Item 1.
Business
Introduction
ICN Pharmaceuticals, Inc. (the “Company”) is a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. In 2001, the Company had revenues of $858.1 million and net income of $64.1 million. Based on the closing price of the Company’s common stock on the New York Stock Exchange on March 21, 2002, the Company has an equity market capitalization of approximately $2.6 billion.
The Company distributes and sells a broad range of prescription (or “ethical”) and over-the-counter (“OTC”) pharmaceutical and nutritional products in over 100 countries. These pharmaceutical products treat viral and bacterial infections, diseases of the skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders.
The Company pursues a strategy of international expansion which includes: (i) the acquisition of high margin products that complement existing product lines and can be introduced into new markets to meet the specific needs of those markets; (ii) the creation of a pipeline of new products through internal research and development, as well as strategic partnerships, licensing arrangements and acquisitions; and (iii) the consolidation of the Company’s leadership position in Central and Eastern Europe, including Russia. In executing this strategy, the Company believes that it is uniquely positioned to continue to exploit its basic competitive advantages: (i) large enough economies of scale in its global distribution network not enjoyed by smaller pharmaceutical companies that provide opportunities to develop and register multi-regional products; and (ii) small enough economies of scale in much of its manufacturing and production facilities and its local and regional sales and marketing groups that provide for higher profitability on the Company’s smaller, niche products that cannot be achieved by the larger pharmaceutical companies.
The Company’s research and development efforts are primarily focused on the discovery, development, acquisition and commercialization of innovative products for the treatment of unmet medical needs, principally in the antiviral and anticancer areas. The Company’s current research and development program areas include hepatitis C, hepatitis B, cancer and HIV, each of which affects a large number of patients. The Company seeks to capitalize on an extensive library of nucleoside analogs and other compounds that has already lead to the discovery and development of ribavirin.
The Company operates in two principal business areas: the pharmaceutical business which comprises approximately 93% of the Company’s 2001 total revenue, and the biomedical business which makes up the remainder. The Company’s pharmaceutical business operates as five regional businesses: North America, Latin America, Western Europe (including Poland, Hungary and the Czech Republic), Eastern Europe (predominantly Russia), and Asia, Africa and Australia (“AAA”). The regional businesses are each comprised of a number of local operating subsidiaries most of which are owned directly or indirectly through the Company’s principal operating company in the United States. The Company’s biomedical business operates in three primary areas: research chemicals, dosimetry and diagnostic equipment.
Restructuring
The Company currently is in the process of implementing a restructuring plan to split its business into three separate publicly traded companies: Ribapharm Inc. (comprised of the Company’s royalty stream from ribavirin and the Company’s U.S. research & development operations), ICN International AG (comprised of the Company’s operations in Western Europe, Eastern Europe and Asia, Africa and Australia) and ICN Americas (comprised of the Company’s operations in North America and Latin America and the biomedicals business).
Ribapharm
Ribapharm Inc. (“Ribapharm”), which is currently one of the Company’s wholly-owned subsidiaries, is a biotechnology company that seeks to discover, develop, acquire and commercialize innovative products for the treatment of significant unmet medical needs, principally in the antiviral and anticancer areas. Ribapharm’s product ribavirin is an antiviral drug that Schering-Plough markets under license from the Company.
In connection with the restructuring, the Company has contributed to Ribapharm:
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subject to the approval of the holders of a 	majority of the outstanding 8 3/4% Notes due 2008 (the 	“8 3/4% Notes”), the Company’s right, title 	and interest under the Schering-Plough license, which would 	entitle Ribapharm to receive all of the royalties from 	Schering-Plough in connection with the sale of oral forms of 	ribavirin from the time Ribapharm becomes a separate publicly 	traded company; 	
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all the chemical compounds contained in the 	Company’s chemical compound library, along with all 	associated records, journals and data; 	
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all intellectual property rights, including all 	patents, copyrights and trademarks, related to Ribapharm’s 	business, including all intellectual property rights held by the 	Company in ribavirin, TiazoleTM, 	AdenazoleTM, LevovirinTM, 	ViramidineTM and the chemical compounds in the 	Company’s nucleoside analog library; 	
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all of the equipment and furniture contained in, 	and personnel employed in, Ribapharm’s research and 	development department in the Costa Mesa facility; and 	
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all other assets used in the conduct of 	Ribapharm’s business. 	
The approval of the holders of the 8 3/4% Notes was obtained as a result of the receipt of the requisite consents necessary to remove the covenants restricting the transfer of the Schering-Plough license to Ribapharm. However, these consents do not become operative until the 8 3/4% Notes are purchased by the Company pursuant to an offer to purchase and consent solicitation (the “Tender Offer”) for all of the Company’s outstanding 8 3/4% Notes. The Tender Offer is contingent, at the option of the Company, upon completion of an initial public offering of Ribapharm common stock (the “Ribapharm IPO”).
The Company intends for Ribapharm to become a separate publicly traded company. To achieve this objective, the Company intends to complete the Ribapharm IPO. The shares to be sold in the Ribapharm IPO will be shares owned by the Company and the Company would recognize taxable income on the proceeds it receives. A portion of the proceeds from the Ribapharm IPO would be used to purchase all of the outstanding 8 3/4% Notes in connection with the Tender Offer. The Company has filed a registration statement with the Securities and Exchange Commission to effect the Ribapharm IPO. Following the Ribapharm IPO, the Company is committed to distributing its remaining interest in Ribapharm to the Company’s stockholders (the “Spin-Off”) on a tax-free basis. The distribution will be subject to a ruling from the U.S. Internal Revenue Service (“IRS”) or a favorable opinion from the Company’s counsel regarding the federal tax consequences of the Spin-Off, compliance with all other legal and regulatory provisions including SEC regulations, Delaware General Corporate Law provisions regarding the payment of dividends and compliance with applicable fraudulent conveyance laws, and completion of the Tender Offer. The Company may seek approval of the Spin-Off by its stockholders. In order for the Spin-Off to be tax-free to the Company’s stockholders, the Company must distribute to its stockholders at least 80% of the issued and outstanding common stock of Ribapharm. This requirement limits the number of shares of Ribapharm common stock that can be sold in the Ribapharm IPO or thereafter
Upon the earlier of the Ribapharm IPO or the Spin-Off, Ribapharm will become jointly and severally liable for the obligations under the Company’s $525 million 6 1/2% subordinated convertible notes. In addition, after the Spin-Off, a holder will also receive shares of Ribapharm common stock upon conversion of notes. The number of shares received will be the same number of shares of Ribapharm common stock as the
holder would have received had the holder converted the notes immediately prior to the record date for the Spin-Off.
