As filed with the Securities and Exchange Commission on April 2, 2004
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2003
Commission File Number: 001-31368
Sanofi-Synthélabo
(exact name of registrant as specified in its charter)
N/A
(translation of registrants name into English)
France
(jurisdiction of incorporation)
174, avenue de France, 75013 Paris, France
(address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities: |
Name of each exchange on which registered: | |
American Depositary Shares, each representing one-half of one ordinary share, nominal value 2 per share |
New York Stock Exchange | |
Ordinary shares, nominal value 2 per share | New York Stock Exchange (for listing purposes only) |
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
The number of outstanding shares of each of the issuers classes of capital or
common stock as of December 31, 2003 was:
ordinary shares: 732,848,072
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 Item 18 x
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Item 7. |
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Item 8. |
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Item 9. |
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Item 10. |
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123 | ||||
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Item 11. |
130 | |||
Item 12. |
134 |
1
140 | ||||
Item 13. |
140 | |||
Item 14. |
Material Modifications to the Rights of Security Holders and Use of Proceeds |
140 | ||
Item 15. |
140 | |||
Item 16.A. |
140 | |||
Item 16.B. |
140 | |||
Item 16.C. |
140 | |||
Item 16.D. |
141 | |||
142 | ||||
Item 17. |
142 | |||
Item 18. |
142 | |||
Item 19. |
142 |
2
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
3
Introduction
Our company is the result of the 1999 merger of two French companies, Sanofi and Synthélabo. While we have prepared consolidated financial statements for 2000, 2001, 2002 and 2003 and a consolidated balance sheet as of December 31, 1999, we did not prepare a consolidated statement of income or statement of cash flows for 1999, the year of the merger. Instead, each of Sanofi and Synthélabo prepared consolidated statements of income and cash flows for the first half of 1999, and we prepared consolidated statements of income and cash flows for the second half of 1999. We have presented those statements of income and cash flows below, but they do not provide information that is comparable to the information in our 2000, 2001, 2002 and 2003 statements of income and cash flows.
We have also prepared a pro forma income statement for the year ended December 31, 1999, based on the assumption that the merger of Sanofi and Synthélabo occurred on January 1, 1999 and that the sale of Sanofis beauty division occurred on December 31, 1998. The pro forma income statement data was prepared under French accounting rules applicable to pro forma financial information, and not in accordance with the regulations of the Securities and Exchange Commission applicable to pro forma financial statements. We have included certain data from the pro forma information below in order to reflect trends in our business during the period from 1999 to 2003. The methodology used to calculate our pro forma financial information is described in our registration statement on Form 20-F dated June 25, 2002 (SEC File No. 001-31368).
Our consolidated financial statements and those of our predecessor companies have been prepared in accordance with French generally accepted accounting principles, or French GAAP, and applicable French laws, which differ in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. These differences include, among other things:
| the treatment of the merger under U.S. GAAP as a purchase of Synthélabo by Sanofi and related subsequent accounting consequences; |
| the treatment of certain provisions for restructuring; |
| the treatment of stock options granted to employees at fair value; |
| revenue recognition of a U.S. alliance under the operational management of Bristol-Myers Squibb; and |
| the deferred income tax effect of our U.S. GAAP adjustments. |
We have reconciled our net income and shareholders equity to U.S. GAAP. Note F to our consolidated financial statements sets out the details of the reconciliation.
Unless otherwise indicated, U.S. dollar amounts in this annual report are translated using the December 31, 2003 Noon Buying Rate (as defined under Exchange Rate Information below) of $1.00 = 0.79384.
4
Selected Financial Data
The selected financial data set forth below have been derived from:
| our audited consolidated financial statements as of and for the years ended December 31, 2000, 2001, 2002 and 2003; |
| our audited consolidated statement of income for the second half of 1999; |
| our unaudited pro forma statement of income for the year ended December 31, 1999; |
| the audited consolidated financial statements of Sanofi for the six months ended June 30, 1999; and |
| the audited consolidated financial statements of Synthélabo for the six months ended June 30, 1999 (gross profit and operating profit data are unaudited as they are derived from management accounts and reflect classification differences to conform to the presentation of selected financial data for Sanofi for such periods). |
The data derived from our pro forma statement of income are presented for illustration only, and do not necessarily reflect the actual results that would have been realized had Sanofi and Synthélabo operated on a combined basis for all of 1999. Due to the merger, the selected financial data for Sanofi and Synthélabo, as well as our selected financial data for the second half of 1999, are not comparable to our selected financial data for 2000, 2001, 2002 and 2003.
The first table below presents selected financial data for our company for the second half of 1999, and all of 2000, 2001, 2002 and 2003, as well as selected pro forma financial data for 1999. The second table presents selected financial data for Sanofi and Synthélabo for the first half of 1999.
5
Six months ended December 31, 1999 |
As of and for the year ended December 31, | ||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2003 | ||||||||||||||
(pro forma unaudited) |
U.S. $ |
||||||||||||||||||
(millions of , except per share data) | |||||||||||||||||||
Income statement data: |
|||||||||||||||||||
French GAAP |
|||||||||||||||||||
Net sales |
2,658 | 5,350 | 5,963 | 6,488 | 7,448 | 8,048 | 10,138 | ||||||||||||
Gross profit |
1,889 | 3,744 | 4,521 | 5,235 | 6,070 | 6,620 | 8,339 | ||||||||||||
Operating profit |
531 | 971 | 1,577 | 2,106 | 2,614 | 3,075 | 3,874 | ||||||||||||
Net income |
342 | 625 | 985 | 1,585 | 1,759 | 2,076 | 2,615 | ||||||||||||
Earnings per share (basic(a) and diluted) |
0.47 | 0.85 | 1.35 | 2.17 | 2.42 | 2.95 | 3.72 | ||||||||||||
Balance sheet data:(b) |
|||||||||||||||||||
French GAAP |
|||||||||||||||||||
Property, plant and equipment, net |
1,143 | 1,217 | 1,229 | 1,395 | 1,449 | 1,825 | |||||||||||||
Total assets |
6,824 | 7,845 | 9,967 | 9,459 | 9,749 | 12,281 | |||||||||||||
Long-term debt |
137 | 121 | 119 | 65 | 53 | 67 | |||||||||||||
Total shareholders equity |
3,578 | 4,304 | 5,768 | 6,035 | 6,323 | 7,965 | |||||||||||||
U.S. GAAP Data:(c) |
|||||||||||||||||||
French GAAP Net income |
985 | 1,585 | 1,759 | 2,076 | 2,615 | ||||||||||||||
Purchase accounting adjustments |
(606 | ) | (445 | ) | (311 | ) | (269 | ) | (339 | ) | |||||||||
Provisions and other liabilities |
(99 | ) | (23 | ) | | | | ||||||||||||
Stock-based compensation(f) |
(5 | ) | (8 | ) | (8 | ) | (50 | ) | (63 | ) | |||||||||
Revenue recognition U.S. BMS alliance |
(8 | ) | (136 | ) | 117 | 33 | 41 | ||||||||||||
Other |
104 | (42 | ) | 31 | (16 | ) | (20 | ) | |||||||||||
Income tax effects |
221 | 167 | 52 | 91 | 115 | ||||||||||||||
U.S. GAAP Net income |
| | 592 | 1,098 | 1,640 | 1,865 | 2,349 | ||||||||||||
French GAAP Shareholders equity |
4,304 | 5,768 | 6,035 | 6,323 | 7,965 | ||||||||||||||
Purchase accounting adjustments |
9,479 | 8,927 | 8,576 | 8,267 | 10,414 | ||||||||||||||
Provisions and other liabilities |
110 | 35 | | | | ||||||||||||||
Revenue recognition U.S. BMS alliance |
(21 | ) | (160 | ) | (35 | ) | | | |||||||||||
Other |
(168 | ) | (456 | ) | (695 | ) | (635 | ) | (800 | ) | |||||||||
Income tax effects |
(1,563 | ) | (1,365 | ) | (1,282 | ) | (1,219 | ) | (1,536 | ) | |||||||||
U.S. GAAP Shareholders equity |
| | 12,141 | 12,749 | 12,599 | 12,736 | 16,043 | ||||||||||||
U.S. GAAP Earnings per share |
|||||||||||||||||||
basic(d) |
0.82 | 1.52 | 2.30 | 2.71 | 3.41 | ||||||||||||||
diluted(e) |
0.82 | 1.51 | 2.28 | 2.70 | 3.40 |
(a) | Based on the weighted average number of shares outstanding in each year, equal to 731,232,525 shares in 2000, 731,711,225 shares in 2001, 727,686,372 shares in 2002 and 702,745,208 shares in 2003. Each ADS represents one-half of one share. For 1999, the weighted average number of shares for the six months ended December 31, 1999 was 731,011,354, and for the full year (pro forma) it was equal to 730,783,868 shares. |
(b) | As discussed in Note B.2 to our consolidated financial statements included under Item 18, we changed our method of accounting for liabilities as of January 1, 2002. The impact of this change on shareholders equity was 24 million. |
(c) | As discussed in Note G.3.1 to our consolidated financial statements included under Item 18, we applied Statement of Financial Accounting Standard 142, Goodwill and Other Intangible Assets, as of January 1, 2002. |
(d) | Based on the weighted average number of shares outstanding in each year used to compute basic earnings per share, equal to 723,095,521 shares in 2000, 720,726,645 shares in 2001, 714,322,379 shares in 2002 and 689,018,905 shares in 2003. |
(e) | Based on the weighted average number of shares outstanding in each year used to compute diluted earnings per share, equal to 726,783,765 shares in 2000, 725,665,764 shares in 2001, 718,041,806 shares in 2002 and 691,120,198 shares in 2003. |
(f) | As discussed in Note G.1.C to our consolidated financial statements included under Item 18, we voluntarily adopted the fair value recognition provisions of Statement of Accounting Standards 123, Accounting for Stock-Based Compensation, as of January 1, 2003. |
6
Sanofi |
Synthélabo | |||
Six months ended June 30, 1999 |
Six months ended June 30, 1999 | |||
(unaudited)(b) | ||||
(millions of , except per share data) | ||||
Income statement data: |
||||
French GAAP |
||||
Net sales |
1,880 | 995 | ||
Gross profit |
1,264 | 734 | ||
Operating profit |
272 | 180 | ||
Net income |
146 | 109 | ||
Earnings per share (basic and diluted)(a) |
0.30 | 2.26 | ||
Balance sheet data: |
||||
French GAAP |
||||
Property, plant and equipment, net |
753 | 281 | ||
Total assets |
6,197 | 2,021 | ||
Long-term debt |
39 | 58 | ||
Total shareholders equity |
4,331 | 1,155 |
(a) | Due to the merger, per share data for Sanofi and Synthélabo are not meaningful. |
(b) | Gross profit and operating profit data are unaudited. All other data is audited. |
7
DIVIDENDS
We paid annual dividends for the years ended December 31, 1999, 2000, 2001 and 2002 and our shareholders will be asked to approve the payment of dividends for the year 2003 at our next annual shareholders meeting. If approved, this dividend will be paid on June 3, 2004. However, if we have reason to believe that our offers to acquire Aventis may not close by that date, our board of directors will arrange for an interim dividend of 0.97 per share to be paid, with the balance to be paid after the offers close. We expect that we will continue to pay regular dividends based on our financial condition and results of operations.
The following table sets forth information with respect to the dividends paid by our company in respect of the years 1999, 2000, 2001 and 2002 and the dividend that will be proposed for approval by our shareholders in regards to the year ended in 2003 at our May 24, 2004 shareholders meeting.
1999 |
2000 |
2001 |
2002 |
2003(1) | ||||||
Net Dividend per Share (in ) |
0.32 | 0.44 | 0.66 | 0.84 | 1.02 | |||||
Net Dividend per Share (in U.S. $) |
0.28 | 0.39 | 0.59 | 0.88 | 1.28 |
(1) | Proposal, subject to shareholder approval. |
The declaration, amount and payment of any future dividends will be determined by majority vote of the holders of our shares at an ordinary general meeting, following the recommendation of our board of directors. Any declaration will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by our shareholders. Accordingly, we cannot assure you that we will pay dividends in the future on a continuous and regular basis. Under French law, we are required to pay dividends approved by an ordinary general meeting of shareholders within nine months following the meeting where they are approved. The shares registered hereby are eligible for all dividends (if any) declared and approved.
In France, dividends are paid out of after-tax income. French residents were formerly entitled to a tax credit, known as the avoir fiscal, in respect of dividends received from French companies. However, the French Finance Law for 2004 includes a reform of the French tax treatment of distributions that involves the implementation of a new mechanism to avoid double taxation of dividends and the elimination of the former avoir fiscal and précompte mechanisms as explained in Item 10 Additional Information Taxation. French resident individual shareholders will still benefit from the avoir fiscal with respect to dividend distributions made in 2004 but will no longer be entitled to any such tax credit with respect to dividend distributions made as from 2005, as a consequence of the implementation of a new taxation system. French resident corporate shareholders will lose the benefit of the avoir fiscal for tax credits that they would otherwise have been able to use as from January 1, 2005. Dividends paid to non-residents normally are subject to a 25% French withholding tax and are not eligible for the benefit of the avoir fiscal. However, non-resident holders that are entitled to and comply with the procedures for claiming benefits under an applicable tax treaty may be subject to a reduced rate of withholding tax and entitled to certain other benefits. See Item 10 Additional Information Taxation. The information in the table above represents the net dividend paid, without regard to the avoir fiscal.
8
EXCHANGE RATE INFORMATION
Exchange Rates
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rates for the euro from 1999 through March 31, 2004, expressed in U.S. dollar per euro. The information concerning the U.S. dollar exchange rate is based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate). We provide the exchange rates below solely for your convenience. We do not represent that euros were, could have been, or could be, converted into U.S. dollars at these rates or at any other rate. For information regarding the effect of currency fluctuations on our results of operations, see Item 5 Operating and Financial Review and Prospects.
Period-end Rate |
Average Rate(1) |
High |
Low | |||||
(U.S. dollar per euro) | ||||||||
1999 |
1.01 | 1.06 | 1.18 | 1.00 | ||||
2000 |
0.94 | 0.92 | 1.03 | 0.83 | ||||
2001 |
0.89 | 0.89 | 0.95 | 0.84 | ||||
2002 |
1.05 | 0.95 | 1.05 | 0.86 | ||||
2003 |
1.26 | 1.14 | 1.26 | 1.04 | ||||
2004 (through March 31, 2004) |
1.21 | 1.23 | 1.29 | 1.21 | ||||
2003 |
||||||||
September |
1.17 | 1.13 | 1.17 | 1.08 | ||||
October |
1.16 | 1.17 | 1.18 | 1.16 | ||||
November |
1.20 | 1.17 | 1.20 | 1.14 | ||||
December |
1.26 | 1.23 | 1.26 | 1.20 | ||||
2004 |
||||||||
January |
1.25 | 1.26 | 1.29 | 1.24 | ||||
February |
1.24 | 1.26 | 1.28 | 1.24 | ||||
March |
1.21 | 1.22 | 1.24 | 1.21 |
(1) | The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period for year average; on each business day of the month (or portion thereof) for monthly average. On March 31, 2004, the Noon Buying Rate was $1 = .81 ($1.23 per 1). |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
9
Risks Relating to Proposed Acquisition of Aventis
As of the date of this annual report, we have open three separate offers, on substantially similar terms, pursuant to which we are offering to acquire all the ordinary shares, nominal value 3.82 per share, of Aventis, including Aventis ordinary shares represented by American depositary shares, or ADSs. For further information on the terms and conditions of these offers, see Item 8 Financial Information Significant Changes of this annual report. As of the date of this annual report, we do not know whether the offers will be successful. There are a number of risks to our shareholders associated with the offers, the most significant of which we describe in this section. Any of these risks could have an adverse effect on our business, financial condition, results of operations or prospects, which could in turn affect the price of our shares or our ADSs.
If the offers are not successful, the failure to complete the acquisition of Aventis could have an adverse effect on our share price, investor relations and employee morale.
Our offers for the Aventis securities are subject to the conditions that Aventis securities representing at least 50% of the total share capital and voting rights in Aventis, calculated on a fully diluted basis, plus one Aventis ordinary share have been tendered into the offer, that the applicable waiting period under the U.S. Hart-Scott-Rodino Act of 1976, or HSR Act, shall have expired or been terminated and no order has been entered prohibiting the transaction, and that our shareholders shall have approved the issuance of the additional shares to be issued on completion of the offer. In addition, because our offers are subject to an antitrust condition, under applicable French regulations, the French offer will lapse as soon as the U.S. Federal Trade Commission issues a second request for information before the expiration of the HSR Act waiting period. If the French offer lapses for this reason, we will withdraw the U.S. offer and the German offer. There is a risk that we may not be successful in completing the offers because of the failure to satisfy these conditions. If the offers are not successful, the failure to complete the acquisition of Aventis could have an adverse effect on our share price, investor relations and employee morale. Moreover, if the offers are not successful, we will have incurred costs in connection with the offers without realizing the benefits that we expected to gain upon completion of the offers.
The integration of the companies will present significant challenges that may result in the combined business not operating as effectively as expected or in the failure to achieve some or all of the anticipated benefits of the transaction.
The benefits and synergies expected to result from the offers will depend in part on whether our operations and those of Aventis can be integrated in a timely and efficient manner. We will face significant challenges in consolidating our functions with those of Aventis, and integrating the organizations, procedures and operations of the two businesses. The integration of our company and Aventis will be complex and time-consuming, and the managements of both companies will have to dedicate substantial time and resources to it. These efforts could divert managements focus and resources from other strategic opportunities and from day-to-day operational matters during the integration process. Failure to successfully integrate the operations of our company and Aventis could result in the failure to achieve some or all of the anticipated benefits of the transaction, including synergies and other operating efficiencies, and could have an adverse effect on the business, results of operations, financial condition or prospects of our company after the transaction.
Even if we consummate the offers, there may be a delay before we can obtain control of the management of Aventis.
In order for us to control the management of Aventis following successful completion of the offers, we will need to take control of the supervisory board (conseil de surveillance) and the management board (directoire) of
10
Aventis. Pursuant to Article L. 225-103, II, 4 of the French Commercial Code, if we gain control of Aventis pursuant to the offers, we may request the management board (directoire) of Aventis to convene a meeting of shareholders with an agenda that, among other things, will provide for the election of a new supervisory board (conseil de surveillance) and, if necessary, the dismissal of the existing management board (directoire) of Aventis. Under French law, the supervisory board (conseil de surveillance) could then appoint a new management board (directoire). If the management board refuses to convene such a shareholders meeting, we are permitted, after a reasonable delay and the notice mentioned above to Aventis management board (directoire), to convene a meeting for the election of the supervisory board (conseil de surveillance). In any event, shareholders meetings may be held no sooner than 30 days after the publication of a notice announcing the meeting in the Bulletin des Annonces Légales Obligatoires, or BALO, the French official legal gazette.
Compliance with conditions and obligations imposed in connection with regulatory approvals could adversely affect our business and the business of Aventis.
Our proposed acquisition of the Aventis securities will be reviewed by and require regulatory approvals from the European Commission, any member state of the European Union that has successfully sought jurisdiction to review the offers under its national competition law and the U.S. antitrust authorities. In order to obtain these regulatory approvals, we may have to divest, or commit to divesting, to third parties certain of our businesses or products and/or the business or products of Aventis. In the alternative or in addition, in order to obtain the necessary regulatory approvals, we may have to make other commitments to the European Commission and/or the U.S. antitrust authorities. These divestitures and other commitments, if any, may have an adverse effect on our business, results of operations, financial condition or prospects after the transaction. Further, if we do not complete any required divestiture, or provide commitments satisfactory to the U.S. Federal Trade Commission, or FTC, with respect to such a divestiture, before the expiration of the initial thirty-day waiting period under the HSR Act, the FTC may issue a second request in order to extend the waiting period. Because the offers are subject to an anti-trust condition, under applicable French regulations, the French offer will lapse (est caduque, meaning it is null and void) as soon as the FTC issues a second request. If the French offer lapses for this reason, we will withdraw the U.S. offer and the German offer.
In addition, if the European Commission initiates a Phase II investigation and we close the offers while such investigation is ongoing (as the procedure for antitrust review by the European Commission permits), until completion of the Phase II investigation, we may not be able to exercise the voting rights of the Aventis ordinary shares that we acquire pursuant to the offers or may only be able to exercise those voting rights to maintain the full value of the Aventis ordinary shares acquired. In such case, we may be delayed from implementing the current plans that we have for Aventis after the successful completion of the offers, and we may not be able to realize some or all of the anticipated benefits from the transaction, including synergies and other operating efficiencies, on the timetable that we currently expect.
Jurisdictions throughout the world claim jurisdiction under their competition or antitrust laws in respect of acquisitions or mergers that have the potential to affect their domestic marketplace. A number of these jurisdictions may claim to have jurisdiction to review the transaction. Such investigations or proceedings may be initiated and, if initiated, may have an adverse effect on our business, results of operations, financial condition or prospects after the transaction.
If the offers are successful, we will incur a substantial amount of debt to finance the cash portion of the consideration for the Aventis securities to be acquired, which debt could restrict our ability to engage in additional transactions or incur additional indebtedness.
In connection with our proposed acquisition of the Aventis securities, on January 25, 2004, we entered into a credit facility agreement that permits us to borrow up to 12,000 million. We may only borrow amounts under this credit facility if our offers for the Aventis securities are successful. If the offers are successful, we expect to borrow a substantial amount under this credit facility, which we will use mainly to finance the cash portion of the consideration to be paid to holders of Aventis securities pursuant to the offers and to refinance certain debt of
11
Aventis and its subsidiaries. The credit facility includes terms and conditions customary for agreements of this type, which could restrict our ability to engage in additional transactions or incur additional indebtedness. For additional information regarding the 12,000 million credit facility, see Item 5 Operating and Financial Review and Prospects Liquidity and Capital Resources and Item 8 Financial Information Significant Changes Proposed Acquisition of Aventis The 12,000 Million Credit Facility of this annual report.
We have not been given the opportunity to conduct a due diligence review of the non-public records of Aventis. Therefore, we may be subject to unknown liabilities of Aventis, which may have an adverse effect on our profitability and results of operations.
In commencing the offers and determining their terms and conditions, we have relied solely and exclusively upon publicly available information relating to Aventis, including periodic and other reports for Aventis as filed with or furnished to the Securities and Exchange Commission on Form 20-F and Form 6-K, as well as Aventis 2003 document de référence, as filed with the AMF. We have not conducted an independent due diligence review of, nor had access to, any non-public information about Aventis. As a result, after the consummation of our offers, we may be subject to unknown liabilities of Aventis, which may have an adverse effect on our profitability, results of operations and financial position, which we might have otherwise discovered if we had been permitted by Aventis to conduct a complete due diligence review.
Consummation of the offers may result in adverse tax consequences to us resulting from a change of ownership of Aventis.
We have not had access to information concerning Aventis tax situation. It is possible that the consummation of the offers may result in adverse tax consequences arising from a change of ownership of Aventis. The tax consequences of a change of ownership of a corporation can lead to an inability to carry-over certain tax attributes, including, but not limited to, tax losses, tax credits and/or tax basis of assets. In addition, the change of ownership may result in other tax costs not normally associated with the ordinary course of business. Such other tax costs include, but are not limited to, stamp duties, land transfer taxes, franchise taxes and other levies. The fact that we are unaware of information relevant to a determination of the potential tax consequences and related costs represents an additional transaction risk.
Change of control provisions in Aventis agreements may be triggered upon our acquisition of control of Aventis and may lead to adverse consequences for us, including the loss of significant contractual rights and benefits, the termination of joint venture and/or licensing agreements or the need to renegotiate financing agreements.
Aventis may be a party to joint ventures, licenses and other agreements and instruments that contain change of control provisions that may be triggered when we acquire control of Aventis upon the completion of the offers. Aventis has not provided us with copies of any of the agreements to which it is party and these types of agreement are not generally publicly available. Agreements with change of control provisions typically provide for, or permit the termination of, the agreement upon the occurrence of a change of control of one of the parties or, in the case of debt instruments, require repayment of all outstanding indebtedness. These provisions, if any, may be waived with the consent of the other party and we will consider whether we will seek these waivers. In the absence of these waivers, the operation of the change of control provisions, if any, could result in the loss of significant contractual rights and benefits, the termination of joint venture agreements and licensing agreements or require the renegotiation of financing agreements.
In addition, employment agreements with members of the Aventis senior management and other Aventis employees may contain change of control clauses providing for compensation to be paid in the event the employment of these employees is terminated, either by Aventis or by those employees, following the consummation of the offers. These payments, if triggered, could be substantial and could adversely affect our results of operations in the period they become payable.
12
If the offers for Aventis securities are successful, but some Aventis securities remain outstanding, the existence of minority interests in Aventis following the offers may limit our ability to integrate and manage the assets and operations of the combined businesses and therefore reduce benefits that we could otherwise achieve.
The existence of minority interests in Aventis after the completion of the offers could impede the integration of our operations with those of Aventis and thereby make it more difficult to achieve the cost savings and other operating efficiencies or to realize the revenue and earnings growth that might otherwise be possible.
Risks Relating to Our Company
We may not be able to continue to expand our presence profitably in the United States, a market that is a key to our growth strategy, and where we are investing substantial resources.
We may not achieve our growth strategy if we do not continue to profitably expand our presence in the United States, the worlds largest pharmaceuticals market. We have identified the United States, which accounted for 23.8% of our consolidated sales in 2003, as a potential major source of continued future growth and plan to continue to expand significantly our direct presence in the United States in the coming years. We face a number of challenges to profitable growth in the United States, including:
| The success of the new management organization that we have established in the United States. |
| The targeting of new markets. |
| The fact that the United States market is dominated by major U.S. pharmaceutical companies. |
| Potential changes in health care reimbursement policies and possible cost control regulations in the United States, such as Medicare reform. |
We depend on third parties for the marketing of some of our products outside Europe. These third parties may act in ways that could harm our business.
We commercialize some of our products outside Europe in collaboration with other pharmaceutical companies. We currently have a major collaborative arrangement with Bristol-Myers Squibb for the marketing of Plavix® and Aprovel®. We also have alliances with several Japanese companies for the marketing of our products in Japan. See Item 4 Information on the Company Business Overview Marketing and Distribution. When we commercialize our products through collaboration arrangements, we are subject to the risks that certain decisions, such as the establishment of budgets and promotion strategies, are subject to the control of our collaboration partners, and that deadlocks may adversely affect the activities conducted through the collaboration arrangements. For example, our alliances with Bristol-Myers Squibb are subject to the operational management of Bristol-Myers Squibb in some countries, including the United States. We cannot be certain that our partners will perform their obligations as expected. Further, our partners might pursue their own existing or alternative technologies or product candidates in preference to those being developed or marketed in collaboration with us.
We depend on third parties for the manufacturing of the active ingredients for some of our products, including Stilnox®, Eloxatin® and Xatral®, three of our strategic products.
Although our general policy is to manufacture the active ingredients for our products ourselves, we subcontract the manufacture of some of our active ingredients to third parties, which exposes us to the risk of a supply interruption in the event that our suppliers experience financial difficulties or are unable to manufacture a sufficient supply of our products. The manufacture of the active ingredients for Stilnox®, Eloxatin® and Xatral®, which are three of our strategic products, is currently done by third parties. See Item 4 Information on the Company Business Overview Production and Raw Materials for a description of these outsourcing
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arrangements. Although we have not experienced any problems in the past, if disruptions were to arise from problems with our manufacturers, this would impact our ability to sell our products in the quantities demanded by the market, and could damage our reputation and relationships with our customers. Even though we try to have backup sources of supply whenever possible, including by manufacturing backup supplies of our principal active ingredients at a second or third facility when practicable, we cannot be certain they will be sufficient if our principal sources become unavailable.
