|
|
|
|
|
|
|
|
|
The increase in inventories at March 31, 2006 compared to December 31, 2005 was primarily due
to the Inamed acquisition.
6. Income Taxes
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 R&D tax credits available in the United States. The Company’s effective tax rate
may be subject to fluctuations during the fiscal year as new information is obtained, which may
affect the assumptions it uses to estimate the annual effective tax rate, including factors such as
mix of pre-tax earnings in the various tax jurisdictions in which it operates, valuation allowances
against deferred tax assets, reserves for tax contingencies, utilization of R&D tax credits and
changes in or interpretation of tax laws in jurisdictions where the Company conducts operations.
The Company recognizes deferred tax assets and liabilities for temporary differences between the
financial reporting basis and the tax basis of its assets and liabilities, along with net operating
loss and credit carryforwards. The Company records a valuation allowance against its deferred tax
assets to reduce 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 deferred tax
assets, its income tax expense will increase or decrease, respectively, in the period such
determination is made.
Valuation allowances against deferred tax assets were $43.1 million and $44.1 million at March
31, 2006 and December 31, 2005, respectively. Changes in the valuation allowances are generally a
component of the estimated annual effective tax rate. The decrease in the amount of valuation
allowances at March 31, 2006 compared to December 31, 2005 is primarily due to a decrease in the
valuation allowance related to deferred tax assets for certain capitalized intangible assets that
became realizable due to the completion of a federal tax audit in the U.S. This decrease in the amount of
the valuation allowance was partially offset by an increase in valuation allowances due to the
acquisition of Inamed. 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 the
Company.
The Company has not provided for withholding and U.S. taxes for the unremitted earnings of
certain non-U.S. subsidiaries because it has currently reinvested these earnings indefinitely in
the operations of these non-U.S. subsidiaries. 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 Company’s U.S. tax
liability, if any. The Company annually updates its estimate of unremitted earnings outside the
United States after the completion of each fiscal year.
15
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Included in the provision for income taxes in the first quarter of 2006 is a $14.5 million
reduction in estimated income taxes payable primarily due to the resolution of several significant
and previously uncertain income tax audit issues associated with the completion of an audit by the
United States Internal Revenue Service for tax years 2000 to 2002, and a $1.2 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.
7. Employee Stock Plans
Premium Priced Stock Option Plan
The Company has a premium priced stock option plan that provides for the granting of
non-qualified premium priced stock options to officers and key employees. On July 30, 2001, the
Company granted non-qualified stock options to purchase up to 2,500,000 shares of its common stock
with a weighted average exercise price of $107.44 per share and a weighted average fair value of
$17.02 per share to participants, including the Company’s executive officers, under the premium
priced stock option plan. The options were issued in 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
Company’s 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 Company’s common stock exceeding $88.55.
In response to SFAS 123R, on April 25, 2005, the Organization and Compensation Committee of
the Company’s 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 Company’s
current employees, including the Company’s executive officers, and certain former employees of the
Company who received grants while employees prior to the AMO spin-off. 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, pursuant to their
original terms, automatically vest as soon as they are in the money. Consequently, as soon as the
options have any value to the participant, they would vest according to their original terms.
Therefore, early vesting does not provide any immediate benefit to participants, including the
Company’s 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 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 Company’s pro forma footnote
disclosure for the year ended December 31, 2005. This treatment is permitted under the transition
guidance provided by SFAS 123R.
Incentive Compensation Plan
The Company has an incentive compensation plan that provides for the granting of non-qualified
stock options, incentive stock options, stock appreciation rights, performance shares, restricted
stock and restricted stock units to officers and key employees. Options granted under this
incentive compensation plan are granted at an exercise price equal to the fair market value at the
date of grant, have historically become vested and exercisable at a rate of 25% per year beginning
twelve months after the date of grant, generally expire ten years after their original date of
grant,
16
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
and provide that an employee holding a stock option may exchange stock that the employee has
owned for at least six months as payment against the exercise of their option. These provisions
apply to all options outstanding at March 31, 2006.
Restricted share awards under the incentive compensation plan are subject to restrictions as
to sale or other disposition of the shares and to restrictions that require continuous employment
with the Company. The restrictions generally expire, and the awards become fully vested, four years
from the date of grant.
Non-employee Director Equity Incentive Plan
The Company has a non-employee director equity incentive plan that provides for the issuance
of restricted stock and non-qualified stock options to non-employee directors. Under the terms of
the non-employee director equity incentive plan, each eligible non-employee director receives, upon
election, reelection or appointment to the Board of Directors, an annual award consisting of 1,800
shares of restricted stock multiplied by the number of years, including treating any partial year
as a full year, in that non-employee director’s remaining term of service on the Board of
Directors. In addition, each eligible non-employee director is granted a non-qualified stock option
to purchase 4,500 shares of stock on the date of each regular annual meeting of stockholders at
which the directors are to be elected. From 2003 to 2005, eligible non-employee directors were
granted a non-qualified stock option to purchase 2,500 shares of stock on the date of each regular
annual meeting of stockholders under a prior amendment to the director equity incentive plan.
Non-qualified stock options are granted at an exercise price equal to the fair market value at
the date of grant, become fully vested and exercisable one year from the date of grant and expire
10 years after the date of grant. Restrictions on restricted stock awards generally expire when the
awards vest. Vesting occurs at the rate of 331/3% per year beginning twelve
months after the date of grant.
Stock option activity under the Company’s premium priced stock option plan, incentive
compensation plan and the non-employee director equity incentive plan is summarized below:
| |
|
|
|
|
|
|
|
|
| |
|
Number |
|
Weighted |
| |
|
Of |
|
Average |
| |
|
Shares |
|
Exercise |
| |
|
(in thousands) |
|
Price |
Outstanding at December 31, 2005 |
|
|
10,782 |
|
|
$ |
72.86 |
|
Options granted |
|
|
1,834 |
|
|
|
111.99 |
|
Options exercised |
|
|
(778 |
) |
|
|
67.29 |
|
Options cancelled |
|
|
(102 |
) |
|
|
82.15 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
11,736 |
|
|
|
79.26 |
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
7,103 |
|
|
|
72.96 |
|
|
|
|
|
|
|
|
|
|
The total pre-tax intrinsic value of options exercised during the three months ended March 31,
2006 was $33.0 million. Upon exercise the Company generally issues shares from treasury.
17
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table summarizes stock options outstanding at March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
Options Exercisable |
| |
|
Number |
|
Average |
|
Weighted |
|
Aggregate |
|
Number |
|
Weighted |
|
Aggregate |
| |
|
Outstanding |
|
Remaining |
|
Average |
|
Intrinsic |
|
Exercisable |
|
Average |
|
Intrinsic |
| Range of |
|
at 3/31/06 |
|
Contractual Life |
|
Exercise |
|
Value |
|
at 3/31/06 |
|
Exercise |
|
Value |
| Exercise Prices |
|
(in thousands) |
|
(in years) |
|
Price |
|
(in millions) |
|
(in thousands) |
|
Price |
|
(in millions) |
$ 12.75 - $ 51.00 |
|
|
837 |
|
|
|
2.7 |
|
|
$ |
30.23 |
|
|
$ |
65.5 |
|
|
|
837 |
|
|
$ |
30.23 |
|
|
$ |
65.5 |
|
$ 51.01 - $ 63.76 |
|
|
1,944 |
|
|
|
5.7 |
|
|
|
57.71 |
|
|
|
98.7 |
|
|
|
1,506 |
|
|
|
57.01 |
|
|
|
76.5 |
|
$ 63.77 - $ 76.51 |
|
|
3,030 |
|
|
|
7.4 |
|
|
|
69.37 |
|
|
|
118.6 |
|
|
|
1,618 |
|
|
|
67.02 |
|
|
|
63.3 |
|
$ 76.52 - $ 89.26 |
|
|
2,893 |
|
|
|
5.9 |
|
|
|
82.51 |
|
|
|
75.2 |
|
|
|
1,971 |
|
|
|
82.35 |
|
|
|
51.2 |
|
$ 89.27 - $114.76 |
|
|
2,446 |
|
|
|
7.9 |
|
|
|
110.03 |
|
|
|
— |
|
|
|
587 |
|
|
|
105.33 |
|
|
|
— |
|
$114.77 - $127.51 |
|
|
586 |
|
|
|
1.4 |
|
|
|
127.48 |
|
|
|
— |
|
|
|
583 |
|
|
|
127.51 |
|
|
|
— |
|
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic
value based on the Company’s closing stock price of $108.50 as of March 31, 2006, which would have
been received by the option holders had all the option holders exercised their options as of that
date.
The fair value of restricted shares is based on the market value of the Company’s shares on
the date of grant. The following table summarizes the Company’s restricted share activity for the
three months ended March 31, 2006:
| |
|
|
|
|
|
|
|
|
| |
|
Number |
|
Weighted |
| |
|
Of |
|
Average |
| |
|
Shares |
|
Grant-Date |
| |
|
(in thousands) |
|
Fair Value |
Restricted share awards at December 31, 2005 |
|
|
189 |
|
|
$ |
74.23 |
|
Shares granted |
|
|
68 |
|
|
|
101.80 |
|
Shares vested |
|
|
(6 |
) |
|
|
111.95 |
|
Shares cancelled |
|
|
(1 |
) |
|
|
88.12 |
|
|
|
|
|
|
|
|
|
|
Restricted share awards at March 31, 2006 |
|
|
250 |
|
|
|
83.67 |
|
|
|
|
|
|
|
|
|
|
Valuation and Expense Recognition of Share-Based Awards
On
January 1, 2006, the Company adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share-based awards made to the Company’s employees and
directors based on the estimated fair value of the awards. The Company adopted SFAS 123R using the
modified prospective application method, under which prior periods are not retrospectively revised
for comparative purposes. Accordingly, no compensation expense for stock options was recognized for
the periods prior to January 1, 2006.
Pre-tax share-based compensation expense recognized under SFAS 123R for the three months ended
March 31, 2006 was $15.3 million, which consisted of compensation related to employee and director
stock options of $10.1 million, employee and director restricted share awards of $1.8 million, and
$3.4 million related to stock contributed to employee benefit plans. Pre-tax share based
compensation expense recognized under APB 25 for the three months ended March 25, 2005 was $3.6
million, which consisted of compensation related to employee and director restricted share awards
of $0.9 million and $2.7 million related to stock contributed to employee benefit plans. There was no share-based
compensation expense recognized during the three months ended March 25, 2005 related to employee or
director stock options. The income tax benefit related to recognized share-based compensation was
$5.5 million and $1.4 million for the three months ended March 31, 2006 and March 25, 2005,
respectively.
18
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The following table summarizes pre-tax share-based compensation recognized for stock option
awards for the three month periods ended March 31, 2006 and March 25, 2005.
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
| |
|
(in millions) |
Cost of sales |
|
$ |
0.7 |
|
|
$ |
— |
|
Selling, general and administrative expense |
|
|
7.0 |
|
|
|
— |
|
Research and development |
|
|
2.4 |
|
|
|
— |
|
The Company uses the Black-Scholes option-pricing model to estimate the fair value of
share-based awards. The determination of fair value using the Black-Scholes option-pricing model is
affected by the Company’s stock price as well as assumptions regarding a number of highly complex
and subjective variables including expected stock price volatility, risk-free interest rate,
expected dividends and projected employee stock option exercise behaviors. The weighted average
estimated fair value of employee and director stock options granted during the three months ended
March 31, 2006 was $35.93 per share using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
| |
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
| |
|
2006 |
Expected volatility |
|
|
30.0 |
% |
Risk-free interest rate |
|
|
4.42 |
% |
Expected dividend yield |
|
|
0.50 |
% |
Expected option life (in years) |
|
|
4.75 |
|
Upon adoption of SFAS 123R the Company changed its estimated volatility calculation to an
equal weighting of the Company’s ten year historical average and the average implied volatility of
at-the-money options traded in the open market. Prior to the adoption of SFAS 123R the Company used
an estimated stock price volatility based on the Company’s five year historical average. The
Company believes this method provides a more accurate estimate of stock price volatility over the
expected life of the share-based awards.