The Company may not undertake the Ribapharm IPO at all if the maximum number of shares that could be sold in the offering, taking into account the foregoing limitations, would not provide a sufficiently liquid market. On March 12, 2002, the Company filed for a request with the IRS for a ruling that the Spin-Off will qualify as a tax free spin-off under U.S. tax laws. Typically, it takes four to six months from the date of submission of a ruling request for the IRS to make a determination. The Company cannot assure you that it will not take longer for the IRS to rule on the Company’s request or that the IRS will issue a favorable ruling. Nor can the Company assure you that the Company will be able to obtain a favorable opinion from its counsel or that the IRS or a court will agree with the conclusions reached in that opinion. Furthermore, the Company’s commitment to effect the spin-off does not constitute a binding legal obligation to do so. There can be no assurance that the Ribapharm IPO or the Spin-Off will be completed.
Copies of the preliminary prospectus relating to the offering of shares of common stock of Ribapharm Inc. may be obtained from the offices of UBS Warburg LLC, 299 Park Avenue, New York, New York 10171, telephone 212-821-3000; or from CIBC World Markets Corp., 417 5th Avenue, 2nd Floor, New York, NY 10016, (212) 667-7200; or from SG Cowen Securities Corporation, 1221 Avenue of the Americas, 6th Floor, New York, NY 10020 (212) 278-6000.
A registration statement relating to the shares of common stock of Ribapharm has been filed with the U.S. Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time that the registration statement becomes effective. This Annual Report on Form 10-K shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
ICN International
ICN International AG (“ICN International”) develops, manufactures and sells prescription and over-the-counter branded pharmaceutical products throughout Europe, Asia, Africa and Australia. The Company currently intends to sell up to a 40% interest in ICN International in an offering outside the United States, although it is possible that a portion of the offering will be sold in the United States in a private placement. It is the Company’s longer term intention to sell its remaining interest in ICN International, subject to market conditions and regulatory requirements. There can be no assurance that an offering of ICN International will be completed.
Any securities of ICN International offered will not be and have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States, absent registration or an applicable exemption from registration requirements.
ICN Americas
ICN Americas will be comprised of the Company’s remaining assets. These include the pharmaceutical operations in North, Central and South America, as well as the biomedical operations worldwide and the NLiteTM product. In addition, ICN Americas will hold the remaining interests in ICN International and Ribapharm until such time as these interests are disposed of as discussed above.
Acquisitions
The Company, as a fundamental aspect of its growth strategy, actively pursues acquisitions throughout its regions of operations. Currently, the Company has operations in twelve of the top fifteen pharmaceutical markets, as measured by sales. Over the past three years, the Company has acquired a variety of products and a number of companies around the world. The following is a summary of the Company’s acquisitions.
In August 2001, the Company acquired certain assets from an Argentine company, New Pharma S.A., for 23.8 million Argentine pesos, of which $8.4 million was paid in cash and the balance as a note payable ($9.6 million as of December 31, 2001). The note is payable through February 2003 and accrues interest at 6% per annum. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company.
Effective January 1, 2001, the Company acquired certain assets from Medical Alliance, Inc., a provider of office based surgical services, for $14.4 million in cash. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company.
Throughout 2001, the Company acquired the rights to certain products in Western Europe and Eastern Europe from several companies for total consideration of $26.2 million. None of these product acquisitions are material to the financial position or results of operations of the Company.
In July 2000, the Company acquired the Swiss pharmaceutical company Solco Basel AG for $30.4 million, of which $25.2 million was paid in cash ($4 million of cash was received as part of the Solco assets) and the balance in 125,000 shares of the Company’s common stock. Under the terms of the Company’s agreement with the sellers, the Company has guaranteed a per share price initially at CHF 64 ($38.56 at December 31, 2001), increasing at a rate of 4% per annum through June 30, 2002. If the holders of the shares sell any of the shares prior to June 30, 2002, the Company is entitled to one-half of any proceeds realized in excess of the guaranteed price. If the market price of the Company’s common stock is below the guaranteed price at the end of the guarantee period, the Company will be required to satisfy the aggregate guarantee amount by payment in cash. The aggregate guaranteed value of the shares held by the sellers exceeds the market value by approximately $1.1 million as of December 31, 2001.
In September 1999, the Company acquired a chain of 88 retail outlets in Moscow and St. Petersburg, Russia, for $7.6 million in cash. The purchase complements the Company’s plan to vertically integrate the Russian market and provides the Company with the ability to effectively implement one element of its distribution strategy.
Royalty Agreement and Revenues
In 1995, the Company entered into an Exclusive License and Supply Agreement (“License Agreement”) with Schering-Plough Ltd. (“Schering-Plough”) whereby Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C (“HCV”) in combination with Schering-Plough’s interferon alfa-2b (the “Combination Therapy”). The License Agreement provided the Company an initial non-refundable payment and future royalty payments from sales of ribavirin by Schering-Plough, including certain minimum royalty rates. As part of the License Agreement, the Company retained the right to co-market ribavirin capsules in the European Union under its trademark Virazole®. In 1998, the Company sold to Schering-Plough its rights to co-market oral ribavirin for the treatment of hepatitis C in the European Union in exchange for increased royalty rates on sales of ribavirin worldwide. Accordingly, Schering-Plough currently has exclusive worldwide marketing rights for oral forms of ribavirin for hepatitis C and is responsible for all clinical development and regulatory activities. As part of the original agreement, Schering-Plough was required to purchase $42 million of the Company’s common stock. In 1999, after certain regulatory milestones were achieved, Schering-Plough purchased 2,041,498 shares of the Company’s common stock, fulfilling its obligation.
In June 1998, Schering-Plough received approval from the United States Food and Drug Administration (“FDA”) to market Combination Therapy under the brand name RebetronTM for the treatment of HCV in patients with compensated liver disease who have relapsed following interferon alpha therapy and began selling Combination Therapy in the United States. On June 16, 1998, Schering-Plough filed a supplemental New Drug Application (“NDA”) with the FDA for Combination Therapy for the treatment of HCV in patients with compensated liver disease previously untreated with interferon alpha therapy (referred to as treatment-naive patients) and in December 1998, this supplemental NDA was approved by the FDA.
In May 1999, the European Union’s (“EU”) Commission for the European Communities (the “EU Commission”) granted marketing authorization to Schering-Plough to market Rebetol® (ribavirin) capsules for use in combination with interferon alfa-2b injection (marketed as Intron®A in certain countries) for the treatment of both treatment relapsed and treatment-naive HCV patients. The EU Commission’s approval resulted in a single Marketing Authorization with unified labeling that was immediately valid in all 15 EU Member States.
In January 2001, the FDA granted Schering-Plough authorization to market pegylated interferon alfa-2b, a longer lasting form of interferon alfa-2b, as a monotherapy for the treatment of HCV for patients who have not previously been treated with interferon alpha-2b.