Our collaborations with third parties expose us to risks that they will assert intellectual property rights on our inventions or fail to keep our unpatented technology confidential.
We occasionally provide information and materials to research collaborators in academic institutions or other public or private entities, or request them to conduct tests to investigate certain materials. In all cases we enter into appropriate confidentiality agreements with such entities. However, those entities might assert intellectual property rights with regard to the results of the tests conducted by their collaborators, and might not grant licenses to us regarding their intellectual property rights on acceptable terms.
We also rely upon unpatented proprietary technology, processes, know-how and data that we regard as trade secrets and protect them in part by entering into confidentiality agreements with our employees, consultants and certain contractors. We cannot be sure that these agreements or other trade secret protection will provide meaningful protection, or if they are breached, that we will have adequate remedies. You should read Item 4 Information on the Company Business Overview Patents and Intellectual Property Rights for more information about our patents and licenses.
We have two principal shareholders who continue to maintain a significant degree of influence and who will continue to own a significant percentage of our enlarged share capital and voting rights immediately after the offers are completed.
Our two principal shareholders, Total and LOréal, owned 24.4% and 19.5% of our share capital, respectively, as of December 31, 2003. Our bylaws provide that our fully paid up shares that have been held in registered form for at least two years under the name of the same shareholder acquire double voting rights. As a result, as of December 31, 2003, Total and LOréal held shares representing 35.0% and 28.1%, respectively, of our voting rights, and are in a position to exert significant influence in the election of our directors and officers and other corporate actions that require shareholder approval.
Even if all of the Aventis securities are validly tendered and exchanged pursuant to the terms of the U.S. offer, the French offer and the German offer, immediately after the exchange, Total and LOréal will own, on a diluted basis and taking into account all in-the-money options that are exercisable as of the expected closing date, approximately 13.2% and approximately 10.6%, respectively, of the share capital (other than share capital held by us) and approximately 21.1% and approximately 16.9%, respectively, of our voting rights. Under the terms of a shareholders agreement, Total and LOréal have agreed to act in concert with respect to their shareholdings in our company and to certain restrictions on the transfer of their ordinary shares. On November 24, 2003, Total and LOréal amended the shareholders agreement so that it terminates on December 2, 2004 according to its terms, the parties having indicated that they do not intend to act in concert with respect to their shareholdings in our company as from that date. See Item 7 Major Shareholders and Related Party Transactions Major Shareholders Shareholders Agreement.
To the extent these shareholders maintain such level of shareholding, and particularly if they act in concert, after the exchange Total and LOréal will remain in a position to exert heightened influence in the election of our directors and officers and in other corporate actions that require shareholders approval. Continued ownership of a large percentage of our share capital and voting rights by these two principal shareholders, who are also members of our board of directors, particularly if they act in concert, may have the effect of delaying, deferring or preventing a future change in our control and may discourage future bids for our shares other than with the support of these shareholders.
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Fluctuations in currency exchange rates could adversely affect our financial condition and results of operations.
Because we sell our products in numerous countries, our results of operations and financial condition could be adversely affected by fluctuations in currency exchange rates. We are particularly sensitive to movements in exchange rates between the euro and the U.S. dollar and, to a lesser extent, certain currencies in Latin America. In 2003, approximately 23.8% of our consolidated sales were realized in the United States (the United States also represented 45.4% of our 2003 operating profit excluding unallocated costs). While we incur expenses in those currencies, the impact of these expenses does not fully offset the impact of currency exchange rates on our revenues. As a result, currency exchange rate movements can have a considerable impact on our earnings. For example, in 2003, our operating income grew by 17.6% compared to 2002. However, at 2002 exchange rates, our operating income would have grown by 34.4%. When deemed appropriate, we enter into transactions to hedge our exposure to foreign exchange risks. These efforts, when undertaken, may fail to offset the effect of adverse currency exchange rate fluctuations on our results of operations. For more information concerning our exchange rate exposure, see Item 11 Quantitative and Qualitative Disclosures About Market Risk.
Risks Relating to Our Industry
We invest substantial sums in research and development in order to remain competitive, and we may not recover these sums if our products are unsuccessful in clinical trials or fail to receive regulatory approval.
We need to invest heavily in research and development to remain competitive.
To be successful in the highly competitive pharmaceutical industry, we must commit substantial resources each year to research and development in order to develop new products. Even if our research and development efforts are fruitful, our competitors may develop more effective products or a greater number of successful new products. In 2003, we spent 1,316 million on research and development, amounting to approximately 16.4% of our consolidated net sales. Our ongoing investments in new product launches and research and development for future products could produce higher costs without a proportionate increase in revenues.
The research and development process is lengthy and carries a substantial risk of product failure.
The research and development process typically takes from 10 to 15 years from discovery to commercial product launch. This process is conducted in various stages, and during each stage there is a substantial risk that we will not achieve our goals and will have to abandon a product in which we have invested substantial amounts. For example, in order to develop a commercially viable product, we must demonstrate, through extensive pre-clinical and human clinical trials, that the pharmacological compounds are safe and effective for use in humans. There is also no assurance that favorable results obtained in pre-clinical trials will be confirmed by later clinical trials, or that the clinical trials will establish sufficient safety and efficacy data necessary for regulatory approval. As of February 16, 2004, we had 56 compounds in pre-clinical and clinical development in our four targeted therapeutic areas, of which 25 were in phase II or phase III clinical trials. For additional information regarding clinical trials and the definition of the phases of clinical trials, see Item 4 Information on the Company Business Overview Research and Development. There can be no guarantee that any of these compounds will be proven safe or effective, or that they will produce commercially successful products.
After completing the research and development process, we must invest substantial additional resources seeking to obtain government approval in multiple jurisdictions, with no guarantee that approval will be obtained.
We must obtain and maintain regulatory approval for our pharmaceutical products from the European Union, the United States and other regulatory authorities before a given product may be sold in its markets and thereafter. The submission of an application to a regulatory authority does not guarantee that it will grant a license to market the product. Each authority may impose its own requirements, including requiring local studies, and may delay or refuse to grant approval, even though a product has already been approved in another country.
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In our principal markets, the approval process for one or more indications of a new product is complex and lengthy, and typically takes from six months to two years from the date of application depending on the country. Moreover, if regulatory approval of a product is granted, the approval may place limitations on the indicated uses for which it may be marketed. A marketed product is also subject to continual review even after regulatory approval. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in marketing restrictions or withdrawal of the product, as well as possible legal sanctions. In addition, we are subject to strict government controls on the manufacture, labeling, distribution and marketing of our products. Each of these factors can increase our costs of developing new products and the risk that we will not succeed in selling them successfully.
If we are unable to protect our proprietary rights, we may not compete effectively or operate profitably.
It is important for our success that we be able effectively to obtain, maintain and enforce our patents and other proprietary rights. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is a continually evolving field of law and can be subject to some uncertainty. Accordingly, we cannot be sure that:
| new, additional inventions will be patentable, |
| patents for which applications are now pending will be issued to us, or |
| the scope of any patent protection will be sufficiently broad to exclude competitors. |
Additionally, third parties may challenge the validity of the patents issued or licensed to us, which may result in the invalidation of these rights. We currently have approximately 9,800 patents and patent applications worldwide, and we license-in approximately 30 additional patents. We cannot be sure how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings.
In the first half of 2002, two pharmaceutical companies, Apotex and Dr. Reddys Laboratories, each filed an Abbreviated New Drug Application, or ANDA, with the U.S. Food and Drug Administration, or FDA, seeking to market a generic form of Plavix® in the United States and challenging certain U.S. patents relating to Plavix®. In March 2003, Apotex instituted a similar challenge in Canada. For additional information regarding ANDAs, see Item 4 Information on the Company Business Overview Regulation. We have filed suit against Apotex and against Dr. Reddys Laboratories for infringement of our patent rights. See Item 8 Financial Information Legal Proceedings. The Plavix® patent rights are material to our companys business, and if we were unsuccessful in asserting them or they were deemed invalid, any resulting introduction of a generic prescription version of Plavix® in the U.S. would reduce the price that we receive for this product and the volume of the product that we would be able to sell.
In recent years, governments faced with national crises have used pressure to obtain substantial concessions from pharmaceutical companies, including threatening compulsory licensing of products that they consider essential. While we support the efforts of national governments to combat major health care crises, if those efforts come at the expense of effective patent protection, the ability of our company and other pharmaceutical manufacturers to recover amounts spent on research and development will be adversely affected. In such event, we and other manufacturers might curtail our research and development expenditures, and as a result might not develop as many new products.
Our patents may be infringed, or we may infringe the patents of others.
Our competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement, we may file infringement claims, which are expensive and time consuming. Policing unauthorized use of our intellectual property is difficult, and we may not be able to prevent misappropriation of our proprietary rights. This risk is increased by the growth in the number of patent applications filed and patents granted in the pharmaceutical industry.
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Product liability claims could adversely affect our business and results of operations.
Product liability is a significant commercial risk for us, and could become a more significant risk as we expand in the United States (where product liability claims can be particularly costly). Substantial damage awards have been made in certain jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. In addition, some pharmaceutical companies have recently withdrawn products from the market in the wake of significant product liability claims. Although we are not currently involved in any significant product liability cases claiming damages as a result of the use of our products, it is possible that such cases will be brought in the future. Further, there is a general trend in the insurance industry to exclude certain products from coverage and to reduce insured limits for liabilities arising through joint ventures. Although we maintain insurance to cover this risk, we cannot be certain that our insurance will be sufficient to cover all potential liabilities.
We face uncertainties over pricing of pharmaceutical products.
The commercial success of our products depends in part on the extent to which the cost of our products is reimbursed. Price pressure is strong due to:
| a tendency of governments and private health care providers to favor generic pharmaceuticals; |
| price controls imposed by governments in many countries; and |
| parallel imports, in particular in the European Economic Area, a practice by which traders exploit price differentials among markets by purchasing in lower-priced markets for resale in higher-priced markets. |
Price pressure is considerable in our two largest markets, Europe and the United States, which represented 58.3% and 23.8%, respectively, of our consolidated sales in 2003 (the United States also accounted for 45.4% of our 2003 operating profit excluding unallocated costs). Changes in the pricing environments in the United States or Europe (on an individual country basis) could have a significant impact on our revenues and operating profits. See Item 4 Information on the Company Business Overview Pricing for a description of certain regulatory pricing systems that impact our company.
Risks from the handling of hazardous materials could harm our operating results.
Pharmaceutical manufacturing activities, such as the chemical manufacturing of the active ingredients in our products and the related storage and transportation of raw materials, products and wastes exposes us to various risks, including:
| fires and/or explosions from inflammable substances; |
| storage tank leaks and ruptures; and |
| discharges or releases of toxic or hazardous substances. |
These operating risks can cause personal injury, property damage and environmental contamination, and may result in:
| the shutdown of affected facilities and |
| the imposition of civil or criminal penalties. |
The occurrence of any of these events may significantly reduce the productivity and profitability of a particular manufacturing facility and harm our operating results.
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Although we maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, we cannot assure you that this insurance will be adequate to cover fully all potential hazards incident to our business. For more detailed information on environmental issues, see Item 4 Information on the Company Business Overview Health, Safety and Environment.
Environmental liabilities and compliance costs may have a significant negative effect on our operating results.
The environmental laws of various jurisdictions impose actual and potential obligations on our company to remediate contaminated sites. These obligations may relate to sites:
| that we currently own or operate, |
| that we formerly owned or operated, or |
| where waste from our operations was disposed. |
These environmental remediation obligations could significantly reduce our operating results. In particular, our accruals for these obligations may be insufficient if the assumptions underlying these accruals prove incorrect or if we are held responsible for additional, currently undiscovered contamination. Any shortfalls could have a material impact on our operating profits. See Item 4 Information on the Company Business Overview Health, Safety and Environment and Regulation for additional information regarding our environmental policies.
Furthermore, we are or may become involved in claims, lawsuits and administrative proceedings relating to environmental matters. An adverse outcome in any of these might have a significant negative impact on our operating results. Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to our company and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby harming our business and operating results.
Risks Relating to an Investment in our Shares or ADSs
Foreign exchange fluctuations may adversely affect the U.S. dollar value of our ADSs and dividends (if any).
As a holder of ADSs, you may face some exchange rate risk. Our ADSs will trade in U.S. dollars and our shares will trade in euro. The value of the ADSs and our shares could fluctuate as the exchange rates between these currencies fluctuate. If and when we do pay dividends, they would be denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of ADSs upon conversion by the depositary of cash dividends, if any. Moreover, these fluctuations may affect the U.S. dollar price of the ADSs on the New York Stock Exchange, whether or not we pay dividends in addition to the amounts, if any, that you would receive upon our liquidation or upon the sale of assets, merger, tender offer or similar transactions denominated in euro or any other foreign currency other than U.S. dollars.
If you hold ADSs rather than shares it may be difficult for you to exercise some of your rights as a shareholder.
As a holder of ADSs, it may be more difficult for you to exercise your rights as a shareholder than it would be if you directly held shares. For example, if we offer new shares and you have the right to subscribe for a portion of them, the depositary is allowed, in its own discretion, to sell for your benefit that right to subscribe for new shares instead of making it available to you. Also, to exercise your voting rights, as a holder of ADSs, you
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must instruct the depositary how to vote your shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for you, as a holder of ADSs, than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting. For a detailed description of your rights as a holder of ADSs, you should read Item 12 Description of Securities other than Equity Securities Description of American Depositary Shares.
Sales of our shares that will be eligible for sale in the near future may cause the market price of our shares or ADSs to decline.
At December 31, 2003, we had 732,848,072 shares outstanding, approximately 43.9% of which are held by our two largest shareholders, Total and LOréal. On November 24, 2003, Total and LOréal amended their shareholders agreement so that it terminates on December 2, 2004 according to its terms, as the parties have indicated that they do not intend to act in concert with respect to their shareholdings in our company as from that date. See Item 7 Major Shareholders and Related Party Transactions Major Shareholders Shareholders Agreement. Upon the termination of the existing shareholders agreement between those two shareholders, all of our shares owned by these shareholders will become available to be sold in the public market, subject to applicable laws and regulations. Sales of a substantial number of our shares, or a perception that such sales may occur, could adversely affect the market price for our shares and ADSs. See Item 10 Additional Information Share Capital Shares Eligible for Future Sale for a more detailed description of the eligibility of our shares for future sale.
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FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. We may also make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission on Form 6-K, in our annual report to shareholders, in our proxy statements, in our offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Examples of such forward-looking statements include:
| projections of operating revenues, net income, net earnings per share, capital expenditures, dividends, capital structure or other financial items or ratios; |
| statements of our plans, objectives or goals, including those relating to products, clinical trials, regulatory approvals and competition; |
| statements about our future economic performance or that of France, the United States or any other countries in which we operate; and |
| statements of assumptions underlying such statements. |
Words such as believe, anticipate, plan, expect, intend, target, estimate, project, predict, forecast, guideline, should and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such factors, some of which are discussed under Item 3 Key Information Risk Factors beginning on page 10, include but are not limited to:
| the impact of our proposed acquisition of Aventis; |
| our ability to continue to expand our presence profitably in the United States; |
| the success of our research and development programs; |
| our ability to protect our intellectual property rights; and |
| the risks associated with reimbursement of healthcare costs and pricing reforms, particularly in the United States and Europe. |
We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.
Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update them in light of new information or future developments.
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Item 4. Information on the Company
Introduction
We are an international pharmaceutical group engaged in the research, development, manufacture and marketing of pharmaceutical products for sale principally in the prescription market. In 2003, our consolidated net sales were 8,048 million ($10,138 million), our operating profit was 3,075 million ($3,874 million) and our net income was 2,076 million ($2,615 million). On the basis of 2003 sales, we are the second largest pharmaceutical group in France, the seventh largest pharmaceutical group in Europe and among the twenty largest pharmaceutical groups in the world (IMS data).
In our prescription pharmaceuticals business, we specialize in four therapeutic areas:
| Cardiovascular/Thrombosis. Our Cardiovascular/Thrombosis products include two of the fastest-growing products on the Cardiovascular/Thrombosis market today: the blood pressure medication Aprovel® and the anti-clotting agent Plavix®. |
| Central Nervous System, or CNS. Our CNS medicines include Stilnox®, the worlds leading prescription insomnia medication, and Depakine®, one of the leading treatments for epilepsy. |
| Internal Medicine. Our Internal Medicine products include Xatral®, a leading treatment for benign prostatic hypertrophy. In November 2003, we launched a once-a-day formulation in the United States under the brand name Uroxatral®. |
| Oncology. Our lead product in this strategic market is Eloxatin®, which is our fastest growing product in terms of sales. Eloxatin® is marketed in Europe and the United States as a first- and second-line treatment against colorectal cancer in combination with 5-FU/LV. |
Our five strategic products are Aprovel®, Eloxatin®, Plavix®, Stilnox® and Xatral®, which together accounted for 54.7% of our total consolidated net sales, or 4,399 million, in 2003.
We have a strong commitment to research and development. We have 14 research centers and have over 6,800 employees devoted to research and development. At February 16, 2004, we had 56 compounds in development in the four therapeutic areas, 25 of which were in phase II or phase III clinical trials.
The legal and commercial name of our company is Sanofi-Synthélabo. We are a French société anonyme, a form of limited liability stock company, formed in 1994 pursuant to the French commercial code for a term of 99 years. Our registered office is located at 174, avenue de France, 75013 Paris, France. Our telephone number is +33 (0)1 53 77 40 00.
A. History and Development of the Company
Our company is the result of the 1999 merger of Sanofi and Synthélabo, two major French pharmaceutical companies. Since the merger, we have combined the resources of the two companies to expand our global presence, particularly in the United States, and to increase our focus on research and development for products with strong future potential. In 2003 we celebrated the thirtieth anniversary of our group worldwide.
Sanofi was founded in 1973 by Elf Aquitaine, a French oil company, when it took control of the Labaz Group (a pharmaceutical company) for diversification purposes. Sanofi launched its first major product on the market, Ticlid®, in 1978. At the time of the merger in 1999, Sanofi was the second largest pharmaceutical group in France in terms of sales. A majority of its share capital was owned by Elf Aquitaine, which was acquired by Total. Sanofi made a significant venture into the United States market in 1994, when it acquired the prescription pharmaceuticals business of Sterling Winthrop, an affiliate of Eastman Kodak. Sanofi launched its first major product on the U.S. market, Aprovel®, in 1997, followed by Plavix® in 1998.
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Synthélabo was founded in 1970 through the merger of two French pharmaceutical laboratories, Laboratoires Dausse (founded in 1834) and Laboratoires Robert & Carrière (founded in 1899). In 1973, the French cosmetics group LOréal acquired the majority of its share capital and in 1988, Synthélabo launched two major products on the French market: Stilnox® and Xatral®. At the time of the merger, Synthélabo was the third largest pharmaceutical group in France in terms of sales. A majority of its share capital was still owned by LOréal. In 1993, Synthélabo launched Stilnox® in the United States under the brand name Ambien®. By 1994, Stilnox® had become the leading insomnia prescription medication worldwide according to IMS data.
Sanofi and Synthélabo agreed to merge at the end of 1998, and the merger became effective in the second quarter of 1999. Following the merger, Total and LOréal were the largest shareholders of the new group, although neither held a majority of the share capital. These two principal shareholders have entered into a shareholders agreement that lasts until December 2004. The terms of the shareholders agreement are described under Item 7 Major Shareholders and Related Party Transactions Major Shareholders.
Part of our strategy following the merger was to concentrate on our core prescription pharmaceuticals business. To implement this strategy, we divested non-core businesses, including:
| in 1999, Sanofis beauty business, our diagnostics business, our animal health and nutrition business and an equity affiliate in the cheese business; and |
| in 2001, our custom chemicals business and two medical equipment businesses, as well as our direct shareholding in Laboratoires de Biologie Végétale Yves Rocher. |
In January 2004, we made a mixed cash/exchange offer to acquire Aventis, a major French pharmaceutical company. This transaction is described under Item 8 Financial Information Significant Changes.
For a description of our principal capital expenditures and divestitures since 2000, our expectations as to future capital expenditures and divestitures and the impact of the merger and these divestitures on our results of operations and financial condition, see Item 5 Operating and Financial Review and Prospects. We currently have no material capital expenditures or divestitures in progress other than divestitures that we expect to make if the Aventis transaction goes forward.
Strategy
We believe we have the potential to grow profitably by taking advantage of our focused portfolio of current and potential drugs centered around four targeted therapeutic areas. The key elements of our strategy to achieve these goals are to:
| Capitalize on our direct presence in the United States. We intend to continue to capitalize on our potential for growth in the U.S. market. Our strategy in the United States has been based largely on organic growth, with upgrades to our sales force and local infrastructure timed to match the progress of our product portfolio and product launches. For example, we have also more than tripled our U.S. sales force in the past four years to 2,675 employees as at December 31, 2003. During this period, we increased our interest in the promotional activities and profitability of our alliance with Bristol-Myers Squibb that markets Aprovel® (under the name Avapro®) in the United States, we purchased Pharmacias interest in the joint venture that markets Stilnox® (under the name Ambien®) in the U.S. and regained full U.S. marketing rights to Ambien®, we launched Eloxatin® in August 2002 with great success, and most recently we launched Uroxatral®, which we began marketing in November 2003. |
| Capitalize on the sales potential of our five strategic products. We believe that each of Aprovel®, Plavix®, Stilnox® and Eloxatin® will continue to have strong growth potential and that Xatral® has the |
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potential to become a leading product. We intend to make the necessary investment of marketing and other resources to fully promote these strategic products, which are early in their life cycles and have significant remaining potential for sustained growth. |
| Continue our strong commitment to research and development. As at February 16, 2004, we had 56 compounds in our research and development pipeline, of which 25 were in phase II or III clinical trials. We believe that the number of compounds in later stage development in our pipeline, together with our capabilities in the high technology areas of genomics, proteomics, high throughput screening, combinatorial chemistry and bioinformatics, gives us a solid foundation for developing future products. We intend to continue to focus our efforts on developing products to meet unmet medical needs in our four targeted therapeutic areas and to maintain our current high level of research and development spending as a percentage of revenues. |
| Continue to improve sales force productivity. Over the last few years, we have successfully improved the productivity of our sales force, reorganizing affiliates in Europe to sharpen customer focus and achieving a critical mass in the United States that puts us among the leaders in productivity measured by the number of sales calls that result in a physician intending to change prescriptions. We believe that our focused structure gives us the opportunity to improve our profitability, and we intend to take advantage of this opportunity by targeting our promotional efforts on our higher margin products. |
| Continue to enhance our presence worldwide. Over time, we intend to build progressively our presence in Japan and other targeted countries. Our strategy is to establish local subsidiaries and a local sales force, when possible. In Japan, we plan to replicate the business model that has been successful in the United States, by reinforcing our local research projects, capitalizing on our strategic partnerships with Fujisawa and Daiichi, putting in place our own sales force and pursuing marketing authorization for Plavix®. As part of our strategy in Japan, in January 2004 we signed an agreement with Taisho that will permit us to market Ancaron® directly beginning in 2006. |
| Seize appropriate opportunities for growth through selective mergers, acquisitions and strategic alliances. Where appropriate, we intend to continue to seize appropriate external opportunities for growth through selective mergers, acquisitions and strategic alliances. Our principal focus in this regard is our proposed acquisition of Aventis, which is described under Item 8 Financial Information Significant Changes. |
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Principal Products
Our principal products are prescription pharmaceuticals, which we group into four main therapeutic categories: Cardiovascular/Thrombosis, Central Nervous System, Internal Medicine and Oncology. The following table outlines our consolidated net sales by therapeutic area for the year ended December 31, 2003.
Consolidated Sales by Therapeutic Area
Year Ended December 31, 2003 |
|||||
(millions of ) |
% of Net Sales |
||||
Prescription Pharmaceuticals* |
|||||
Cardiovascular/Thrombosis |
|||||
Aprovel®/Avapro®/Karvea® |
683 | 8.5 | % | ||
Plavix®/Iscover® |
1,325 | 16.5 | % | ||
Other |
1,161 | 14.4 | % | ||
Total |
3,169 | 39.4 | % | ||
Central Nervous System |
|||||
Stilnox®/Ambien®/Myslee® |
1,345 | 16.7 | % | ||
Other |
974 | 12.1 | % | ||
Total |
2,319 | 28.8 | % | ||
Internal Medicine |
|||||
Xatral®/ Uroxatral® |
222 | 2.8 | % | ||
Other |
1,190 | 14.8 | % | ||
Total |
1,412 | 17.6 | % | ||
Oncology |
|||||
Eloxatin® |
824 | 10.2 | % | ||
Other |
47 | 0.6 | % | ||
Total |
871 | 10.8 | % | ||
Other Pharmaceuticals |
277 | 3.4 | % | ||
Total consolidated net sales |
8,048 | 100.0 | % | ||
* | Our products include over 160 Cardiovascular/Thrombosis products, over 130 Central Nervous System products, over 500 Internal Medicine products and over 15 Oncology products worldwide. Other Pharmaceuticals includes all of our other pharmaceutical products that cannot be classified in our main therapeutic areas, such as our dental hygiene products. |
A number of our products, including three of our five strategic products (Plavix®, Aprovel® and Stilnox®), are sold in certain countries through alliances that we have entered into with other pharmaceutical companies, or through licensees. Our consolidated revenues only reflect a portion of the total revenues realized by the alliances and licensees. In some cases, our revenue shares from the alliances are based on formulas that make our consolidated revenues grow at a different rate than the overall growth in sales of the products. In this annual report, we present both our consolidated revenues from products sold through alliances, and developed sales, which represent the overall sales of these products, including sales by our alliance partners and licensees. We believe that developed sales are a useful measurement tool because they demonstrate trends in the overall sales of our products in the market, without regard to the formulas under which our revenue shares are determined.
A drug can be referred to either by its international non-proprietary name, or INN, or by its brand name, which is normally exclusive to the company that markets it. In most cases, our brand names, which may vary from country to country, are protected by trademark registrations. In the description that follows, our products are generally referred to by the brand names that we use in France.
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Prescription Pharmaceuticals
Our portfolio of prescription pharmaceuticals includes a range of innovative products with strong market positions in our four targeted therapeutic areas. In Thrombosis, we are the leader in the European and U.S. markets for anti-platelet agents based on total consolidated sales of our anti-atherothrombotic agent Plavix® (clopidogrel) and rank second in the European market for heparins with products including Fraxiparine® and Arixtra® (IMS data). In the Cardiovascular market, we rank second in the European market and third in the U.S. market for angiotensin II receptor antagonists based on annual sales of Aprovel® (IMS data). In the area of central nervous system disorders, according to IMS data, we are the leader in Europe, Japan and the U.S. based on total consolidated net sales of our product Stilnox® (zolpidem), the treatment of choice for sleep disorders.
In our prescription pharmaceuticals business, we specialize in four therapeutic areas: Cardiovascular/Thrombosis, Central Nervous System, Internal Medicine and Oncology. On an industry-wide basis, these four therapeutic areas account for more than half of worldwide pharmaceutical sales, according to IMS data. Certain of our products are sold both by us and, in selected markets, by our alliance partners and licensees, giving these products a broad, worldwide market presence. For a discussion of these arrangements, see Item 4 Information on the Company Business Overview Marketing and Distribution Alliances. The following table outlines our leading prescription pharmaceuticals based on consolidated net sales for the year ended December 31, 2003. In some countries, our products have only been approved (or approval has only been sought) for a portion of the areas of use indicated in the table.