The risk-free interest rate assumption is based on observed interest rates for the appropriate
term of the Company’s stock options. The Company does not target a specific dividend yield for its
dividend payments but is required to assume a dividend yield as an input to the Black-Scholes
option-pricing model. The dividend yield assumption is based on the Company’s history and an
expectation of future dividend amounts. The expected option life assumption is estimated based on
actual historical exercise activity and assumptions regarding future exercise activity of
unexercised, outstanding options.
Share-based compensation expense under SFAS 123R is recognized only for those awards that are
ultimately expected to vest. An estimated annual forfeiture rate of 4.2% has been applied to unvested
awards for the purpose of calculating compensation cost. Forfeitures were estimated based on
historical experience. SFAS 123R requires these estimates to be revised, if necessary, in future
periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact
compensation cost in the period in which the change in estimate occurs.
As of March 31, 2006, total compensation cost related to non-vested stock options and
restricted stock not yet recognized was $135.5 million, which is
expected to be recognized over the 48 month period after March 31, 2006 (25 months on a weighted-average basis). The Company has not capitalized as part of
inventory any share-based compensation costs because such costs were negligible as of March 31,
2006.
19
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Prior to adopting the provisions of SFAS 123R, the Company recorded estimated compensation
expense for employee and director stock options based on their intrinsic value on the date of grant
pursuant to APB 25 and provided the pro forma disclosures required by SFAS 123. Because the Company
has historically granted at-the-money stock options that have no intrinsic value upon grant, no
expense was recorded for stock options prior to adopting SFAS 123R. For purposes of pro forma
disclosures under SFAS 123, compensation expense under the fair value method and the effect on net
income and earnings per common share for the three months ended March 25, 2005 were as follows:
| |
|
|
|
|
| |
|
Three months ended |
| |
|
March 25, |
| (in millions, except per share amounts) |
|
2005 |
Net earnings, as reported |
|
$ |
79.9 |
|
Add stock-based compensation expense included in
reported net earnings, net of tax |
|
|
2.2 |
|
Deduct stock-based compensation expense
determined under fair value based method, net of
tax |
|
|
(10.5 |
) |
|
|
|
|
|
Pro forma net earnings |
|
$ |
71.6 |
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
As reported basic |
|
$ |
0.61 |
|
As reported diluted |
|
$ |
0.60 |
|
Pro forma basic |
|
$ |
0.55 |
|
Pro forma diluted |
|
$ |
0.54 |
|
The fair value of stock options granted during the three months ended March 25, 2005 were
estimated at grant date using the following weighted average assumptions: expected volatility of
33.4%; risk-free interest rate of 3.4%; and expected life of five years.
8. Employee Retirement and Other Benefit Plans
The Company sponsors various qualified defined benefit pension plans covering a substantial
portion of its employees. In addition, the Company sponsors two supplemental nonqualified plans
covering certain management employees and officers and one retiree health plan covering United
States retirees and dependents.
Components of net periodic benefit cost for the three month periods ended March 31, 2006 and
March 25, 2005, respectively, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
|
|
|
|
|
|
|
|
Other |
| |
|
|
|
|
|
|
|
|
|
Postretirement |
| (in millions) |
|
Pension Benefits |
|
Benefits |
| |
|
March 31, |
|
March 25, |
|
March 31, |
|
March 26, |
| |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Service cost |
|
$ |
5.7 |
|
|
$ |
4.5 |
|
|
$ |
0.8 |
|
|
$ |
0.5 |
|
Interest cost |
|
|
6.8 |
|
|
|
6.3 |
|
|
|
0.5 |
|
|
|
0.3 |
|
Expected return on plan assets |
|
|
(8.1 |
) |
|
|
(6.9 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service
cost |
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Recognized net actuarial loss |
|
|
3.2 |
|
|
|
2.4 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
7.6 |
|
|
$ |
6.3 |
|
|
$ |
1.1 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Company currently expects to pay contributions of between $14.0 million and $16.0
million to its U.S. and non-U.S. pension plans and between $0.7 million and $0.8 million to its
other postretirement plan.
20
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
9. Litigation
The following supplements and amends our discussion set forth under Part I, Item 3, “Legal
Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
In June 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®, the Company 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 the
Company’s favor on January 27, 2004, holding that the patent at issue is valid, enforceable and
infringed by Apotex’s proposed generic drug. Following an appeal by Apotex, the United States Court
of Appeals for the Federal Circuit issued an opinion in May 2005, affirming the lower court’s
ruling on inequitable conduct and claim construction and reversing and remanding the issue of
obviousness. The court did not address the issue of infringement. In October 2005, the court denied
a motion by Apotex to vacate the injunction pending resolution of the remand from the United States
Court of Appeals for the Federal Circuit. Apotex appealed the court’s ruling regarding the motion
to vacate injunction and filed an emergency motion to stay the injunction with the United States
Court of Appeals for the Federal Circuit. In December 2005, the United States Court of Appeals for
the Federal Circuit granted Apotex’s motion, ruling that the permanent injunction had been vacated
by its remand to the District Court. The Company filed a motion for a 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 the Company’s motion, ruling that the
defendants were restrained and enjoined, pending the court’s 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®. In
February 2006, following a hearing on the Company’s motion for preliminary injunction and the
defendants’ obviousness challenge to the validity of the patent at issue, the District Court
extended the temporary restraining order currently in place until the
court issued its order
regarding the defendants’ challenge to the validity of the patent at issue based on obviousness. In
March 2006, Apotex filed an appeal of the District Court’s order granting injunctive relief and an
emergency motion to stay the injunction with the United States Court of Appeals for the Federal
Circuit. On March 15, 2006, the Company filed an opposition to
both motions. On May 1, 2006, the United States Court of Appeals for the Federal Circuit issued an order vacating
the District Court’s extended temporary restraining order on the grounds that the Federal Rules of
Civil Procedure require that the District Court provide additional analysis of its conclusion that
the Company is likely to prevail on the merits at the rehearing before the District Court.
Accordingly, on May 4, 2006, the Company re-filed a motion for temporary restraining order and
preliminary injunction with the District Court. Apotex has not received final approval from the
FDA to market its generic product. On June 29, 2001, the
Company 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.
Inamed Related Matters Assumed in Our Acquisition of Inamed
In connection with its purchase of Collagen in September 1999, the Company’s subsidiary Inamed
assumed certain liabilities relating to the Trilucent breast implant, a soybean oil-filled breast
implant, which had been manufactured and distributed by various subsidiaries of Collagen between
1995 and November 1998. In November 1998, Collagen announced the sale of its LipoMatrix, Inc.
subsidiary, manufacturer of the Trilucent implant to Sierra Medical Technologies, Inc. Collagen
retained certain liabilities for Trilucent implants sold prior to November 1998.
In March 1999, the United Kingdom Medical Devices Agency, or MDA, announced the voluntary
suspension of marketing and withdrawal of the Trilucent implant in the United Kindom as a
precautionary measure. The MDA did not identify any immediate hazard associated with the use of
the product but stated that it sought the withdrawal because it had received “reports of local
complications in a small number of women” who had received those implants, involving localized
swelling. The same notice stated that there “has been no evidence of permanent injury or harm to
general health” as a result of these implants. In March 1999, Collagen agreed with the U.K.
National Health Service that, for a period of time, it would perform certain product surveillance
with respect to U.K. patients implanted with the Trilucent implant and pay for explants for any
U.K. women with confirmed Trilucent implant ruptures. Subsequently, LipoMatrix’s notified body in
Europe suspended the product’s CE Mark pending further
21
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
assessment of the long-term safety of the product. Sierra Medical has since stopped sales of
the product. Subsequent to acquiring Collagen, Inamed elected to continue the voluntary program.
In June 2000, the MDA issued a hazard notice recommending that surgeons and their patients
consider explanting the Trilucent implants even if the patient is asymptomatic. The MDA also
recommended that women avoid pregnancy and breast-feeding until the explantation as a precautionary
measure stating that “although there have been reports of breast swelling and discomfort in some
women with these implants, there has been no clinical evidence of any serious health problems, so
far.”
Concurrently with the June 2000 MDA announcement, Inamed announced that, through its AEI, Inc.
subsidiary, it had undertaken a comprehensive program of support and assistance for women who have
received Trilucent breast implants, under which it was covering medical expenses associated with
the removal and replacement of those implants for women in the European Community, the United
States and other countries. After consulting with competent authorities in each affected country,
Inamed terminated this support program in March 2005 in all countries other than the United States
and Canada. Notwithstanding the termination of the general program, Inamed continued to pay for
explantations and related expenses in certain cases if a patient justified her delay in having her
Trilucent implants removed on medical grounds or owing to lack of notice. Under this program,
Inamed may pay a fee to any surgeon who conducts an initial consultation with any Trilucent
implantee. Inamed also pays for the explantation procedure and related costs, and for replacement
(non-Trilucent) implants for women who are candidates for and who desire them. To date, virtually
all of the U.K. residents and more than 95% of the non-U.K. residents who have requested
explantations as a result of an initial consultation have had them performed.
A Spanish consumer union has commenced a single action in the Madrid district court in which
the consumer union, Avinesa, alleges that it represents 41 Spanish Trilucent explantees. To date,
64 women in Spain have commenced individual legal proceedings in court against Inamed, of which 37
were still pending as of March 31, 2006. Prior to the issuance of a decision by an Appellate Court
sitting in Madrid in the second quarter of 2005, Inamed won approximately one-third, and lost
approximately two-thirds of its Trilucent cases in the lower courts. The average damages awarded
in cases the Company lost were approximately $18,000. In the second quarter of 2005, in a case
called Gomez Martin v. AEI, for the first time an appellate court in Spain issued a decision
holding that Trilucent breast implants were not “defective” within the meaning of applicable
Spanish product liability law and dismissed a €60,000 award issued by the lower court. While this
ruling is a positive development for Inamed, it may not be followed by other Spanish appellate
courts or could be modified or found inapplicable to other cases filed in the Madrid district.
Since the ruling in Gomez Martin v. AEI, Inamed has had greater success in winning the Spanish
cases than before the ruling.
As of March 31, 2006, Inamed has approximately $0.5 million of insurance coverage remaining
under a settlement between Inamed and AISLIC, an AIG company, for the indemnification of non-U.S.
Trilucent claims. In addition, at March 31, 2006, Inamed had an accrual for future Trilucent
claims, costs, and expenses of approximately $2.0 million and insurance of $0.5 million, or $1.5
million, net of insurance.
The Company believes that that Inamed’s current accruals and available insurance coverage are
sufficient to discharge future Trilucent related liabilities; however, there can be no assurances
that future Trilucent-related liabilities will not exceed the current accruals and insurance
coverage.
In May 2002, Ernest Manders filed a lawsuit against Inamed and other defendants entitled
“Ernest K. Manders, M.D. v. McGhan Medical Corporation, et al.”, in the United States District
Court for the Western District of Pennsylvania, Case No. 02-CV-1341. Manders’ amended complaint
seeks damages for alleged infringement of a patent allegedly held by Manders in the field of tissue
expanders. In February 2003, Inamed answered the complaint, denying its material allegations and
counterclaiming against Manders for declarations of invalidly as well as noninfringement.
Following fact discovery and expert discovery, Manders elected to limit his claim for infringement
to twelve of the forty-six claims in his patent. In September 2004 and October 2004, the court
held a Markman hearing on claim construction under the patent and in February 2006, the court
issued its Memorandum
22
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Opinion on claim construction. The court
held a status conference on April 21, 2006 and another status
conference on May 5, 2006,
at which time the court indicated that it would refer the case to a
magistrate for mediation.
On February 24, 2005, the U.S. Securities and Exchange Commission (SEC) notified Inamed that
it had initiated a formal private investigation to determine whether Inamed had violated federal
securities laws. By letter dated April 11, 2006, the SEC notified counsel to Inamed that the
investigation had been terminated and that no enforcement action had been recommended by the staff
of the SEC.
The Company is 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 the Company’s consolidated financial position, liquidity or
results of operations.