In March 2001, the EU granted Schering-Plough authorization to market Peg-IntronTM (pegylated interferon alfa-2b) Injection with Rebetol® (ribavirin) capsules as combination therapy for the treatment of both relapsed and treatment-naive adult patients with histologically proven HCV. EU Commission approval of the centralized Type II variations to the Marketing Authorizations for Peg-Intron™ and Rebetol® resulted in unified labeling that was immediately valid in all 15 EU-Member States and Iceland and Norway.
In July 2001, Schering-Plough received authorization from the FDA to market ribavirin capsules in the U.S. under the brand name Rebetol® separately for use only in combination with interferon alfa-2b. Schering-Plough now sells ribavirin separately as well as part of a package with interferon alfa-2b.
In August 2001, the FDA granted Schering-Plough authorization to market Peg-IntronTM (pegylated interferon alfa-2b) for use in combination therapy with Rebetol for the treatment of HCV in patients with compensated liver disease previously untreated with interferon alfa-2b and who are at least 18 years of age.
In November 2001, Schering-Plough received marketing approval from the Ministry of Health, Labor and Welfare of Japan for ribavirin in combination with interferon alfa-2b for the treatment of HCV. The combination therapy is the first combination therapy approved in Japan for treating patients with HCV. In December 2001, Schering-Plough received pricing approval for this combination therapy in Japan.
Schering-Plough also markets the combination therapy in many other countries around the world based on the U.S. and EU regulatory approvals.
According to the Centers for Disease Control and Prevention, approximately four million Americans are chronically infected with HCV. Of these, approximately 20% - 25% are expected to develop liver cirrhosis, of which 20% - 30% are expected to go on to develop liver cancer or liver failure requiring liver transplant. An equal or greater degree of disease prevalence is projected in Western Europe. In Japan, the number of people chronically infected with HCV is estimated to be between 1.5 million and 2.0 million.
Royalty revenues under the License Agreement were $137.0 million, $155.1 million and $108.9 million for 2001, 2000 and 1999, respectively.
Schering-Plough has informed the Company that it believes royalties paid under the License Agreement should not include royalties on products distributed as part of an indigent patient marketing program. Schering-Plough claims that because it receives no revenue from products given to indigent patients, it should not have to pay royalties on these products under the License Agreement. The Company does not agree with Schering-Plough’s interpretation of the License Agreement. However, in August 2001, Schering-Plough withheld approximately $11.6 million from its royalty payment relating to the second quarter of 2001. The amount withheld was purportedly intended by Schering-Plough to be a retroactive adjustment of royalties previously paid to the Company through the third quarter of 2000 on products distributed as part of this indigent patient marketing program. Since the fourth quarter of 2000, Schering-Plough is withholding on a current basis all royalty payments purportedly related to this indigent patient marketing program. The Company recognized the approximately $11.6 million of withheld royalty payments for the retroactive adjustment and approximately $3 million of royalty payments withheld for the fourth quarter of 2000 and the first quarter of 2001 as income. These amounts are included on the Company’s balance sheet as a receivable. The Company has not established a reserve for these amounts because, in the opinion of the Company’s management, collectibility is reasonably assured. Since the second quarter of 2001, the Company no longer
recognizes any of these withheld royalty payments as income as the Company can no longer determine such amounts due to a lack of information provided by Schering-Plough.
In addition to the use of ribavirin in Combination Therapy, the Company markets ribavirin under its own trademark Virazole® for commercial sale in over 40 countries for one or more of a variety of viral infections, including respiratory syncytial virus (“RSV”). In the United States and Europe, Virazole® is approved for use in hospitalized infants and children with severe lower respiratory infections due to RSV.
Products
During 2001, the ten pharmaceutical products generating the greatest sales volume for the Company represented approximately 30% of the Company’s worldwide pharmaceutical sales. The following table summarizes the Company’s top ten pharmaceutical products based on sales in 2001:
Antivirals
The Company sells its antiviral drug, ribavirin, under the tradename Virazole® in North America and most European countries. Ribavirin is sold as Vilona® and Virazide® in Latin America and Virazide® in Spain. Reference to the sale of Virazole® includes sales made under the trademarks Vilona® and Virazide®. Ribavirin accounted for approximately 2%, 3% and 1% of the Company’s product sales for the years ended December 31, 2001, 2000 and 1999, respectively. Ribavirin is currently approved for sale in various pharmaceutical formulations in over 40 countries for the treatment of several different human viral diseases, including RSV, hepatitis, herpes, influenza, measles, chicken pox and HIV. In the United States and Canada, Virazole® has been approved for hospital use in aerosolized form to treat infants and young children who have severe lower respiratory tract infections caused by RSV. In treating RSV, the drug is administered by a small particle aerosol generator, a system that permits direct delivery of ribavirin to the site of the infection. Similar approvals for ribavirin for use in the treatment of RSV have been granted by governmental authorities in 22 other countries.
Antibacterials
The Company sells antibacterial products which accounted for approximately 8%, 8% and 10% of the Company’s product sales for the years ended December 31, 2001, 2000 and 1999, respectively.
The major products in this group include Ancobon®/Ancotil®, Anapenil® and Yectamicina®. Ancobon®/Ancotil® is a systemic anti-fungal product that is used in the treatment of serious infections. Anapenil® is an antibiotic product that is used in the treatment of susceptible infections. Yectamicina® is a bactericidal aminoglycoside antibiotic that is used in the treatment of respiratory, urinary, gastrointestinal tract infections, sepsis, meningitis and bone infections due to Gram-negative and Gram-positive bacteria.
Other Ethicals
The Company manufactures and/or markets a wide variety of other ethical pharmaceuticals, including analgesics, anticholinesterases, antirheumatics, cardiovasculars, dermatologicals, endocrine agents, gastrointestinals, hormonals and psychotropics. Other ethicals accounted for approximately 69%, 73% and 68% of product sales for the years ended December 31, 2001, 2000 and 1999, respectively.
Dermatological products represent the Company’s largest selling product line among its other ethical pharmaceutical products. Dermatological products include Efudex®/Efudix®, Oxsoralen-Ultra®, Kinerase®, Glyquin® and Solaquin Forte®, which are principally used for actinic keratosis, psoriasis, reducing wrinkles and other signs of aging and pigmentation disorders. The Company’s largest selling ethical product is Efudex®/Efudix®, a topical anti-skin cancer product.
Other ethical products include Mestinon®, Librax®, Bedoyecta®, Dalmane®/Dalmadorm®, Fluorouracil injectible, Librium® and Limbitrol®.
Photonics
The Company has a laser-based product, known as N-LiteTM, for the reduction of wrinkles. N-LiteTM is currently cleared by the FDA for the specific claim of wrinkle reduction. The product is currently being tested for other indications, including acne. The Company believes N-LiteTM is complementary to its dermatological business. The Photonics business includes the acquisition of Medical Alliance, Inc., which occurred in January 2001. The Photonics business accounted for 5% of product sales for the year ended December 31, 2001.