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Principal Prescription Pharmaceuticals
Year Ended December 31, 2003 | ||||
Therapeutic Area / Product Name |
Consolidated Net Sales |
Drug Category/ Main Areas of Use | ||
(millions of ) | ||||
Cardiovascular/Thrombosis |
||||
Cardiovascular Products |
||||
Aprovel® (irbesartan) |
683 | Angiotensin II receptor antagonist Hypertension | ||
Cordarone® (amiodarone) |
146 | Anti-arrhythmic agent Treatment / prevention of cardiac arrhythmia (irregular heartbeat) | ||
Tildiem® (diltiazem) |
131 | Calcium antagonist Angina Pectoris Hypertension | ||
Thrombosis Products |
||||
Plavix® (clopidogrel) |
1,325 | ADP receptor antagonist Atherothrombosis | ||
Fraxiparine® (nadroparin calcium) |
319 | Low molecular weight heparin Venous thromboembolism (VTE) | ||
Central Nervous System |
||||
Stilnox® (zolpidem) |
1,345 | Hypnotic Sleep disorders | ||
Depakine® (sodium valproate) |
277 | Anti-epileptic Epilepsy | ||
Solian® (amisulpride) |
148 | Neuroleptic Schizophrenia Dysthymia | ||
Internal Medicine |
||||
Xatral® (alfuzosin) |
222 | Uroselective alpha1 blocker Benign prostatic hypertrophy | ||
Oncology |
||||
Eloxatin® (oxaliplatin) |
824 | Cytotoxic agent Colorectal cancer |
Three of our five strategic products are sold directly by us and through alliances. The figures above reflect only sales included in our consolidated net sales. In 2003, total worldwide developed sales of Plavix®, Aprovel® and Stilnox® were 3,225 million, 1,255 million and 1,381 million respectively.
Cardiovascular/Thrombosis
The Cardiovascular/Thrombosis market as a whole is the largest therapeutic area in the worldwide pharmaceutical market. According to IMS data, in the cardiovascular market, we rank second in the European market and third in the U.S. market for angiotensin II receptor antagonists with Aprovel® in terms of annual sales. We are number three in the European market for calcium antagonists with Tildiem® and are number two in the European market for anti-arrhythmics with Cordarone® (IMS data). In Thrombosis, we rank first in the European and U.S. markets for anti-platelet agents with Plavix® and we are number two in the European market for heparins with Fraxiparine® and Arixtra® according to IMS data.
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Cardiovascular. Our main products for the treatment of cardiovascular disease are:
| Aprovel®/Avapro®/Karvea® (irbesartan; hypertension). Aprovel® belongs to the most recent class of anti-hypertensives, angiotensin II receptor antagonists, and is indicated as a first-line treatment for hypertension, or high blood pressure. Angiotensin II receptor antagonists, which are highly potent and generally well tolerated, act by blocking the effect of angiotensin, the hormone responsible for blood vessel contraction, thereby enabling blood pressure to return to normal. In addition to Aprovel®, we market CoAprovel®/Avalide® a combination of irbesartan and hydrochlorothiazide, a diuretic that increases the excretion of water by the kidneys. These products achieve control of blood pressure in close to 90% of patients and with a very good safety profile. |
Aprovel® was launched in 1997 and is now marketed in more than 80 countries, including the United States, through an alliance with Bristol-Myers Squibb, or BMS (under the brand name Avapro®). In Japan, where the product is licensed to BMS and Shionogi, an application for marketing authorization for the treatment of hypertension was submitted in October 2002.
In 2002, Aprovel® was approved for a new indication, the treatment of diabetic nephropathy, in both Europe (June 2002) and the United States (September 2002). These approvals were based on the results of the PRIME program, a clinical program that demonstrated that irbesartan protects type-2 diabetic hypertensive patients from the progression of renal impairment, at both early and more advanced stages of the disease. Following the announcement of the PRIME results, the American Diabetes Association (ADA) recommended the use of angiotensin receptor antagonists as a first-line treatment for renal disease in patients with type 2 diabetes.
In 2003, at the request of the FDA, we worked on the development of a pediatric indication for Aprovel® in the United States.
We are currently conducting two large-scale clinical programs, part of our life cycle management program for Aprovel®, that will enroll a total of 14,000 patients and that we expect to complete in 2006:
| I-PRESERVE, to evaluate the benefit of irbesartan in the treatment of a specific but common form of heart failure, heart failure with preserved systolic function or diastolic heart failure. In this type of heart failure, the contractile capacity of the ventricles is preserved, but ventricular filling is disturbed. This study was initiated in 2002 and is currently in the active stage of patient enrollment. |
| ACTIVE-I, to evaluate the efficacy of irbesartan, combined with clopidogrel (the active ingredient in Plavix®), in preventing complications in patients suffering from atrial fibrillation. We began this clinical program in April 2003. |
| Cordarone®/Ancaron® (amiodarone; cardiac rhythm disorders). Thirty-six years after its first marketing authorization was granted, Cordarone® remains a leading anti-arrhythmic drug for the treatment and prevention of cardiac rhythm disorders such as cardiac arrhythmia, or irregular heart beat. Cordarone® is also effective against potentially life-threatening supraventricular rhythm disorders, the most common of these being atrial fibrillation. Two clinical studies, CAT, published in 2002, and AMIOVIRT, published in 2003, demonstrated that Cordarone® is as effective as the implantation of a defibrillator in preventing sudden cardiac death in patients with idiopathic dilated cardiomyopathy, a rare disease that attacks the heart muscle. Cordarone® has a good cardiac safety profile and only exceptionally induces complications potentially associated with the use of anti-arrhythmics, such as Torsades de Pointe (a serious and potentially fatal ventricular rhythm disorder) or ventricular insufficiency. However, its effects on thyroid function limit its use. Cordarone® is available in more than 126 countries, including the United States where it is licensed to Wyeth (formerly American Home Products), and Japan where it is marketed under the brand name Ancaron® through joint venture with Taisho. In January 2004 we signed an agreement with Taisho to purchase its interest in the joint venture, which will permit us to market Ancaron® directly beginning in 2006. |
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| Tildiem® (diltiazem; angina, hypertension). Among calcium antagonists, Tildiem® is considered a reference treatment for angina. Tildiem® works by increasing oxygen supply to the myocardium (the muscle surrounding the heart) through coronary vasodilatation, while simultaneously reducing oxygen needs by decreasing the heart rate and lowering peripheral artery resistance. Tildiem® thereby exhibits good anti-anginal efficacy, combined with a good safety profile. Our sustained release formulations of Tildiem® LP 200/300 mg provide 24-hour protection against ischemia with a single daily dose. This convenience of use improves both compliance and tolerability. Furthermore, a meta-analysis (a statistical analysis) showed that these formulations permit consistent regulation of heart rate: the faster the heart rate initially, the more it is slowed by Tildiem®. Additionally, the NORDIL study of morbidity and mortality associated with hypertension showed that Tildiem® was as effective as diuretics and beta-blockers (the reference treatment) in reducing cardiovascular complications. These results emphasize the value of treating hypertension with Tildiem® LP 200/300 mg. Tildiem® LP 200/300 mg is marketed in most European countries. |
Thrombosis. Thrombosis occurs when a thrombus, or blood clot, forms inside a blood vessel. Left unchecked, a thrombus within a blood vessel can eventually grow large enough to block the blood vessel, preventing blood and oxygen from reaching the organ being supplied. Our principal products for the treatment of thrombosis are:
| Plavix®/Iscover® (clopidogrel; atherothrombosis). Plavix®, a platelet adenosine diphosphate receptor antagonist, is indicated for the prevention of atherothrombotic events in patients with a history of recent myocardial infarction, recent ischemic stroke or documented peripheral arterial disease. Plavix® is currently the only drug indicated for the secondary prevention of atherothrombosis regardless of the location of the arteries initially affected (heart, brain, lower limbs). This broad indication is supported by the results of the CAPRIE study, the largest phase III study ever conducted with almost 20,000 patients enrolled. CAPRIE demonstrated the superior efficacy of Plavix® to acetylsalicylic acid, with a safety profile at least equally good. |
Plavix® was launched in 1998, and is now marketed in over 75 countries, including the United States, through our alliance with BMS. In Japan, where it is being developed in partnership with Daiichi, we submitted an application for marketing authorization in February 2004.
| In 2002, U.S. and European health authorities approved an extension of indication of Plavix® for the treatment of acute coronary syndrome following the results of the CURE trial. The new indication was incorporated into the guidelines of the American Heart Association, the American College of Cardiology, and the European Society of Cardiology. The CURE trial demonstrated that clopidogrel, when added to a standard therapy including or comprising acetylsalicylic acid, reduced the risk of atherothrombotic events (myocardial infarction, stroke and death from cardiovascular cause) by 20% with only a 1% increase in the rate of major hemorrhages and provided significant short- and long-term benefit in patients presenting an acute coronary syndrome. With more than 12,000 patients enrolled, CURE is the largest clinical trial ever conducted with patients presenting unstable angina or non-Q-wave myocardial infarction. |
| The results of the CREDO clinical trial, announced in November 2002, confirmed the therapeutic value of Plavix® in the short- and long-term prevention of atherothrombotic events in patients having undergone coronary angioplasty, either with or without stenting. The CREDO trial, conducted in more than 2,000 patients, demonstrated the benefit of prolonged use of clopidogrel and showed that the risk of atherothrombotic events was reduced by 27% after one year. |
| In September 2002, the CHARISMA trial began enrolling patients, and is expected to include a total of 15,000 patients. CHARISMA aims to demonstrate the value of using Plavix® when added to existing treatments in the primary prevention of cardiovascular events in patients at risk. We anticipate results from the CHARISMA study in 2006. |
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| In 2003, at the request of the FDA, we worked on the development of a pediatric indication for Plavix® in the United States. |
We have other major on-going clinical studies that are designed to support the long-term use of Plavix® by providing complementary data. These include:
| MATCH, assessing the benefit of clopidogrel combined with acetylsalicylic acid in the prevention of serious ischemic events in 7,600 high-risk patients who have recently experienced a stroke or transient ischemic attack, should yield results in 2004; |
| CLARITY and COMMIT, evaluating the benefit of clopidogrel combined with acetylsalicylic acid in acute myocardial infarction; |
| CAMPER, assessing the benefit of clopidogrel in patients with peripheral arterial disease who have undergone angioplasty or bypass surgery; and |
| ACTIVE (A & W), assessing the value of clopidogrel in patients in the prophylactic treatment of thromboembolic events in patients with atrial fibrillation, which should yield results in 2007. |
| The WATCH study, which is assessing the value of clopidogrel in patients suffering from heart failure, is ongoing with a smaller number of patients than initially expected due to a slow inclusion rate. |
The extensive core clinical program for Plavix®, including all completed, ongoing and planned studies, will enroll more than 100,000 patients.
| Arixtra® (fondaparinux sodium; venous thrombosis). Arixtra®, fondaparinux sodium, is a totally synthetic compound that is currently indicated for the prevention of venous thromboembolism, including deep vein thrombosis and pulmonary embolism, in patients who have undergone major orthopedic surgery of the lower limbs (a high risk situation). We co-developed Arixtra® with Organon (a subsidiary of Akzo Nobel), and believe that it represents a major advance in the prevention of venous thromboembolism. It is the first agent in a new class of injectable anti-thrombotics (anti-coagulant), selective synthetic inhibitors of coagulation factor Xa, and works by interrupting a key step in the coagulation cascade, thereby preventing the formation of blood clots. Further, Arixtra® is obtained by chemical synthesis, which leads to a high level of purity. For both of these reasons, we believe Arixtra® constitutes a major technological and therapeutic advance. |
We believe its development potential is substantial. Phase III studies, which included over 7,000 patients, demonstrated a major clinical benefit relative to the reference low molecular weight heparin. Irrespective of the orthopedic surgical procedure (hip replacement, hip fracture or knee surgery) and the characteristics of the patient, Arixtra® reduced the risk of a thromboembolic event by 55% without increasing the risk of clinically important bleeding. For patients undergoing surgery for hip fracture, the risk of deep-vein thrombosis was reduced to 8% with Arixtra® compared to around 20% with the reference treatment. The safety profile of the two treatments is similar.
We launched Arixtra® in February 2002 in the United States, where it was approved for the prevention of venous thromboembolic events after orthopedic surgery in December 2001 following a priority review. In March 2002, Arixtra® received its European marketing authorization for the same indication and launch has been rolling out in various countries since that time. In December 2002, the FDA modified the summary product characteristics for Arixtra® to provide an improved description of its profile, and approved Arixtra® for a new indication, extended prophylaxis of deep vein thrombosis, in June 2003 and the new indication was approved in Europe in November 2003. Arixtra® is currently the only anti-thrombotic agent indicated in the United States for the extended prophylaxis of deep vein
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thrombosis in patients undergoing hip fracture surgery. Unlike other injectable anti-coagulants, Arixtra® is very well tolerated by patients suffering from renal insufficiency. In 2003, a new indication of a 1.5 mg dosage for patients with severe renal insufficiency was approved in Europe. In Japan, the product completed phase IIb/III clinical development, with results anticipated in 2004. We currently plan to submit an application for marketing authorization in late 2004.
Because of the development potential of Arixtra®, we have implemented a life cycle management program to cover all segments of the thrombosis market:
| Treatment of venous thromboembolism. In 2002, the completed MATISSE study, which enrolled over 4,000 patients, demonstrated that Arixtra® is as well tolerated and at least as effective as the existing standard therapies for the treatment of deep vein thrombosis and pulmonary embolism (when compared to low weight molecular heparin and unfractionated heparin, respectively). Based on these results, in the third quarter of 2003 we submitted applications in both the United States and Europe for the approval of Arixtra® for this new indication. |
| Prevention of venous thrombosis. Our APOLLO and PEGASUS programs studied Arixtra® in the prevention of venous thrombosis in other types of surgery, such as abdominal surgery. The results of the PEGASUS study demonstrated benefits in Arixtra® that could reduce the risk of deep venous thrombosis after major abdominal surgery. We also studied Arixtra® for the prevention of venous thrombosis in medical patients at high risk of venous thromboembolic events who have not undergone surgery (our ARTEMIS program). The results of the ARTEMIS study were presented at the International Society on Thrombosis and Haemostasis conference in July 2003, and demonstrated a significant reduction of the risk of deep vein thrombosis in acutely ill medical patients treated with Arixtra®. Based on these results, we submitted applications in both the United States and Europe for the approval of Arixtra® for these new indications in the first quarter of 2004. |
| Acute coronary disease. We are studying Arixtra®s effectiveness in acute coronary disease (unstable angina, coronary angioplasty, myocardial infarction). The initial efficacy results were confirmed by the Phase IIb Pentua trial, which were presented at the November 2001 scientific sessions of the American Heart Association. We believe that these studies provide a basis for expecting a good benefit to risk ratio when compared to existing therapies for acute coronary disease. A phase III clinical program that began in April 2003 (the Michelangelo program) will enroll 26,000 patients. From 2003 through 2005, Michelangelo/Oasis 5 will study Arixtra®s effectiveness in the treatment of unstable angina, while Michelangelo/Oasis 6 will study Arixtra®s effectiveness in the treatment of myocardial infarction. |
In the United States, Canada and Mexico, we marketed Arixtra® through our joint venture with Organon. In January 2004, we agreed to acquire all of Organons interests relating to Arixtra® that were the subject of this joint venture, as well as Organons interests relating to idraparinux sodium and other oligosaccharides. For additional information regarding the sale of Arixtra® see Item 4 Information on the Company Business Overview Marketing and Distribution Alliances. In the rest of the world (apart from Japan), we market Arixtra® on our own.
| Fraxiparine® (nadroparin calcium; venous and arterial thrombosis). Fraxiparine® is an injectable low-molecular-weight heparin. Launched in 1986, it is currently marketed in over 100 countries (excluding the United States and Japan). Fraxiparine®s approved indications have expanded over the years. Initially indicated for the prevention of venous thromboembolic disease, Fraxiparine® is currently indicated for the treatment of this disease as well, and the treatment of acute coronary syndromes. It is also indicated for the prevention of extra-corporal coagulation in patients undergoing dialysis. We launched Fraxodi®, a curative treatment for venous thromboembolic disease administered as a once-a-day injection, in France in 1998. Fraxodi® is now marketed in most countries in Europe and Latin America. The once-a-day regimen permits shorter hospital stays, facilitates outpatient treatment and |
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enhances overall patient recovery. A new indication of Fraxiparine® for the treatment of the acute phase of unstable angina in association with acetylsalicylic acid is now successfully registered in many countries, including the principal European markets, but excluding Japan and the United States. |
In connection with our proposed acquisition of Aventis, on January 26, 2004, we began a sales process to divest our interests in Arixtra® and Fraxiparine® in order to be able to respond to possible demands of the competition authorities. As of the date of this annual report, confidential discussions and negotiations are ongoing with several interested parties.
Other products in the Cardiovascular/Thrombosis market include Ticlid®, Corotrope® and Kerlone®.
Central Nervous System
In the Central Nervous System market, according to IMS data, we rank first in the European and U.S. markets and in the Japanese market since December 2003, for hypnotics with Stilnox®, and are number three in Europe in the market for anti-epileptics, with drugs including Depakine®. In the market for neuroleptics, we rank third in Europe and fifth in Japan with drugs such as Solian® (IMS data). Key products in this therapeutic area include:
| Stilnox®/Ambien®/Myslee® (zolpidem; insomnia). Stilnox® is the leading hypnotic in the United States, Europe and Japan (based on IMS data), and is sold in over 100 countries worldwide. Stilnox® is both chemically and pharmacologically distinct from benzodiazepines, and is distinguished by its selective binding exclusively to receptors that mediate hypnotic activity. Due to this characteristic, Stilnox® rapidly induces sleep that is qualitatively close to natural sleep and devoid of certain side effects that are characteristic of the benzodiazepine class as a whole. Its action lasts for six to eight hours, and is generally well tolerated, allowing the patient to awake with a reduced risk of impaired attention, decreased alertness or memory lapses throughout the day. The risk of dependence is minimal when Stilnox® is used at the recommended dosage and duration of use. Based on the results of an extensive program of eight clinical trials, which together enrolled over 6,000 patients, Stilnox® is currently the only hypnotic demonstrated to be suitable for use on an as needed basis depending upon each patients individual requirements. This mode of administration avoids the systematic intake of a hypnotic for patients who suffer only occasionally from insomnia. |
We believe that Stilnox® is also one of the most studied hypnotics in the world as data on its efficacy and safety have been generated from 140 clinical trials that included 80,000 patients worldwide.
Although launched only in December 2000, by October 2003, Stilnox® had achieved high market penetration in Japan, and became the leading hypnotic on the Japanese market in December 2003 (according to IMS data) where it is sold under the brand name Myslee® through our joint venture with Fujisawa. With a market share of 22.4% in December 2003 (according to IMS data), Japan is now the second-largest market for sales of Stilnox®.
We are also developing a controlled release formula of zolpidem, Ambien® CR. A three-week placebo-controlled study, ZOLADULT, conducted in sleep laboratories assessed Ambien® CR in the treatment of patients experiencing insomnia. The ZOLADULT study showed that Ambien® CR improved sleep maintenance, sleep duration, and the ability to fall asleep. Based on these results, we plan to file an application for the approval of Ambien® CR in the United States in the second quarter of 2004.
| Depakine® (sodium valproate; epilepsy). Depakine® is a broad-spectrum anti-epileptic that has been prescribed for over 30 years. Numerous clinical trials, as well as long years of experience have shown that it is effective for all types of epileptic seizures and epileptic syndromes, and is generally well tolerated. Consequently, Depakine® remains a reference treatment for epilepsy worldwide. Furthermore, in contrast to findings sometimes reported with other anti-epileptic agents, Depakine® does not induce |
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paradoxical aggravation of seizures. The Chrono® form (our prolonged release formulation) permits once-a-day administration in most cases, thereby improving compliance with treatment and overall patient care. We produce a wide range of formulations of Depakine®, permitting its adaptation to all types of patients. A new formulation of Depakine®, chronosphere, facilitating its use by children and the elderly, has been approved in several European countries, and we plan to launch it gradually over the next few years as we register the product and reach agreement on pricing in those countries. Depakine® is marketed in over 100 countries, including the United States where it is licensed to Abbott. In 2003, we received marketing approval in certain European countries for Depakine Chrono® for use in the treatment of bipolar disorders. |
| Solian® (amisulpride; schizophrenia). Solian® is an anti-psychotic with an atypical pharmacological profile. Its originality consists of its capacity to act selectively on D3/D2 dopaminergic receptors and its dual pre- and post-synaptic activity. Furthermore, its preferential action on the limbic system confers excellent neurological safety. Solian® is effective on all symptoms of schizophrenia, both positive and negative, irrespective of the phase of the disease, whether acute or chronic. At doses of 400 mg to 800 mg per day in patients with positive symptoms and associated depressive symptoms, and at the optimal daily dose of 100 mg in patients with dominant negative symptoms, the efficacy of Solian® is accompanied by a good safety profile. Solian® is available over 50 countries worldwide, including the principal European markets. In 2003, we launched Solian® in 6 additional countries, including Hungary, Taiwan and Hong Kong. |
In addition to these products, we market Aspégic® in European, African and Asian Markets and Dogmatil® in over 90 countries worldwide. We also market products for the treatment of anxiety, and agitation and aggressiveness.
Internal Medicine
Our principal fields in this therapeutic area are urology, gastroenterology, respiratory disease, and the musculoskeletal system. Our leading product in this field is Xatral® (alfuzosin).
| Xatral® (alfuzosin; benign prostatic hyperplasia). Our research efforts resulted in the discovery of alfuzosin, the active ingredient in Xatral®, which we first launched in France in 1988. Xatral® belongs to the alpha1-blocker class, and was the first product of the class to be indicated uniquely and specifically for the treatment of the symptoms of benign prostatic hyperplasia, as well as the first marketed product capable of acting selectively on the urinary system. Due to this clinical uroselectivity, Xatral® is immediately effective, with no need for dose titration and shows good tolerability, particularly cardiovascular. Active from the first dose, it provides rapid and lasting symptom relief and improves patient quality of life. |
Besides this symptomatic action, the results of major clinical trials completed in 2002 demonstrated the original contribution of Xatral® to the treatment of benign prostatic hyperplasia, and the prevention of its complications.
| The results of the first phase of the ALFAUR trial showed that Xatral® doubles the probability of restored capacity to urinate normally after an episode of acute urine retention in conjunction with catheter insertion. These are the first published results that demonstrate the capacity of Xatral® to prevent acute urinary retention, the principal complication of benign prostatic hyperplasia. We obtained authorizations of this extension of indication in nine European countries in 2003. |
| The results of the ALFAUR trial have led to another clinical study, ALTESS, which includes over 1,400 patients in a two-year study for an extension of indication of Xatral® for the primary prevention of acute urinary retention. |
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| The results of another large international trial with over 800 patients have shown that Xatral® preserves sexual function in patients suffering from benign prostatic hyperplasia. |
Since its launch in 1988 in France, we have constantly worked on developing improvements to optimize the formulation of Xatral®. The new once-daily formulation of Xatral® has now been registered in over 90 countries and is currently marketed in 14 European countries and in more than 35 other countries worldwide. As of December 2003, we ranked third on the European market for prostatic diseases with our product Xatral® (IMS data). In June 2003, we received FDA approval for alfuzosin, and we launched Uroxatral®, the once-a-day formula of Xatral® in the United States in November 2003. We also completed phase I clinical trials for the once-a-day formulation of Xatral® for the treatment of benign prostatic hyperplasia in Japan.
Our main products in gastroenterology are Primpéran® (metoclopramide), a leading treatment for nausea and vomiting, Ercefuryl® (nifuroxazide), an intestinal antiseptic with a broad anti-bacterial spectrum and Inipomp® (pantoprazole), a potent inhibitor of gastric acid secretion. We also market Mizollen® (mizolastine) and Virlix® (cetirizine), for the treatment of allergic reactions, and Myolastan® (tetrazepam), a muscle relaxant.
Oncology
Oncology is a new therapeutic area for our company, and one in which we expect to concentrate significant efforts in the future. Our first product in this therapeutic area is Eloxatin®.
| Eloxatin® (oxaliplatin; colorectal cancer). Eloxatin® is an innovative platinum agent, and is currently the only one to have demonstrated activity in colorectal cancer. Its recent introduction in the treatment of metastatic colorectal cancer has led to major progress, including both the prolongation of the median survival to 20 months when used as a first-line treatment in connection with 5-fluorouracil, or 5-FU, and enabling a significant proportion of patients with isolated hepatic metastases to undergo surgical resection due to the rapid and substantial reduction in the size of these metastases. Consequently, Eloxatin® gives these patients the hope of substantially prolonged survival. |
In the United States, the FDA granted approval as a second-line treatment in August 2002 following a 46-day priority review for registration. This rapid review was on the basis of the results of a large U.S. trial conducted on patients in relapse after an initial treatment, which showed that treatment with oxaliplatin in combination with infusional 5-fluorouracil/leucovorin, or 5-FU/LV, succeeded in delaying disease progression and demonstrated a clinical benefit in terms of pain reduction, weight gain and improvement of general status.
The final results of the N-9741 study were presented at the May 2003 meeting of the American Society of Clinical Oncology, or ASCO. The N-9741 study, one of the largest randomized trials ever conducted in metastatic colorectal cancer, demonstrated survival benefit with first-line treatment with oxaliplatin. Conducted with the support of the U.S. National Cancer Institute, the study showed that the combination of oxaliplatin, the active ingredient in Eloxatin®, with 5-FU (the Folfox regimen) was more effective and better tolerated than irinotecan in combination with 5-FU (the IFL regimen, and current reference first-line treatment). Because of the prolongation of median survival of patients receiving oxaliplatin, the trial was prematurely discontinued, and all patients still enrolled in the trial were then treated with the oxaliplatin-based regimen.
In January 2004, the FDA approved Eloxatin® in combination with 5-FU as a first-line treatment in the United States. This approval indicates the use of Eloxatin® (oxaliplatin for injection) in combination with infusional 5FU/LV for the treatment of advanced carcinoma of the colon or rectum. Also in January 2004, we announced that Eloxatin® successfully completed a Mutual Recognition Procedure in Europe, which will allow the product to be indicated for first- and second-line treatment of metastatic colorectal cancer.
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Due to its tolerability, Eloxatin® is being developed as an adjuvant treatment for non-metastatic colorectal cancer, to prevent relapse in patients undergoing surgery. The results of the MOSAIC study, which studied the efficacy of Eloxatin® as an adjuvant treatment in over 2,200 patients, were presented at the May 2003 meeting of the ASCO. The study showed that the addition of oxaliplatin to the current post-surgery standard chemotherapy of 5-FU/LV for colon cancer reduces the risk of recurrence by 23% when compared to the standard treatment alone. We believe that this important result, coming 15 years after 5-FU/LV was established as the standard adjuvant treatment, is a major step towards curing more patients and was obtained without dramatically impacting safety.
In January 2004, we filed an application for the approval of oxaliplatin as an adjuvant, or post-surgery, treatment for colorectal cancer in the United States and in Europe.
Its activity in colorectal cancer has also encouraged specialists to explore the value of Eloxatin® in the treatment of other tumors, particularly tumors of the digestive system, such as pancreatic cancer, but also ovarian cancer and certain hematological cancers.