Under U.S. generally accepted accounting principles, the Company establishes an accrual for an
estimated loss contingency when it is both probable that an asset has been impaired or that a
liability has been incurred and the amount of the loss can be reasonably estimated. Given the
uncertain nature of litigation generally, and the uncertainties related to the incurrence, amount
and range of loss on any pending litigation, investigation or claim, the Company is currently
unable to predict the ultimate outcome of any litigation, investigation or claim, determine whether
a liability has been incurred or make a reasonable estimate of the liability that could result from
an unfavorable outcome. While the Company believes 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 its consolidated financial position, liquidity or results of
operations, in view of the uncertainties discussed above, it could incur charges in excess of any
currently established accruals and, to the extent available, excess liability insurance. In
addition, an adverse ruling in a patent infringement lawsuit involving the Company could materially
affect its ability to sell one or more of its products or could result in additional competition.
In view of the unpredictable nature of such matters, the Company cannot provide any assurances
regarding the outcome of any litigation, investigation or claim to which it is a party or the
impact on the Company of an adverse ruling in such matters. As additional information becomes
available, the Company will assess its potential liability and revise its estimates.
10. Guarantees
The Company’s Certificate of Incorporation, as amended, provides that the Company 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 the Company or was serving at the request of the Company as a
director, officer, employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise. The Company has also entered into contractual indemnity agreements with
each of its directors and executive officers, pursuant to which the Company has agreed to indemnify
such directors and executive officers against any payments they are required to make as a result of
a claim brought against such executive officer or director in such capacity, excluding claims (i)
relating to the action or inaction of a director or executive officer that resulted in such
director or executive officer gaining personal profit or advantage, (ii) for an accounting of
profits made from the purchase or sale of securities of the Company 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 director’s or executive officer’s knowingly fraudulent,
deliberately dishonest or willful misconduct. The maximum potential amount of future payments that
the Company could be required to make under these indemnification provisions is unlimited. However,
the Company has purchased directors’ and officers’ liability insurance policies intended to reduce
the Company’s monetary exposure and to enable the Company to recover a portion of any future
amounts paid. The Company has not previously paid any material amounts to defend lawsuits or settle
claims as a result of these indemnification provisions. As a result, the Company believes the
estimated fair value of these indemnification arrangements is minimal.
23
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Company customarily agrees in the ordinary course of its business to indemnification
provisions in agreements with clinical trials investigators in its drug development programs, in
sponsored research agreements with academic and not-for-profit institutions, in various comparable
agreements involving parties performing services for the Company in the ordinary course of
business, and in its real estate leases. The Company also customarily agrees to certain
indemnification provisions in its drug discovery and development collaboration agreements. With
respect to the Company’s clinical trials and sponsored research agreements, these indemnification
provisions typically apply to any claim asserted against the investigator or the investigator’s
institution relating to personal injury or property damage, violations of law or certain breaches
of the Company’s contractual obligations arising out of the research or clinical testing of the
Company’s compounds or drug candidates. With respect to real estate lease agreements, the
indemnification provisions typically apply to claims asserted against the landlord relating to
personal injury or property damage caused by the Company, to violations of law by the Company or to
certain breaches of the Company’s contractual obligations. The indemnification provisions appearing
in the Company’s 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 the Company could be required to make under these provisions is generally
unlimited. The Company has purchased insurance policies covering personal injury, property damage
and general liability intended to reduce the Company’s exposure for indemnification and to enable
the Company to recover a portion of any future amounts paid. The Company has not previously paid
any material amounts to defend lawsuits or settle claims as a result of these indemnification
provisions. As a result, the Company believes the estimated fair value of these indemnification
arrangements is minimal.
11. Earnings Per Share
The table below presents the computation of basic and diluted earnings per share:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| (in millions, except per share amounts) |
|
2006 |
|
2005 |
Net (loss) earnings |
|
$ |
(444.8 |
) |
|
$ |
79.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares issued |
|
|
135.1 |
|
|
|
131.1 |
|
Net shares assumed issued using the treasury stock method for options
and non-vested equity shares and share units outstanding during each
period based on average market price |
|
|
— |
|
|
|
1.0 |
|
Dilutive effect of assumed conversion of convertible notes outstanding |
|
|
— |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
135.1 |
|
|
|
132.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(3.29 |
) |
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(3.29 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
Stock options outstanding during the three period ended March 31, 2006 were not included in
the computation of diluted earnings per share because the Company incurred a loss from continuing
operations and hence, the impact would be antidilutive. Options to purchase 11,736,000 shares of
common stock at exercise prices ranging from $12.75 to $127.51 per share were outstanding as of
March 31, 2006. Additionally, for the three month period ended March 31, 2006, the effect of
approximately 2.5 million common shares related to the convertible subordinated notes was not
included in the computation of diluted earnings per share because the effect would be antidilutive.
For the three month period ended March 25, 2005, options to purchase 5.4 million shares of
common stock at exercise prices ranging from $76.15 to $127.51 were outstanding, but were not
included in the computation of diluted earnings per share because the options’ exercise prices were
greater than the average market price of common shares and, therefore, the effect would be
anti-dilutive.
24
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
12. Comprehensive Income (Loss)
The following table summarizes components of comprehensive income (loss) for the three month
periods ended March 31, 2006, and March 25, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| (in millions) |
|
March 31, 2006 |
|
March 25, 2005 |
| |
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
Tax |
|
|
| |
|
Before-tax |
|
(expense) |
|
Net-of-tax |
|
Before-tax |
|
(expense) |
|
Net-of-tax |
| |
|
amount |
|
or benefit |
|
amount |
|
amount |
|
or benefit |
|
amount |
Foreign currency translation adjustments |
|
$ |
3.5 |
|
|
$ |
— |
|
|
$ |
3.5 |
|
|
$ |
(3.3 |
) |
|
$ |
— |
|
|
$ |
(3.3 |
) |
Unrealized holding gains/(losses) on
derivatives designated as cash flow hedges |
|
|
12.6 |
|
|
|
(5.0 |
) |
|
|
7.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unrealized holding gains/(losses) on
available-for-sale securities |
|
|
4.4 |
|
|
|
(2.3 |
) |
|
|
2.1 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss) |
|
$ |
20.5 |
|
|
$ |
(7.3 |
) |
|
|
13.2 |
|
|
$ |
(3.6 |
) |
|
$ |
0.1 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
|
|
|
|
|
|
|
|
|
(444.8 |
) |
|
|
|
|
|
|
|
|
|
|
79.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
$ |
(431.6 |
) |
|
|
|
|
|
|
|
|
|
$ |
76.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Business Segment Information
The Company produces a broad range of pharmaceutical products including: 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. The Company also produces medical devices, including:
breast implants for aesthetic augmentation and reconstructive surgery, 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. The Company
provides global marketing strategy teams to ensure development and execution of a consistent
marketing strategy for its products in all geographic regions that share similar distribution
channels and customers.
The Company currently operates its business on the basis of a single reportable segment —
specialty pharmaceuticals, but due to its March 2006 acquisition of Inamed, the Company expects to
change the number of reportable segments to two reportable segments, specialty pharmaceuticals and
medical devices, beginning with the Company’s second fiscal quarter of 2006. Because of the late
timing of the acquisition of Inamed, the Company did not report any revenue and profit or loss for
the medical devices segment in the first quarter ended March 31, 2006. However, the segment
information below includes separate disclosures regarding total identifiable assets and long-lived
assets for the specialty pharmaceutical and medical devices segments. The Company expects to begin
providing separate disclosures of revenues and profit or loss for the two reportable segments
beginning with its second fiscal quarter 2006.
Management evaluates its various global product portfolios on a revenue basis, which is
presented below. The Company’s principal markets are the United States, Europe, Latin America and
Asia Pacific. The United States information is presented separately as it is the Company’s
headquarters country, and U.S. sales, including manufacturing operations, represented 67.4% and
66.9% of the Company’s total consolidated product net sales for the quarters ended March 31, 2006
and March 25, 2005, respectively.
25
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Sales to McKesson Drug Company for the three month periods ended March 31, 2006 and March 25,
2005 were 16.2% and 14.4%, respectively, of the Company’s total consolidated product net sales.
Sales to Cardinal Healthcare for the three month periods ended March 31, 2006 and March 25, 2005
were 14.7% and 13.4%, respectively, of the Company’s total consolidated product net sales. No other
country or single customer generates over 10% of total product net sales. Other product net sales
and net sales for manufacturing operations primarily represent sales to AMO pursuant to the
manufacturing and supply agreement entered into as part of the AMO spin-off. Net sales for the
Europe region also include sales to customers in Africa and the Middle East, and net sales in the
Asia Pacific region also include sales to customers in Australia and New Zealand.
Long-lived assets are assigned to geographic regions based upon management responsibility for
such items.
| |
|
|
|
|
|
|
|
|
| Net Sales by Product Line |
|
|
| (in millions) |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
Specialty Pharmaceuticals: |
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals |
|
$ |
361.9 |
|
|
$ |
298.0 |
|
Botox®/Neuromodulators |
|
|
223.0 |
|
|
|
176.3 |
|
Skin Care |
|
|
30.3 |
|
|
|
29.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
615.2 |
|
|
|
504.1 |
|
Other |
|
|
— |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
615.2 |
|
|
$ |
527.2 |
|
|
|
|
|
|
|
|
|
|
Geographic Information
| |
|
|
|
|
|
|
|
|
| Net Sales |
|
|
| (in millions) |
|
Three months ended |
| |
|
March 31, |
|
March 25, |
| |
|
2006 |
|
2005 |
United States |
|
$ |
414.5 |
|
|
$ |
331.7 |
|
Europe |
|
|
112.3 |
|
|
|
96.9 |
|
Latin America |
|
|
36.3 |
|
|
|
26.2 |
|
Asia Pacific |
|
|
27.2 |
|
|
|
32.6 |
|
Other |
|
|
23.9 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
614.2 |
|
|
|
506.2 |
|
Manufacturing operations |
|
|
1.0 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
615.2 |
|
|
$ |
527.2 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Long-Lived Assets |
|
|
|
|
| (in millions) |
|
March 31, |
|
December 31, |
| |
|
2006 |
|
2005 |
United States |
|
$ |
2,870.9 |
|
|
$ |
209.2 |
|
Europe |
|
|
10.9 |
|
|
|
21.3 |
|
Latin America |
|
|
18.8 |
|
|
|
18.0 |
|
Asia Pacific |
|
|
1.9 |
|
|
|
2.0 |
|
Other |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,902.8 |
|
|
|
250.9 |
|
Manufacturing operations |
|
|
212.4 |
|
|
|
214.2 |
|
General corporate |
|
|
215.6 |
|
|
|
204.9 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,330.8 |
|
|
$ |
670.0 |
|
|
|
|
|
|
|
|
|
|
26
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Long-lived assets related to the acquisition of Inamed are reflected in the United States
balance above. The Company’s management has not completed its analysis of long-lived assets or
assigned regional management responsibility for these assets. Once management responsibility is
assigned, the assets will be reflected in their respective geographical locations.
Total identifiable assets at March 31, 2006 were $5,260.4 million compared to $2,850.5 million
at December 31, 2005. The increase in identifiable assets as of March 31, 2006 compared to December
31, 2005 is primarily due to the addition of the fair value of assets acquired in connection with
the acquisition of Inamed.
14. Contingent Non-Income Taxes in Brazil
The
Company is currently involved in a longstanding administrative matter in Brazil related
to the payment of certain sales taxes. This matter relates to a claim for tax credits taken by the
Company for taxes previously paid that were determined to result from an illegal temporary increase
in the applicable tax rate. Although the tax rate increase was ruled by the Brazilian Federal
Supreme Court to be unconstitutional, the taxing authority has asserted that the Company does not
have the ability to claim the credit for its own account rather than for the benefit of its
customers who originally paid the tax to the Company upon purchasing the Company’s products. The
Company currently believes that it is more likely than not, but not probable, that the Company
could sustain a liability for unpaid taxes, including interest and penalties, estimated to be
approximately $5.0 million at March 31, 2006.