OTC Products
OTC products encompass a broad range of ancillary products, which are sold through the Company’s existing distribution channels. OTC products accounted for approximately 8%, 7% and 11% of the Company’s product sales for the years ended December 31, 2001, 2000 and 1999, respectively.
Biomedical Products
Research chemicals, diagnostic and other biomedical products accounted for approximately 8%, 9% and 10% of the Company’s product sales for the years ended December 31, 2001, 2000 and 1999, respectively.
Research Chemicals: The Company serves life science researchers throughout the world primarily through a catalog sales operation. The Company’s catalog lists approximately 55,000 products which are used by medical and scientific researchers involved in molecular biology, cell biology, immunology and biochemistry, microbiology and other areas. A majority of these products are purchased from third party manufacturers and distributed by the Company. Products include biochemicals, immunobiologicals, radiochemicals, tissue culture products and organic, rare and fine chemicals.
Diagnostics: Among the diagnostics marketed by the Company are reagents that are routinely used by physicians and medical laboratories to accurately and quickly diagnose hundreds of patient samples for a variety of disease conditions. The Company manufactures both enzyme and radio-immunoassay kits, which it markets under the ImmuChemTM product line. The Company is also a supplier of immunodiagnostic tests for the screening of newborn infants for inherited and other disorders.
Dosimetry: The Company is a supplier of analytical monitoring services to detect personal occupational exposure to radiation. This service is provided to dentists, veterinarians, chiropractors, podiatrists, hospitals, universities, government institutions, nuclear power plants, small office practitioners and others exposed to
ionizing radiation. The Company’s service includes both film and thermo luminescent badges in several configurations to accommodate a broad scope of users. This service includes the manufacture of badges, distribution to and from clients, analysis of badges and a radiation report including exposure.
Research and Development
The Company’s research and development effort, primarily performed by the Company’s Ribapharm subsidiary, seeks to discover, develop, acquire and commercialize innovative products for the treatment of significant unmet medical needs, principally in the antiviral and anticancer areas. The Company’s current program areas include hepatitis C, hepatitis B, HIV, and cancer, each of which affects a large number of patients. The Company’s research and development activities are based upon the expertise accumulated in over 30 years of nucleic acids research focusing on the internal generation of novel molecules.
The research and development function works closely with corporate marketing on a global and regional basis. In connection with this arrangement, the Company has entered into licensing arrangements with other larger pharmaceutical companies, as well as strategic partnerships to develop its proprietary products, as discussed below. In addition, the Company develops innovative products targeted to address the specific needs of the Company’s local markets.
In March 2000, the Company hired Johnson Y.N. Lau, Ph.D., M.D., to lead the research and development effort. Dr. Lau, an expert in viruses and liver diseases, was formerly senior director in antiviral research at the Shering-Plough Research Institute. The Company spent approximately $22 million in 2001 and $18 million in 2000 to update and modernize its research laboratories and equipment. This modernization will enable the Company to accelerate its drug discovery and development process by utilizing advanced screening techniques and equipment, biological assays and sophisticated computer assisted drug design. The Company currently employs approximately 130 employees devoted to research and development activities.
Near and Medium-Term Research and 	Development
The Company’s near-term development pipeline includes the registration of a number of products in regional markets, including, but not limited to, Latin America and Central and Eastern Europe. This ongoing activity introduces both high quality generic and licensed proprietary products into under-served markets.
The Company’s medium-term research and development pipeline involves the pre-clinical and clinical evaluation of certain nucleoside compounds which have broad market attractiveness and which have shown promise for successful commercialization. These compounds include:
	Virazole® 	(ribavirin): In addition to the use of ribavirin for HCV, 	clinical studies have been performed with ribavirin in various 	formulations for the treatment of several other viral diseases. 	Among diseases for which at least one governmental health 	regulatory agency, in countries other than the United States, 	has approved commercialization of ribavirin are herpes zoster, 	genital herpes, chickenpox, hemorrhagic fever with renal 	syndrome, measles, influenza and HIV. The Company is initiating 	focused clinical studies evaluating the use of ribavirin for 	early intervention against RSV infections in persons whose 	immune defenses are compromised as a consequence of bone marrow 	transplantation. 	
	LevovirinTM: LevovirinTM is a nucleoside analog that is being 	developed in oral form for the treatment of HCV. Pre-clinical 	studies suggest that LevovirinTM may have an ability 	to stimulate an immune response to viral infections without a 	direct antiviral effect and without the anemia associated with 	ribavirin. In preliminary toxicology studies, 	LevovirinTM appeared to have fewer side effects than 	ribavirin at the same dosage levels. The Company filed an 	Investigational New Drug Application (“IND”) with the 	FDA in December 2000 to begin clinical testing of 	LevovirinTM for use in combination with interferon 	alpha for the treatment of HCV. The Company began Phase I 	clinical trials on LevovirinTM in February 2001 in 	the United States. 	
	In June 2001, Ribapharm licensed 	LevovirinTM to F. Hoffmann-La Roche 	(“Roche”). Ribapharm received a one time licensing fee 	and will be eligible to receive future payments based upon Roche 	achieving certain milestones. Roche will be responsible for all 	future development costs of LevovirinTM. If 	
LevovirinTM is successfully developed 	and receives regulatory approval, Ribapharm will be entitled to 	receive royalty payments. In addition, Roche licensed to 	Ribapharm a compound that is at a similar stage of development, 	IL-12. Ribapharm will be responsible for the development costs 	of this compound, milestone payments and royalties if the 	compound is successfully developed. 	
	ViramidineTM: ViramidineTM is a nucleoside analog that the 	Company intends to develop in oral form for the treatment of 	HCV. The Company expects to test Virmidine’sTM 	effect on the hepatitis C virus both on its own and in 	combination with interferon alpha or pegylated interferon alpha. 	Preclinical studies indicated that ViramidineTM, a 	liver-targeting prodrug of ribavirin, stimulates an immune 	response to viral infections similar to ribavirin. In an animal 	hepatitis model, ViramidineTM showed antiviral 	activity similar to ribavirin. The liver-targeting properties of 	ViramidineTM were also confirmed in two animal 	models. Short-term toxicology studies also showed that 	ViramidineTM may be safer than ribavirin at the same 	dosage levels. This data suggests that ViramidineTM, 	as a liver-targeting prodrug of ribavirin, may have the 	potential of having better efficacy and less side effects 	compared to ribavirin. 	
	In September 2001, the Company initiated Phase I 	clinical trials on ViramidineTM in Europe. The 	Company filed an IND with the FDA in December 2001. The Company 	intends to initiate additional Phase I clinical trials on 	ViramidineTM in the U.S. in April 2002. 	