We in-license Eloxatin® from Debiopharm, and market it in 60 countries in Europe, Asia and Latin America. Since September 2002, we have also marketed it in the United States.
| Fasturtec®/Elitek® (rasburicase; tumor lysis syndrome). Fasturtec® is a recombinant enzyme produced through genetic engineering and is the first biotechnology product discovered and developed entirely by our company. Fasturtec® works by converting uric acid, which is poorly soluble and nephrotoxic, into allantoin, a highly soluble compound that is readily eliminated through urination, thereby avoiding tumor lysis syndrome. Administered at the same time as chemotherapy, Fasturtec® allows clinicians to administer anti-cancer treatment in optimal conditions without delays or dose reductions that are often required due to tumor lysis syndrome. In February 2001, we obtained a European marketing authorization for Fasturtec®, and have launched it in several European countries, including Germany and the United Kingdom, beginning in May 2001. In April 2002, we received European authorization for an additional formulation of Fasturtec®, and in July 2002, Fasturtec® received FDA approval and was made commercially available in August 2002 under the brand name Elitek®. Fasturtec® is currently in clinical development in Japan. |
| Eligard® (leuprolide acetate; prostate cancer). Eligard® is a luteinizing hormone releasing hormone (LHRH) agonist indicated in the treatment of advanced prostate cancer that we in-license from Atrix. In January 2002, the FDA granted marketing approval for the one-month formulation in the treatment of prostate cancer. In July 2002, the three-month formulation received marketing approval from the FDA, and in February 2003, the four-month formulation received marketing approval from the FDA. We market Eligard® in the United States and Canada. |
Generics
We also manufacture and market a variety of generics in France, Germany and the United Kingdom. These products cover various therapeutic classes, and are typically sold under their international non-proprietary names, or INNs, although in some cases they have a specific brand name. For example, we market Dialgirex®, a generic product used for aches and pains, in France and Monoflam®, an anti-inflammatory, in Germany.
Research and Development
We have a long tradition of commitment to research and development and many of our products have resulted from our own research and development activities. In 2003, we spent 1,316 million (16.4% of total consolidated net sales) on research and development.
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We often enter into collaborative research and development arrangements with other pharmaceutical or biotechnology companies under which we fund research expenses in exchange for a right to use and market the products upon regulatory approval. Some of our collaboration agreements include those with Mitsubishi-Pharma Corp., Cephalon and IDM.
| In 1998, we entered into an agreement with Mitsubishi-Pharma Corp. to identify new neuroprotective agents for use in the treatment of neurogenerative disorders. This agreement was recently renewed up to the end of 2004. |
| In December 2001, we entered into an agreement with Cephalon to have access to specific angiogenesis inhibitors that are potential anti-cancer agents, as well as to a research program aimed at identifying new compounds with a similar mechanism of action. Angiogenesis inhibitors are molecules that act by preventing the development of blood vessels in tumors. We have agreed to co-promote any drugs that are successfully developed in the United States, Canada and Mexico with Cephalon, and we have exclusive marketing rights to such drugs in Europe and the rest of the world (excluding Japan). Under the agreement, we made an upfront payment to Cephalon, share in the costs of development, will make milestone payments during the development process and pay royalties on sales of drugs that are successfully developed. |
| In 2001, we signed a ten-year agreement with IDM to cooperate in cellular immunotherapy research for the development and marketing of immunologic treatments for cancers. Under this agreement, we have a right of first refusal to select up to twenty cell drugs from IDMs line of products. IDM will undertake the preclinical development, and if we exercise our option, we will finance the clinical development and have worldwide marketing rights for the selected drugs if the clinical trials are successful. A first product under this agreement, Uvidem®, which targets melanoma, is currently in Phase II clinical development. |
We have entered into collaborative agreements for data-base sharing in the field of genomics with Human Genome Sciences and Genset as well as agreements with research centers specialized in combinatorial chemistry, high throughput screening and structural analysis and proteomics. These collaborative agreements have now terminated but provide for payments should products resulting from these collaborations experience future success. In the field of functional genomics, we have entered into joint projects with Genfit, Genoway and Lifespan. We also have a joint project with CEREP for compound screening, as well as capabilities in bioinformatics.
In 2002, we began three cooperative research and development programs for Impact Malaria. Impact Malaria is a program created by a dedicated team within our company in order to develop and design new drugs and new health strategies for the treatment of malaria that conform to WHO recommendations, such as anti-malarial combination therapies, which are at prices adapted to the population for which they are intended. In 2003, ferroquine (SR 97193) entered the pre-clinical development phase. Impact Malaria also includes a follow-up aspect both to guarantee that the new drugs are used appropriately (through educational programs), and to ensure that the drugs are used by the populations for which they are intended.
We employ over 6,800 personnel in research and development and have 14 research facilities in 6 countries. At February 16, 2004, we had 56 compounds in our research and development pipeline, of which 25 were in phase II or III clinical trials. These 56 compounds include 53 projects for new chemical entities, 2 projects for additional indications for 2 of those new chemical entities (rimonabant and saredutant), and 1 project for an additional formulation of an existing product (Stilnox®). In addition, in 2003 three new compounds entered pre-clinical development. We significantly reinforced our research and development efforts in Japan in 2003. In particular, we accelerated the development of new products for the Japanese market.
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We focus our research and development efforts on our four targeted therapeutic areas. The composition of our research and development pipeline by therapeutic area as of February 16, 2004 is outlined in the following table.
Cardiovascular/ Thrombosis |
Central Nervous System |
Oncology |
Internal Medicine |
TOTAL | ||||||
Phase III |
2 | 4 | 1 | 2 | 9 | |||||
Phase IIb |
1 | 6 | 2 | 1 | 10 | |||||
Phase IIa |
2 | 1 | 1 | 2 | 6 | |||||
Phase I |
2 | 5 | 3 | 1 | 11 | |||||
Pre-clinical |
3 | 6 | 4 | 7 | 20 | |||||
TOTAL |
10 | 22 | 11 | 13 | 56 | |||||
The research and development process historically takes from 10 to 15 years from discovery to initial product launch and is conducted in various stages. During the pre-clinical stage, research scientists perform pharmacology and toxicology studies in various animals. Before testing in humans, an application for the compound must be filed with and approved by the requisite regulatory authorities. Testing in humans is performed in different clinical phases to demonstrate the safety and efficacy of a new compound:
| Phase I. In clinical phase I, studies are performed on healthy human volunteers to obtain information concerning safety, preliminary dose-ranging, pharmacokinetics and preliminary interaction with other medications. |
| Phase IIa. In clinical phase IIa, studies are performed to study the pharmacological activity of the dose range determined in the phase I studies and/or to assess preliminary therapeutic activity in patients. |
| Phase IIb. In clinical phase IIb, the aim is to determine the risk ratio, i.e., to demonstrate the clinical activity and to determine the optimal dose in a larger and more varied population. |
| Phase III. In clinical phase III, we verify the clinical efficacy of the compound on a large population of patients (usually between 3,000 and 5,000 volunteers). These studies involve control groups taking a reference compound or a placebo (an inactive compound identical in appearance to the study compound). |
Together, phases II(b) and III typically take from three to five years to complete. Thereafter, an application containing all data for the proposed drug is sent to regulatory authorities for approval, which may take an additional six months to two years or longer. There are two types of further clinical trials: one called phase IIIb, where new indications are sought; and one called phase IV trials, which are generally carried out after product launch to continue to monitor the efficacy and safety of a new drug.
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The table below sets out, in summary form, our current principal projects in phase IIb or phase III clinical trials, together with the current projected filing dates for each product if phase III trials are successful. No assurance can be given that the products discussed below will complete the development process, that they will be filed for approval on the planned timetable or that they will ultimately receive the required governmental approvals necessary for commercial launch.
Principal Compounds in Phase IIb, III or IIIb Clinical Trials
Product |
Indication |
Status |
Targeted Filing | |||
Cardiovascular/Thrombosis |
||||||
Arixtra® (fondaparinux sodium) |
Acute coronary syndrome | Phase IIIb | 2005 | |||
Other venous thromboembolic events after surgery or in medical patients |
Phase IIIb | 2004 | ||||
Dronedarone |
Atrial fibrillation | Phase III | 2006 | |||
Idraparinux sodium |
Long-term treatment of deep veinous trombosis/ pulmonary embolism and atrial fibrillation |
Phase III | 2007 | |||
SR 121463 |
SIADH (inappropriate secretion of anti-diuretic hormone syndrome), chronic heart failure, cirrohtic ascites |
Phase IIb | 2007 | |||
Central Nervous System |
||||||
Xaliproden |
Alzheimers disease | Phase III | 2007 | |||
Rimonabant (Acomplia) |
Smoking cessation | Phase III | 2005 | |||
Stilnox® CR (zolpidem MR) |
Insomnia | Phase III | 2004 | |||
Osanetant |
Schizophrenia | Phase IIb | 2006/2007 | |||
Saredutant |
Depression/anxiety | Phase IIb | 2006/2007 | |||
SR 58611 |
Depression | Phase III | 2006/2007 | |||
SL 65.1498 |
Anxiety; muscular contractions |
Phase IIb | 2006/2007 | |||
Eplivanserin |
Sleep disorders | Phase IIb | ||||
SL 65.0155 |
Alzheimers disease; Parkinsons disease |
Phase IIb | ||||
SR 57667B |
Alzheimers disease; Parkinsons disease |
Phase IIb | ||||
Oncology |
||||||
Eloxatin® |
Gastric-pancreas cancer | Phase IIIb | ||||
Tirapazamine |
Head and neck cancer | Phase III | ||||
SR 31747 |
Prostate cancer | Phase IIb | 2006/2007 | |||
SR 48692 |
Small cell lung cancer | Phase IIb | ||||
Internal Medicine |
||||||
Fumagillin |
Intestinal microsporidiosis |
Phase III | 2004 (Europe) | |||
Rimonabant (Acomplia) |
Obesity | Phase III | 2005 | |||
Xatral® (alfuzosin) |
Acute urinary retention | Phase IIIb | 2005 (U.S.) | |||
Saredutant |
Irritable bowel syndrome | Phase IIb |
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Cardiovascular/Thrombosis
Certain of our principal products in the field of Cardiovascular/Thrombosis currently in phase IIIb, phase III or phase IIb clinical trials are described below.
| Idraparinux sodium (thromboembolic events; Phase III). Idraparinux sodium belongs to the synthetic oligosaccharide family and is an injectable synthetic pentasaccharide, selectively inhibiting coagulation factor Xa. Idraparinux sodium has a demonstrated potency and long duration of action that permit a therapeutic regimen consisting of only one injection per week in humans. The results of the PERSIST phase IIb study, published in September 2002, compared idraparinux sodium with anti-vitamin K in the treatment of venous thrombosis and permitted selection of the 2.5mg dose and the initiation of two Phase III trials, VAN GOGH and AMADEUS, both of which started in early 2003 and are expected to enroll over 10,000 patients. The VAN GOGH program is studying idraparinux sodium in the long-term treatment of thromboembolic events in patients suffering from deep-vein thrombosis or pulmonary embolism. The AMADEUS program is studying idraparinux sodium in the prevention of thromboembolic events associated with atrial fibrillation. |
| Dronedarone (atrial fibrillation; phase III). The current reference anti-arrhythmic is still amiodarone, which we have marketed since the late 1960s under the brand name Cordarone®. With dronedarone, a potential successor to Cordarone®, our goal is to develop a new treatment that is at least as effective as amiodarone, but with improved tolerability. The first indication being developed for dronedarone is the prevention of recurrence of atrial fibrillation, the most common cardiac rhythm disorder. The usual treatment for acute atrial fibrillation is an external electric shock to the heart, which is then generally followed by a medicinal anti-arrhythmic agent to avoid recurrences, which are extremely common. In 2002, we initiated two Phase III programs to study both the efficacy and tolerability of dronedarone. The EURIDIS (Europe) and ADONIS (North and South America, Australia and South Africa) phase III trials are studying the efficacy of dronedarone in the prevention of recurrences in patients who have already experienced atrial fibrillation. We completed the trials involving 1,245 patients in early 2003. These studies confirmed dronedarone as an anti-arrhythmic with a high benefit/risk ratio, particularly with the absence of any proarrythmic effect. We have concluded based on these results that dronedarone is highly effective in all recurrences of atrial fibrillation, including symptomatic recurrences. The other phase III trial we began during 2002, ANDROMEDA, was studying the tolerability of dronedarone in high-risk patients suffering from heart failure and impaired ventricular function. We stopped the ANDROMEDA trial in January 2003 after enrolling 627 patients instead of the planned 1,000 when an interim tolerability analysis indicated a higher potential risk of death in the group treated with dronedarone. We plan to develop a new protocol for the tolerability study after we have completed a detailed analysis of all data gathered. |
| SR 121463 (Vasopressin V2 receptor antagonist; phase IIb). SR 121463, a pure aquaretic compound, is a Vasopressin V2 receptor antagonist developed to correct serum sodium levels. A phase IIb study of this compound on Syndrome of Inappropriate AntiDiuretic Hormone Secretion (SIADH) was completed in 2003. In a double-blind comparison study of five-day treatments, we saw a significant increase in serum sodium levels. We also saw positive outcomes in a Phase IIa study of SR 121463 on the levels of diuresis and plasma sodium in cirrhotic patients. Based on these favorable results, we plan to start phase III development of SR 121463 in the second quarter of 2004, enrolling 75 patients in a placebo-controlled study of the correction of serum sodium levels in SIADH. |
Central Nervous System
Certain of our principal products in the field of Central Nervous System currently in phase IIIb, phase III or phase IIb clinical trials are described below.
| Xaliproden (Alzheimers disease; phase III). Xaliproden is a non-peptide compound that activates the synthesis of endogenous neurotrophins. It is orally active as a single daily dose. Because xaliproden has |
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both neurotrophic and neuroprotective properties, we believe it could be the first treatment capable of slowing the progression of Alzheimers disease, compared to current treatments for Alzheimers disease, which are purely symptomatic. So far, xaliprodens efficacy as a curative or preventive treatment has been demonstrated in vitro and in vivo in numerous models of central or peripheral neurodegeneration. We completed phase II studies in 2002, which confirmed the tolerability of xaliproden in elderly subjects with Alzheimers disease, and we initiated an international Phase III development program in 2003. |
| SR 57677B (Alzheimers disease, Parkinsons disease; phase IIb). SR 57667B, like xaliproden, is a non-peptide compound that activates the synthesis of endogenous neurotrophins. With both neurotrophic and neuroprotective properties, we believe that SR 57677B may have potential therapeutic applications in the treatment of Alzheimers disease and Parkinsons disease. In 2003, we initiated a phase IIb research program, which we expect to enroll more than 1,200 patients in total. |
| SL 65.0155 (Alzheimers disease, Parkinsons disease; phase IIb). SL 65.0155 is a partial serotonin receptor agonist that has both neuroprotective and memory improving properties. We believe that these properties will enable SL 65.0155 to encourage neuron repair and to prevent memory loss. In 2003, we began phase IIb studies. |
| Osanetant (schizophrenia; phase IIb). We designed an original study protocol, METATRIAL, to evaluate the therapeutic activity of four compounds possessing novel mechanisms of action in patients with schizophrenia. Osanetant, an NK3 receptor antagonist, showed an activity and a profile close to those of haloperidol, the reference treatment, combined with very good tolerability. Based on these results, the phase II clinical investigation continued in 2003. Osanetant was also being developed for depression. However, the phase IIb trial evaluating the potential of osanetant in severe depression proved non-conclusive and was discontinued. |
| SR58611 (depression; phase III). SR58611 is a beta3 adrenergic receptor antagonist. These substances stimulate neuronal activity in a specific region of the prefrontal cortex and could give rise to a new class of anti-depressants. In a phase IIa trial in patients suffering from severe, recurrent depression, SR58611 was observed to be superior to fluoxetine, a reference treatment, and was well-tolerated. The results of a phase IIb study comparing SR58611 to paroxetine, a reference treatment, demonstrated an efficacy and tolerability profile that were sufficiently encouraging to warrant further studies. We initiated two phase III trials in 2003. |
| Saredutant (depression; phase IIb). Saredutant is an NK2 receptor antagonist developed for the treatment of Major Depressive Disorders. In 2003, we completed a phase IIb study of six-week treatment of patients with moderate to severe major depressive disorder episodes. The results of the study were positive, and we plan to progress to phase III studies in 2004. We are also studying the use of saredutant in irritable bowel syndrome. |
| Rimonabant (smoking cessation; phase III). Rimonabant is a CB1 endocannabinoid receptor antagonist that we are studying as an aid both to quit smoking and for the long-term maintenance of abstinence from smoking. The results of a 10-week phase IIa trial completed in 2002 showed that rimonabant resulted in smoking cessation rates superior to those achieved with placebo. The trial also showed the patients receiving rimonabant lost an appreciable amount of weight in contrast to placebo-treated patients ceasing to smoke, who gained weight. Based on these results, and in agreement with the FDA, we began a large-scale phase III program, to include over 6,500 patients, in the United States and Europe in 2002. Preliminary results of the STRATUS-US program on smoking cessation demonstrated elevated prolonged abstinence rates in smokers receiving dosages of 20 mg of rimonabant during the last four weeks of treatment, with a low incidence of body weight gain and a positive safety profile, with no safety issue detected through laboratory, vital signs or ECG data. We are also studying the use of rimonabant for the treatment of obesity, see Internal Medicine below. |
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Internal Medicine
Certain of our principal products in the field of Internal Medicine currently in phase III clinical trials are described below.
| Rimonabant (obesity; phase III). Rimonabant is currently the only selective CB1 endocannabinoid receptor antagonist in clinical trials in humans for use in the treatment of obesity. Rimonabant appears to intervene at the center of central appetite, regulating systems by counteracting endogenous cannabinoids (endocannabinoids), such as anandamide. The important aspect of this mode of action is that it induces both a quantitative regulation of calorie consumption and a quantitative regulation of nutrition by diminishing the appetite for fatty foods, or foods with excessive sugar content. Studies to date so far have demonstrated that weight reduction is significant with rimonabant and that it has a good tolerability profile. We began phase III studies to assess rimonabant in the reduction of weight and in the prevention of weight regain in August 2001, enrolling over 6,600 patients. These phase III studies included two large two-year studies, in the United States and in Europe, of 4,200 patients total. The phase III studies also include two additional studies, each including close to 1,000 patients, which are designed to demonstrate the efficacy of rimonabant in obese patients suffering from diabetes or dyslipidemia, disorders aggravating the cardiovascular risk factors associated with obesity. The results of one of these phase III studies, presented at the March 2004 conference of the American College of Cardiology, demonstrated the central and peripheral roles of the CB1 receptor and the activity of rimonabant in the regulation of lipid and glucid metabolism and in body weight loss with an excellent safety profile. The other phase III studies will complete recruitment in 2004. We believe that due to its effects on obesity and glyco-lipidic profile, rimonabant is likely to become a cornerstone treatment in the management of patients with cardiovascular risk factors. We are also evaluating rimonabant as an aid to cease smoking, see Central Nervous System above. |
| Fumagillin (intestinal microspiridial infection; phase III). Fumagillin is currently in development for the treatment of intestinal diarrhea of parasitic origin (microsporidia). This kind of diarrhea is severe and can be life-threatening in patients whose immune systems have been weakened. In February 2002, fumagillin was included on the European Unions list of orphan drugs. |
Oncology
One of our principal products in the field of Oncology currently in phase III clinical trials is described below.
| Tirapazamine (head and neck cancer; phase III). Tirapazamine is an anti-cancer agent that is not directly cytolytic, but promotes the destruction of resistant hypoxic cells. This innovative mechanism of action is likely to diminish the rate of relapse. Phase III trials on tirapazamine in combination with cisplatin and vinorelbine in non-small-cell lung cancer were not conclusive, and the development of Tirapazamine for this indication was discontinued. Phase III clinical studies for indications in head and neck cancer are ongoing. |
Production and Raw Materials
Generally, we develop and manufacture the active ingredients that we use in our products. We have a general policy of producing the active ingredients for our principal products at our own plants rather than outsourcing production. Even though we must outsource certain production elements, we are committed to this general principle, which reduces our dependency on key suppliers.
In February 2001, we sold two manufacturing facilities to Dynamit Nobel, and we outsource to those facilities the production of the active ingredients used in Stilnox®, Kerlone®, Xatral®, Solian® and Tildiem®. Our outsourcing agreement requires us to purchase around 80% of our manufacturing requirements of the ingredients
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for Stilnox®, Xatral® and Solian® and all of our manufacturing requirements of the ingredients for Kerlone® and Tildiem® from these facilities through December 31, 2004, at which point we may manufacture these ingredients ourselves or negotiate a new outsourcing agreement. Either we or Dynamit Nobel may terminate the outsourcing agreement in the event of a material breach that is not cured for any one of the active ingredients. Additionally, we may terminate the agreement for any one of the active ingredients if they continuously fail to meet specifications or are used in a product that is withdrawn from the market.
In connection with our proposed acquisition of Aventis we have begun to divest our interests in Arixtra® and Fraxiparine®. Our facility at Notre-Dame de Bondeville may also be sold.
Among our other key products, we also depend on third parties in connection with the manufacture of Eloxatin®. Under the terms of our license agreement, we purchase the active ingredient from Debiopharm, and the production of the finished product is outsourced to two manufacturers.
Our principal manufacturing processes consist of three stages: the manufacture of active ingredients, the incorporation of those ingredients into products designed for use by the consumer and packaging. Each stage of the manufacturing process is carried out under carefully controlled conditions and is regulated by applicable legislation including, for facilities that produce products marketed in the United States, the U.S. Food and Drug Administration, or FDA. Wherever possible, we seek to have at least three plants approved for the production of key active ingredients and finished products. All of our facilities are Good Manufacturing Practice, or GMP, compliant in accordance with international guidelines.
We purchase a variety of raw materials for use in our manufacturing processes. When possible, we have a policy of maintaining multiple sources of supply for materials. In a few cases raw materials may be in short supply. For example, there are limited supplies of a raw material used in the manufacture of Fraxiparine®. Nonetheless, we have not experienced any difficulty in obtaining a sufficient supply of raw materials in recent years and believe that we will be able to obtain supplies in sufficient quantities in the future. We are not exposed to any material risk related to the volatility of the prices of raw materials that we outsource.
Our main production facilities are located in France, Hungary, the United Kingdom and Spain, with additional facilities located in many other countries around the world including in Northern Africa, Eastern Europe, Asia and Latin America.
Marketing and Distribution
Overview
We have our largest presence in Europe, which accounted for 4,693 million, or 58.3% of 2003 consolidated net sales. In Europe, France is our largest single country in terms of sales and accounted for 1,646 million, or 20.4% of our 2003 consolidated net sales. Other European countries accounted for 3,047 million, or 37.9% of our 2003 consolidated net sales, with Germany, Italy, Spain and the United Kingdom representing the largest European markets other than France. Our next largest market is the United States, which accounted for 1,912 million, or 23.8% of 2003 consolidated sales.
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The following table breaks down our consolidated net sales by geographic market for 2001, 2002 and 2003:
Year Ended December 31, | ||||||
2001 |
2002 |
2003 | ||||
( in millions) | ||||||
Europe |
||||||
France(1) |
1,487 | 1,584 | 1,646 | |||
Germany |
596 | 634 | 667 | |||
Italy |
433 | 444 | 478 | |||
Other(2) |
1,361 | 1,642 | 1,902 | |||
Total Europe |
3,877 | 4,304 | 4,693 | |||
United States |
1,098 | 1,689 | 1,912 | |||
Other countries |
1,513 | 1,455 | 1,443 | |||
Total net sales |
6,488 | 7,448 | 8,048 | |||
(1) | Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana). |
(2) | From 2003, figures for Europe include sales in Slovenia. Prior to 2003, sales in Slovenia were included in other countries. 2002 figures have been modified to conform to the new presentation. The impact on 2001 figures is not significant. |
Our principal marketing activities have historically focused on Europe and have been conducted through our own subsidiaries. In the United States and Japan, which together with Europe make up the most significant part of the world pharmaceutical market, we have historically marketed most of our products through partnerships with other pharmaceutical companies. We have increased our presence in the U.S. market, by acquiring the remainder of the Lorex Pharmaceuticals joint venture, which marketed Stilnox® (under the name Ambien®) and Kerlone® in the United States, from Pharmacia in April 2002, by increasing our involvement in the promotional activities and profits of the alliance with Bristol-Myers Squibb that markets Aprovel® (under the name Avapro®) in the United States from October 2001, and by marketing directly in the United States key strategic products such as Eloxatin® and Xatral® (under the name Uroxatral®). These alliances are described below under Alliances and Item 5 Operating and Financial Review and Prospects Overview Financial Presentation of Alliances. Our proprietary U.S. sales force, which numbered 2,675 as at December 31, 2003, has tripled over the last three years from 880 as at December 31, 2000.
We manage the marketing process by integrating the marketing approach developed by our central strategic marketing group at our headquarters in Paris with that of our group companies in their local markets. A major focus of our marketing strategy is to launch new products in the appropriate key world markets as rapidly as possible, subject to the constraints imposed by the extensive process of obtaining regulatory approvals. The launch of a major product is supported by participation in scientific conferences and exhibitions and by informing the medical community of the qualities, applications and limitations of the product. This process involves the presentation of information generated by clinical trials in a form tailored to each market.
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Direct Sales Force and Representative Offices
We market and promote our products primarily through our own sales force and also have representative offices in certain countries. The following table sets forth certain information about the geographical distribution of our sales force.
Sales Force by Region
At December 31, 2003 |
|||||
Sales Force |
% of Total |
||||
Europe |
5,090 | 43.9 | % | ||
United States |
2,675 | 23.1 | % | ||
Other Countries |
3,836 | 33.1 | % | ||
Total |
11,601 | 100 | % | ||
Alliances
In 2003, we had two major alliances through which three of our leading products were marketed. The first, with Bristol-Myers Squibb, or BMS, governs the development and marketing of Aprovel® and Plavix®. The second, with Organon, a subsidiary of Akzo Nobel, governed the development and marketing of Arixtra®. In addition, until April 2002, Stilnox® was the subject of a major alliance. The alliance structures have had a significant impact on the effect that sales of these products have had on our financial condition and results of operations. The financial impact of these structures on our results of operations is described in detail under Item 5 Operating and Financial Review and Prospects Overview Financial Presentation of Alliances.
BMS
We market Aprovel® and Plavix® through a series of alliances with Bristol-Myers Squibb, or BMS. The alliance agreements include marketing and financial arrangements that vary depending on the country in which the products are marketed.
There are three principal marketing arrangements that are used in the BMS alliance:
| Co-marketing. Under a co-marketing system, each company markets the products independently under its own brand names. |
| Exclusive Marketing. Under the exclusive marketing system, one company has the exclusive right to market the products. |
| Co-promotion. Under a co-promotion system, the products are marketed through the alliance arrangements (either by contractual arrangements or by separate entities) under a single brand name. |
Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world excluding Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals, and Plavix® is under development through an alliance between our company and Daiichi Pharmaceuticals Co., Ltd.
| Territory under our operational management. In the territory under our operational management, the marketing arrangements are as follows: |
| We use the co-promotion system for most of the countries of Western Europe for Aprovel® and Plavix® and for certain Asian countries for Plavix®. |
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| We use the co-marketing system in Germany, Spain and Greece for both Aprovel® and Plavix®, and in Italy for Aprovel®. |
| We have the exclusive right to market Aprovel® and Plavix® in Eastern Europe, Africa and the Middle East, and we have the exclusive right to market Aprovel® in Asia (excluding Japan). |
| Territory under BMS operational management. In the territory under BMS operational management, the marketing arrangements are as follows: |
| We use the co-promotion system in the United States and Canada, where the products are sold through the alliances under the operational management of BMS. |
| We use the co-marketing system in Brazil, Mexico, Argentina and Australia for Plavix® and Aprovel® and in Colombia for Plavix®. |
| We have the exclusive right to market the products in certain other countries of Latin America. |
In countries where the products are marketed by BMS on a co-marketing basis, or through alliances under the operational management of BMS, we often sell the active ingredients for the products to BMS or such entities.