The Company expects that a resolution of the matter may ultimately take several years. The
Company has not recorded any accrued costs for settlement of this matter.
15. Subsequent Events
On April 12, 2006 the Company completed and issued concurrent private placements of $750
million aggregate principal amount of 1.50% Convertible Senior Notes due 2026 (2026 Convertible
Notes) and $800 million aggregate principal amount of 5.75% Senior Notes due 2016 (2016 Notes). The
2026 Convertible Notes were sold in a private placement to qualified institutional buyers pursuant
to Rule 144A under the Securities Act of 1933 and the 2016 Notes were sold in a private placement
to qualified institutional buyers and non-U.S. persons pursuant to Rule 144A and Regulation S under
the Securities Act of 1933.
The 2026 Convertible Notes pay interest semi-annually at a rate of 1.50% per annum. The 2026
Convertible Notes will be convertible, at the holder’s option, at an initial conversion rate of
7.8952 shares per $1,000 principal amount of notes. In certain circumstances the 2026 Convertible
Notes may be convertible into cash in an amount equal to the lesser of their principal amount or
their conversion value. If the conversion value of the 2026 Convertible Notes exceeds their
principal amount at the time of conversion, the Company will also deliver common stock or, at its
election, a combination of cash and common stock for the conversion value in excess of the
principal amount. The Company will not be permitted to redeem the 2026 Convertible Notes prior to
April 5, 2009, will be permitted to redeem the 2026 Convertible Notes from and after April 5, 2009
to April 4, 2011 if the closing price of its common stock reaches a specified threshold, and will
be permitted to redeem the 2026 Convertible Notes at any time on or after April 5, 2011. Holders of
the 2026 Convertible Notes will also be able to require the Company to redeem the 2026 Convertible
Notes on April 1, 2011, April 1, 2016 and April 1, 2021 or upon a change in control of the Company.
The 2026 Convertible Notes mature on April 1, 2026, unless previously redeemed by the Company or
earlier converted by the note holders.
The 2016 Notes were sold at 99.717% of par value and will pay interest semi-annually at a rate
of 5.75% per annum, and are redeemable at any time at the Company’s option, subject to a make-whole
provision based on the present value of remaining interest payments at the time of the redemption.
The aggregate outstanding principal amount of the 2016 Notes will be due and payable on April 1,
2016, unless earlier redeemed by Allergan.
27
Allergan, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
During April 2006, the Company amended its committed long-term credit facility to provide
borrowings of up to $800 million through March 2011 and amended its commercial paper program to
provide for borrowings of up to $600 million.
During
April 2006 and May 2006, holders of an aggregate principal amount at
maturity of $479.4 million
of the Company’s zero coupon convertible senior notes due 2022 (2022 Notes) tendered their
2022 Notes to the Company for conversion. As of May 9, 2006, the Company completed the
conversion of an aggregate principal amount at maturity of
$142.1 million of the 2022 Notes
and, in accordance with the amended and restated indenture governing the 2022 Notes,
the Company paid the note holders $115.6 million in cash, which amount represented the
accreted value of the 2022 Notes on the respective conversion dates, and approximately
480,200 shares of the Company’s common stock. The Company announced in April 2006 that
it will redeem the entire outstanding principal amount of the 2022
Notes on May 15, 2006,
unless earlier converted by the note holders.
During April 2006, the Company repurchased approximately 2.9 million shares of its common
stock for approximately $308 million.
28
ALLERGAN, INC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006
This financial review presents our operating results for the three month periods ended March
31, 2006 and March 25, 2005, and our financial condition at March 31, 2006. 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 the caption “Risk Factors” in Item 1A of Part II below. In addition,
the following review should be read in connection with the information presented in our unaudited
condensed consolidated financial statements and related notes for the three month period ended
March 31, 2006.
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 materially from the estimates we use in applying our critical
accounting policies.
Revenue Recognition
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 $2.4 million and $1.8 million at March 31, 2006 and
December 31, 2005, respectively. Provisions for cash discounts deducted from consolidated sales in
the first quarter of 2006 and the first quarter of 2005 were $7.4 million and $5.9 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 management’s evaluation of specific factors that increase the risk of returns.
The amount of allowances for sales returns accrued at March 31, 2006 and December 31, 2005 were
$10.9 million and $5.1 million, respectively. The increase in the allowance for sales returns at
March 31, 2006 compared to December 31, 2005 was primarily due to the acquisition of Inamed.
Provisions for sales returns deducted from consolidated sales were $7.7 million and $5.0 million in
the first quarter of 2006 and the first quarter of 2005, 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 and Medicare. 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 March 31,
2006 and December 31, 2005 were $84.6 million and $71.9 million, respectively. The $12.7 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 March 31, 2006
compared to December 31, 2005, 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 $53.2 million and $46.2 million in the first quarter of 2006 and the first quarter of
2005,
29
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
respectively. The increase in the provision for sales rebates and other incentive programs
during the first quarter of 2006 compared to the first quarter of 2005 is also 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 management’s 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, management’s 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 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.
Advertising Expenses
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 $24.8 million and $18.6 million in the first
quarters of 2006 and 2005, respectively.
Pensions
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 2006, which is the same rate used for
2005. 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
30
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
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
and our net periodic benefit costs for 2006 is 5.60%, which represents a 0.35 percentage point
decline in the discount rate used to calculate our net periodic benefit costs for 2005. We
determine the discount rate largely based upon an index of high-quality fixed income investments
(U.S. Moody’s 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.
Share-Based Payments
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised),
Share-Based Payment (SFAS 123R), which requires measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors. Under SFAS No 123R the fair
value of share-based payment awards is estimated at grant date using an option pricing model and
the portion that is ultimately expected to vest is recognized as compensation cost over the
requisite service period. Prior to the adoption of SFAS No. 123R, we accounted for share-based
awards using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), as allowed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the
intrinsic value method no share-based compensation cost was recognized for awards to employees or
directors if the exercise price of the award was equal to the fair market value of the underlying
stock on the date of grant.
We adopted SFAS 123R using the modified prospective application method. Under the modified
prospective application method prior periods are not retrospectively revised for comparative
purposes. The valuation provisions of SFAS 123R apply to new awards and awards that are outstanding
on the adoption effective date that are subsequently modified or cancelled. Estimated compensation
expense for awards outstanding and unvested on the adoption effective date will be recognized over the remaining
service period using the compensation cost calculated for pro forma disclosure purposes under SFAS
123.
Pre-tax share-based compensation expense recognized under SFAS 123R for the three months ended
March 31, 2006 was $15.3 million, which consisted of compensation related to employee and director
stock options of $10.1 million, employee and director restricted share awards of $1.8 million, and
$3.4 million related to stock contributed to employee benefit plans. Pre-tax share-based
compensation expense recognized under APB 25 for the three months ended March 25, 2005 was $3.6
million, which consisted of compensation related to employee and director restricted share awards
of $0.9 million and $2.7 million related to stock contributed to employee benefit plans. There was no share-based
compensation expense recognized during the three months ended March 25, 2005 related to employee or
director stock options. The income tax benefit related to recognized share-based compensation was
$5.5 million and $1.4 million for the three months ended March 31, 2006 and March 25, 2005,
respectively.
We use the Black-Scholes option-pricing model to estimate the fair value of share-based
awards. The determination of fair value using the Black-Scholes model is affected by our stock
price as well as assumptions regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility over the term of the
awards and projected employee stock option exercise behaviors.
31
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
Prior to the adoption of SFAS 123R we used an estimated stock price volatility based on the
Company’s five year historical average. Upon adoption of SFAS 123R we changed our estimated
volatility calculation to an equal weighting of our ten year historical average and the average
implied volatility of at-the-money options traded in the open market. We believe this method
provides a more accurate estimate of stock price volatility over the expected life of the
share-based awards. Employee stock option exercise behavior is estimated based on actual historical
exercise activity and assumptions regarding future exercise activity of unexercised, outstanding
options.
We recognize share-based compensation cost over the requisite service period using the
straight-line single option method. Since share-based compensation under SFAS 123R is recognized
only for those awards that are ultimately expected to vest, an estimated forfeiture rate has been
applied to unvested awards for the purpose of calculating compensation cost. SFAS 123R requires
these estimates to be revised, if necessary, in future periods if actual forfeitures differ from
the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the
change in estimate occurs. In the our pro forma information required under SFAS 123 prior to
January 1, 2006, we accounted for forfeitures as they occurred.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. FAS 123(R)-3, Transitional Election Related to Accounting for Tax Effects of
Share-Based Payment Awards. We have elected to adopt the alternative transition method provided in
this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to
SFAS 123R. The alternative transition method includes a simplified method to establish the
beginning balance additional paid-in capital pool (APIC Pool) related to tax effects of employee
share-based compensation, which is available to absorb tax deficiencies recognized subsequent to
the adoption of SFAS 123R.
Income Taxes
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 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 contingencies, 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 $43.1 million and $44.1 million at
March 31, 2006 and December 31, 2005, respectively. Changes in the valuation allowances are
generally a component of the estimated annual effective tax rate. The decrease in the amount of
valuation allowances at March 31, 2006 compared to December 31, 2005 is primarily due to a decrease
in the valuation allowance related to deferred tax assets for certain capitalized intangible assets
that became realizable due to the completion of a federal tax audit in the U.S. This decrease in the
amount of the valuation allowance was partially offset by an increase in valuation allowances due
to the acquisition of Inamed. 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 the
operations of these non-U.S.
32
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
subsidiaries. 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. We annually update our estimate of
unremitted earnings outside the United States after the completion of each fiscal year.
During the first quarter of 2006, we reduced our estimated income taxes payable and related
provision for income taxes by $14.5 million primarily due to a change in estimate resulting from
the resolution of several significant and previously uncertain income tax audit issues associated with the
completion of an audit by the United States Internal Revenue Service for tax years 2000 to 2002.
Also during the first quarter of 2006, we increased our 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, by $1.2 million and reduced our related provision for
income taxes.
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 and liabilities assumed based on their respective fair values. Prior to our March
23, 2006 acquisition of Inamed Corporation, or Inamed, we had limited access to Inamed’s management
and underlying accounting records. Therefore, we have not yet had sufficient time to complete a
final determination of the estimated fair values of net assets at the acquisition date.
Accordingly, the purchase price for Inamed was allocated to tangible and intangible assets acquired
and liabilities assumed based on their preliminary estimated fair values at the acquisition date.
We have engaged an independent third-party valuation firm to assist us in determining the
preliminary fair values of in-process research and development, identifiable intangible assets and
certain tangible assets. The final valuation of net assets is expected to be completed as soon as
possible, but no later than one year from the acquisition date in accordance with U.S. generally
accepted accounting principles. Such a valuation requires significant estimates and assumptions
including but not limited to: determining the timing and estimated costs to complete the in-process
projects, projecting regulatory approvals, estimating future cash flows, and developing appropriate
discount rates. We believe the preliminary fair values assigned to the assets acquired and
liabilities assumed are based on reasonable assumptions. However, the assumptions may be inaccurate
and unanticipated circumstances may occur which could significantly affect the fair value
estimates. Furthermore, the fair value estimates for the purchase price allocation may change as
additional information becomes available.
OPERATIONS
Headquartered in Irvine, California, we are a technology-driven, global health care company
that develops and commercializes specialty pharmaceutical and medical device products for the
ophthalmic, neurological, medical aesthetics, medical dermatological and other specialty markets.
We employ approximately 6,524 persons around the world. 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. Our principal markets are the United States, Europe, Latin America and
Asia Pacific.
33
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
RESULTS OF OPERATIONS
We currently produce a broad range of pharmaceutical products, including: 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. Through our acquisition of Inamed, we also produce
medical devices, including: breast implants for aesthetic augmentation and reconstructive surgery;
dermal products to correct facial wrinkles; and products for the treatment of obesity. 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.