	Hepavir 	BTM: 	Hepavir BTM is a nucleoside analog the Company 	licensed from Metabasis Therapeutics, Inc. 	(“Metabasis”) in October 2001. The Company is 	exploring the possibilities of developing this compound into an 	oral once a day monotherapy for patients with chronic hepatitis 	B infection. The active molecule in this compound exhibits 	anti-hepatitis B activity against both the wild type and 	Lamivudine drug-resistant hepatitis B. Based on biologic and 	molecular modeling data, this compound binds to the active site 	of the hepatitis B replication enzyme so that the virus is 	prevented from utilizing the natural substrate from the host to 	replicate. A prodrug modification developed by Metabasis 	significantly improved the compound’s physiochemical 	properties and ability to target the liver. In preliminary 	experiments in rodents, the active molecule was delivered in 	significantly greater proportion to the targeted organ, the 	liver, as compared to the non-targeted organs, the kidneys. The 	kidneys are the organs responsible for causing potential 	toxicity. In these experiments, the amount of metabasis-modified 	compound delivered to the liver versus kidneys was approximately 	10 times greater than the amount of compound delivered by 	another well established process. The Company is working on 	largescale synthesis of this compound and has commenced 	formulation studies. The Company has also initiated additional 	biology, drug metabolism, pharmacokinetic, and toxicology 	studies. The Company expects to finish these studies and, if 	these studies produce satisfactory results, file an 	investigational new drug application with the FDA in the fourth 	quarter of 2002. If that filing is made and accepted by the FDA, 	the Company intends to initiate Phase I clinical trials on 	Hepavir BTM. 	
	Metabasis has one issued U.S. patent on the 	structure of this compound. The Company is in the process of 	preparing patent applications on this compound in other 	countries. 	
	TiazoleTM 	(tiazofurin): TiazoleTM is currently in phase III 	clinical trials for the treatment of chronic myelogenous 	leukemia (study commenced September 2000). If required studies 	and tests are successful, the Company intends to file a NDA with 	the FDA for the treatment of chronic myelogenous leukemia with 	blast crisis. 	
	TiazoleTM is also being developed for 	the treatment of ovarian cancer and multiple myeloma. It is 	believed that TiazoleTM may cause inhibition of the 	biosynthesis of guanosine triphosphate, which is a building 	block essential for tumor cell growth in various cancer cell 	lines. The Company believes that the resulting reduction in the 	concentration of these building blocks may reduce the capacity 	of the cancer cells to proliferate. 	
	AdenazoleTM 	(8-CI cAMP, Tocladesine): AdenazoleTM is a nucleoside 	analog being developed for the treatment of colon cancer. 	AdenazoleTM may potentially control cell growth and 	cause cancer cells to behave more like normal cells in various 	cancer cell lines. The Company expects that 	AdenazoleTM will be administered to patients 	intravenously. 	
	AdenazoleTM has been evaluated for 	potential use in the treatment of colon cancer in two Phase I 	studies. Of the 19 patients with colon cancer in the two 	studies, one patient showed a 70% reduction of retroperitoneal 	mass, believed to be related to cancer, while another patient 	showed stable disease for four months. In December 1999, the 	Company submitted various data to U.S. and Russian regulatory 	authorities to obtain permission to proceed with Phase I trials 	in the treatment of colon cancer in both countries. A 	Phase Ib study was initiated in September 2000 with the 	University of California in San Diego and Los Angeles and the 	University of Southern California as the three clinical trial 	sites. 	
	The rights to the compounds TiazoleTM 	and AdenazoleTM were among the assets which the 	Company contributed to ICN Yugoslavia, upon the formation of 	that joint venture in 1991. The resolution of the ongoing matter 	with the Yugoslavian government may affect the status of these 	compounds with the Company. 	
	The Company has contributed the 	Hepavir BTM license and its rights to the 	compounds LevovirinTM, ViramidineTM, 	TiazoleTM and AdenazoleTM to Ribapharm. 	
Long-Term Research and 	Development
The Company’s long-term research and development activities are focused on the identification and development of novel therapeutic compounds for the treatment of viral diseases and cancer. The Company’s research focus is based on extending the library of nucleoside analogs through new synthesis and screening efforts. This is a proven approach that led to the identification of ribavirin by the Company and to other nucleoside therapeutics, in particular, antiviral and anticancer drugs, by other companies. Given the success of the use of nucleoside analogs in the areas of antiviral and anticancer research, the Company is focusing its research and development efforts in these two therapeutic areas.
There can be no assurance of the results of any of the Company’s research and development efforts or the ultimate commercial success of any of the products in development.
Marketing and Customers
The Company markets its pharmaceutical products in some of the most developed pharmaceutical markets, as well as many developing markets. The Company adjusts its marketing strategies according to the individual markets in which it operates. The Company believes its marketing strategy is distinguished by flexibility, allowing the Company to successfully market a wide array of pharmaceutical products within diverse regional markets, as well as certain drugs on a worldwide basis.
The Company has a marketing and sales staff of approximately 2,800 persons who promote its pharmaceutical products. As part of its marketing program for pharmaceuticals, the Company uses direct mailings, advertises in trade and medical periodicals, exhibits products at medical conventions, sponsors medical education symposia and sells through distributors in countries where it does not have its own sales staff.
In the United States, the Company currently promotes its pharmaceutical products to physicians through its own sales force. These products are distributed to drug stores and hospitals through wholesalers. In Canada, the Company has its own sales force and promotes and sells directly to physicians, hospitals, wholesalers and large drug store chains. In Latin America, principally Mexico, Argentina and Brazil, the Company promotes to physicians and distributes products either directly or indirectly to hospitals and pharmacies. In Western Europe the Company promotes and sells pharmaceutical products through its own sales forces to physicians, hospitals, retail outlets, pharmacies and wholesalers.
In Russia, the Company’s sales and marketing organization is in various stages of development. Most of the domestic product line is sold through a network of distributors and their agents and accounts for approximately 90% of in-market sales. Products imported from other subsidiaries such as branded generics or proprietary drugs are promoted directly to physicians through the Company’s own sales force. In addition, the Company utilizes its own network of distributors and wholesalers, as well as third party distributors and wholesalers, to market to pharmacies and hospitals. Additionally, in September 1999, the Company acquired a
chain of 88 retail pharmacies in Moscow and St. Petersburg, Russia from an affiliate of Groupe Multipharma SC. The acquisition of these retail pharmacies provides the Company with the ability to implement one element of its distribution strategy.
The research chemical and diagnostic product lines are sold worldwide primarily through the Company’s mail order catalogs. The Company’s customer group for research products is principally composed of biomedical research institutions, such as universities, the National Institutes of Health, pharmaceutical companies and, to a lesser extent, hospitals.