Organon
Through January 2004, we had an alliance with Organon, a subsidiary of Akzo Nobel, covering the worldwide development, manufacturing and commercialization of Arixtra®. Similar to our other alliances, the marketing and financial arrangements varied depending on the region in which Arixtra® was sold, as follows:
| North America. In the United States, Mexico and Canada, Arixtra® was sold by entities that we jointly controlled on a 50/50 basis with Organon. |
| Europe and Other Countries (excluding Japan). We had the exclusive right to market and sell Arixtra®. |
In January 2004, we agreed to acquire all of Organons interests relating to Arixtra® that were the subject of this joint venture, as well as Organons interests relating to idraparinux sodium and other oligosaccharides. We now have full rights to market Arixtra® and other products worldwide and will make royalty payments to Organon based on future sales, under a licensing arrangement.
In connection with our proposed acquisition of Aventis, on January 26, 2004, we began a sales process to divest our interests in Arixtra® in order to be able to respond to possible demands of the competition authorities. As of the date of this annual report, confidential discussions and negotiations are ongoing with several interested parties.
Japan
In Japan, we market our products primarily through alliances or by licensing our products to other pharmaceutical companies. Our most important alliances and licensing agreements in Japan are with Fujisawa for Stilnox® and Dogmatil®; Daiichi for the development of Plavix®; Mitsubishi for Kerlone® and Yamanouchi for Corotrope®. We also have an agreement with Taisho for Cordarone® (under the name Ancaron®), although in January 2004 we signed an agreement with Taisho that will permit us to market the product directly beginning in 2006.
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Other Countries
In order to strengthen our worldwide presence, we have entered into other types of agreements, including alliances in Slovenia, China, Vietnam and Indonesia.
Patents, Intellectual Property and Other Rights
Trademarks
Our products are sold around the world under brand-name trademarks that we consider to be of material importance in the aggregate. It is our policy to register our trademarks worldwide, and to monitor the trademarks in our portfolio and defend them worldwide.
The degree of trademark protection varies country by country, as each state implements its own laws applicable to trademarks used in its territory. In some countries, trademark protection is primarily based on use, whereas in other countries, trademark rights may only be obtained by registration. Registrations are generally granted for a fixed term (typically ten years) and are renewable indefinitely, but in some instances may be subject to the continued use of the trademark. When trademark protection is based on use, it covers the products and services for which the trademark is used. When trademark protection is based on registration, it covers only the products and services designated in the registration. We usually register our trademarks so as to cover pharmaceutical products in class 5, although we sometimes are required, subject to local trademark law requirements, to further specify the type of product protected by the trademark. Additionally, in certain cases, we may enter into a coexistence agreement with a third party that owns potentially conflicting rights in order to better protect and defend our trademarks.
Patents
We currently own approximately 9,800 patents and patent applications worldwide, and we license-in approximately 30 patents. These patents cover:
| active ingredients, |
| pharmaceutical formulations, |
| product manufacturing processes, |
| intermediate chemical compounds used in manufacturing, and |
| therapeutic indications. |
Patent protection for individual products typically extends for 20 years from the filing date in countries where we seek patent protection. This protection may be further extended in some countries, in particular in Europe, the United States and Japan. The protection afforded depends upon the type of patent and its scope of coverage and may also vary from country to country. In most industrial countries, patent protection exists for new active substances and formulations, as well as for new indications and production processes. We monitor our competitors and vigorously challenge patent and trademark infringements.
The expiration of a product patent may result in significant competition from generic products against the covered product and, particularly in the United States, can result in a dramatic reduction in sales of the pioneering product. In some cases, it is possible to continue to obtain commercial benefits from product manufacturing trade secrets, patents on processes and intermediates for the economical manufacture of the active ingredients, patents for special formulations of the product or for delivery mechanisms, and conversion of the active ingredient to OTC products. In some countries, including Europe and the United States, many of our
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products may also benefit from a 5- to 10-year market exclusivity period. This exclusivity period operates independently of patent protection and may protect the product from generic competition even if the basic patent for the product has expired.
Among our top ten products, Cordarone® and Solian® no longer enjoy any kind of patent protection in major markets. For certain of our other top 10 products, including Fraxiparine®, Tildiem® and Depakine®, the main patent has expired and we only have patent protection on a particular formulation of the drug or on a manufacturing process in certain countries. For Plavix® there are three U.S. patents, one expiring in 2011 and two expiring in 2019, and two European patents, expiring in 2013 and 2019, respectively. We have an additional U.S. patent expiring in 2014, although we have requested the FDA to delist this patent from its list of Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the FDAs Orange Book. Finally, two patents expired during 2003 (one U.S. and one European). Aprovel® is protected in the United States until 2011 and in Europe until 2012. Stilnox® began to lose some of its patent protection in 2002, and its remaining main patents will expire in different countries during 2004 (France) through 2006 (United States and Japan). Arixtra® has market exclusivity in the United States until 2006, and in Europe it will have data protection until 2012. Among our strategic products, Eloxatin® is marketed under a licensing agreement, as we do not own the Eloxatin® patents but in-license them from a third party for marketing. Those patents expire in 2013.
The most recent of our major pharmaceutical products to go off patent in major markets was Corotrope®, whose main patents expired in the United States in May 2002 (where it is sold under the brand name Primacor®).
One of the main limitations on our operations in some countries outside the U.S. and Europe is the lack of effective intellectual property protection of our products. Under international agreements in recent years, global protection of intellectual property rights is improving. The TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights), which forms part of the General Agreement on Tariffs and Trade, requires developing countries to amend their intellectual property laws to provide patent protection for pharmaceutical products by the end of a 10-year transition period that expires on January 1, 2005, and a number of countries have already enacted such amendments. Although the situation has gradually improved, the lack of protection for intellectual property rights poses difficulties in certain countries.
In the United States, two pharmaceutical companies have filed Abbreviated New Drug Applications, or ANDAs, challenging our patent related to Plavix® that expires in 2011, as well as other patents that have since expired or that we have not pursued in the litigation. See Item 8 Financial Information Legal Proceedings. An ANDA is an application by a generic manufacturer for an abbreviated approval of a generic product. See Regulation below. We believe that our patent rights are valid and we intend to defend them vigorously.
On March 5, 2004, we were informed that Teva Pharmaceuticals USA, Inc., or Teva, a generic drug manufacturer, filed an ANDA with the FDA claiming that one of our patents relating to Plavix® is invalid (the patent expiring in 2014 that we are seeking to delist from the FDAs Orange Book as discussed above) and that two others (those expiring in 2019) will not be infringed by Teva. None of these patents is involved in the pending patent infringement litigation involving Plavix® that we have filed against Apotex and Dr. Reddys Laboratories, two generic drug manufacturers. The Teva filing does not challenge the patent at issue in the Plavix® litigation and therefore is not expected to have any impact on that litigation; nor does it appear that Teva intends to commercialize a generic form of Plavix® prior to the expiration or termination of the patent at issue in the Plavix® litigation (which does not expire until 2011), although there can be no assurance that this will continue to be the case.
Other than as described in this annual report, we are not currently involved in any material patent or trademark litigation nor, to our knowledge, is any such litigation threatened.
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Competition
The pharmaceutical industry in which we operate is highly competitive. Over the last few years, the pharmaceutical industry has experienced increased vertical and horizontal consolidation. In addition to the consolidation, significant changes in marketing conditions are occurring in the European, U.S. and Japanese pharmaceutical markets, including decreased pricing flexibility, increased cost control measures, and the impact of managed care, especially with respect to product selections and pricing concessions. As a result of these factors, the breadth of products that we offer and our distribution capabilities have become increasingly important.
The pharmaceutical market is generally defined by three types of competition:
| competition among pharmaceutical companies to develop new patented products for a specific therapeutic indication; |
| competition among patented pharmaceutical products for a specific therapeutic indication; and |
| competition among original products with generic bioequivalent products following the loss of patent protection. |
We compete with other pharmaceutical companies to develop new and innovative pharmaceutical products. We may develop new technologies and new patented products entirely internally, or we may enter into collaborative research and development arrangements in order to access additional new technologies. When we compete for new technologies through outside research and development collaborative arrangements, we compete directly with large pharmaceutical companies. Some of these companies have substantially greater resources than our company and may be able to offer more attractive milestone payment or other terms. Additionally, as many of these companies have larger U.S. sales forces and consequently larger presences in the U.S. market, the largest market for pharmaceuticals, they may be more attractive partners for smaller pharmaceutical companies that are typically compensated with royalty payments of sales of products developed.
Once a patented product is on the market, it competes directly with other products that have been developed for the same therapeutic indication. For example, Plavix®, Aprovel®, Stilnox®, Eloxatin®, Xatral® and Arixtra®, among others, may face competition from existing products or other products that have recently appeared on the market or are in later-stage development by other companies. Plavix®, for example, has always faced competition from acetylsalicylic acid, and a combination of acetylsalicylic acid and dipyridamole (Asasantin®/Aggrenox® produced by Boehringer-Ingelheim GmbH). Aprovel® competes directly with Cozaar® (produced by Merck & Co., Inc.), Diovan® (produced by Novartis AG) and Benicar® (produced by Sankyo/Forest Laboratories), Stilnox® competes directly with Sonata® (produced by King Pharmaceuticals), Eloxatin® competes directly with Campto®/Camptosar® (produced by Aventis/Pfizer), Xatral® competes with Flomax® (produced by Abbott Laboratories/Boehringer-Ingelheim GmbH), Proscar® (produced by Merck & Co., Inc.) and Hytrin® (produced by Abbott Laboratories) and Arixtra® competes directly with low molecular weight heparins, notably Lovenox® (produced by Aventis).
Finally, when a pharmaceutical product loses patent protection, it typically faces competition from generic products, which generally are priced much lower than the original product. We thus compete directly on price with generic product manufacturers for sales once one of our products loses patent protection. For example, since Corotrope®s U.S. patent protection expired in May 2002, it has faced direct competition from generics. As expected, this competition has led to a significant drop in sales in the United States of Corotrope® (where it is sold under the brand name Primacor®).
Pricing
In addition to the normal competitive forces that affect the level of prices, a further constraint exists in the form of price controls in most countries where we sell our products. These controls arise either by law or because
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the government or other healthcare providers in a particular jurisdiction are the principal purchasers of the product or reimburse purchasers for the cost of the product. Price control mechanisms operate differently in different jurisdictions and can result in large price differentials between markets, which may be aggravated by currency fluctuations (apart from countries of the European Monetary Union, which have had the same currency since January 1, 2002). These price differentials can also be exploited by traders (parallel importers) who purchase brand-name products in lower-priced markets for resale in higher-priced markets.
In recent years, cost-control efforts by public authorities have led to a tightening of reimbursement policies in most of the countries in which we operate, particularly in Western Europe, where state-controlled healthcare programs (with reimbursement of a percentage of health expenses by the state) are common. Direct cost control measures can take a variety of forms, including mandatory price reductions (or failure to approve price increases), increases in the percentages to be paid by patients (the co-pay), exclusion of certain products from lists of reimbursable products, benchmarking of reimbursement prices based on the lowest priced therapy available in a category, cost-benefit analysis of prescription pharmaceuticals, encouragement of the growth of generic drug markets and consideration of the price paid in other countries for the same product. For example, in 2003, Italian authorities continued cost-containment measures by implementing a 2% price decrease for reimbursed products in January 2003 and extended the reference price system to certain therapeutic classes.
German healthcare reforms published in November 2003 call for a benefit analysis of prescription drugs and drug guidelines to be conducted by a future public institute for quality and economic efficiency in the health sector, and the inclusion of patented drugs without significant therapeutic benefits in the reference price system. The inclusion of drugs in the reference price system has the effect of lowering their prices. Although the implementation of these proposed changes is not yet finalized, until such time, the obligatory manufacturers discount to Krankenkassen (German public health insurance system) on non-reference priced drugs increased from 6% to 16% effective from January 1, 2004, and life-style and non-prescription drugs will no longer be reimbursed.
In certain European countries, governments also influence the price of pharmaceutical products indirectly through control of national healthcare systems that fund a significant portion of the cost of such products. In France, for example, a government authority sets the price level for reimbursable medications and, since 2002, must take into account the scientific value of the product, as well as the individual agreements signed between the governmental authority and the pharmaceutical companies. Every five years (to be reduced to three years in the near future), the reimbursement of and price levels for products on the list are reviewed. The price of a product depends on the benefits it provides in rendering medical treatment (including innovations) as well as an economic analysis of the product in comparison to existing treatments. In furtherance of these rules, the French government published an official list of 617 products judged to have weak or moderate medical benefits in April 2003, for which the reimbursement rate has been reduced from 65% to 35%. None of our major products were included on this list. An additional list of 82 products, judged to be of low medical value, was also published, and since October 25, 2003, these products are no longer reimbursed. None of our major products were included on this list. Finally, in August 2003, the French government published a list of 29 active ingredients to be affected by a reference price system. Although none of our top 10 products was on this list, certain of our other non-core products were included, so we have reduced the retail price to the reference price level. The government is expected to publish a second list of products to be affected by the reference price system during 2004.
Additionally, in June 2003, a new framework agreement regulating French pharmaceutical prices, promotions and reimbursement of sales, was entered into by the Economic Committee for Medical Products (CEPS) and the National Union for the Pharmaceutical Industry (LEEM) that will be in effect through December 31, 2006. One of the main features of this new framework agreement is faster price determination for products authorized under the EU centralized procedure and for those products that represent an improvement in medical service via a price notification system. The system requires French pharmaceutical companies to propose prices comparable to those in Germany, the United Kingdom, Spain and Italy, and imposes a 14 to 21-day deadline for the CEPS to object to the price.
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In Japan, the National Health Ministry conducts bi-annual reviews of the prices of certain pharmaceutical products (in the past, these reviews have resulted in regular price reductions). In the United States, there are currently no price controls over private sector pharmaceutical purchases; however, federal and state legislation require drug manufacturers to pay rebates on certain drugs to state Medicaid agencies based on each states reimbursement of pharmaceutical products under the Medicaid program. We also must give discounts or rebates in the United States on purchases or reimbursements of pharmaceutical products by certain other federal and state agencies and programs. Although Medicare reform was enacted in December 2003 in the United States, it is not effective until 2006 and we are evaluating the impact it could have on our business, although we do not expect it to be material. Further healthcare reforms continue to be considered in both the United States and other jurisdictions and, depending on their form, adoption could have a material effect on our future operations. In the absence of new government regulation, managed care has become a potent force in the market place that increases downward pressure on prices of pharmaceutical products.
Regulation
The international pharmaceutical industry is highly regulated. National and supranational regulatory authorities administer numerous laws and regulations covering the testing, approval, manufacturing, importation, exportation, labeling and marketing of drugs, and also review the quality, safety and efficacy of pharmaceutical products. Of particular importance is the requirement to obtain and maintain regulatory approval for a pharmaceutical product from a countrys national regulatory authority before such product may be marketed in that country and thereafter. These regulatory requirements are a major factor in determining whether a substance can be developed into a marketable product and the amount of time and expense associated with such development.
The submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Furthermore, each regulatory authority may impose its own requirements and may refuse to grant, or may require additional data before granting, an approval, even though the relevant product has been approved in another country. Regulatory authorities also have administrative powers that determine product recalls, seizure of products and other sanctions.
Europe, the United States and Japan all have very high standards for technical appraisal. The length of time required to obtain approval varies by country, but generally takes from six months to, in some cases, several years from the date of application, depending on the quality of data produced, the degree of control exercised by the regulatory authority, the efficiency of its review procedures and the nature of the product. In recent years, intensive efforts have been made among the United States, the European Union, or EU, and Japan to harmonize registration requirements. Many pharmaceutical companies are now able to prepare a common technical document, or CTD, that can be used in each jurisdiction for a particular product with local or regional adaptation. However, the requirement of many countries (including Japan and several member-states of the EU) to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time to market after initial approval is granted.
In the EU, there are two main procedures by which to apply for marketing authorization, namely the Centralized Procedure and the Mutual Recognition Procedure. In the Centralized Procedure, applications are made to the European Agency for the Evaluation of Medicinal Products for an authorization that is valid across all EU member-states. The Centralized Procedure is mandatory for all biotechnology products and optional for other new chemical compounds or innovative medicinal products. In the Mutual Recognition Procedure, a first authorization is granted by a single EU member-state. Subsequent mutual recognition of this first authorization is sought from the other EU member-states. National authorizations are still possible but are only for products intended for commercialization in a single EU member-state, or for line extensions to existing national product licenses.
In the United States, applications for drug registration are submitted to and reviewed by the FDA. The FDA has broad regulatory powers over all pharmaceutical products that are intended to be, and which are,
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commercialized in the United States. To commercialize a product in the U.S., a new drug application (NDA) is filed with the FDA with data that sufficiently demonstrate the drugs quality, safety and efficacy. A supplemental new drug application (sNDA) must be filed for the approval of a new indication of a previously registered drug.
Generic drug manufacturers may file an abbreviated new drug application (ANDA). These applications are abbreviated because generic manufacturers need only demonstrate that their product is bioequivalent (i.e., that it performs in the same manner as the innovators drug). Consequently, the length of time for development of such product can be considerably shorter than for the innovators drug.
Once marketing authorization is granted, the new pharmaceutical (or new indication) may be prescribed by physicians. Thereafter, the drug owner must submit periodic reports to regulatory authorities including any cases of adverse reactions. For some medications, regulatory authorities may require additional studies to evaluate long-term effects or to gather information on the use of the product under special conditions. In addition, manufacturing facilities must also be approved by regulatory authorities, and are subject to periodic inspections. In addition to local regulatory approvals, a non-U.S. manufacturing facility that exports products for sale in the United States must be approved by the FDA, and is also subject to periodic FDA inspection.
In addition to the regulatory approval of our products, all of our manufacturing facilities must be Good Manufacturing Practice (GMP) compliant. GMP is a term that is used internationally to describe a set of principles and procedures that, when followed by manufacturers of therapeutic goods, helps ensure that the products manufactured will have the required quality for human use. A basic tenet of GMP is that quality cannot be tested in a batch of product but must be built into all stages of the manufacturing process. These quality system regulations include requirements related to the methods used in, and the facilities and controls used for, designing, manufacturing, packaging, labeling and storing pharmaceutical products, including guidelines relating to the installation and servicing the equipment used in drug manufacture. Compliance with specified GMP requirements is used by most countries as the basis for licensing the manufacturer of pharmaceutical products.
Health, Safety and Environment
Our manufacturing and research operations are subject to increasingly stringent health, safety and environmental laws and regulations. Such laws and regulations are complex and rapidly changing. We have made, and intend to continue to make, necessary expenditures for compliance with them. Our expenditures related to health, safety and environmental compliance vary from year to year. In 2003, we invested approximately 20 million in health, safety and environmental compliance, compared to 23 million in 2002. While we cannot predict with certainty the future costs for compliance, we believe that our designated provisions are adequate based on currently available information. However, given the inherent uncertainties in projecting environmental liabilities we cannot guarantee that additional costs will not be incurred beyond the amounts accrued.
The environmental laws and regulations that we are subject to may require us to remove or mitigate the effects of the disposal or release of chemical substances at our various sites. Under some of these laws and regulations, a current or previous owner or operator of a property may be held liable for the costs of removal or remediation of hazardous substances on, under or in its property, or transported from its property to third party sites, without regard to whether the owner or operator knew of, or caused the presence of, the contaminants. The current or previous owner may also be liable regardless of whether the practices that resulted in the contamination were legal at the time they occurred.
Because certain of our manufacturing sites have an extended history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on us in the future. As is typical for companies involved in the pharmaceutical industry, soil and groundwater contamination has occurred in the past at some of our sites, and might occur or be discovered at other sites. Four of our French sites are currently included on a list
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of potentially contaminated land and sites on a database known as the BASOL, which is maintained by the Directions Régionales de lIndustrie, de la Recherche et de lEnvironnement (or DRIRE), the French equivalent of the U.S. Environmental Protection Agency, or EPA. In connection with an audit conducted in 1999 and 2000 at the request of the DRIRE, an assessment of the groundwater contamination was conducted at our Sisteron site, and we are now in the process of rehabilitating the site in cooperation with the DRIRE. We also have been identified as having potential liability for investigation and cleanup at several other sites and we are conducting remediation projects at three other sites (current and former). We have established reserves for the currently known sites and for contractual guarantees for environmental liabilities for sites that we have sold, and do not consider these reserves to be amounts that are material to our results of operations.
We believe that we are not currently subject to liabilities for non-compliance with applicable environmental, health and safety laws and regulations that would materially and adversely affect our business, financial condition or results of operations. We also believe that we are in substantial compliance with environmental, health and safety laws and regulations and that we have obtained all material environmental permits required for the operation of our facilities. We are committed to providing safe and environmentally sound work places that will not adversely affect the health or environment of our employees or the communities in which we operate.
We have implemented a health, safety and environmental policy that promotes the health and well-being of our employees and respect for our environment. We consider this policy to be an integral element of our commitment to social responsibility. The key points of this policy are summarized below.
Health. From the development of compounds to the launch of new drugs, our research scientists continuously assess the effect of our products on human health. We make this expertise available to our employees through two committees responsible for chemical and biological risk assessment. Our COVALIS committee classifies all chemical and pharmaceutical products handled within the group and sets workplace exposure limits for each of them. Our TRIBIO Committee classifies all biological agents according to their degree of pathogenicity and establishes guidelines for their containment and the preventive measures to be respected throughout our operations.
Safety. We have a rigorous policy in place to identify and evaluate risks and to develop preventive measures and methods for checking their efficacy. Additionally, we invest in training schemes that are designed to ensure that a concern for safety is built into all professional activities. We implement these policies worldwide to ensure the safety to our employees and protect their health. Each project, whether in research, development or manufacturing, is subject to evaluation procedures incorporating the chemical substance and processes data from the COVALIS and TRIBIO committees discussed above. Our preventive measures are designed primarily to reduce the number and seriousness of industrial accidents involving our permanent and temporary employees or employees of outside contractors.
Under a recent French law concerning the prevention of technological risks, two of our French sites, Sisteron and Aramon, are subject to increased levels of safety inspections due to the toxic and/or inflammable materials stored on site or used in manufacturing activities. We believe that the security and safety procedures, the risk evaluation studies and the risk management controls in place at each site, as well as the insurance policies covering any possible future material harm to third parties, comply with the new French legal requirements.
Environment. Our environmental policys core objectives are to implement clean manufacturing processes, minimize the use of natural resources and reduce the environmental impact of our business. In order to optimize and improve our environmental performance, we are working towards obtaining ISO 14001 certification. Currently, three of our manufacturing sites and two of our research and development sites are certified. This goal is an integral part of the strategy of continuous improvement practiced in all of our establishments through the annual implementation of health, safety and environment progress plans, known as PASS. We believe that this strategy clearly expresses the commitment of both management and individuals to health, safety and environment.
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Our recent environmental protection efforts have targeted reduction in water consumption, improvement in performance of water treatment installations, in the release of volatile organic compounds, savings or recycling of raw materials and reduction or improved recycled ratios in waste materials. Even with our increased production volume, we have achieved considerable improvements in each of these areas.
Insurance
We have set up two worldwide insurance programs with reputable internationally recognized firms. These programs are designed to cover general and product liability, property damage and business interruption, plus damage to goods in transit. In addition to these general programs, we have also taken out other insurance policies for specifically identified risks or to comply with local requirements.
Although we were able to maintain our liability coverage at sufficient levels in 2003, the general trend of introducing new exclusions that are aimed at certain products and of raising the level of deductibles has continued in the insurance industry. This market trend did not affect property cover and business interruption policies to the same degree, although these policies were subject to reductions and some significant exclusions related to the perceived terrorism threat and natural events. In order to address this market trend, we formed a Bermuda-based mutual insurance company in May 2003 with six other major makers of medicinal products. In order to improve our coverage and reduce our costs, this company has participated in our insurance coverage since January 2004.
The table below sets forth our significant subsidiaries and affiliates as of the date of this annual report. For a complete list of our consolidated subsidiaries, see Note F to our consolidated financial statements, included under Item 18 Financial Statements.
Significant Subsidiary or Affiliate |
Country |
Ownership Interest |
|||
Sanofi-Synthelabo Inc. |
United States | 100 | % | ||
Sanofi Winthrop Industrie |
France | 100 | % | ||
Lorex Inc. |
United States | 100 | % |
D. Property, Plants and Equipment
Our principal executive offices are located in Paris, France. We operate our business through a number of offices, research facilities and production sites throughout the world.
We both own and lease our facilities. We have entered into material leasing and operating leasing agreements with respect to real estate properties located in France in Paris, Gentilly, Chilly Mazarin and Bagneux. Under our operating leases, our real estate properties are composed of buildings constructed pursuant to the operating lease agreements, under which we pay periodic rent and have a purchase option exercisable at expiration. We are responsible for all repairs, taxes and other costs during the term of the operating leases. The operating leases are classified as debt in our consolidated balance sheet.
In 2003, we spent 338 million primarily to increase capacity and improve productivity at our various manufacturing sites. We believe that our production plants and research facilities are well maintained and generally adequate to meet our needs for the foreseeable future.
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Below is a summary of our principal manufacturing, distribution, research and development and administrative facilities. In addition to these principal sites, we have 86 additional facilities throughout the world that serve their local and regional markets.