We
currently operate our business on the basis of a single reportable
segment – specialty
pharmaceuticals, but due to the March 2006 acquisition of Inamed, we expect to change the number of
reportable segments to two reportable segments – specialty pharmaceuticals and medical devices —
beginning in our second fiscal quarter of 2006. Because of the late timing of the acquisition of
Inamed, we did not report any revenue and profit or loss from the medical devices segment in the
first quarter ended March 31, 2006, as these amounts are considered immaterial.
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.
The following table compares net sales by product line and certain selected products for the
three month periods ended March 31, 2006 and March 25, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
|
|
| |
|
March 31, |
|
March 25, |
|
Change in Net Sales |
|
Percent Change in Net Sales |
| (in millions) |
|
2006 |
|
2005 |
|
Total |
|
Performance |
|
Currency |
|
Total |
|
Performance |
|
Currency |
Net Sales by Product Line: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eye Care Pharmaceuticals |
|
$ |
361.9 |
|
|
$ |
298.0 |
|
|
$ |
63.9 |
|
|
$ |
67.0 |
|
|
$ |
(3.1 |
) |
|
|
21.4 |
% |
|
|
22.5 |
% |
|
|
(1.0 |
)% |
Botox/Neuromodulator |
|
|
223.0 |
|
|
|
176.3 |
|
|
|
46.7 |
|
|
|
48.4 |
|
|
|
(1.7 |
) |
|
|
26.5 |
% |
|
|
27.5 |
% |
|
|
(1.0 |
)% |
Skin Care |
|
|
30.3 |
|
|
|
29.8 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
— |
|
|
|
1.7 |
% |
|
|
1.7 |
% |
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
615.2 |
|
|
|
504.1 |
|
|
|
111.1 |
|
|
|
115.9 |
|
|
|
(4.8 |
) |
|
|
22.0 |
% |
|
|
23.0 |
% |
|
|
(1.0 |
)% |
Other* |
|
|
— |
|
|
|
23.1 |
|
|
|
(23.1 |
) |
|
|
(23.1 |
) |
|
|
— |
|
|
|
(100.0 |
)% |
|
|
(100.0 |
)% |
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
615.2 |
|
|
$ |
527.2 |
|
|
$ |
88.0 |
|
|
$ |
92.8 |
|
|
$ |
(4.8 |
) |
|
|
16.7 |
% |
|
|
17.6 |
% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
67.4 |
% |
|
|
66.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
32.6 |
% |
|
|
33.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Product Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alphagan P, Alphagan and
Combigan |
|
$ |
71.0 |
|
|
$ |
66.7 |
|
|
$ |
4.3 |
|
|
$ |
5.2 |
|
|
$ |
(0.9 |
) |
|
|
6.4 |
% |
|
|
7.8 |
% |
|
|
(1.4 |
)% |
Lumigan |
|
|
72.9 |
|
|
|
62.0 |
|
|
|
10.9 |
|
|
|
12.1 |
|
|
|
(1.2 |
) |
|
|
17.5 |
% |
|
|
19.5 |
% |
|
|
(2.0 |
)% |
Other Glaucoma |
|
|
4.4 |
|
|
|
4.6 |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(3.9 |
)% |
|
|
(1.2 |
)% |
|
|
(2.7 |
)% |
Restasis |
|
|
66.1 |
|
|
|
37.3 |
|
|
|
28.8 |
|
|
|
28.8 |
|
|
|
— |
|
|
|
77.1 |
% |
|
|
77.1 |
% |
|
|
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 in
June 2005.
34
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
The $4.8 million decrease in net sales resulting from foreign currency changes for the three
month period ended March 31, 2006 was due primarily to the weakening of the euro, British pound and
Australian dollar, partially offset by the strengthening of the Brazilian real, Canadian dollar and
other Latin American currencies compared to the U.S. dollar.
The $88.0 million increase in net sales in the first quarter of 2006 compared to the first
quarter of 2005 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 the first quarter of 2006 compared to the first
quarter of 2005 primarily because of strong growth in sales 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 eye drop products, primarily Refresh®, an increase in sales of Zymar®, a newer
anti-infective, and an increase in new product sales of Alphagan® P 0.1%, our recently introduced
next generation of Alphagan® for the treatment of glaucoma that was launched in the United States
in the first quarter of 2006. This increase in sales was partially offset by a decrease in sales of
Acular®, our older generation anti-inflammatory, and lower sales of Alphagan® and Alphagan® P 0.15%
due to a general decline in U.S. wholesaler demand for Alphagan® P, the small cannibalization effect from our newly launched Alphagan® P 0.1% product and the negative impact from
generic Alphagan® competition in the first quarter of 2006 compared to the first quarter of 2005.
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 five percent
to nine percent, effective January 22, 2006. We increased the published U.S. list price for
Lumigan® by five percent, Restasis® by seven percent, Alphagan® P 0.15% by five percent and Zymar®
by seven 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. 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 March 31, 2006, 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 the first quarter of 2006 compared to the first quarter of 2005
primarily as a result of strong growth in demand in the United States for both therapeutic and
cosmetic uses and growth in demand in international markets for cosmetic use. Effective January 1,
2006, 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
2006, primarily related to sales of Botox® Cosmetic. In the United States, the actual net effect
from the increase in price for sales of Botox® for therapeutic use is difficult to determine,
primarily due to rebate programs with U.S. federal and state government agencies. International
Botox® sales benefited from strong sales growth for cosmetic use in Europe, especially in the U.K.
and Germany, and to a lesser degree, France, Spain and Italy, as well as a strong increase in sales
of Botox® in smaller distribution markets serviced by our European export sales group. This
increase in international Botox® sales was partially offset by a decrease in international sales of
Botox® for therapeutic use, primarily in Japan, where we recently shifted to a third party license
and distribution business model as a result of a long-term agreement with GlaxoSmithKline, and in
Europe. We believe our worldwide market share for neuromodulators, including Botox®, is currently
over 85%.
Skin care sales increased slightly in the first quarter of 2006 compared to the first quarter
of 2005 primarily due to higher sales of Tazorac®, Zorac® and Avage®, partially offset by a
decrease in sales of Prevage™ antioxidant cream, which we launched in January 2005. Net sales of
Tazorac®, Zorac® and Avage® increased $1.8 million, or 9.1%, to $21.6 million in the first quarter
of 2006 compared to $19.8 million in the first quarter of 2005. We increased the published U.S.
list price for Tazorac® and Avage® by nine percent effective January 14, 2006.
35
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
The increase in the percentage of U.S. sales as a percentage of total product net sales during
the first three months of 2006 compared to the same period in 2005 was primarily attributable to an
increase in U.S. Botox® and eye care pharmaceuticals sales, as a percentage of total product net
sales.
Our gross margin percentage for the first quarter of 2006 was 83.5% of net sales, which
represents a 1.3 percentage point increase from our gross margin percentage of 82.2% for the first
quarter of 2005. Our gross margin percentage increased in the first quarter of 2006 compared to the
first quarter of 2005 primarily as a result of the $23.1 million decrease in other
non-pharmaceutical sales, primarily contract manufacturing sales, which had a significantly lower
gross margin percentage than our pharmaceutical sales, an increase in the mix of Botox® sales as a
percentage of total product net sales, which generally have a higher gross margin percentage than
our other pharmaceutical product lines, and an increase in the mix of total domestic U.S. sales as
a percentage of total product net sales. Sales in the United States of our pharmaceutical products
generally have a higher gross margin percentage than our international sales. This increase in
gross margin percentage was partially offset by an overall decrease in gross margin percentage for
total Botox® net sales, primarily due to an increase in validation costs associated with our new
biologics facility in Irvine, California and a negative impact from recognized manufacturing cost
variances in the first quarter of 2006 compared to the first quarter of 2005, partially offset by
the price increase for Botox® and Botox® Cosmetic in the United States. Gross margin in dollars
increased in the first quarter of 2006 compared to the first quarter of 2005 by $80.5 million, or
18.6%, as a result of the 16.7% increase in net sales and by the 1.3 percentage point increase in
gross margin percentage.
Other revenue increased $7.6 million to $10.5 million in the first quarter of 2006 compared to
$2.9 million in the first quarter of 2005. In the first quarter of 2006, other revenue includes
$2.6 million of royalty income and $7.9 million of reimbursement income earned from services
provided in connection with contractual agreements primarily related to the development and
promotion of Botox® in Japan and China and co-promotion of GlaxoSmithKline’s products Imitrex
STATdose System® and Amerge® in the United States to neurologists, and the development of Posurdex®
for the ophthalmic specialty market in Japan. In the first quarter of 2005, other revenue included
$0.9 million of royalty income and $2.0 million of reimbursement income earned primarily in
connection with a third-party skin care product co-promotion agreement.
Selling, general and administrative, or SG&A, expenses were $274.0 million, or 44.5% of net
sales, in the first quarter of 2006 compared to $213.2 million, or 40.4% of net sales, in the first
quarter of 2005. The increase in SG&A expense dollars in the first quarter of 2006 compared to the
first quarter of 2005 was primarily a result of an increase in promotion costs associated with
direct-to-consumer advertising in the United States for Botox® Cosmetic and Restasis®, an increase
in selling expenses and marketing expenses, principally personnel costs driven by an expansion of
our Botox® and glaucoma products sales forces, supporting the increase in consolidated sales,
especially for Restasis®, Lumigan®, Botox® and Botox® Cosmetic, and co-promotion costs related to
the agreement with GlaxoSmithKline, or GSK, to co-promote GSK’s
products Imitrex STATdose System®
and Amerge® in the United States, an increase in transition related and duplicate operating
expenses associated with the restructuring and streamlining of our European operations which
totaled $4.2 million, including an impairment loss of $2.6 million on the expected sale of our
Mougins, France facility, and the incurrence of $5.0 million of integration and transition costs
associated with our acquisition of Inamed. SG&A expenses also increased due to an increase in legal
costs related to various patent and trademark infringement lawsuits, and general corporate legal
matters, additional costs associated with expensing stock options of $7.0 million, and higher other
general and administrative expenses. As a percentage of net sales, SG&A expenses increased in the
first quarter of 2006 compared to the first quarter of 2005, due primarily to higher promotion
expenses, selling expenses, and general and administrative costs as a percentage of net sales.
Research
and development expenses were $670.1 million, or 108.9% of net sales, in the first
quarter of 2006 compared to $82.0 million, or 15.6% of net sales, in the first quarter of 2005. In
the first quarter of 2006, research and development expenses include a charge of $562.8 million for
acquired in-process research and development, or
36
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
IPR&D, assets related to the Inamed acquisition. The amount of IPR&D expenses represents a
preliminary estimate of the fair value of purchased in-process technology for projects that, as of
the acquisition date, had not reached technical feasibility and had no alternative future uses in
their current state. Excluding the effect of the $562.8 million IPR&D charge in the first quarter
of 2006, research and development spending increased by $25.3 million to $107.3 million, or 17.4%
of net sales, compared to $82.0 million, or 15.6% of net sales, in the first quarter of 2005.
Research and development spending increased in the first quarter of 2006 compared to the first
quarter of 2005 primarily as a result of the acquired IPR&D assets related to the Inamed acquisition, higher rates of investment in our eye care pharmaceuticals
and Botox® product lines, increased spending for new technologies and $2.4 million of additional
costs associated with expensing stock options. Spending increases in the first quarter of 2006
compared to the first quarter of 2005 were primarily driven by an increase in clinical trial costs
associated with our Posurdex® technology and certain Botox® indications for overactive bladder,
migraine headache and benign prostatic hypertrophy.
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 our
Botox®
product 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 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 $2.0 million and $3.0 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.
As of March 31, 2006, we recorded cumulative pre-tax restructuring charges of $1.9 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 64 were severed as of March 31, 2006.
The following table presents the cumulative restructuring activities through March 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.8 |
|
Net charge (reversal) during the first quarter of 2006 |
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
(0.4 |
) |
Spending |
|
|
(0.9 |
) |
|
|
(0.1 |
) |
|
|
(1.0 |
) |
Reduction in accrued pension liability included in
net charges (reversal) during the first quarter of
2006 |
|
|
— |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
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 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/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/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 151 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 to continue to incur them
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/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 to continue to incur them 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 to continue to incur them up through and
including the second quarter of 2006.