Competition
The Company operates in a highly competitive environment. The Company’s competitors, many of whom have substantially greater capital resources and marketing capabilities and larger research and development staffs and facilities than the Company, are actively engaged in marketing products similar to those of the Company and in developing new products similar to those proposed to be developed and sold by the Company. The Company believes that many of its competitors spend significantly more on research and development related activities than the Company spends. Competitive factors vary by product line and customer and include service, product availability and performance, price and technical capabilities. The Company does business in an industry characterized by extensive and ongoing research efforts. Others may succeed in developing products that are more effective than those presently marketed or proposed for development by the Company. Progress by other researchers in areas similar to those explored by the Company may result in further competitive challenges.
The Company may also face increased competition from manufacturers of generic pharmaceutical products when patents covering certain of its currently marketed products expire.
Manufacturing
The Company manufactures its pharmaceutical products at 21 facilities. At the Humacao, Puerto Rico plant, the Company has a toll manufacturing agreement with Roche to manufacture some of its products for its U.S. and European market. The Company also uses the Humacao plant to produce and distribute some of the Company’s pharmaceutical products. The Company believes it has sufficient manufacturing facilities to meet its needs for the foreseeable future. All of the manufacturing facilities that require certification from the FDA or foreign agencies have obtained such approval.
In order to meet the demand for some of its markets, the Company subcontracts the manufacturing of some of its products, including products under the rights acquired from other pharmaceutical companies. Generally, acquired products continue to be produced for a specific period of time by the selling company. During that time, the Company integrates the products into its own manufacturing facilities or initiates toll manufacturing agreements with third parties. As a result of the acquisition of products from Roche, the Company is in the process of transferring technology that will allow the Company to assume the production of the acquired products. However, there can be no assurance that the Company will be successful in its efforts to manufacture such products or that such products will continue to be available from outside suppliers.
Manufacturing of the Company’s research chemical products is chiefly carried out in three domestic facilities and one foreign facility: Irvine, California (radiochemicals); Orangeburg, New York (diagnostic and immunobiologicals); Aurora, Ohio (biochemicals and immunobiologicals); and Eschwege, Germany (chromatography products).
Employees
As of December 31, 2001, the Company employed 11,970 persons. These employees included 7,430 in production, 3,070 persons in sales and marketing, 130 in research and development, and 1,340 in general and administrative matters. The majority of the Company’s employees in Mexico, Spain, Poland and Hungary are covered by collective bargaining or similar agreements. Substantially all of the employees in Russia, the Czech Republic, Poland and Hungary are covered by national labor laws which establish the rights of employees,
including the amount of wages and benefits paid and, in certain cases, severance and similar benefits. The Company currently considers its relations with its employees to be satisfactory and has not experienced any work stoppages, slowdowns or other serious labor problems which have materially impeded its business operations.
Licenses, Patents and Trademarks (Proprietary Rights)
The Company has three U.S. patents related to ribavirin. These patents claim uses of ribavirin, including treatment of hepatitis C alone and in combination therapy with interferon alpha. The Company believes these patents may provide additional protection for the Rebetron combination therapy. These patents expire in 2016.
Schering-Plough has five U.S. patents covering specific formulations of ribavirin. These patents expire in 2017. Schering-Plough also has at least three U.S. patents covering the use of ribavirin with interferon alpha-2b in combination therapy for the treatment of hepatitis C. These patents expire between 2015 and 2018. Schering-Plough has advised the Company that it has licensed its patents relating to ribavirin as part of a combination therapy for the treatment of hepatitis C to Roche. This license was entered into in connection with the settlement between Schering-Plough and Roche of litigation between them relating to pegylated interferon. The Company has not licensed any of its patents related to ribavirin to Roche. The Company’s license agreement with Schering-Plough prohibits Schering-Plough from sublicensing our patent rights, but not Schering-Plough’s rights, related to ribavirin to third parties without our consent. The Company is involved in preliminary discussions to license its rights in ribavirin to Roche.
The Company has an European Union patent claiming methods of using of ribavirin for medical treatment for arboviruses, including the virus responsible for hepatitis C. This patent expires in 2005. The Company has filed for an extension of this patent until 2010 in the relevant countries of the European Union, Switzerland and Japan. Roche has filed an opposition to this patent with the European Patent Office seeking to invalidate this patent.
The Company believes Roche may have filed an NDA in the United States and European Union for a form of ribavirin using the brand name Copegus in combination therapy with Pegasys. Roche announced at its annual media conference that it expects regulatory approval of Copegus in the second half of 2002. Since NDAs are not publicly available, the Company is unable to confirm whether Roche has made a new drug application filing for Copegus or when this filing might have been made.
On February 11, 2002, Roche filed a notice of opposition with the European Patent Office seeking to invalidate the Company’s European patents relating to ribavirin. The Company intends to file a response to Roche’s filing with the European Patent Office. Each of Germany, France, Great Britain, the Netherlands, Austria, Italy and Switzerland have issued national patents from the patents issued by the European Patent Office.
It is possible that Roche has filed a reexamination procedure with the U.S. Patent and Trademark Office for the Company’s patents related to ribavirin. If Roche has filed a reexamination procedure, then the U.S. Patent and Trademark Office will conduct an internal investigation, which could take four to six months from the date of filing. If the U.S. Patent and Trademark Office finds a reexamination in order, it will notify the Company and begin a formal proceeding.
If Roche is able to successfully market a combination therapy of interferon alpha or pegylated interferon without licensing ribavirin from the Company, its royalty revenues may decrease significantly.
The Company believes others cannot manufacture, import or sell ribavirin for the treatment of hepatitis C in the U.S., designated countries of the European Union or Japan without infringing on the Company’s patent rights unless those patents are invalidated or they obtain a license from the Company.
Schering-Plough currently has regulatory protection under the Hatch-Waxman Act in the United States for the treatment of hepatitis C using the Rebetron combination therapy. This protection means that the FDA cannot approve an abbreviated application for a generic form of the Rebetron combination therapy until June
2002. In addition, final approval of abbreviated applications may be stayed for up to 30 months pending the outcome of patent litigation.
Geneva Pharmaceuticals Technology Corporation, a subsidiary of Geneva Pharmaceuticals, Inc. and an indirect subsidiary of Novartis, Three Rivers Pharmaceuticals, LLC and Teva Pharmaceuticals USA, Inc. submitted abbreviated NDAs for generic forms of ribavirin. The Company has sued Geneva and its parent, Geneva Pharmaceuticals, Inc., and Teva to prevent them from marketing a generic form of ribavirin that relies on Schering-Plough’s NDA approvals. Schering-Plough has sued both Geneva and Three Rivers to prevent them from marketing a generic form of ribavirin that relies on Schering-Plough’s NDA approvals. Geneva has answered the Schering-Plough and the Company complaints and has asserted that the Schering-Plough and Company patents are not infringed and that the claims of the patents are invalid. Three Rivers has answered the Schering-Plough complaint and has asserted that the Schering-Plough patents are not infringed and that the claims of the patents are invalid.