Facility |
Appx. Size (m2) |
Principal Use | ||
Manufacturing |
||||
Ambarès, France (near Bordeaux) Sanofi Winthrop Industrie 1, rue de la Vierge BP 599 33440 Ambarès, France |
72,600 | Pharmaceutical Manufacturing (primarily Plavix®, Aprovel®, Depakine® and Cordarone®) | ||
Amilly, France (near Orléans) Sanofi Winthrop Industrie 196, rue du Maréchal Juin Zone Industrielle Amilly 45208 Montargis Cedex, France |
25,800 | Chemical and Pharmaceutical Manufacturing and storage (primarily Aspégic®) | ||
Aramon, France (near Avignon) Sanofi Chimie Route dAvignon 30390 Aramon, France |
47,000 | Chemical Manufacturing (primarily irbesartan, amiodarone and fondaparinux sodium) | ||
Colomiers, France (near Toulouse) Sanofi Winthrop Industrie 1-3 Allée de la Neste BP 319 31773 Colomiers cedex, France |
16,200 | Pharmaceutical Manufacturing (primarily Depakine®) | ||
NotreDame de Bondeville, France (near Rouen) Sanofi Winthrop Industrie 1, rue de lAbbaye 76960 NotreDame de Bondeville, France |
49,400 | Chemical and Pharmaceutical Manufacturing (primarily Fraxiparine®, Depakine®, Eloxatin® (packaging), Arixtra® and fondaparinux sodium) | ||
Quetigny, France (near Dijon) Sanofi Winthrop Industrie 6, boulevard de lEurope 21800 Quetigny, France |
27,600 | Pharmaceutical Manufacturing (primarily Stilnox®, Tildiem®, Plavix® and Solian®) | ||
Sisteron, France (near Marseille) 45, chemin de Meteline BP 15 04201 Sisteron Cedex, France |
58,000 | Chemical Manufacturing (primarily clopidogrel, ticlopidine and fondaparinux sodium) | ||
Tours, France 30-36, avenue Gustave Eiffel 37100 Tours cedex, France |
25,900 | Pharmaceutical Manufacturing (primarily Stilnox®, Tildiem®, Aprovel® and Xatral®) | ||
Alcobendas (near Madrid) Sanofi-Synthélabo SA Avda. de la Industria, 31 Poligono Industrial 28108 Alcobendas, Spain |
12,600 | Pharmaceutical Manufacturing (primarily Dogmatil®) |
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Facility |
Appx. Size (m2) |
Principal Use | ||
Csanyikvolgy, Hungary Chinoin Pharmaceuticals Works Co. Ltd P.O.B. 5653510 Miskolc Csanyikvolgy Hungary |
13,400 | Pharmaceutical Manufacturing (primarily Fraxiparine® and Arixtra®) | ||
Fawdon, England (near Newcastle) Sanofi Winthrop Ltd. Fawdon Manufacturing Centre Edgefield Avenue, Fawdon Newcastle Upon Tyne, NE3 3TT England |
29,000 | Pharmaceutical Manufacturing (primarily Plavix®, Aprovel® and Cordarone®) | ||
Riells, Spain (near Barcelona) Sanofi-Synthélabo Carretera de la Batlloria a Hostarlich KM 1,4 17404 Riells y Viabrea (Girona), Spain |
15,200 | Pharmaceutical Manufacturing (primarily Ticlid® and Cordarone®) | ||
Ujpest, Hungary (near Budapest) Chinoin Pharmaceutical and Chemical Works Co. Ltd. TO U 1-5 P.O.B. 110 1325 Budapest Hungary |
101,000 | Chemical and Pharmaceutical Manufacturing (primarily Ticlid® and irbesartan) | ||
Veresegyhaz, Hungary Chinoin Levai utca 5 Veresgyhaz H-2112 Hungary |
13,300 | Pharmaceutical Manufacturing (primarily Cordarone®) | ||
Research and Development |
||||
Alnwick, U.K. (near Newcastle) Willowburn Avenue Alnwick Northumberland, NE66 NQ England |
12,600 | Research | ||
Bagneux, France (near Paris) Sanofi-Synthélabo Recherche 31, avenue Paul Vaillant Couturier 92200 Bagneux, France |
21,700 | Research | ||
Chilly-Mazarin, France (near Paris) 1, avenue Pierre Brossolette 91385 Chilly-Mazarin cedex, France |
61,800 | Research, as well as distribution (primarily for the French consumer products market) | ||
Great Valley, PA, United States Sanofi-Synthelabo Research a division of Sanofi-Synthelabo Inc. 9, Great Valley Parkway Malvern, PA 19355 U.S.A. |
30,100 | Research |
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Facility |
Appx. Size (m2) |
Principal Use | ||
Porcheville, France (near Paris) 2-8, rue de Royen Zone Industrielle de Limay 78440 Porcheville, France |
24,500 | Research | ||
Montpellier, France Sanofi-Synthélabo Recherche 371, rue du Professeur Joseph Blayac 34184 Montpellier cedex 04, France |
52,000 | Research | ||
Strasbourg, France Sanofi-Synthélabo Recherche 18, rue dAnkara 67080 Strasbourg, France |
7,300 | Research | ||
Toulouse, France Sanofi-Synthélabo Recherche 195, route dEspagne 31306 Toulouse, France |
19,400 | Research | ||
Distribution |
||||
Amilly, France (near Orléans) Sanofi-Winthrop Industrie 196, rue du Maréchal Juin Zone Industrielle Amilly 45208 Montargis Cedex, France |
16,500 | Distribution center for pharmaceutical products | ||
St. Loubes, France (near Bordeaux) Sanofi Winthrop Industrie site No. 4 Z.I. La Lande 7, rue des Genets BP 53 33451 Saint Loubes cedex, France |
15,500 | Distribution center for pharmaceutical products | ||
Office Space |
||||
Sanofi-Synthélabo 174, avenue de France, Paris, France |
17,100 | Headquarters | ||
Sanofi-Synthélabo 74-82, avenue de Raspail Gentilly, France (near Paris) |
29,300 | Administrative offices and other operational activities | ||
Sanofi-Synthelabo, Inc. 90 Park Avenue New York, NY U.S.A. |
18,000 | Administrative offices, U.S. headquarters |
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Item 5. Operating and Financial Review and Prospects
You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto included in this annual report under Item 18. Our consolidated financial statements have been prepared in accordance with French GAAP, which differ in certain significant respects from U.S. GAAP. Note G to our consolidated financial statements provides a description of the principal differences between French GAAP and U.S. GAAP as they relate to our company, and reconciles our shareholders equity and net income to U.S. GAAP as of and for each of the years ended December 31, 2001, 2002 and 2003. Unless otherwise indicated, the following discussion relates to our French GAAP financial information.
The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See Item 3 Key Information Forward-Looking Statements.
Introductory Note Relating to our Proposed Acquisition of Aventis
If successful, our proposed acquisition of Aventis may have a significant impact on our results of operations and financial condition. If the offer is successful, we will issue a substantial number of new shares, and we will incur substantial indebtedness and be required to comply with financial covenants under our new credit agreement. In addition, the combination of our business with that of Aventis will impact trends in revenue growth, margins, financial expense, overall profitability and operating cash flow. As a result, trends evidenced by our historical financial statements and the discussion below may not be indicative of the future operating results or financial condition or future performance of the combined businesses of our company and Aventis.
We describe the terms of the offer, its current status and its potential impact under Item 8 Financial Information Significant Changes, and Item 3 Key Information Risk Factors Risks Relating to Our Proposed Acquisition of Aventis. As of the date of this annual report, the offer has been launched, but has not closed. As a result, we cannot be certain whether we will complete the offer, or if so whether we will modify the terms of the offer before its completion.
Overview
Over the last several years, our revenues have grown significantly. Our net sales in 2003 were 8,048 million, representing an increase of 8.1% compared to 2002, or an increase of 15.6% excluding the impact of changes in the scope of consolidation and exchange rates. Our 2002 net sales were 14.8% higher than our 2001 net sales, or 12.8% higher excluding the impact of changes in the scope of consolidation and exchange rates.
Our growth has been driven principally by strong sales of our four leading products, Plavix®, Aprovel®, Stilnox® and Eloxatin®, which together accounted for net sales of 2,110 million in 2001, 3,362 million in 2002 and 4,177 million in 2003. Between 2001 and 2002, a portion of our net sales growth was also due to our increased interest in the entity that markets Stilnox® in the United States.
We have also improved our operating margins over the last three years. Operating profit represented 32.5% of our net sales in 2001, 35.1% in 2002 and 38.2% in 2003. The principal reasons for our improved operating margins have been:
| strong growth in our top 10 products in 2003, which represented 67.3% of our net sales in 2003, compared to 61.4% in 2002, and 49.8% in 2001; |
| improved productivity from our sales teams, which we adapted to meet the needs of our various markets, including a substantial reinforcement in the United States for the launch of new products in the U.S. market (Eloxatin® and Uroxatral®) as well as our assumption of the responsibility for marketing Stilnox®; and |
| our increased financial interest in operating profits resulting from sales of Stilnox® and Aprovel® in the United States. |
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While we have improved our operating margins over the last few years, we have also maintained a significant research and development effort. In 2003, we had research and development expenses of 1,316 million, which represented an 8.0% increase over 1,218 million in 2002 (a 14.7% increase based on 2002 exchange rates), which itself represented an 18.1% increase over 2001. The 2003 figure represented 16.4 % of our net sales.
Our activities generate significant operating cash flow, which has historically been sufficient to fund our investment needs and to allow us to pay dividends. At the end of 2003, we had a net cash position of 3,010 million, including the value of treasury shares reserved for stock option plans. We do not anticipate needing cash resources other than those generated by our operations to fund our existing activities. However, if our proposed acquisition of Aventis is successful, we will incur substantial indebtedness in order to fund the cash portion of the consideration we are offering to pay for Aventis shares. In the future, we will need to use a portion of our operating cash flow to make debt service payments. See Item 8 Financial Information Significant Changes.
Sources of Revenues and Expenses
Revenues. Our principal source of revenues is the sale of pharmaceutical products. We sell these products directly, through alliances and through licensees throughout the world. When we sell products directly, we record sales revenues as part of our consolidated revenues. When we sell products through alliances, the revenues reflected in our consolidated financial statements are based on the overall level of sales of the products and on the arrangements governing those alliances. We describe our principal alliances below under Financial Presentation of Alliances. When we sell products through licensees, we receive royalty income that we record as a reduction in our cost of goods sold, as discussed further below.
Cost of Goods Sold. Our cost of goods sold consists primarily of the cost of purchasing active ingredients and raw materials, labor and other costs relating to our manufacturing activities, packaging materials and distribution costs, as well as government charges that we are required to pay in some countries.
Our cost of goods sold also includes our net royalties relating to license agreements for products. We have license agreements under which we distribute products that are patented by other companies and license agreements under which other companies distribute products that we have patented. When we pay royalties, we record them in cost of goods sold, and when we receive royalties, we record them as reductions in our cost of goods sold.
Operating Profit. Our operating profit consists of gross profit less research and development costs, selling and general expenses and items that we record as other operating income/(expense), net. We expense all of our research and development costs as incurred. Our other operating income/(expense), net relates primarily to profit sharing arrangements with partners under joint ventures and alliance agreements for the commercialization of products. The effects of these profit sharing arrangements are reflected in operating profit. See Financial Presentation of Alliances below for a description of these arrangements. Amortization and depreciation of intangible assets is presented below operating income in our consolidated financial statements.
Treatment of Milestone Payments Under Licensing Agreements
When we enter into a licensing agreement with respect to products under development, we frequently pay the patent owner an up-front payment and/or payments for reaching certain development milestones. If the product has not yet received regulatory approval, we record these payments as additions to our research and development expenses. If the product has already received regulatory approval or the payment is made upon receipt of regulatory approval, we record the payment as an addition to our intangible assets, which is amortized over the shorter of the useful life of the product and the duration of the relevant license.
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Presentation of Net Sales
In the discussion below, we present our net sales for each period, and we break down our net sales among various categories, such as by therapeutic class, product and geographical area. We refer to our historical sales as reported sales. In addition to reported sales, we also present and discuss two other non-GAAP indicators that we believe are useful measurement tools to explain changes in our reported net sales:
| Comparable Sales. When we refer to the change in our net sales on a comparable basis, we mean that we exclude the impact of exchange rate fluctuations and changes in our group structure (due to acquisitions and divestitures of entities, rights to products as well as changes in the consolidation percentage for consolidated entities). For any two periods, we exclude the impact of exchange rates by recalculating net sales for the earlier period on the basis of exchange rates used in the later period. We exclude the impact of acquisitions by including sales for a portion of the prior period equal to the portion of the current period during which we owned the entity or product rights based on sales information we receive from the party from whom we make the acquisition. Similarly, we exclude sales in the relevant portion of the prior period when we have sold an entity or rights to a product. For a change in the consolidation percentage of a consolidated entity, the prior period is recalculated on the basis of the consolidation method used for the current period. |
A reconciliation of our reported sales to our comparable sales is provided below in the results of operations sections for each year-on-year comparison.
| Developed Sales. When we refer to developed sales of a product, we mean consolidated sales worldwide, excluding sales of products to our alliance partners, but including those that are made through our alliances but that are not included in our consolidated net sales (as described under Financial Presentation of Alliances below). Our alliance partners provide us information regarding their sales in order to allow us to calculate developed sales. We believe that developed sales are a useful measurement tool because they demonstrate trends in the overall presence of our products in the market. |
A reconciliation of our developed sales to our consolidated net sales is provided below in the results of operations sections for each year-on-year comparison.
Impact of Exchange Rates
We report our consolidated financial statements in euros. Because we earn a significant portion of our revenues in countries where the euro is not the local currency, our results of operations can be significantly impacted by exchange rate movements between the euro and other currencies, primarily the U.S. dollar and, to a lesser extent, Latin American, Asian and other European currencies. We experience these effects even though certain of these countries do not account for a large portion of our net sales. In 2003, we earned 23.8% of our revenues in the United States. A decrease in the value of the U.S. dollar against the euro, like that experienced during 2003, has a negative impact on our revenues, which is not offset by an equal reduction in our costs and therefore negatively impacts our operating profits. A decrease in the value of the U.S. dollar has a particularly significant impact on our operating margins, which are higher in the United States than elsewhere due mainly to the fact that we record operating profit, but only limited consolidated net sales, from sales of Plavix® and Aprovel® in the United States by alliance entities under the operational management of BMS.
As a general policy, we do not specifically hedge foreign currency net investments, but rather engage in various foreign currency transactions to reduce our exposure to the risks arising from fluctuations in exchange rates and to protect our operating margins. Hedging instruments relate to assets and liabilities existing at the balance sheet date and, in some cases, to commitments related to future transactions as determined in our annual forecast process.
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Financial Presentation of Alliances
Our revenues, expenses and operating profits are affected significantly by the presentation of our alliances in our consolidated financial statements. We have a major alliance with Bristol-Myers Squibb that covers two of our four leading products, Aprovel® and Plavix®. Additionally, until January 2004, we had a major alliance with Organon (a subsidiary of Akzo Nobel) for the development and marketing of Arixtra®. We also have an alliance for Stilnox®, one of our four leading products, in Japan and we had an alliance for Stilnox® in the United States until April 2002.
The Bristol-Myers Squibb Alliance
The two products that are subject to the Bristol-Myers Squibb alliance, Aprovel® and Plavix®, accounted for an aggregate of 1,128 million of consolidated net sales in 2001, 1,549 million of consolidated net sales in 2002 and 2,008 million of consolidated net sales in 2003. Total developed sales of the two products amounted to an aggregate of 2,957 million in 2001, 3,655 million in 2002 and 4,480 million in 2003.
The proportion of developed sales of these products represented by our consolidated revenues from these products varies from year to year because differences in the marketing arrangements for these products from country to country impact the presentation of sales of these products. There are three principal marketing arrangements that are used:
| Co-marketing. Under the co-marketing system, each company markets the products independently under its own brand names. We record our own sales and related costs in our consolidated financial statements. |
| Exclusive Marketing. Under the exclusive marketing system, one company has the exclusive right to market the products. We record our own sales and related costs in our consolidated financial statements. |
| Co-promotion. Under the co-promotion system, the products are marketed through the alliance arrangements (either by contractual arrangements or by separate entities) under a single brand name. The accounting treatment of the co-promotion arrangement depends upon who has majority ownership and operational management in that territory, as discussed below. |
The alliance arrangements include two royalty streams that are applied on a worldwide basis (excluding Japan), regardless of the marketing system and regardless of which company has majority ownership and operational management:
| Discovery Royalty. We earn a discovery royalty on all sales of Aprovel® and Plavix® regardless of the marketing system. The discovery royalty is reflected in our consolidated statement of income in our gross profit, which results in an increase in our gross margin. |
| Development Royalty. In addition to the discovery royalty, we and BMS are each entitled to a development royalty related to certain know-how and other intellectual property in connection with sales of Aprovel® and Plavix®. Each legal entity that markets products pays a development royalty. We record development royalties paid to BMS in our consolidated statement of income as an increase to our cost of goods sold in countries where we consolidate sales of the products. We record development royalties that we receive as a reduction to our cost of goods sold in countries where BMS consolidates sales of the products. |
In 2003, we received an aggregate of 501 million in royalties under the alliance arrangements, and we paid BMS an aggregate of 51 million in royalties under the alliance arrangements.
Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of
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Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world excluding Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals, and Plavix® is under development through an alliance between our company and Daiichi Pharmaceuticals Co., Ltd.
Territory under our operational management. In the territory under our operational management, the marketing arrangements are as follows:
| We use the co-promotion system for most of the countries of Western Europe for Aprovel® and Plavix® and for certain Asian countries for Plavix®. We record 100% of all alliance revenues and expenses in our consolidated financial statements. We also record, as selling and general expenses, payments to BMS for the cost of BMSs personnel involved in the promotion of the products. BMSs share of the operating profit of the alliances is recorded as other operating income/(expense), net and thus is deducted from our operating profit. |
| We use the co-marketing system in Germany, Spain and Greece for both Aprovel® and Plavix® and in Italy for Aprovel®. |
| We have the exclusive right to market Aprovel® and Plavix® in Eastern Europe, Africa and the Middle East, and we have the exclusive right to market Aprovel® in Asia (excluding Japan). |
Territory under BMS operational management. In the territory under BMS operational management, the marketing arrangements are as follows:
| We use the co-promotion system in the United States and Canada, where the products are sold through the alliances under the operational management of BMS. There are different arrangements applicable to each of the two products in these countries: |
| Aprovel®. With respect to Avapro® (the brand name used in the United States for Aprovel®), in October 2001, we entered into an agreement to increase our participation in the promotional activities and profitability of Aprovel® in the United States and we have made payments to BMS totalling $350 million under this agreement. We do not expect to make any further payments to BMS. In addition to our profit share recorded under other operating income/(expense), net, we also receive payments from BMS for the cost incurred for our personnel in connection with the promotion of the product (which are deducted from our consolidated selling and general expenses). |
| Plavix®. With respect to Plavix®, we record our share of the alliances operating profit under other operating income/(expense), net, with the result that our operating profit is increased by this amount. We also record payments from BMS for the cost of our personnel in connection with the promotion of the product as a deduction from our selling and general expenses. |
| We use the co-marketing system in Brazil, Mexico, Argentina and Australia for Plavix® and Aprovel® and in Colombia for Plavix®. |
| We have the exclusive right to market the products in certain other countries of Latin America. |
In countries where the products are marketed by BMS on a co-marketing basis, or through alliances under the operational management of BMS, we also earn revenues from the sale of the active ingredients for the products, which we record as sales in our consolidated statement of income.
In March 2002, BMS began a program to reduce excess wholesaler inventories with respect to certain of the products that it markets, including Plavix® and Aprovel®. As a result of the inventory workdown program, sales
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of these products in the United States were adversely affected in 2002, and as a consequence the amount we report as developed sales, and our share of the operating profit of the alliance entities that market these products in the United States, were adversely affected in 2002. The impact of the inventory workdown program in 2002 is detailed under Results of Operations Year ended December 31, 2002 compared with year ended December 31, 2001. The impact of the inventory workdown program on U.S. sales of Plavix® and Aprovel® ended after the first quarter of 2003, explaining a part of the growth of our operating profits in 2003 compared to 2002.
The Arixtra® Alliance with Organon
Through January 2004, we had an alliance with Organon covering the development, manufacturing and commercialization of Arixtra® on a worldwide basis. We launched Arixtra® in the United States in February 2002 and began rolling it out in Europe in the second half of 2002. The treatment of the alliance varied by geographical region, as follows:
| North America. In the United States, Mexico and Canada, Arixtra® was sold by entities that we jointly controlled with Organon. We consolidated the sales and related expenses of Arixtra® using the proportional consolidation method based upon our 50.0% ownership interest in the alliance. |
| Europe and Other Countries (excluding Japan). We had the exclusive right to market and sell Arixtra®, and included 100% of our sales in these countries in our consolidated net sales. We paid a royalty to Organon based on sales of Arixtra®, which is recorded as cost of goods sold. |
In January 2004, we agreed to acquire all of Organons interests relating to Arixtra® that were the subject of this joint venture, as well as Organons interests relating to idraparinux sodium and other oligosaccharides. We now have full rights to market Arixtra® and other products worldwide and will make royalty payments to Organon based on future sales, under a licensing arrangement. We have launched the process of selling our interests in Arixtra® in order to respond to possible demands of competition authorities in connection with our proposed acquisition of Aventis.
Stilnox® Marketing Arrangements
The impact on our financial results of sales of Stilnox® has been significantly impacted by the treatment of two marketing arrangements for the product, one of which is in Japan and the other of which was in the United States until we acquired our partners interest in the arrangement in April 2002. In 2001, 2002 and 2003, we recorded consolidated sales of Stilnox® of 786 million, 1,424 million and 1,345 million, respectively, compared to total developed sales of the product of 1,215 million, 1,455 million and 1,381 million, respectively.
In Japan, we market Stilnox® (under the brand name Myslee®) through a joint venture with Fujisawa. Until the end of 2001, we fully consolidated the joint venture. Beginning in 2002, we recorded our 51% interest in the joint venture on the basis of the proportional consolidation method, pursuant to which we included our share of the revenues and expenses of the joint venture in the appropriate line items of our consolidated financial statements. The change occurred because we modified our contract with Fujisawa, as a result of which we no longer have exclusive control of the joint venture.
In the United States, until April 16, 2002 we marketed Stilnox® (as well as Kerlone®) through Lorex Pharmaceuticals, a joint venture with Pharmacia. On April 16, 2002 we purchased Pharmacias interest in Lorex Pharmaceuticals for 670 million. In December 2001 we signed an agreement with Pharmacia giving us exclusive control over Lorex Pharmaceuticals. As a result, we fully consolidated Lorex Pharmaceuticals beginning as of December 31, 2001, and we recorded Pharmacias share of the net income of Lorex Pharmaceuticals from January 1, 2002 through April 15, 2002 as a minority interest.
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In 2001, we recorded our 49% interest in Lorex Pharmaceuticals on the basis of the proportional consolidation method. However, while our ownership in Lorex Pharmaceuticals was 49%, our entitlement to the operating profit of Lorex Pharmaceuticals was 47% in 2001. We recorded the difference between our proportionately consolidated revenues and operating expenses and our actual financial interest in the operating profits of the joint venture under other operating income/(expense), net. We also recorded royalties that we received from Lorex Pharmaceuticals as a deduction from our cost of sales.
Divestitures
In 2001, we sold our custom chemicals subsidiary, Sylachim (effective for accounting purposes as of January 1, 2001), our two medical equipment businesses, Porgès (effective as of January 1, 2001) and Ela Medical (effective as of May 1, 2001), and our direct shareholding in Laboratoires de Biologies Végétale Yves Rocher (effective as of December 18, 2001). Total proceeds from these divestitures, excluding the repayment of inter-company loans, were 588 million.
In 2001, the contribution to our consolidated net sales of Ela Medical was 39 million, or less than 1% of our consolidated net sales of 6,488 million for the same period. The direct shareholding in Laboratoires de Biologie Végétale Yves Rocher was classified as an investment in a non-consolidated company.
Acquisitions
We did not make any significant acquisitions during 2003. On January 26, 2004, we announced our intention to acquire all of the outstanding shares of Aventis. This proposed acquisition is described in more detail under Item 8 Financial Information Significant Changes.
Recent Developments
The most significant recent development that could impact our results of operations and financial condition is our proposed acquisition of Aventis. In addition, we have initiated the process of divesting our interests in Arixtra® and Fraxiparine®. See Item 8 Financial Information Significant Changes.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Developed Sales
Developed sales of our products were 10,560 million in 2003, representing a 10.2% increase over 2002. On a comparable basis, developed sales increased by 20.4% between 2002 and 2003. Plavix® and Aprovel® had combined developed sales of 4,480 in 2003, a 22.6% increase over 2002, or 36.2% on a comparable basis. Sales of these two products accounted for 42.4% of total developed sales of our products, compared to 38.1% in 2002. Developed sales in 2002 were impacted by Bristol-Myers Squibbs program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States.
The following table reconciles our developed sales and our consolidated net sales for the year ended December 31, 2003:
2003 | ||
(in millions of ) | ||
Total Consolidated Net Sales |
8,408 | |
Plavix® non-consolidated sales less product sales to Bristol-Myers Squibb |
1,900 | |
Aprovel® non-consolidated sales less product sales to Bristol-Myers Squibb |
572 | |
Stilnox® non-consolidated sales less product sales to Fujisawa |
36 | |
Arixtra® non-consolidated sales |
5 | |
Total Developed Sales |
10,560 | |
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The following table sets forth developed sales of Plavix® and Aprovel® in 2002 and 2003, broken down into our three geographic markets:
Year Ended December 31, |
% change |
|||||||||||
2002 Reported |
2002 Comparable |
2003 Reported |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Plavix®/Iscover® |
||||||||||||
Europe(1) |
770 | 766 | 1,056 | 37.1 | % | 37.9 | % | |||||
United States |
1,565 | 1,318 | 1,817 | 16.1 | % | 37.9 | % | |||||
Other Countries(1) |
252 | 221 | 352 | 39.7 | % | 59.3 | % | |||||
2,587 | 2,305 | 3,225 | 24.7 | % | 39.9 | % | ||||||
Aprovel®/Avapro®/Karvea® |
||||||||||||
Europe(1) |
515 | 513 | 634 | 23.1 | % | 23.6 | % | |||||
United States |
373 | 313 | 407 | 9.1 | % | 30.0 | % | |||||
Other Countries(1) |
180 | 158 | 214 | 18.9 | % | 35.4 | % | |||||
1,068 | 984 | 1,255 | 17.5 | % | 27.5 | % | ||||||
Total two products |
3,655 | 3,289 | 4,480 | 22.6 | % | 36.2 | % | |||||
Total developed sales |
9,585 | 8,768 | 10,560 | 10.2 | % | 20.4 | % | |||||
(1) | In 2003, we included Slovenia under Europe whereas in previous years, these sales were included under Other Countries. For comparison purposes, we have restated the 2002 figures to take into account this reallocation. |
Developed sales of Plavix® were 3,225 million in 2003, a 24.7% increase over developed sales of 2,587 million in 2002. In the United States, developed sales of Plavix® reached 1,817 million, an increase of 16.1%, or 37.9% on a comparable basis, adjusting for the impact of the weak dollar. Plavix® sales in the United States, which are included in the developed sales totals but are not reflected in our consolidated net sales, saw an increase in overall U.S. demand for Plavix® in 2003, with overall prescription volume increasing by 26.8% from 2002 to 2003 (based on IMS retail, mail order and long-term care data). Additionally, we estimate that Plavix® inventory levels were at approximately 1 month at the end of December 2003 following the end of the BMS wholesaler inventory workdown program. In addition, prices increased for the product in the United States. In Europe and in the Other Countries, developed sales of Plavix® increased by 37.1% and 39.7%, respectively, in 2003 compared to 2002.
Developed sales of Aprovel® were 1,255 million in 2003, a 17.5% increase over developed sales of 1,068 million in 2002. In the United States, developed sales of Aprovel® reached 407 million, an increase of 9.1%, or 30.0% on a comparable basis, adjusting for the impact of the weak dollar. As with Plavix®, U.S. sales of Aprovel® are not included in our consolidated net sales, although they are included in developed sales. During 2003, overall U.S. demand for Aprovel® was up, with a 14.9% increase in overall prescription volume from 2002 to 2003 (based on IMS retail, mail order and long-term care data). Favorable price movements in the United States also had a positive effect. Additionally, we estimate that Aprovel® inventory levels were at approximately 1 month at the end of December 2003 following the end of the BMS wholesaler inventory workdown program. In Europe and in the Other Countries, developed sales of Aprovel® increased by 23.1% and 18.9%, respectively, in 2003 compared to 2002.
Net Sales
We had total consolidated net sales of 8,048 million in 2003, an increase of 8.1% over net sales of 7,448 in 2002, or an increase of 15.6% on a comparable basis. Our net sales were negatively impacted by 7.2 percentage points due to currency effects, 4.0 percentage points of which was attributable to the weakness of the U.S. dollar compared to the euro, with the remainder due to the decrease in value of certain Latin American,
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Asian and other European currencies. Changes in the scope of consolidation had a negative impact of 0.3 percentage points, mostly attributable to the change in consolidation method to proportional consolidation (51%) for our joint venture with Fujisawa in Taiwan in May 2002.
The following table sets forth a reconciliation between our reported sales for the year ended December 31, 2002 and our comparable sales for that year based on 2003 exchange rates and group structure:
Year Ended December 31, 2002 |
|||
(in millions of ) | |||
Reported |
7,448 | ||
Impact of change of group structure |
(24 | ) | |
Impact of exchange rate fluctuation |
(460 | ) | |
Comparable |
6,964 | ||
Markets. We divide our sales into three markets: Europe, the United States and Other Countries. The following table breaks down our 2002 and 2003 consolidated net sales by market.