38
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
As of March 31, 2006 we have recorded cumulative pre-tax restructuring charges of $31.8
million related to the restructuring of the Company’s 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 March
31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
15.2 |
|
|
|
— |
|
|
|
15.2 |
|
Net charge during the first quarter of 2006 |
|
|
— |
|
|
|
2.9 |
|
|
|
2.9 |
|
Spending |
|
|
(5.6 |
) |
|
|
(2.9 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 (included in Other accrued expenses) |
|
$ |
9.6 |
|
|
$ |
— |
|
|
$ |
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance in the preceding table relates to 151 employees, of which 107 were severed
as of March 31, 2006. 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 the
first quarter of 2006, we recorded a $2.6 million impairment related to our Mougins, France facility
and reported $11.9 million of assets held for sale included in Other current assets. During the
first quarters of 2006 and 2005, we also recorded $1.9 million and $0.3 million, respectively, 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 for the three months
ended March 31, 2006 consisted of $0.1 million in cost of sales, $1.6 million in selling, general
and administrative expenses and $0.2 million in research and development expenses.
Transition/duplicate operating expenses for the three months ended March 25, 2005 consisted of $0.2
million in selling, general and administrative expenses and $0.1 million in research and
development expenses.
Termination of Manufacturing and Supply Agreement with Advanced Medical Optics
In October 2004, our Board of Directors approved certain restructuring activities related to
the scheduled termination in June 2005 of our manufacturing and supply agreement with AMO, which we spun-off
in June 2002. Under the manufacturing and supply agreement, which was entered into in connection
with the AMO spin-off, we 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, we eliminated certain manufacturing
positions at our Westport, Ireland; Waco, Texas; and Guarulhos, Brazil manufacturing facilities.
As of March 31, 2006, we recorded cumulative pre-tax restructuring charges of $21.9 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, our 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.
39
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
The following table presents the cumulative restructuring activities through March 31, 2006
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 |
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
Net charge during the first quarter of 2006 |
|
|
0.3 |
|
|
|
— |
|
|
|
0.3 |
|
Spending |
|
|
(0.4 |
) |
|
|
— |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating loss in the first quarter of 2006 was $422.8 million compared to operating
income of $113.4 million for the first quarter of 2005. The $536.2 million decrease in operating
income was due primarily to the $588.1 million increase in
research and development expenses, including the IPR&D charge of
$562.8 million, and
$60.8 million increase in SG&A expenses, partially offset by the $80.5 million increase in gross
margin, $24.6 million decrease in restructuring charges and $7.6 million increase in other
revenues.
Total net non-operating expenses in the first quarter of 2006 were $0.3 million compared to
net non-operating income of $5.6 million in the first quarter of 2005. Interest income in the first
quarter of 2006 was $9.2 million compared to interest income of $5.5 million in the first quarter
of 2005. The increase in interest income in the first quarter of 2006 was primarily due to higher
average cash equivalent balances earning interest of approximately $229 million and an increase in
average interest rates earned on all cash equivalent balances earning interest of approximately
1.98% in the first quarter of 2006 compared to the same period in 2005, partially offset by a $4.9
million reversal of previously recognized estimated 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. Interest expense increased $3.3
million to $7.8 million in the first quarter of 2006 compared to $4.5 million in the first quarter
of 2005, primarily due to an increase in foreign borrowings in Ireland to effectuate our
repatriation of dividends during the third quarter of 2005 and additional borrowings under our
bridge credit facility to finance the acquisition of Inamed, partially offset by a $0.6 million
reversal of previously accrued statutory interest expense associated with the resolution of several
significant uncertain income tax audit issues.
We recorded a net unrealized loss on derivative instruments of $1.0 million in the first
quarter of 2006 compared to a net unrealized gain of $0.1 million in the first quarter of 2005. We
record as “Unrealized gain (loss) on derivative instruments, net” the mark to market adjustments on
our outstanding foreign currency options, which we enter into to reduce the volatility of expected
earnings in currencies other than U.S. dollars. Other, net expenses were $0.7 million in the first
quarter of 2006 compared to Other, net income of $4.5 million in the first quarter of 2005. In the
first quarter of 2006, Other, net includes net realized losses from foreign currency transactions
of $1.1 million. In the first quarter of 2005, Other, net 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
gains from foreign currency transactions of $0.3 million.
40
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
Our effective tax rate for the first quarter of 2006 was 5.2%. Included in our operating loss
in the first quarter of 2006 are pre-tax charges of $562.8 million for in-process research and
development associated with our acquisition of Inamed. We did not record any income tax benefit
for the in-process research and development charges. Included in the provision for income taxes in
the first quarter of 2006 is a $14.5 million reduction in estimated income taxes payable primarily
due to the resolution of several significant previously uncertain income tax audit issues
associated with the completion of an audit by the United States Internal Revenue Service for tax
years 2000 to 2002, and a $1.2 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. Excluding the impact of the $562.8 million of
in-process research and development charges, the $14.5 million reduction in estimated income taxes
payable due to the resolution of several significant uncertain income tax audit issues and the $1.2
million additional income tax benefit for previously paid state income taxes which became
recoverable, our adjusted effective tax rate for the first quarter of 2006 was 26.9%. We believe
that the use of an adjusted effective tax rate provides a more meaningful measure of the impact of income taxes on our results of
operations because it excludes the effect of certain discrete items that are not included as part of our core business activities. This allows stockholders to better determine the effective
tax rate associated with our core business activities.
Our effective tax rate for the first quarter of 2005 was 32.9%, our full year 2005 effective
tax rate was 32.1% and our full year 2005 adjusted effective tax rate was 27.5%. Included in our
operating income in fiscal year 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 to AMO 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 fiscal year 2005 was 27.5%.
41
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
The calculation of our fiscal year 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 to AMO |
|
|
(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 to AMO |
|
|
(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 |
% |
|
|
|
|
|
The decrease in our adjusted effective tax rate to 26.9% in the first quarter of 2006 compared
to our full year 2005 adjusted effective tax rate of 27.5% is primarily due to estimated beneficial
tax rate effects from increased U.S. deductions for interest expense associated with the
acquisition of Inamed and stock option compensation expense, and from an increase in the mix of our
earnings in lower tax rate jurisdictions, which include nine months of estimated operating results
from our Inamed acquisition, which generally have a lower effective tax rate than our
pharmaceutical operations. The decrease in our adjusted effective tax rate in the first quarter of
2006 compared to our full year 2005 adjusted effective tax rate was partially offset by a negative
impact from the expiration of federal research and development tax credits in the United States
beginning in 2006.
Our net loss in the first quarter of 2006 was $444.8 million compared to net earnings of $79.9
million for the first quarter of 2005. The $524.7 million decrease in net earnings in the first
quarter of 2006 compared to the first quarter of 2005 was primarily the result of the decrease in
operating income of $536.2 million and the decrease in total net non-operating income of $5.9
million, partially offset by the decrease in the provision for income taxes of $17.3 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 for the three months ended March 31,
2006 was $116.7 million compared to cash provided of $90.9 million for the three months ended March
25, 2005. The increase in net cash provided by
42
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
operating activities of $25.8 million was primarily due to an increase in earnings, including
the effect of non-cash items, partially offset by an increase in cash required to fund growth in
trade receivables, and a decrease in accounts payable, excluding the effect of the Inamed
acquisition. In the first three months of 2006 and 2005, we paid pension contributions of $2.5
million and $1.5 million, respectively, to our U.S. defined benefit pension plan. In 2006, we
currently expect to pay contributions of between $14.0 million and $16.0 million for our U.S. and
non-U.S. pension plans.
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 future amortization of the unrecognized net
actuarial losses is not expected to materially affect future pension contribution requirements.
Net cash used in investing activities in the first three months of 2006 was $1,250.4 million.
Net cash used in investing activities in the first three months of 2005 was $13.9 million. The
increase in cash used in investing activities is primarily due to the Inamed acquisition. The
cash portion of the purchase price for Inamed Corporation was $1,215.2 million, net of cash
acquired. Additionally, we invested $32.7 million in new facilities and equipment during the three
months ended March 31, 2006 compared to $11.5 million during the same period in 2005. During the
first quarter of 2006, we purchased additional real property, composed of two office buildings,
contiguous to our main facility in Irvine, California. Net cash used in investing activities also
includes $2.9 million and $3.3 million to acquire software during the three months ended March 31,
2006 and March 25, 2005, respectively. We currently expect to invest between $80 million and $90
million in capital expenditures for administrative and manufacturing facilities and other property,
plant and equipment during 2006.
Net cash provided by financing activities was $712.3 million in the first three months of 2006
compared to net cash used in financing activities of $108.1 million in the first three months of
2005. In order to fund part of the cash portion of the Inamed purchase price, we borrowed $825.0
million on our bridge credit facility. Additionally, we received $27.1 million from the sale of
stock to employees and $10.2 million in excess tax benefits from share-based compensation. These
amounts were partially offset by net repayments of notes payable of $42.6 million, cash paid on the
conversion of our Senior Notes due 2022 of $94.1 million and $13.3 million in dividends paid to
stockholders. During the first three months of 2005 we repurchased $94.3 million of treasury stock,
paid $13.1 million in dividends to stockholders and had net repayments of notes payable of $4.6
million. This use of cash was partially offset by $3.9 million received from the sale of stock to
employees. Effective May 1, 2006, our Board of Directors declared a quarterly cash dividend of
$0.10 per share, payable on June 13, 2006 to stockholders of record on May 19, 2006. Under our stock
repurchase program, we may maintain up to 9.2 million repurchased shares in our treasury account at
any one time. As of March 31, 2006, we held approximately 0.6 million treasury shares under this
program. During the month of April 2006, we repurchased approximately 2.9 million shares of our
common stock for approximately $308 million. We are uncertain as to the level of treasury stock
repurchases to be made in the future.
At March 31, 2006, we had a bridge credit facility, a committed long-term credit facility, 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 bridge facility provides for borrowings of up to $1.1 billion
through March 2007. The committed long-term credit facility allows for borrowings of up to $800
million through March 2011. The commercial paper
43
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
program also provides for up to $600 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 maximum leverage ratios and minimum interest coverage ratios. Certain
covenants also limit subsidiary debt. We believe we were in
compliance with these covenants at March 31, 2006. As of March 31, 2006, we had borrowings of $825
million under the bridge credit facility, $127.0 million in borrowings under our committed
long-term credit facility, $57.7
million in borrowings outstanding under the medium term note program and no borrowings under our
commercial paper program.
On March 23, 2006, we completed the acquisition of Inamed. The acquisition was completed
pursuant to an agreement and plan of merger, dated as of December 20, 2005, by and among us, our
wholly-owned subsidiary Banner Acquisition, Inc., and Inamed and an exchange offer made by Banner
Acquisition to acquire Inamed shares for either $84.00 in cash or 0.8498 of a share of our common
stock, subject to proration so that 45% of the aggregate Inamed shares tendered were exchanged for
cash and 55% of the aggregate Inamed shares tendered were exchanged for shares of our common stock.
In the exchange offer we paid approximately $1.31 billion in cash and issued 16,194,045 shares of
common stock through Banner Acquisition, acquiring approximately 93.86% of Inamed’s outstanding
common stock. Following the exchange offer, the remaining outstanding shares of Inamed common stock
were acquired for approximately $81.7 million in cash and 1,010,576 shares of our common stock
through the merger of Banner Acquisition with and into Inamed in a merger in which
Inamed survived as our wholly-owned subsidiary. As a final step in the plan of reorganization, we are planning to merge Inamed into Inamed, LLC, our wholly-owned subsidiary. The consideration paid in the merger does not
include shares of common stock and cash that were paid to option holders for outstanding options to
purchase shares of Inamed common stock, which were cancelled in the merger and converted into the
right to receive an amount of cash equal to 45% of the “in the
money” value of the option and a
number of shares of our common stock with a value equal to 55% of the
“in the money” value of the
option. Subsequent to the merger, we issued 236,992 shares of common stock and paid $17.9 million
in cash to satisfy this obligation to the option holders. We funded part of the cash portion of the
purchase price by borrowing $825 million under our $1.1 billion bridge credit facility. In April
2006 we issued $750 million in 1.50% Convertible Senior Notes due 2026 and $800 million in 5.75%
Senior Notes due 2016 and used part of the proceeds from these issuances to repay all borrowings
under the bridge credit facility. Also, we subsequently terminated the bridge credit facility in April 2006.