As a general policy, the Company expects to seek patents, where available, on inventions concerning novel drugs, techniques, processes or other products that it may develop or acquire in the future. However, there can be no assurance that any patents applied for will be granted, or that, if granted, they will have commercial value; nor can there be any assurance as to their breadth or the degree of protection which these patents, if issued, will afford the Company. In some instances, the Company intends to rely substantially on its unpatented proprietary know-how, but there can be no assurance that others will not develop substantially equivalent proprietary information or otherwise obtain access to the Company’s know-how. Patents for pharmaceutical compounds are not available in certain countries in which the Company markets its products. Marketing approvals in certain foreign countries provide an additional level of protection for products approved for sale in such countries.
Many of the names of the Company’s products are registered trademarks worldwide. The Company anticipates that the names of future products will be registered as trademarks in the major markets in which it will operate. Other organizations may in the future apply for and be issued patents or own proprietary rights covering technology that may become useful to the Company’s business. The extent to which the Company at some future date may need to obtain licenses from others is not known.
In November 2000, the Company entered into an agreement that provides Schering-Plough with certain rights to license various products the Company may develop. Under the terms of the strategic agreement, Schering-Plough has the option to exclusively license on a worldwide basis up to three compounds that the Company may develop for the treatment of hepatitis C on terms specified in the agreement. The option does not apply to LevovirinTM or ViramidineTM. The option is exercisable as to a particular compound at any time prior to the start of Phase II clinical studies for that compound. Once it exercises the option with respect to a compound, Schering-Plough is required to take over all developmental costs and responsibility for regulatory approval for that compound.
Under the terms of the agreement, the Company also granted Schering-Plough the right of first/last refusal to license compounds relating to the treatment of infectious diseases (other than hepatitis C) or cancer or other oncology indications as well as the right of first/last refusal with respect to LevovirinTM and ViramidineTM (collectively, the “Refusal Rights”). Under the terms of the Refusal Rights, if the Company intends to offer a license or other rights with respect to any of these compounds to a third party, the Company is required to notify Schering-Plough. At Schering-Plough’s request, the Company is required to negotiate in good faith with Schering-Plough on an exclusive basis the terms of a mutually acceptable exclusive worldwide license or other form of agreement on commercial terms to be mutually agreed upon. If the Company cannot reach an agreement with Schering-Plough, the Company is permitted to negotiate a license agreement or other arrangement with a third party. Prior to entering into any final arrangement with the third party, the Company is required to offer substantially similar terms to Schering-Plough, which terms Schering-Plough has the right to match.
If Schering-Plough does not exercise its option or Refusal Rights as to a particular compound, the Company may continue to develop that compound or license that compound to other third parties. The agreement with Schering-Plough will terminate the later of 12 years from the date of the agreement or the
termination of the 1995 license agreement with Schering-Plough. The agreement was entered into as part of the resolution of claims asserted by Schering-Plough against the Company, including claims regarding the Company’s alleged improper hiring of former Schering-Plough research and development personnel and claims that the Company was not permitted to conduct hepatitis C research.
In June 2001, the Company licensed LevovirinTM to Roche. The Company’s agreement with Schering-Plough granted Schering-Plough Refusal Rights for LevovirinTM. Although the Company believes it has complied with the Refusal Rights, Schering-Plough may allege that the Company has not complied with the Refusal Rights as to LevovirinTM.
Government Regulation
The Company is subject to licensing and other regulatory control by the FDA, the Nuclear Regulatory Commission, other Federal and state agencies, and comparable foreign governmental agencies.
FDA approval must be obtained in the United States and approval must be obtained from comparable agencies in other countries prior to marketing or manufacturing new pharmaceutical products for use by humans. Obtaining FDA approval for new products and manufacturing processes can take a number of years and involve the expenditure of substantial resources. To obtain FDA approval for the commercial sale of a therapeutic agent, the potential product must undergo testing programs on animals, the data from which is used to file an Investigational New Drug Application with the FDA. In addition, there are three phases of human testing. Phase I: safety tests for human clinical experiments, generally in normal, healthy people; Phase II: expanded safety tests conducted in people who are sick with the particular disease condition that the drug is designed to treat; and Phase III: greatly expanded clinical trials to determine the effectiveness of the drug at a particular dosage level in the affected patient population. The data from these tests is combined with data regarding chemistry, manufacturing and animal toxicology and is then submitted in the form of a NDA to the FDA. The preparation of a NDA requires the expenditure of substantial funds and the commitment of substantial resources. The review by the FDA could take up to several years. If the FDA determines that the drug is safe and effective, the NDA is approved. No assurance can be given that authorization for commercial sale by the Company of any new drugs or compounds for any application will be secured in the United States or any other country, or that, if such authorization is secured, those drugs or compounds will be commercially successful. The FDA in the United States and other regulatory agencies in other countries also periodically inspect manufacturing facilities.
The Company is subject to price control restrictions on its pharmaceutical products in many countries in which it operates. The Company has been affected in the past by pricing adjustments in Spain and by the lag in allowed price increases in Russia and Mexico, which has created lower sales in United States dollars and reductions in gross profit. Future sales and gross profit could be materially affected if the Company is unable to obtain price increases commensurate with the levels of inflation.
Litigation, Government Investigations and Other Matters
Litigation: See Note 11 of Notes to Consolidated Financial Statements for a description of the Company’s litigation.
Product Liability Insurance: The Company is currently self-insured with respect to product liability claims. The Company could be exposed to possible claims for personal injury resulting from allegedly defective products. While to date, no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a negative impact on the results of operations and cash flows.
Eastern European Developments
During 1999, the Company’s operations in Eastern Europe were adversely affected by economic and political developments in the region, including the Yugoslavian government’s seizure of the Company’s Yugoslavian operations.
Yugoslavia
On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company’s 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision by the Ministry for Economic and Property Transformation that was reached on November 26, 1998, effectively reduced the Company’s equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on a unilaterally imposed recalculation of the Company’s original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, contrary to Yugoslavian law, without any notification to or representation by the Company. As a result, the Company had and continues to have no effective control over the operating and financial affairs of ICN Yugoslavia. Accordingly, the Company has deconsolidated the financial statements of ICN Yugoslavia as of November 26, 1998, and reduced the carrying value of its investment in ICN Yugoslavia to fair value, estimated to be zero. The Company did not recognize any income or losses from ICN Yugoslavia in the years ended 2001, 2000 and 1999.