Year Ended December 31, |
% change |
|||||||||||
2002 Reported |
2002 Comparable |
2003 Reported |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Europe |
||||||||||||
France(1) |
1,584 | 1,580 | 1,646 | 3.9 | % | 4.2 | % | |||||
Germany |
634 | 630 | 667 | 5.2 | % | 5.9 | % | |||||
Italy |
444 | 443 | 478 | 7.7 | % | 7.9 | % | |||||
Other(2) |
1,642 | 1,596 | 1,902 | 15.8 | % | 19.2 | % | |||||
Total Europe(2) |
4,304 | 4,249 | 4,693 | 9.0 | % | 10.4 | % | |||||
United States |
1,689 | 1,439 | 1,912 | 13.2 | % | 32.9 | % | |||||
Other Countries(2) |
1,455 | 1,276 | 1,443 | (0.8 | %) | 13.1 | % | |||||
Total net sales |
7,448 | 6,964 | 8,048 | 8.1 | % | 15.6 | % | |||||
(1) | Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana). |
(2) | In 2003, we included Slovenia under Europe whereas in previous years, these sales were included under Other Countries. For comparison purposes, we have restated the 2002 figures to take into account this reallocation. |
In Europe, we had consolidated net sales of 4,693 million, representing an increase of 9.0% on a reported basis (or 10.4% on a comparable basis). This growth was achieved despite health-care cost containment measures enacted during 2003 in France and Germany, our two biggest European markets. Europe represented 58.3% of our total consolidated net sales in 2003 compared to 57.8% in 2002.
In the United States, our consolidated net sales reached 1,912 million, representing an increase of 13.2% on a reported basis, or 32.9% on a comparable basis. The difference between reported and comparable sales growth is principally due to the weakness of the U.S. dollar compared to the euro. Growth in the United States was principally driven by the success of Eloxatin®, which had U.S. net sales of 460 million in 2003, more than quadruple 2002 U.S. net sales on a comparable basis and a 296.6% increase on a reported basis. In addition, U.S. sales of Stilnox® increased to 1,124 million in 2003, representing a decrease of 7.0% compared to 2002 on a reported basis (or growth of 10.6% on a comparable basis). The increase in U.S. sales of Stilnox® on a comparable basis was achieved despite a significant reduction in inventory levels compared to the end of 2002. The United States represented 23.8% of our total consolidated net sales in 2003 compared to 22.7% in 2002.
In the other countries, our consolidated net sales reached 1,443 million, representing a slight decrease of 0.8% on a reported basis, but an increase of 13.1% on a comparable basis. The principal reason for the difference
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between reported and comparable growth is due to the weakness of certain Latin American and Asian currencies compared to the euro, as well as the change from full consolidation to proportional consolidation (51%) of our joint venture with Fujisawa in Taiwan. The other countries represented 17.9% of our total consolidated net sales in 2003 compared to 19.5% in 2002.
Products. Our ten largest products had 5,420 million in total consolidated net sales in 2003, representing an increase of 18.5% over 2002. Sales of our top ten products represented approximately 67.3% of our total consolidated net sales in 2003, compared to 61.4% in 2002.
The main reason for this growth was the strong performance of our four leading products, Plavix®, Aprovel®, Stilnox® and Eloxatin®, which together had total net sales of 4,177 million, an increase of 24.2% over 2002 on a reported basis, or 34.9% on a comparable basis. Sales of our four leading products represented 51.9% of our total consolidated net sales compared to 45.1% in 2002.
The following table breaks down our consolidated net sales by product.
Year ended December 31, |
% change |
|||||||||||||
2002 Reported |
2002 Comparable |
2003 Reported |
Reported |
Comparable |
||||||||||
( in millions) | ||||||||||||||
Product |
Therapeutic Area | |||||||||||||
Stilnox® |
Central Nervous System | 1,424 | 1,218 | 1,345 | (5.5 | %) | 10.4 | % | ||||||
Plavix® |
Cardiovascular/Thrombosis | 987 | 964 | 1,325 | 34.2 | % | 37.4 | % | ||||||
Eloxatin® |
Oncology | 389 | 365 | 824 | 111.8 | % | 125.8 | % | ||||||
Aprovel® |
Cardiovascular/Thrombosis | 562 | 549 | 683 | 21.5 | % | 24.4 | % | ||||||
Fraxiparine® |
Cardiovascular/Thrombosis | 324 | 314 | 319 | (1.5 | %) | 1.6 | % | ||||||
Depakine® |
Central Nervous System | 267 | 258 | 277 | 3.7 | % | 7.4 | % | ||||||
Xatral® |
Internal Medicine | 182 | 178 | 222 | 22.0 | % | 24.7 | % | ||||||
Cordarone® |
Cardiovascular/Thrombosis | 162 | 154 | 146 | (9.9 | %) | (5.2 | %) | ||||||
Solian® |
Central Nervous System | 135 | 133 | 148 | 9.6 | % | 11.3 | % | ||||||
Tildiem® |
Cardiovascular/Thrombosis | 141 | 138 | 131 | (7.1 | %) | (5.1 | %) | ||||||
Total of top 10 Products |
4,572 | 4,271 | 5,420 | 18.5 | % | 26.9 | % | |||||||
Others |
2,876 | 2,693 | 2,628 | (8.6 | %) | (2.4 | %) | |||||||
Total consolidated net sales |
7,448 | 6,964 | 8.048 | 8.1 | % | 15.6 | % | |||||||
Stilnox® was our largest product in terms of consolidated net sales. The difference between the 10.4% increase in sales of Stilnox® on a comparable basis and the 5.5% decline on a reported basis is due to the weakness of the dollar, as we realize a majority of Stilnox® sales in the United States (marketed under the brand name Ambien®). The growth in Stilnox® sales on a comparable basis included a reduction in inventory levels in the United States equivalent to an estimated 0.8 months sales. In Japan, consolidated sales of Stilnox® (where it is marketed under the brand name Myslee®) reached 49 million, an increase of 16.7% on a reported basis and 28.9% on a comparable basis, making it the market leader in its therapeutic class in the Japanese market just three years after its launch (IMS data).
Consolidated net sales of Plavix® were 1,325 million in 2003, an increase of 34.2% over 2002. The continued strong level of growth in Plavix® since its launch in 1998 comes from both Europe, where it was approved for health-care reimbursement in both Italy and Portugal in 2003, and the other countries. The difference between reported growth and comparable growth was relatively small, as U.S. sales are limited to sales of active ingredients to the alliance entities under the operational management of BMS.
65
Consolidated net sales of Aprovel® were 683 million in 2003, an increase of 21.5% over 2002. Much of the growth was realized in Europe where Aprovel®, in terms of sales, became the second product in its class, angiotensin II receptor antagonists, in Europe and first in France, Belgium, Greece and Switzerland (according to IMS data).
Consolidated net sales of Eloxatin® were 824 million in 2003, an increase of 111.8% over 2002. This is principally a result of the strong growth in the U.S. market since its launch on August 30, 2002, with U.S. sales of 460 million in 2003. Outside the United States, Eloxatin® grew by 37.4% in Europe and 14.5% in the other countries.
Consolidated net sales of Arixtra® reached 19 million, principally due to the limited nature of its currently approved indication. Our efforts to increase its approved indications are continuing as planned, and the approval of Arixtra® in the prevention of deep vein thrombosis after orthopedic surgery was obtained in both the United States and Europe in 2003.
Consolidated net sales of Xatral® increased by 22.0%, as sales of the product were boosted by the continued success of the once-a-day formulation that was gradually launched in various countries in Europe in 2002.
Among our other top 10 products, we recorded strong growth in sales of Solian®, while sales of Tildiem® and Cordarone® declined due to generic competition. Sales of Fraxiparine® were relatively flat.
Consolidated net sales of other products in our product portfolio decreased by 8.6% to 2,628 million in 2003, although they remained essentially stable on a comparable basis, declining by only 2.4%. The main reason for the difference between reported and comparable sales is due to currency effects. Excluding sales of Corotrope®, which declined by 71.7% in 2003 due to the introduction of generics in the U.S. market in May 2002 following expiration of its patent, and Ticlid®, which declined by 37.2% as it is gradually replaced with Plavix®, the remaining products in our portfolio have slight growth of 2.2% in 2003 on a comparable basis (on a reported basis, they declined by 4.1% in 2003).
Therapeutic Areas.
The following table breaks down our consolidated net sales by therapeutic area:
Year Ended December 31, |
% change |
|||||||||||
2002 Reported |
2002 Comparable |
2003 Reported |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Therapeutic area: |
||||||||||||
Cardiovascular/Thrombosis |
2,904 | 2,800 | 3,169 | 9.1 | % | 13.2 | % | |||||
Central Nervous System |
2,409 | 2,162 | 2,319 | (3.7 | %) | 7.3 | % | |||||
Internal Medicine |
1,427 | 1,341 | 1,412 | (1.1 | %) | 5.3 | % | |||||
Oncology |
404 | 378 | 871 | 115.6 | % | 130.4 | % | |||||
Total |
7,144 | 6,681 | 7,771 | |||||||||
Other |
304 | 283 | 277 | (8.9 | %) | (2.1 | %) | |||||
Total consolidated net sales |
7,448 | 6,964 | 8,048 | 8.1 | % | 15.6 | % | |||||
Cardiovascular/Thrombosis sales were 3,169 million in 2003, representing approximately 39.4% of our total consolidated net sales. The sales growth in this category reflects primarily the increase in sales of Plavix® and Aprovel®, which offset the decline in sales of Ticlid® and Corotrope®.
Central Nervous System sales were 2,319 million in 2003, representing approximately 28.8% of our total consolidated net sales. The main reason for the difference between reported and comparable sales in this category is the impact of the weakness of the dollar compared to the euro on the sales of Stilnox® in the United States.
66
Internal Medicine sales were 1,412 million in 2003, accounting for approximately 17.5% of our total consolidated net sales. The main reason for the difference between reported and comparable sales in this category is currency effects.
Oncology sales were 871 million in 2003, representing approximately 10.8% of our total consolidated net sales. The robust growth in this category was mainly due to net sales of Eloxatin®, which more than doubled in 2003.
Other sales were 277 million in 2003, a decrease of 8.9% on a reported basis, or 2.1% on a comparable basis. The main reason for the difference is currency effects.
Gross Profit
Our gross profit was 6,620 million in 2003, an increase of 9.1% compared to 2002, and represented 82.3% of our total consolidated net sales in 2003, compared to 81.5% in 2002, which itself represented an 0.8 percentage point increase over 2001. Using 2002 exchange rates, our gross margin would have been 83.5% in 2003.
This improvement in our gross margin is mainly due to improvements in our productivity and overall product mix, which we estimate accounted for a 0.9 percentage point increase, as well as increased royalty payments on sales of Plavix® and Aprovel®, which we estimate accounted for a 0.3 percentage points increase. These gains were partially offset by the significant increase in the required contribution to be paid by pharmaceutical companies as part of healthcare reforms in Europe, notably in Germany, which we estimated accounted for a loss of 0.4 percentage points.
Operating Profit
Our operating profit was 3,075 million in 2003, representing a 17.6% increase compared to our operating profit in 2002 of 2,614 million. The weak U.S. dollar exchange rate against the euro had a negative impact on our operating profit, which would have increased by 34.4% over 2002 if exchange rates had remained constant. If net income arising from our hedging activities had been recognized at the operating level (rather than as financial income), operating profit would have increased by 19.4%.
Operating profit in 2003 represented 38.2% of consolidated net sales, while in 2002 operating profit was 35.1% of consolidated net sales. This improvement in our operating margins was driven principally by:
| continued strong sales of our top 10 products, including rapid growth of Eloxatin® and strong growth of Plavix® and Aprovel®; and |
| an overall increase in the productivity of our sales force. |
The following table breaks down our operating profit for 2002 and 2003 among its principal components.
Year ended December 31 |
||||||||||||
2002 |
2003 |
|||||||||||
Amount |
% of Sales |
Amount |
% of Sales |
|||||||||
( in millions) | ||||||||||||
Net sales |
7,448 | 100.0 | % | 8,048 | 100.0 | % | ||||||
Cost of goods sold |
(1,378 | ) | (18.5 | %) | (1,428 | ) | (17.7 | %) | ||||
Gross profit |
6,070 | 81.5 | % | 6,620 | 82.3 | % | ||||||
Research and development expenses |
(1,218 | ) | (16.4 | %) | (1,316 | ) | (16.4 | %) | ||||
Selling and general expenses |
(2,428 | ) | (32.6 | %) | (2,477 | ) | (30.8 | %) | ||||
Other operating income/(expense), net |
190 | 2.6 | % | 248 | 3.1 | % | ||||||
Operating profit |
2,614 | 35.1 | % | 3,075 | 38.2 | % | ||||||
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Research and development expenses increased to 1,316 million in 2003, representing 16.4% of our total consolidated net sales, and an 8.0% increase over 2002. Using 2002 exchange rates, the increase in our research and development expenses would have been 14.7%. The increase in spending was principally due to clinical trials that are underway both for new indications for products that are already on the market, such as Plavix®, Aprovel®, Eloxatin®, Xatral® and Arixtra®, as well as for new products in development, such as rimonabant, dronedarone, idraparinux sodium, xaliprodene and tirapazamine, and the new sustained release formulation of Stilnox®, zolpidem MR, among others.
Selling and general expenses were 2,477 million in 2003, representing 30.8% of our total consolidated net sales, and a 2.0% increase over 2002. Using 2002 exchange rates, our selling and general expenses would have increased by 9.2%. The increase is principally the result of our continued efforts to improve our commercial and marketing efforts in all of our geographic markets, which included:
| the incurrence of significant costs relating to establishing the U.S. in connection with the launch of Xatral® in the United States in November 2003 (where it is marketed under the name UroXatral®); and |
| ongoing investments in our European marketing efforts. |
Our other operating income/(expense), net was 248 million (or 3.1% of our net sales) in 2003, a 30.5% increase over 190 million in 2002. Using 2002 exchange rates, our other operating income would have increased by 71.1%. As discussed above, this item reflects operating profits of our alliances to which we are entitled or to which our partners are entitled, and is tied to an alliance with BMS. In 2003, our profit share from sales of Plavix® and Aprovel® by our alliance entity under the operational management of BMS, mainly in North America, were 436 million, compared to 348 million in 2002, with the increase reflecting in part the end of the BMS inventory workdown program. We paid to BMS profit shares from sales of these products under our operational management of 173 million in 2003, compared to 142 million in 2002.
The following table breaks down our 2002 and 2003 operating profit by geographical market.
Year Ended December 31, |
|||||||||
2002 |
2003 |
% change |
|||||||
( in millions) | |||||||||
Europe |
1,633 | 1,874 | 14.8 | % | |||||
United States |
1,781 | 2,025 | 13.7 | % | |||||
Other Countries |
522 | 561 | 7.5 | % | |||||
Unallocated costs(1) |
(1,322 | ) | (1,385 | ) | 4.8 | % | |||
Total operating profit |
2,614 | 3,075 | 17.6 | % | |||||
(1) | Unallocated costs consists mainly of a portion of our research and development expenses and of our corporate expenses. |
We experienced growth in our operating profit in all three of our geographical segments, although growth in the United States was negatively impacted by the weakness of the dollar compared to the euro. Despite this unfavorable currency effect, the United States still accounted for 45.4% of our operating profit excluding unallocated costs compared to 45.2% in 2002. The increase in the United States was due principally to rapid growth in sales of Eloxatin®, sales of Stilnox® and an increase in operating profit from Plavix® and Aprovel®.
Unallocated costs increased by 4.8% in 2003 over 2002 principally as a result of the increase in our research and development expenses.
Amortization and Impairment of Intangibles
Our amortization and impairment of intangibles remained stable at 129 million in 2003, the same amount as in 2002. The increase in amortization due to the repurchase of full rights to Lorex Pharmaceuticals joint venture from Pharmacia in April 2002 was offset by the weakness of the dollar compared to the euro.
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Net Financial Income/(Expense)
Net financial income/(expense) increased from 85 million in 2002 to 155 million in 2003. This increase is principally due to a net foreign exchange gain of 103 million (compared to only 48 million in 2002) and by the reversal of a 2 million impairment provision against treasury shares held in connection with our stock option plans (compared to an increase of 46 million in the provision in 2002). These gains were only partially offset by a reduction in our invested cash position due to the share buyback program initiated in 2002, coupled with lower interest rates (which decreased on the average by 1 percentage point).
Exceptional Income
Exceptional income increased from 10 million in 2002 to 24 million in 2003. This increase is principally due to an additional payment received from the purchaser in connection with our divestiture of Sylachim in 2001.
Income Taxes
Income taxes increased by 312 million, from 746 million in 2002 to 1,058 million in 2003. Our effective tax rate was 33.9% in 2003 compared to 28.9% in 2002. The increase was principally attributable to an increase in consolidated sales in the United States (due to strong sales of our leading products), as well as the establishment of provisions relating to tax audits in certain countries. The increase is also attributable to the fact that our 2002 rate was particularly low due to the release of tax provisions of 53 million and the fact that we consolidated all of the operating profit of the Lorex joint venture, while we paid tax only on our profit share through our acquisition of Pharmacias share in April 2002.
Minority Interests
Income attributable to minority interests was 3 million in 2003 compared to 87 million in 2002. In 2002, income attributable to minority interests represented primarily Pharmacias share of the profits of the Lorex joint venture from January 1, 2002 through April 16, 2002.
Net Income
As a result of the foregoing, our net income increased 18.0% from 1,759 million in 2002 to 2,076 million in 2003. Using 2002 exchange rates, the increase would have been 31.6%. Net income per share in 2003 was 2.95 per share compared to 2.42 per share in 2002, or a 21.9% increase. The difference between the rate of growth in net income and in earnings per share is principally due to the share buyback program initiated in 2002, which decreased the number of outstanding shares.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Developed Sales
Developed sales of our products were 9,585 million in 2002, representing a 9.6% increase over 2001. On a comparable basis, developed sales increased by 14.5% between 2001 and 2002. Two of our four leading products, Plavix® and Aprovel®, had combined developed sales of 3,655 in 2002, a 23.6% increase over 2001, or 28.0% on a comparable basis. Sales of these two products accounted for 38.1% of total developed sales of our products, compared to 33.8% in 2001. Developed sales were impacted by Bristol-Myers Squibbs program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States, beginning in March 2002.
69
The following table reconciles our developed sales and our consolidated net sales for the year ended December 31, 2002:
2002 | ||
(in millions of ) | ||
Total Consolidated Net Sales |
7,448 | |
Plavix® non-consolidated sales less product sales to Bristol-Myers Squibb |
1,600 | |
Aprovel® non-consolidated sales less product sales to Bristol-Myers Squibb |
506 | |
Stilnox® non-consolidated sales less product sales to Fujisawa |
31 | |
Arixtra® non-consolidated sales |
0 | |
Total Developed Sales |
9,585 | |
The following table sets forth developed sales of two of our leading products broken down into our three geographic markets:
Year Ended December 31, |
% change |
|||||||||||
2001 Reported |
2001 Comparable |
2002 Reported(1) |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Plavix®/Iscover® |
||||||||||||
Europe |
520 | 531 | 754 | 45.0 | % | 42.0 | % | |||||
United States |
1,333 | 1,270 | 1,565 | 17.4 | % | 23.2 | % | |||||
Other Countries |
180 | 156 | 268 | 48.9 | % | 71.8 | % | |||||
2,033 | 1,957 | 2,587 | 27.3 | % | 32.2 | % | ||||||
Aprovel®/Avapro®/Karvea® |
||||||||||||
Europe |
388 | 397 | 512 | 32.0 | % | 29.0 | % | |||||
United States |
392 | 374 | 373 | (4.8 | %) | (0.3 | %) | |||||
Other Countries |
144 | 127 | 183 | 27.1 | % | 44.1 | % | |||||
924 | 898 | 1,068 | 15.6 | % | 18.9 | % | ||||||
Total Plavix® and Aprovel® |
2,957 | 2,855 | 3,655 | 23.6 | % | 28.0 | % | |||||
Total developed sales |
8,746 | 8,368 | 9,585 | 9.6 | % | 14.5 | % | |||||
(1) | Reported sales for 2002 are based on the geographical classifications that we used in 2002. As a result, reported figures above do not correspond to the reported figures in the tables comparing sales in 2002 and 2003. |
Developed sales of Plavix® were 2,587 million in 2002, a 27.3% increase over developed sales of 2,033 million in 2001. In the United States, developed sales of Plavix® were 1,565 million, a 17.4% increase over 2001, or 23.2% on a comparable basis, adjusting for the impact of the dollar. Plavix® sales in the United States, which are included in the developed sales totals but are not reflected in our consolidated net sales, were impacted by the BMS inventory workdown program. In addition, sales at the end of 2002 benefited from orders from wholesalers, which anticipated a price increase in early 2003. Overall United States demand for Plavix® increased in 2002 with a 35% increase in overall prescription volume from 2001 to 2002 (based on IMS retail and mail-order data). In addition, prices increased for the product in the United States. In Europe and in Other Countries, developed sales of Plavix® increased by 45.8% in 2002 compared to 2001.
Developed sales of Aprovel® were 1,068 million in 2002, a 15.6% increase over the 2001 figure of 924 million. In the United States, developed sales were 373 million, a decrease of 4.8% compared to 2001, or 0.3% on a comparable basis, adjusting for the impact of the dollar. As with Plavix®, U.S. sales of Aprovel® are not included in our consolidated net sales, although they are included in developed sales. Notwithstanding the decrease in the United States, which was due to the BMS inventory workdown program, overall demand for Aprovel® was up, with a 13% increase in overall prescription volume from 2001 to 2002 (based on IMS retail and mail-order data). Favorable price movements in the United States also had a positive effect. In Europe and in Other Countries, developed sales of Aprovel® increased by 30.6% in 2002 compared to 2001.
70
Net Sales
Our net sales in 2002 were 7,448 million, representing a 14.8% increase compared to net sales of 6,488 million in 2001. On a comparable basis, our net sales increased by 12.8% from 2001 to 2002, after taking into account the impact of changes in the scope of consolidation and currency exchange rate fluctuations.
The following table sets forth a reconciliation between our reported sales for the year ended December 31, 2001 and our comparable sales for that year based on 2002 exchange rates and group structure:
Year Ended December 31, 2001 |
|||
(in millions of ) | |||
Reported |
6,488 | ||
Impact of change of group structure |
252 | ||
Impact of exchange rate fluctuation |
(135 | ) | |
Comparable |
6,605 | ||
Changes in the scope of consolidation, which increased sales by 4.5 percentage points, are principally related to our switch from the proportional consolidation method (49%) to 100% consolidation of the Lorex Pharmaceuticals joint venture (following our acquisition of exclusive control over the joint venture), which was partially offset by the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan, as well as the deconsolidation of Ela Medical beginning in May 2001.
Currency exchange rate fluctuations reduced sales by approximately 2.5 percentage points. The decline of the U.S. dollar against the euro represented 0.8 percentage point of the decrease, 0.5 percentage point was due to the decline of the Japanese yen against the euro and 1 percentage point was due to currency devaluations in Latin America.
Markets. We divide our sales into three markets: Europe, the United States and Other Countries. The following table breaks down our 2001 and 2002 consolidated net sales by market.
Year Ended December 31, |
% change |
|||||||||||
2001 Reported |
2001 Comparable |
2002 Reported(2) |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Europe |
||||||||||||
France(1) |
1,487 | 1,466 | 1,584 | 6.5 | % | 8.0 | % | |||||
Germany |
596 | 592 | 634 | 6.4 | % | 7.1 | % | |||||
Italy |
433 | 428 | 444 | 2.5 | % | 3.7 | % | |||||
Other |
1,361 | 1,357 | 1,635 | 20.1 | % | 20.5 | % | |||||
Total Europe |
3,877 | 3,843 | 4,297 | 10.8 | % | 11.8 | % | |||||
United States |
1,098 | 1,437 | 1,689 | 53.8 | % | 17.5 | % | |||||
Other Countries |
1,513 | 1,325 | 1,462 | (3.4 | %) | 10.3 | % | |||||
Total net sales |
6,488 | 6,605 | 7,448 | 14.8 | % | 12.8 | % | |||||
(1) | Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana). |
(2) | Reported sales for 2002 are based on the geographical classifications that we used in 2002. As a result, reported figures above do not correspond to the reported figures in the tables comparing sales in 2002 and 2003. |
Our 2002 net sales in Europe were 4,297 million, an increase of 10.8% over 2001. The healthy growth in Europe in 2002 was despite the implementation of health-care cost containment measures in Germany and Italy in 2002. Europe represented approximately 57.7% of our total consolidated net sales in 2002, compared to 59.8% in 2001.
71
In Europe, we recorded strong sales growth despite the impact of new cost containment measures implemented by the governments in Germany and Italy. Outside of our three largest countries, France, Germany and Italy, our sales growth was uniformly strong, with the largest growth recorded in Spain, Belgium, Hungary, Greece and Turkey, each of which experienced growth of more than 20%. In Spain, where we recorded 358 million of sales in 2002, growth in sales of Plavix®, Aprovel® and Eloxatin® offset the loss of patent protection for Stilnox®.
In the United States, we had 1,689 million of consolidated net sales in 2002, representing a 53.8% increase over 2001. The difference between reported growth and comparable growth in the United States reflects primarily the inclusion of 100% of the sales of Stilnox® in the United States beginning in 2002. The launch of Eloxatin® in the United States in August 2002 resulted in U.S. sales of the product of 116 million in 2002, helping to offset declining sales of Corotrope® (sold under the brand name Primacor®), which began to face competition from generics in 2002. Our strong reported U.S. sales growth is despite the weakening of the U.S. dollar against the euro. The United States represented approximately 22.7% of our total consolidated net sales in 2002 compared to 16.9% in 2001.
Outside the United States and Europe, we recorded 1,462 million of sales, representing a 3.4% decrease compared to 2001, but a 10.3% increase on a comparable basis. The reason for the difference between reported and comparable sales is mainly due to the switch from 100% consolidation of our joint venture with Fujisawa to 51% proportional consolidation, as well as the weakness of the Japanese yen and certain Latin American currencies. Our growing presence in Asia helped offset the effects of the continued economic crisis in Latin America. The Other Countries represented 19.6% of our total consolidated net sales in 2002, compared to 23.3% in 2001.
Products. Our ten largest products had 4,575 million in total consolidated net sales in 2002, representing an increase of 37.9% over 2001. Sales of our top ten products represented approximately 61.4% of our total consolidated net sales in 2002, compared to approximately 51.1% in 2001.
The main reason for this growth was the strong performance of our four leading products, Plavix®, Aprovel®, Stilnox® and Eloxatin®, which together had total net sales of 3,362 million, an increase of 59.3% over 2001 on a reported basis, or 37.5% on a comparable basis. Sales of our four leading products represented 45.1% of our total consolidated net sales compared to 32.5% in 2001 on a reported basis.
The following table breaks down our consolidated net sales by product.