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. In the three months ended March 31,
2006 holders converted $116.0 million, principal amount at maturity of the Senior Notes. In
connection with these conversions we paid $94.1 million in cash and issued 0.4 million shares of
our common stock. 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
44
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
Senior Notes in the immediately succeeding fiscal quarter. As of March 31, 2006, the
conversion criteria were met, and holders may elect to convert the Senior Notes between March 31,
2006 and June 30, 2006.
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. As of March 31, 2006 these thresholds have been
met. In April 2006, we announced our intention to redeem the entire outstanding principal amount of
the Senior Notes on May 15, 2006. As a result of this announcement, we expect all of the holders
of the Senior Notes will tender their Senior Notes for conversion prior to the redemption date. As
a sensitivity measure, assuming all of the Senior Notes are converted prior to the redemption date,
we expect to pay approximately $428.0 million for the accreted value of the Senior Notes and issue
approximately 2.1 million shares of our common stock, based upon the accreted value of the Senior
Notes at March 31, 2006 and the closing price of our common stock of $108.50 per share on March 31,
2006. We also expect to incur additional interest expense of approximately $3.2 million related to
the write-off of unamortized debt origination fees from the Senior Notes.
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 0.1 million shares of common
stock to the total number of diluted shares used to compute diluted earnings per share for the
three month period ended March 31, 2006.
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 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.
Our manufacturing and supply agreement with AMO terminated as scheduled in June 2005. As of
March 31, 2006, we recorded cumulative pre-tax restructuring charges of $21.9 million. We expect to
record an additional $2.0 million to $3.0 million in pre-tax restructuring charges during the
second and third 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/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. As of
March 31, 2006, we have recorded cumulative pre-tax restructuring charges of $31.8 million and
transition/duplicate operating expenses of $10.1 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 $2.0 million and $3.0 million, substantially all of which are
expected to be cash expenditures. As of March 31, 2006, we have recorded cumulative pre-tax
restructuring charges of $1.9 million. We expect to continue to incur additional charges up through
and including the second quarter of 2006.
45
Allergan, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 2006 (Continued)
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.
46
ALLERGAN, INC.
| Item 3. Quantitative and Qualitative Disclosures About Market Risk and Certain Factors and Trends Affecting Allergan and its Businesses |
| |
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures About Market Risk and Certain Factors and Trends
Affecting Allergan and its Businesses |
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.
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 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 record the gains and losses realized
from settled option contracts in “Other, net” in the accompanying unaudited condensed 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 unaudited condensed consolidated statements of
operations.
Interest Rate Risk
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 March 31, 2006, we had approximately $952.0 million of variable rate debt compared to $169.6
million of variable rate debt at December 31, 2005. If the interest rates on our variable rate debt
were to increase or decrease by 1%, interest expense would increase
or decrease on an annual basis by approximately $9.5 million based on the amount of
outstanding variable rate debt at March 31, 2006.
47
Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The tables below present information about certain of our investment portfolio and our debt
obligations at March 31, 2006 and December 31, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
MARCH 31, 2006 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
| |
|
Maturing in |
|
|
|
|
|
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 |
|
|
4.87 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.87 |
% |
|
|
|
|
Commercial Paper |
|
|
593.8 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593.8 |
|
|
|
593.8 |
|
Weighted Average Interest Rate |
|
|
4.76 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.76 |
% |
|
|
|
|
Foreign Time Deposits |
|
|
65.3 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65.3 |
|
|
|
65.3 |
|
Weighted Average Interest Rate |
|
|
2.88 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.88 |
% |
|
|
|
|
Other Cash Equivalents |
|
|
167.1 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167.1 |
|
|
|
167.1 |
|
Weighted Average Interest Rate |
|
|
4.73 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.73 |
% |
|
|
|
|
Total Cash Equivalents |
|
$ |
876.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
876.2 |
|
|
$ |
876.2 |
|
Weighted Average Interest Rate |
|
|
4.61 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$) |
|
$ |
427.3 |
|
|
|
— |
|
|
$ |
32.7 |
|
|
|
— |
|
|
|
— |
|
|
$ |
25.0 |
|
|
$ |
485.0 |
|
|
$ |
712.0 |
|
Weighted Average Interest Rate |
|
|
1.25 |
% |
|
|
— |
|
|
|
3.56 |
% |
|
|
— |
|
|
|
— |
|
|
|
7.47 |
% |
|
|
1.73 |
% |
|
|
|
|
Variable Rate (US$) |
|
|
952.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
952.0 |
|
|
|
952.0 |
|
Weighted Average Interest Rate |
|
|
5.17 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.17 |
% |
|
|
|
|
Other Fixed Rate (non-US$) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted Average Interest Rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Other Variable Rate (non-US$) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted Average Interest Rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Total Debt Obligations |
|
$ |
1,379.3 |
|
|
|
— |
|
|
$ |
32.7 |
|
|
|
— |
|
|
|
— |
|
|
$ |
25.0 |
|
|
$ |
1,437.0 |
|
|
$ |
1,664.0 |
|
Weighted Average Interest Rate |
|
|
3.95 |
% |
|
|
— |
|
|
|
3.56 |
% |
|
|
— |
|
|
|
— |
|
|
|
7.47 |
% |
|
|
4.01 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
DECEMBER 31, 2005 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
| |
|
Maturing in |
|
|
|
|
|
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 |
% |
|
|
1.73 |
% |
|
|
|
|
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 |
% |
|
|
|
|
In February 2006, we entered into interest rate swap contracts based on the 3-month LIBOR
rate with an aggregate notional amount of $800 million, a swap period of 10 years and a starting
swap rate of 5.198%. We entered into these swap contracts as a cash flow hedge to effectively fix
the future interest rate for our $800 million aggregate principle amount Senior Notes due 2016 that
we issued in April 2006 (see Note 15, Subsequent Events, in the financial statements under
Item 1(D) of Part I of this report). The fair value of the swap contracts rise or fall in value
when the specified interest rate rises or falls, respectively, during the swap contract period. As
of March 31, 2006 the fair value of the swap contracts was $12.6 million, which is recorded in
Other assets in our consolidated balance sheet. The related unrealized gain, net of tax, of $7.6
million is recorded as a component of
48
Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
other comprehensive income. Upon the termination of the swap contracts the total gain or loss
from the contracts will be amortized as a part of interest expense over a 10 year period to match
the term of the $800 million aggregate principle amount Senior Notes due 2016.
Foreign Currency Risk
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 and gross margins as expressed in U.S.
dollars.
From time to time, we enter into foreign currency option and foreign currency forward contracts to
reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow our
management to focus its attention on our core business issues and challenges. Accordingly, we enter
into various contracts which change in value as foreign exchange rates change to economically
offset the effect of changes in the value of foreign currency assets and liabilities, commitments
and anticipated foreign currency denominated sales and operating expenses. We enter into foreign
currency option and foreign currency forward 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 purchase or sale 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, U.K. pound, Brazilian real and euro.
All of our outstanding foreign exchange forward contracts are entered into to protect the value of
intercompany receivables denominated in currencies other than the lender’s functional currency. The
realized and unrealized gains and losses from foreign currency forward contracts and the
revaluation of the foreign denominated intercompany receivables are recorded through “Other, net”
in the accompanying unaudited condensed consolidated statements of operations.
The following tables provide information about our foreign currency derivative financial
instruments outstanding as of March 31, 2006 and December 31, 2005. The information is provided in
U.S. dollar amounts, as presented in our consolidated financial statements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2006 |
|
December 31, 2005 |
| |
|
|
|
|
|
Average Contract |
|
|
|
|
|
Average Contract |
| |
|
Notional |
|
Rate or |
|
Notional |
|
Rate or |
| |
|
Amount |
|
Strike Amount |
|
Amount |
|
Strike Amount |
| |
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Receive US$/Pay Foreign Currency)
Euros |
|
$ |
— |
|
|
|
— |
|
|
$ |
12.6 |
|
|
|
1.20 |
|
Canadian Dollar |
|
|
6.2 |
|
|
|
1.16 |
|
|
|
6.9 |
|
|
|
1.15 |
|
Australian Dollar |
|
|
2.2 |
|
|
|
0.73 |
|
|
|
2.6 |
|
|
|
0.75 |
|
U.K. Pound |
|
|
13.5 |
|
|
|
1.73 |
|
|
|
16.5 |
|
|
|
1.77 |
|
New Zealand Dollar |
|
|
0.2 |
|
|
|
0.64 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22.1 |
|
|
|
|
|
|
$ |
38.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
— |
|
|
|
|
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency purchased put options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Dollar |
|
$ |
20.1 |
|
|
|
1.15 |
|
|
$ |
26.0 |
|
|
|
1.15 |
|
Mexican Peso |
|
|
9.3 |
|
|
|
10.83 |
|
|
|
11.7 |
|
|
|
10.78 |
|
Australian Dollar |
|
|
9.7 |
|
|
|
0.74 |
|
|
|
12.1 |
|
|
|
0.75 |
|
Brazilian Real |
|
|
8.0 |
|
|
|
2.42 |
|
|
|
9.3 |
|
|
|
2.40 |
|
Euro |
|
|
31.1 |
|
|
|
1.20 |
|
|
|
39.4 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78.2 |
|
|
|
|
|
|
$ |
98.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
1.6 |
|
|
|
|
|
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sold call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Pound |
|
$ |
11.9 |
|
|
|
1.76 |
|
|
$ |
17.0 |
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
0.2 |
|
|
|
|
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
ALLERGAN, INC.
ITEM 4. Controls and Procedures
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 Commission’s 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 March 31, 2006, the end
of the quarterly period covered by this report. Based on the foregoing, our Principal Executive
Officer and our Principal Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level.
There has been no change in the Company’s internal controls over financial reporting during the
Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal controls over financial reporting, except for the
potential impact from reporting the acquisition of Inamed Corporation (Inamed) that we completed on
March 23, 2006, as more fully disclosed in Note 3, Inamed Acquisition, to the unaudited condensed
consolidated financial statements under Item 1(D) of Part I of this report. We are currently in
the process of assessing and integrating Inamed’s internal controls over financial reporting into
our financial reporting systems and expect to complete our integration activities over a period of
12 to 18 months from the acquisition date. Prior to being acquired by us, Inamed was a public
company. In conjunction with Inamed’s Form 10-K for the year ended December 31, 2005, Inamed’s
management reported its assessment that as of December 31, 2005 Inamed maintained effective
internal control over financial reporting, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In addition, Inamed’s independent registered public accounting firm issued an
opinion that management’s assessment of internal control over financial reporting was fairly
stated, in all material respects, as of December 31, 2005, and its own opinion that Inamed
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control — Integrated Framework issued
by COSO.
50
ALLERGAN, INC.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The
information required by this Item is incorporated herein by reference
to Note 9, Litigation, to the unaudited condensed consolidated
financial statements under Item 1(D) of Part I of this report.
Item 1A. Risk Factors
The risk factors presented below update, and should be considered in addition to, the risk factors
previously disclosed by us in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.
We operate in a highly competitive business.
The pharmaceutical and medical device industries are highly competitive and require an
ongoing, extensive search for technological innovation. They also require, 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 and medical device industries 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 patient’s 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 regained its licensed rights from Inamed in connection with our
acquisition of Inamed. Beaufour Ipsen licensed its rights to develop, distribute and commercialize
Dysport®/Reloxin® in the United States, Canada and Japan for aesthetic use by
physicians to Medicis Corporation. Beaufour Ipsen has marketed Dysport® in Europe since
1991, prior to our European commercialization of Botox® in 1992.
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
51
Allergan, Inc.