Year ended December 31, |
% change(1) |
|||||||||||||
2001 Reported |
2001 Comparable |
2002 Reported |
Reported |
Comparable |
||||||||||
( in millions) | ||||||||||||||
Product |
Therapeutic Area | |||||||||||||
Stilnox® |
Central Nervous System | 786 | 1,135 | 1,424 | 81.3 | % | 25.5 | % | ||||||
Plavix® |
Cardiovascular/Thrombosis | 705 | 697 | 987 | 39.8 | % | 41.5 | % | ||||||
Aprovel® |
Cardiovascular/Thrombosis | 423 | 419 | 562 | 32.8 | % | 34.0 | % | ||||||
Eloxatin® |
Oncology | 196 | 194 | 389 | 99.2 | % | 101.3 | % | ||||||
Fraxiparine® |
Cardiovascular/Thrombosis | 297 | 294 | 324 | 8.9 | % | 10.1 | % | ||||||
Depakine® |
Central Nervous System | 243 | 240 | 267 | 9.8 | % | 11.0 | % | ||||||
Xatral® |
Internal Medicine | 148 | 147 | 182 | 23.1 | % | 24.3 | % | ||||||
Cordarone® |
Cardiovascular/Thrombosis | 162 | 157 | 162 | (0.1 | %) | 3.1 | % | ||||||
Tildiem® |
Cardiovascular/Thrombosis | 152 | 151 | 141 | (7.4 | %) | (6.9 | %) | ||||||
Ticlid® |
Cardiovascular/Thrombosis | 205 | 205 | 137 | (33.2 | %) | (33.2 | %) | ||||||
Total of top 10 Products |
3,317 | 3,639 | 4,575 | 37.9 | % | 25.7 | % | |||||||
Others |
3,171 | 2,966 | 2,873 | (9.4 | %) | (3.1 | %) | |||||||
Total consolidated net sales |
6,488 | 6,605 | 7,448 | 14.8 | % | 12.8 | % | |||||||
(1) | These percentages are calculated on the basis of figures that have not been rounded. |
72
Stilnox® was our largest product in terms of consolidated net sales and our second fastest growing product (on a comparable basis it was our fourth fastest growing product). The difference between reported growth of Stilnox® (81.3%) and comparable growth (25.5%) is principally the result of consolidation of 100% of sales of Stilnox® in the United States in connection with our repurchase of Lorex Pharmaceuticals joint venture in 2002.
Consolidated net sales of Plavix® were 987 million in 2002, an increase of 39.8% over 2001. The continued strong level of growth in Plavix® is due to the approval of a new indication in 2002, as the product was approved in Europe and the United States for the treatment of acute coronary syndrome. In addition, Plavix® was included on a list of recommended cardiologic therapies both in Europe and the United States.
Consolidated net sales of Aprovel® were 562 million in 2002, an increase of 32.8% over 2001. Much of the growth was realized in Europe where Aprovel® became the second product in its class, angiotensin II receptor antagonists, in terms of sales (according to IMS data).
Consolidated net sales of Eloxatin® were 389 million, an increase of 99.2% over 2001. This strong growth is principally a result of the launch of Eloxatin® in the U.S. market in August 30, 2002, as well as overall growth in Europe and Other Countries.
Consolidated net sales of Xatral® increased by 23.1%, as sales of the product were boosted by the early success of the once-a-day formulation that was gradually launched in various countries in Europe in 2002.
Among our other top 10 products, we recorded strong growth in sales of Fraxiparine® and Depakine®. Sales of Ticlid® declined due to migration to sales of Plavix®.
Consolidated net sales of other products in our product portfolio decreased by 9.4% to 2,873 million in 2002, although they remained essentially stable on a comparable basis, declining by only 3.1%. The main reason for the difference between reported and comparable sales is the deconsolidation of Ela Medical in May 2001, and the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan.
For our other pharmaceuticals, Corotrope® sales were adversely affected by the expiration of the products patent in the United States. The decline in sales of Dogmatil®, and the difference between recorded and comparable sales of Dogmatil®, resulted from the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan, while the consolidation of sales of Kerlone® in the United States (through the Lorex Pharmaceuticals joint venture) offset the impact of the weakening of the U.S. dollar and the Japanese Yen.
Consolidated net sales of Arixtra® were 9.1 million, due to slower penetration than expected in its narrowly defined initial indication. Our program to enlarge its approved indications is progressing, with the filing at the end of 2002 of an application to approve its use in the long-term preventive treatment of venous thrombo-embolic (or VTE) events following orthopedic surgery.
73
Therapeutic Areas.
The following table breaks down our consolidated net sales by therapeutic area:
Year Ended December 31, |
% change |
|||||||||||
2001 Reported |
2001 Comparable |
2002 Reported |
Reported |
Comparable |
||||||||
( in millions) | ||||||||||||
Therapeutic area: |
||||||||||||
Cardiovascular/Thrombosis |
2,625 | 2,583 | 2,904 | 10.6 | % | 12.4 | % | |||||
Central Nervous System |
1,810 | 2,087 | 2,409 | 33.1 | % | 15.4 | % | |||||
Internal Medicine |
1,465 | 1,399 | 1,427 | (2.6 | %) | 2.0 | % | |||||
Oncology |
208 | 206 | 404 | 94.2 | % | 96.1 | % | |||||
Total |
6,108 | 6,275 | 7,144 | 17.0 | % | 13.8 | % | |||||
Other |
380 | 330 | 304 | (20.0 | %) | (7.9 | %) | |||||
Total consolidated net sales |
6,488 | 6,605 | 7,448 | 14.8 | % | 12.8 | % | |||||
Cardiovascular/Thrombosis sales were 2,904 million in 2002, representing approximately 39.0% of our total consolidated net sales. The sales growth in this category reflects primarily the increase in sales of Plavix® and Aprovel®, which offset the decline in sales of Ticlid® and Corotrope®.
Central Nervous System sales were 2,409 million in 2002, representing approximately 32.3% of our total consolidated net sales. The main reason for the difference between reported and comparable sales in this category is the consolidation of 100% of the sales of Stilnox® in the United States in 2002.
Internal Medicine sales were 1,427 in 2002, accounting for approximately 19.2% of our total consolidated net sales in 2002. The slight decline in sales in this category was principally a result of the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan.
Oncology sales were 404 million in 2002, representing approximately 5.4% of our total consolidated net sales. The robust growth in this category was mainly due to the nearly doubling in sales of Eloxatin® in 2002.
Other sales were 304 million in 2002, a decrease of 20.0% on a reported basis, or 7.9% on a comparable basis. The main reason for the difference is the deconsolidation of Ela Medical in May 2001.
Gross Profit
Our gross profit was 6,070 million in 2002, an increase of 15.9% compared to 2001, and represented 81.5% of our total consolidated net sales in 2002, compared to 80.7% in 2001. Using 2001 exchange rates, our gross margin would have been 82.1% in 2002.
This improvement in our gross margin is mainly due to improvements in our productivity, which we estimate accounted for a 0.6 percentage point increase, as well as strong performance from our top 10 products and overall improvements in our product mix, which also accounted for a 0.6 percentage point increase. These gains were partially offset by reductions in revenues received due to Bristol-Myers Squibbs program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States, which had a negative impact of 0.4 percentage points. The full consolidation of Lorex Pharmaceuticals was offset by the loss of sales of bulk active ingredients to the joint venture, such that it had a neutral effect on our gross margin.
Operating Profit
Our operating profit was 2,614 million in 2002, representing a 24.1% increase compared to our operating profit in 2001 of 2,106 million. The weak U.S. dollar exchange rate against the euro had a negative impact on our operating profit, which would have increased by 30.1% over 2001 if exchange rates had remained constant.
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Operating profit in 2002 represented 35.1% of consolidated net sales, while in 2001 operating profit was 32.5% of consolidated net sales. This improvement in our operating margins was driven principally by the change in consolidation method of the Lorex Pharmaceuticals joint venture, as well as improvements in our overall product mix and productivity, which was partially offset by the negative effects of Bristol-Myers Squibbs program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States.
The following table breaks down our operating profit for 2001 and 2002 among its principal components.
Year ended December 31 |
||||||||||||
2001 |
2002 |
|||||||||||
Amount |
% of Sales |
Amount |
% of Sales |
|||||||||
( in millions) | ||||||||||||
Net sales |
6,488 | 100.0 | % | 7,448 | 100.0 | % | ||||||
Cost of goods sold |
(1,253 | ) | (19.3 | %) | (1,378 | ) | (18.5 | %) | ||||
Gross profit |
5,235 | 80.7 | % | 6,070 | 81.5 | % | ||||||
Research and development expenses |
(1,031 | ) | (15.9 | %) | (1,218 | ) | (16.4 | %) | ||||
Selling and general expenses |
(2,306 | ) | (35.5 | %) | (2,428 | ) | (32.6 | %) | ||||
Other operating income/(expense), net |
208 | 3.2 | % | 190 | 2.6 | % | ||||||
Operating profit |
2,106 | 32.5 | % | 2,614 | 35.1 | % | ||||||
Research and development expenses increased to 1,218 million in 2002, representing 16.4% of our total consolidated net sales, and an 18.1% increase over 2001. Using 2001 exchange rates, the increase in our research and development expenses would have been 20.4%. The increase in spending was principally due to clinical trials that are underway both for new indications for products that are already on the market, such as Plavix®, Arixtra®, Eloxatin® and Xatral®, as well as for new products in development, such as rimonabant, dronedarone, tirapazamine, and the new sustained release formulation of Stilnox®, zolpidem MR. Some of the increase is also attributable to development agreements signed in 2001 and 2002 with IDM and Cephalon, which are described in Item 4 Information on the Company Research and Development.
Selling and general expenses were 2,428 million in 2002, a 5.3% increase from 2,306 million in 2001. Using 2001 exchange rates, our selling and general expenses would have increased by 8.0%. The relatively modest increase is the result of several factors:
| the incurrence in the last quarter of 2001 of significant costs relating to putting in place in the United States the commercial teams necessary to permit us to take over fully the marketing of Stilnox® and to launch Arixtra®; |
| an adjustment in our sales efforts in Latin America as a result of the economic and monetary crisis; |
| increased sales in Europe; and |
| an overall improvement in the productivity of our medical visits in all geographic markets. |
These factors more than offset an increase in marketing expenses that we incurred in order to develop the principal products in our portfolio.
Our other operating income/(expense), net, declined by 8.6% from 208 million (or 3.2% of our net sales) in 2001 to 190 million (or 2.6% of our net sales) in 2002. As discussed above, this item reflects principally operating profits of our alliances to which we are entitled or to which our partners are entitled. The decrease was primarily due to two factors: the rapid growth of Plavix® and Aprovel® in Europe, which increased the amount paid to Bristol-Myers Squibb under our alliance arrangements; and a decrease in operating profit from Plavix®
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and Aprovel® in the United States due to Bristol-Myers Squibbs wholesaler inventory workdown program. These were both offset by the fact that we no longer had to pay Pharmacia its share of the profits from our Lorex Pharmaceuticals joint venture, which we repurchased in April 2002. The profits paid to Pharmacia equaled 14 million in 2001, and were recorded under minority interests.
Our operating profit improved in all of our markets. The following table breaks down our 2001 and 2002 operating profit by geographical market.
Year Ended December 31, |
|||||||||
2001 |
2002 |
% change |
|||||||
( in millions) | |||||||||
Europe |
1,427 | 1,633 | 14.4 | % | |||||
United States |
1,311 | 1,781 | 35.9 | % | |||||
Other Countries |
456 | 522 | 14.5 | % | |||||
Unallocated costs(1) |
(1,088 | ) | (1,322 | ) | 21.5 | % | |||
Total operating profit |
2,106 | 2,614 | 24.1 | % | |||||
(1) | Unallocated costs consists mainly of a portion of our research and development expenses and of our administrative expenses. |
Among our three geographical segments, operating profit grew most rapidly in the United States, which accounted for 45.2% of our operating profit excluding unallocated costs compared to 41.0% in 2001. The increase in the United States was due principally to the change in the consolidation method of our Lorex Pharmaceuticals joint venture as well as the other factors that resulted in our sales increase in the United States discussed above.
Unallocated costs increased by 21.5% in 2002 over 2001 principally as a result of the increase in our research and development expenses.
Amortization and Impairment of Intangibles
Our amortization and impairment of intangibles increased from 68 million in 2001 to 129 million in 2002. This increase was principally due to amortization of the intangible assets relating to our October 2001 payment to Bristol-Myers Squibb in exchange for an increase in our participation in the promotional activities and profitability of the alliance relating to U.S. sales of Aprovel® and the amortization of the U.S. rights to Stilnox® in connection with our acquisition of the Lorex Pharmaceuticals joint venture in April 2002.
Net Financial Income/(Expense)
Net financial income/(expense) decreased from 102 million in 2001 to 85 million in 2002. This decrease was due primarily to three factors: a 46 million provision for treasury shares allocated to our stock option plans, which relates entirely to the difference, evaluated on a plan by plan basis, between the market value of our shares and the average price paid to acquire the shares on the market and our average share price (57.10) in December 2002; a decrease in returns from investments following reductions in interest rates by an average of 1.1 percentage points, with average investments remaining constant over the past two years; and an increase in returns from exchange rate hedging transactions due to the decrease in the value of the U.S. dollar against the euro (47 million in 2002 compared to 5 million in 2001).
Exceptional Income
Exceptional income decreased significantly from 281 million to 10 million in 2002. This significant decrease is principally due to the fact that in 2001, we sold our interest in Laboratoires de Biologie Végétale Yves Rocher, which resulted in a gain of 158 million. In 2002, exceptional income represented mainly gains from sales of stock in the United States.
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Income Taxes
Income taxes decreased by 96 million, from 842 million in 2001 to 746 million in 2002. Our effective tax rate was 28.9% in 2002, compared to 34.8% in 2001. The decrease was principally attributable to a decrease in the French tax rate and, in particular, the tax rate applied to royalty payments; the adjustment of prior tax returns resulting in the recovery of 53 million following a tax audit; and the impact of the integration of the Lorex Pharmaceuticals joint venture, a tax transparent company that we acquired in April 2002 (for which our income tax charge includes only the amount allocated to our company, even though we consolidated Lorex Pharmaceuticals fully in 2002).
Our effective tax rate for the first half of 2002, which was affected by the last two elements mentioned above, was 25.8%. Our effective tax rate increased to 31.6% for the second half of 2002.
Minority Interests
Income attributable to minority interests was 87 million in 2002 and represents primarily Pharmacias share of the profits of the Lorex Pharmaceuticals joint venture from January 1, 2002 through April 14, 2002. Because the Lorex Pharmaceuticals joint venture is tax transparent, minority interests does not include the corresponding taxes.
Net Income
As a result of the foregoing, our net income increased 11.0% from 1,585 million in 2001 to 1,759 million in 2002. Net income before exceptional items and goodwill amortization was 1,758 million, an increase of 27.8% compared to 2001. Using 2001 exchange rates, the increase would have been 31.2%.
Liquidity and Capital Resources
Our operations generate significant positive cash flow. We fund our investments primarily with operating cash flow and pay regular dividends on our shares. Our current financial debt is limited, and we had a net cash position as of December 31, 2003, although this position will change if our proposed acquisition of Aventis is successful.
Cash Flow
For the year ended December 31, 2003, our activities generated 2,428 million of cash flow, an increase of 7.4% compared to 2,260 million recorded in 2002. The increase was smaller than the increase in our net income because the 2002 cash flow figure re-integrated the minority interest in the former Lorex joint venture, which was offset against the cash used for the acquisition in our cash flow statement. Our working capital requirements in 2003 increased by 163 million compared to 2002. This increase is generally in line with the growth of our activities and principally relates to an increase in accounts receivable. However, our working capital requirements increased more significantly in 2002 due to the payment of taxes that were recorded as payables in 2001. As a result, our cash flow from operations increased from 1,676 million in 2002 to 2,265 million in 2003.
We used 350 million of cash in our investing activities during the year ended December 31, 2003, a 1,059 million decrease compared to 1,409 million in 2002. The difference is principally the inclusion in 2002 of our acquisition of the remaining 51% of the Lorex joint venture for 670 million and payments made to BMS with respect to the increase in our interest in Aprovel® in the United States. Our investments in tangible fixed assets (principally manufacturing facilities and, to a lesser extent, research sites) slightly decreased from 423 million in 2002 to 338 million in 2003. Proceeds from asset sales slightly increased from 22 million in 2002 to 27 million in 2003.
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In 2003, we used 1,598 million in connection with our financing activities, reflecting primarily the acquisition of our shares under a share buy back program (1,003 million net of sales) and the payment of dividends on our shares (582 million). Cash used in financing activities was 1,591 million in 2002, reflecting essentially the same items. Our borrowings were essentially unchanged in 2003.
Financial Debt
Our financial debt amounted to approximately 368 million at December 31, 2003, of which 315 million was short-term debt. Most of the long-term debt consisted of capital lease obligations. As of December 31, 2003, we had 8 million of long-term debt maturing in 2005 and 7 million of long-term debt maturing in 2006.
As of December 31, 2003, our cash and cash equivalents were 3,378 million. As a result, our net cash position was 3,010 million as of that date.
In connection with our proposed acquisition of Aventis, on January 25, 2004, we entered into a credit facility agreement that permits us to borrow up to 12,000 million. We may only borrow amounts under this credit facility if our offer for the Aventis securities is successful. If the offer is successful, we expect to borrow a substantial amount under this credit facility, which we will use mainly to finance the cash portion of the consideration we are offering to pay for the Aventis securities and to refinance certain debt of Aventis and its subsidiaries. The credit facility includes terms and conditions customary for agreements of this type, including the requirement that we maintain certain financial ratios and restrictions on our ability to engage in additional transactions or incur additional indebtedness. For additional information relating to our proposed acquisition of Aventis and the credit facility, see Item 8 Financial Information Significant Changes.
Liquidity
We expect that our existing cash resources will be sufficient to finance our existing ongoing activities and investments. We do not anticipate any significant increase in our capital expenditures in 2004 compared with recent years, and we have no current plans that would result in a significant increase for the next several years. However, we expect that our overall liquidity position will change significantly if our proposed acquisition of Aventis is successful, due to the fact that we expect to incur substantial debt under our 12,000 million credit facility. See Item 8 Financial Information Significant Changes.
Off-Balance Sheet Arrangements
In 2003, we had no off-balance sheet arrangements that have or, in our opinion, are reasonably likely to have a current or future effect on our financial condition. We do not consider our off-balance sheet arrangements as of December 31, 2003 to be significant.
Contractual Obligations and Other Commercial Commitments
We have various contractual obligations and other commercial commitments arising from our operations. These obligations and commitments are more fully described in this annual report under Item 4 and in this Item 5. We do not consider our aggregate contractual obligations and other commercial commitments as of December 31, 2003 to be significant.
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The following table lists the aggregate maturities of our contractual obligations given as of December 31, 2003.
Contractual obligations given
Payments due by Period |
||||||||||
Total |
Under 1 Year |
1-3 Years |
3-5 Years |
Over 5 Years | ||||||
(in millions of ) | ||||||||||
Long-term debt, excluding capital lease obligations |
13 | 3 | 5 | 1 | 4 | |||||
Capital lease obligations (including interest) |
62 | 10 | 14 | 10 | 28 | |||||
Operating leases |
441 | 91 | 110 | 76 | 164 | |||||
Irrevocable purchase obligations (1) |
150 | 138 | 11 | 1 | | |||||
Other long-term obligations |
226 | 88 | 73 | 25 | 40 | |||||
Total |
892 | 330 | 213 | 113 | 236 | |||||
(1) | Including open purchase orders. |
As of December 31, 2003, we had given a total of 892 million in commercial commitments, 330 million of which is payable within one year, 213 million of which is payable between one to three years, 113 million of which is payable between three to five years and 236 million of which is payable in more than five years from such date. Otherwise, we have no outstanding commercial commitments. For additional information regarding our commercial commitments, see Note D.18 to our consolidated financial statements included under Item 18.
In addition, we may have payments due to our current or former research and development partners under collaborative agreements. These agreements typically cover multiple products, and give us the option to participate in development on a product-by-product basis. When we exercise our option with respect to a product, we pay our collaborative partner a fee and receive intellectual property rights to the product in exchange. We also are generally required to fund some or all of the development costs for the products that we select, and to make payments to our partners when those products reach development milestones.
Our principal agreements of this nature are:
| our agreement under which we purchased Organons rights to Arixtra® and certain other products, which is described above under Financial Presentation of Alliances, and under which we have agreed to support all of the research and development costs and pay Organon an aggregate of $74 million in minimum royalty payments; |
| three licensing agreements under which we have agreed to pay aggregate minimum royalties of 7 million; |
| a collaboration agreement with Cephalon for the development of angiogenesis inhibitors, in respect of which the payment for the first product could reach $32 million; |
| an agreement with Mitsubishi-Pharma Corp to develop neuroprotective agents for use in the treatment of neurogenerative disorders; and |
| an agreement with Immuno-Designed Molecules, or IDM, to develop cellular immunology therapies for cancer under which our payments could reach 32 million for each of up to 20 products, at our option, over 10 years, and under which we acquired 20 million in shares of IDM in 2002. As of December 31, 2003, we had only exercised our option for one product under this agreement. We have agreed to acquire up to an additional 10 million of shares of IDM if IDM elects to list its shares on a public market or conducts a private placement prior to July 31, 2004. |
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Because of the uncertain nature of development work, it is impossible to predict if we will exercise an option for a product or if the relevant milestones will be achieved. For this reason, it is impossible to estimate the maximum aggregate amount that we will actually pay in the future under our outstanding collaborative agreements. Given the nature of our business, it is highly unlikely that we will exercise all options for all products or that all milestones will be reached.
International Financial Reporting Standards
Like all European listed companies, we will be required to apply International Financial Reporting Standards (IFRS) in the preparation of our consolidated financial statements for financial years from January 1, 2005 on. In 2003, we initiated a comprehensive IFRS conversion project for our consolidated financial statements. This project includes:
| workgroups assigned to perform detailed diagnostic work; |
| a project committee responsible for managing the conversion project; and |
| a technical committee responsible for validating the accounting policies adopted. |
The review of our consolidated financial statements in connection with our listing on the New York Stock Exchange (and preparation of the U.S. GAAP reconciliation) enabled us to identify, anticipate and use accounting options available under existing French accounting standards to achieve convergence with IFRS. This led to our adoption of the following accounting treatments:
| recognition of pension and similar obligations and other post-employment benefits (Notes B.20 and D.14.1 to the consolidated financial statements); |
| balance sheet recognition of finance leases (Note B.7 to the consolidated financial statements); and |
| recording foreign exchange gains and losses after income statement recognition of hedging operations (Note B.3 to the consolidated financial statements). |
In 2003, we also took steps to comply with a new French accounting rule regarding asset depreciation, amortization and impairment, and elected component-based accounting treatment, which requires a more detailed analysis of fixed assets. This new rule is consistent with IFRS. We expect to be able to present fully quantified disclosures of the impact of the transition to IFRS in 2005.
U.S. GAAP Reconciliation and Presentation Differences
We prepare our consolidated financial statements in accordance with French GAAP, which differ in certain significant respects from U.S. GAAP. As a result, our net income and shareholders equity is different under U.S. GAAP and under French GAAP. For a detailed discussion of the differences between French GAAP and U.S. GAAP as they relate to our consolidated net income and shareholders equity, see Note G to our audited consolidated financial statements included under Item 18.
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Net Income
The following table sets forth our net income under French GAAP and U.S. GAAP for the periods indicated.
Year Ended December 31, |
|||||||||
2001 |
2002 |
2003 |
|||||||
(in millions of ) | |||||||||
French GAAP net income |
1,585 | 1,759 | 2,076 | ||||||
Purchase accounting adjustments |
(445 | ) | (311 | ) | (269 | ) | |||
Provisions and other liabilities |
(23 | ) | | | |||||
Stock-based compensation |
(8 | ) | (8 | ) | (50 | ) | |||
Revenue recognition U.S. BMS alliance |
(136 | ) | 117 | 33 | |||||
Other |
(42 | ) | 31 | (16 | ) | ||||
Income tax effects |
167 | 52 | 91 | ||||||
U.S. GAAP net income |
1,098 | 1,640 | 1,865 | ||||||
| Purchase accounting. The principal purchase accounting adjustment, amounting to a charge of 364 million in 2001, 265 million in 2002 and 249 million in 2003, relates to the business combination of Sanofi and Synthélabo. Under French GAAP, the transaction was accounted for as a merger. As a result, no goodwill was recorded in connection with the merger, and existing assets and liabilities of Sanofi and Synthélabo were revalued to adjust them to their value to our company. Under U.S. GAAP, the business combination is accounted for as a purchase, with Sanofi deemed the acquirer of Synthélabo. As a result, the transaction resulted in the recognition of significant goodwill and intangible assets. The difference in net income in 2001 was principally the result of amortization of goodwill and identified intangible assets. Beginning in 2002, we no longer amortize goodwill, but instead test goodwill annually for impairment, in accordance with Statement of Financial Accounting Standards No. 142. As a result, in 2002 and 2003 this item reflected primarily the amortization of intangible assets. |
Our net income was also affected by the purchase accounting treatment under U.S. GAAP of Sanofis acquisition of the human healthcare division of Eastman Kodak, Sterling Winthrop, in 1994. Under French GAAP, no goodwill or intangibles associated with the acquisition of Sterling Winthrop are reflected in our consolidated financial statements. Under U.S. GAAP, a portion of the purchase price was allocated to identified intangible assets, which are being amortized over periods ranging from 8 to 20 years. This difference amounted to 52 million in 2001, 46 million in 2002 and 20 million in 2003.
| Provisions and other liabilities. In connection with the merger, under French GAAP we recorded certain provisions, principally in respect of anticipated restructuring costs. Under U.S. GAAP, which has more restrictive criteria, certain of these charges do not qualify for provisioning under U.S. restructuring rules and were charged to expense in 2001. This was the primary factor that led to a reduction of 23 million of net income in 2001. |
| Stock-based compensation. Under French GAAP, we do not recognize compensation expense related to stock-based compensation. Shares issued upon the exercise of stock options are reflected as an increase in share capital upon exercise of the stock option. Under U.S. GAAP, prior to 2003, if the exercise price of the stock options was less than the market price of the underlying shares on the grant date, we recognized compensation expense over the related vesting period. Beginning in 2003, we adopted the fair value recognition provisions of Statement of Accounting Standards No. 123, using the modified prospective method under Statement of Accounting Standards No. 148, and we now recognize compensation expense over the vesting period based on the fair value of the option on the grant date. This was the primary factor that led to a reduction of 50 million of net income in 2003. |
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Presentation Differences
In addition to the foregoing, there are differences in presentation between our French GAAP and U.S. GAAP financial statements, which have no impact on our net income or shareholders equity, but instead impact classification and display. The principal presentation differences are the following:
| Under U.S. GAAP, our Lorex Pharmaceuticals joint venture was accounted for using the equity method until December 31, 2001. Under French GAAP, until December 31, 2001, we accounted for Lorex Pharmaceuticals using the proportionate consolidation method, which means that we presented our share of the assets, liabilities, equity, revenue and expense of the joint venture in each major caption of our balance sheet and statement of income. |
| Under French GAAP, the alliance entities majority-owned by BMS are presented in a manner similar to the equity method, with our share of the operating profit recorded under other operating income/ (expense) in our statement of income. Alliance entities that we majority-own are consolidated, with BMS share of the operating profit recorded as a charge under other operating income/(expense) in our statement of income. Under U.S. GAAP, the alliance entities majority-owned by BMS are presented as equity method investees, with our share of the operating profits recorded as income from equity method investees in our statement of income. Alliance entities that we majority-own are fully consolidated, with BMS share of the operating profit presented in minority interests in our statement of income. |
| Restructuring charges and certain other items are treated as exceptional income or expenses under French GAAP but are treated as operating income or expenses under U.S. GAAP. As a result, these items impact our operating income under U.S. GAAP, while they do not impact our operating income under French GAAP. |
| Under French GAAP, we record royalties received under licenses and specific government levies related to the pharmaceuticals sector paid in certain countries in cost of goods sold. Under U.S. GAAP, license royalties are reflected as revenues, and specific government levies related to the pharmaceuticals sector are reflected in selling and general expense. |
Shareholders Equity
The following table sets forth our shareholders equity under French GAAP and U.S. GAAP as of the dates indicated.
As of December 31, |
|||||||||
2001 |
2002 |
2003 |
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(in millions of ) | |||||||||
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