PART II — OTHER INFORMATION (Continued)
regulated markets in Asia, South America and Central America. These lightly regulated markets
may not require adherence to the FDA’s 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 has received approval from Korean authorities for a botulinum toxin. 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.
Mentor Corporation is our principal competitor in the United States for breast implants.
Mentor announced that it received an “approvable letter” from the FDA for its silicone breast
implants in July 2005. We did not receive an “approvable letter” from the FDA for our silicone
breast implants until September 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 acquired the rights to sell Juvéderm® in the United States,
Canada and Australia and Hydrafill® in certain European countries.
Juvéderm®/Hydrafill® is 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 we 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.
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 FDA’s cGMP regulations. If we experience
difficulties acquiring sufficient quantities of these materials 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.
We also rely on a single supplier for silicone raw materials used in some of our products. We
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 FDA’s Quality System Regulation, or QSR, which sets
forth the current good manufacturing practice requirements for
52
Allergan, Inc.
PART II — OTHER INFORMATION (Continued)
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.
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:
| |
• |
|
a determination that the new indication or product candidate is not safe and effective; |
| |
• |
|
the FDA may interpret our preclinical and clinical data in different ways than we do; |
| |
• |
|
the FDA may not approve our manufacturing processes or facilities; |
| |
• |
|
the FDA may require us to perform post-marketing clinical studies; or |
| |
• |
|
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 products or indications will achieve market
acceptance. Our future performance will be affected by the market acceptance of products such as
Lumigan®, Alphagan® P, Combigan™, Restasis®, Acular
LS®, Zymar®, Botox® and, if approved by the FDA,
Juvéderm® and silicone breast implant products, as well as FDA approval of new
indications for Botox®, and new products such as GANFORT®, 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.
53
Allergan, Inc.
PART II — OTHER INFORMATION (Continued)
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.
We have assumed Inamed’s product liability risks, including any product liability for its past
and present manufacturing of breast implant products. Historically, other breast implant
manufacturers that suffered such claims in the 1990’s were forced to cease operations or even to
declare bankruptcy. Additionally, we are seeking to reintroduce silicone breast implants in the
United States. If we obtain 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 MRI’s, 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 may face similar risks associated with our obesity
intervention and facial aesthetics products.
Additionally, our pharmaceutical and medical device 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 our sales to decline, even if our products are ultimately determined not to have been the
primary cause of the event.
Uncertainties exist in integrating Inamed’s business and operations into our own.
We are currently integrating certain of Inamed’s functions and operations into our own,
although there can be no assurance that we will be successful in this endeavor. There are inherent
challenges in integrating the two 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:
| |
• |
|
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 management’s 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. |
54
Allergan, Inc.
PART II — OTHER INFORMATION (Continued)
If we are not able to adequately address these challenges, we may not 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.
The
receipt of shares of Allergan common stock in the Inamed exchange
offer and/or the Inamed Merger may be taxable to Inamed stockholders.
If the exchange offer for all outstanding Inamed common stock, the subsequent merger in which
Allergan acquired all remaining Inamed shares not acquired in the exchange offer (referred to as
the “First Merger”), and the second merger in which Inamed is expected to be merged into another
subsidiary of Allergan, with the other subsidiary surviving the merger (referred to as the “Second
Merger”), are not treated together as a one integrated
transaction for U.S. federal income
tax purposes, if the Second Merger is not completed, or if the acquisition of Inamed otherwise
fails to qualify as a tax-free reorganization, the exchange of Inamed common stock for shares of
Allergan common stock in the exchange offer and/or the First Merger will be taxable to Inamed
stockholders for U.S. federal income tax purposes. Although Allergan has obtained the opinion of
its outside legal counsel that the exchange offer, the First Merger and the Second Merger will be
treated as an integrated transaction that qualifies as a tax-free reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended, that opinion assumes a number of factors that will not be definitively known
prior to completion of the Second Merger. In addition, this legal opinion will not be binding on
the Internal Revenue Service and there can be no assurance that the Internal Revenue Service will
not challenge the tax treatment of the transaction.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table discloses the purchases of our equity securities during the first fiscal
quarter of 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number |
|
|
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
Maximum Number |
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
(or Approximate |
| |
|
|
|
|
|
|
|
|
|
Part of |
|
Dollar Value) of |
| |
|
|
|
|
|
|
|
|
|
Publicly |
|
Shares that May |
| |
|
Total Number |
|
Average |
|
Announced |
|
Yet Be Purchased |
| |
|
of Shares |
|
Price Paid |
|
Plans |
|
Under the Plans |
| Period |
|
Purchased(1) |
|
per Share |
|
or Programs |
|
or Programs(2) |
January 1, 2006 to January 31, 2006 |
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
8,077,499 |
|
February 1, 2006 to February 28, 2006 |
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
8,167,811 |
|
March 1, 2006 to March 31, 2006 |
|
|
0 |
|
|
$ |
N/A |
|
|
|
0 |
|
|
|
8,632,300 |
|
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 March 31, 2006, the
Company held approximately 0.6 million treasury shares under this program. |
| |
| (2) |
|
The following share numbers reflect the maximum number of shares that may be purchased under
the Company’s stock repurchase program and are as of the end of each of the respective
periods. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
55
Allergan, Inc.
PART II — OTHER INFORMATION (Continued)
Item 6. Exhibits
- Exhibits (numbered in accordance with Item 601 of Regulation S-K)
| |
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K filed by
Allergan with the SEC on December 21, 2005) |
|
|
|
2.2
|
|
Amendment No. 1 to Agreement and Plan of Merger (incorporated
by reference to Exhibit (d)(2) to Amendment No. 10 to the
Tender Offer Statement on Schedule TO filed by Allergan and
Banner with the SEC on March 13, 2006) |
|
|
|
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
Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
Company’s Report on Form 10-K for the Fiscal Year ended
December 31, 1999) |
|
|
|
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
Company’s 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 Company’s
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 Company’s
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 Company’s 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 Company’s
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 Company’s 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 Company’s Registration Statement on Form S-3 dated
January 9, 2003, Registration No. 333-102425) |
|
|
|
4.9
|
|
Indenture, dated as of April 12, 2006, between the Company and
Wells Fargo, National Association relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
56
| |
|
|
|
|
|
4.10
|
|
Indenture, dated as of April 12, 2006, between the Company and
Wells Fargo, National Association relating to the $800,000,000
5.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8-K filed
on April 12, 2006) |
|
|
|
4.11
|
|
Form of 1.50% Convertible Senior Note due 2026 (incorporated by
reference to (and included in) the Indenture dated as of April
12, 2006 between the Company and Wells Fargo, National
Association at Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
|
|
|
4.12
|
|
Form of 5.75% Senior Note due 2016 (incorporated by reference
to (and included in) the Indenture dated as of April 12, 2006
between the Company and Wells Fargo, National Association at
Exhibit 4.2 of the Company’s Current Report on Form 8-K filed
on April 12, 2006) |
|
|
|
4.13
|
|
Registration Rights Agreement, dated as of April 12, 2006,
among the Company and Banc of America Securities LLC and
Citigroup Global Markets Inc., as representatives of the
Initial Purchasers named therein, relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 4.3 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
|
|
|
4.14
|
|
Registration Rights Agreement, dated as of April 12, 2006,
among the Company and Morgan Stanley & Co. Incorporated, as
representative of the Initial Purchasers named therein,
relating to the $800,000,000 5.75% Senior Notes due 2016
(incorporated by reference to Exhibit 4.4 of the Company’s
Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
10.60
|
|
Form of Restricted Stock Award Agreement under the Company’s
2003 Nonemployee Director Equity Incentive Plan, as amended |
|
|
|
10.61
|
|
Form of Non-Qualified Stock Option Award Agreement under the
Company’s 2003 Nonemployee Director Equity Incentive Plan, as
amended |
|
|
|
10.62
|
|
Purchase Agreement, dated as of April 6, 2006, among the
Company and Banc of America Securities LLC, Citigroup Global
Markets Inc. and Morgan Stanley & Co. Incorporated, as
representatives of the initial purchasers named therein,
relating to the $750,000,000 1.50% Convertible Senior Notes due
2026 (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
10.63
|
|
Purchase Agreement, dated as of April 6, 2006, among the
Company and Banc of America Securities LLC, Citigroup Global
Markets Inc., Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated, relating to the $800,000,000 5.75% Senior Notes
due 2016 (incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
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 |
57
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
Date: May 10, 2006
|
|
ALLERGAN, INC. |
| |
|
|
/s/ Jeffrey L. Edwards |
|
|
|
|
|
Jeffrey L. Edwards
Executive Vice President, Finance
and Business Development, Chief Financial Officer
(Principal Financial Officer) |
58
INDEX TO EXHIBITS
| |
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K filed by
Allergan with the SEC on December 21, 2005) |
|
|
|
2.2
|
|
Amendment No. 1 to Agreement and Plan of Merger (incorporated
by reference to Exhibit (d)(2) to Amendment No. 10 to the
Tender Offer Statement on Schedule TO filed by Allergan and
Banner with the SEC on March 13, 2006) |
|
|
|
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
Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
Company’s Report on Form 10-K for the Fiscal Year ended
December 31, 1999) |
|
|
|
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
Company’s 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 Company’s
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 Company’s
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 Company’s 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 Company’s
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 Company’s 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 Company’s Registration Statement on Form S-3 dated
January 9, 2003, Registration No. 333-102425) |
|
|
|
4.9
|
|
Indenture, dated as of April 12, 2006, between the Company and
Wells Fargo, National Association relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
INDEX TO EXHIBITS
| |
|
|
|
|
|
4.10
|
|
Indenture, dated as of April 12, 2006, between the Company and
Wells Fargo, National Association relating to the $800,000,000
5.75% Senior Notes due 2016 (incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8-K filed
on April 12, 2006) |
|
|
|
4.11
|
|
Form of 1.50% Convertible Senior Note due 2026 (incorporated by
reference to (and included in) the Indenture dated as of April
12, 2006 between the Company and Wells Fargo, National
Association at Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
|
|
|
4.12
|
|
Form of 5.75% Senior Note due 2016 (incorporated by reference
to (and included in) the Indenture dated as of April 12, 2006
between the Company and Wells Fargo, National Association at
Exhibit 4.2 of the Company’s Current Report on Form 8-K filed
on April 12, 2006) |
|
|
|
4.13
|
|
Registration Rights Agreement, dated as of April 12, 2006,
among the Company and Banc of America Securities LLC and
Citigroup Global Markets Inc., as representatives of the
Initial Purchasers named therein, relating to the $750,000,000
1.50% Convertible Senior Notes due 2026 (incorporated by
reference to Exhibit 4.3 of the Company’s Current Report on
Form 8-K filed on April 12, 2006) |
|
|
|
4.14
|
|
Registration Rights Agreement, dated as of April 12, 2006,
among the Company and Morgan Stanley & Co. Incorporated, as
representative of the Initial Purchasers named therein,
relating to the $800,000,000 5.75% Senior Notes due 2016
(incorporated by reference to Exhibit 4.4 of the Company’s
Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
10.60
|
|
Form of Restricted Stock Award Agreement under the Company’s
2003 Nonemployee Director Equity Incentive Plan, as amended |
|
|
|
10.61
|
|
Form of Non-Qualified Stock Option Award Agreement under the
Company’s 2003 Nonemployee Director Equity Incentive Plan, as
amended |
|
|
|
10.62
|
|
Purchase Agreement, dated as of April 6, 2006, among the
Company and Banc of America Securities LLC, Citigroup Global
Markets Inc. and Morgan Stanley & Co. Incorporated, as
representatives of the initial purchasers named therein,
relating to the $750,000,000 1.50% Convertible Senior Notes due
2026 (incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
10.63
|
|
Purchase Agreement, dated as of April 6, 2006, among the
Company and Banc of America Securities LLC, Citigroup Global
Markets Inc., Goldman, Sachs & Co. and Morgan Stanley & Co.
Incorporated, relating to the $800,000,000 5.75% Senior Notes
due 2016 (incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K filed on April 12, 2006) |
|
|
|
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 |