The Company is currently engaged in arbitration proceedings through the International Chamber of Commerce International Court of Arbitration with the Republic of Serbia and the State Health Fund of Serbia in which the Company is seeking declaratory relief and damages arising out of the unlawful taking of the Company’s majority interest in ICN Yugoslavia. The State Health Fund of Serbia is seeking injunctive relief and damages based on alleged breaches of the 1990 Foundation Agreement which led to the formation of ICN Yugoslavia. The resolution of these matters may affect the status of certain compounds contributed to ICN Yugoslavia by the Company in accordance with the Foundation Agreement. See Item 1 “Business - Research and Development.”
Foreign Operations
The Company operates directly and through distributors in North America, Latin America (principally Mexico), Western Europe (including Poland, Hungary and the Czech Republic) and Eastern Europe and through distributors elsewhere in the world. For financial information about domestic and foreign operations, see Note 12 of Notes to Consolidated Financial Statements.
Approximately 62%, 64%, and 64% of the Company’s revenues for the years ended December 31, 2001, 2000, and 1999 were generated from operations outside the U.S. Foreign operations are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange controls, limitations on foreign participation in local enterprises, health-care regulation and other restrictive governmental action. Changes in the relative values of currencies take place from time to time and may materially affect the Company’s results of operations. Their effects on the Company’s future operations are not predictable. The Company does not currently provide a hedge on its foreign currency exposure and, in certain countries in which the Company operates, no effective hedging program is available.
While the Russian economy continues to show improvement since the financial crisis that began in August 1998, the economy continues to experience difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999, 2000 and 2001, the ruble continued to fluctuate, there is continued volatility in the debt and equity market, hyperinflation persists, confidence in the banking sector has yet to be restored and there continues to be general lack of liquidity in the economy. In addition, laws and regulations affecting businesses operating within Russia continue to evolve. Russia’s return to economic stability is dependent to a large extent on the effectiveness of the measures taken by the government, decisions of international lending organizations, and other actions, including regulatory and political developments, which are beyond the Company’s control.
At December 31, 2001, the ruble exchange rate was 30.1 rubles to $1 as compared with the rate of 28.2 rubles to $1 and 27.5 rubles to $1 as of December 31, 2000 and 1999, respectively. As a result of the change in the ruble exchange rate, the Company recorded translation and exchange losses of $1.6 million, $3.5 million and $6.7 million, related to its Russian operations during 2001, 2000 and 1999, respectively. As of December 31, 2001, ICN Russia had a net monetary asset position of approximately $13.9 million, which is
subject to foreign exchange loss as further declines in the value of the ruble in relation to the dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate amount of any future translation and exchange loss the Company may incur cannot presently be determined and such loss may have a negative impact on the Company’s results of operations. The Company’s management continues to manage its net monetary exposure.
The Company believes that the economic and political environment in Russia has affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company’s customers, continue to experience liquidity problems as monetary policies have limited the money supply, and Russian companies often lack access to an effective banking system. As a result, many Russian companies have limited ability to pay their debts, which has lead to a number of business failures in the region. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms. These factors have affected, and may continue to adversely affect, sales and gross margins in the Company’s Russian operations.
Item 2.
Item 2.
Properties
The following are the principal facilities of the Company and its subsidiaries:
In the opinion of the Company’s management, all facilities occupied by the Company are adequate for present requirements, and the Company’s current equipment is considered to be in good condition and suitable for the operations involved.
Item 3.
Item 3.
Legal Proceedings
See Note 11 of Notes to Consolidated Financial Statements.
Item 4.
Item 4.
Submission of Matters to a Vote of Security 	Holders
The Registrant did not submit any matters to a vote of security holders during the quarter ended December 31, 2001.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Price Range of Common Stock
The Company’s common stock is traded on the New York Stock Exchange (Symbol: ICN). As of March 21, 2002, there were 6,865 holders of record of the Company’s common stock.
The following table sets forth the high and low sales prices of the Company’s common stock on the New York Stock Exchange - Composite Transactions reporting system.
Dividend Policy
In April 2000, the Board of Directors increased the quarterly dividend to 7.25 cents per share. In June 2001, the Board of Directors increased the quarterly dividend to 7.5 cents per share.
The Board of Directors will continue to review the Company’s dividend policy. The amount and timing of any future dividends will depend upon the financial condition and profitability of the Company, the need to retain earnings for use in the development of the Company’s business, contractual restrictions and other factors. If the Company completes the Ribapharm Inc. public offering, the amount of future dividends paid, if any, could be reduced from the current levels.
Recent Sales of Unregistered Securities
In 2001 and 2000, the Company issued the following equity securities that were not registered under the Securities Act of 1933:
In July 2001, the Company completed an offering of $525 million of 6 1/2% convertible subordinated notes due 2008 for net proceeds of approximately $507 million, which were sold to UBS Warburg as initial purchasers. The notes are convertible into 15,326,010 shares of the Company’s common stock at a conversion rate of 29.1924 shares per $1,000 principal amount of notes or $34.26 per share, subject to anti-dilution adjustments. Upon the earlier to occur of a public offering of Ribapharm Inc. (“Ribapharm”) common stock or a spin-off of the Company’s wholly-owned subsidiary Ribapharm (if either occurs), Ribapharm will become jointly and severally liable for the obligations under the notes. In the event of a spin-off of Ribapharm, converting note holders would receive the Company’s common stock and the number of shares of Ribapharm common stock the note holders would have received had the notes been converted immediately prior to the spin-off. A resale registration for the notes under the Securities Act of 1933 was declared effective by the SEC in November 2001.
In February 2001, the Company issued 92,275 unregistered shares of the Company’s common stock valued at approximately $2.7 million to F. Hoffmann-La Roche in settlement of a stock price guarantee.
In July 2000, the Company acquired the Swiss pharmaceutical company Solco Basel AG for $30.4 million, of which $25.2 million was paid in cash and the balance in 125,000 unregistered shares of the Company’s common stock valued at approximately $5 million.
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain consolidated financial data for the five years ended December 31, 2001. The Company’s selected historical financial data for each of the years in the five-year period ended December 31, 2001 were derived from the audited consolidated financial statements of the Company. The trends in the Company’s revenues and net income (loss) are affected by several business combinations completed in fiscal years 1997 through 2001. The Company’s results of operations for the years 1997 and 1998 include the results of the Company’s former subsidiary, ICN Yugoslavia, prior to its seizure by the Yugoslavian government effective November 26, 1998. For 1998, ICN Yugoslavia generated revenues of $141,740,000 and a loss from operations of ($140,419,000). The Company did not recognize any revenues or expenses related to its investment in ICN Yugoslavia in 2001, 2000 or 1999. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements included elsewhere in this Form 10-K.
See accompanying Notes to Selected Financial Data.
Notes to Selected Financial Data:
(1)
As a result of political and economic events in 	Eastern Europe, including the Yugoslavian government’s 	seizure of the Company’s Yugoslavian operations effective 	November 26, 1998, the Company has recorded write-offs and 	provisions for losses related to Eastern Europe totaling 	$451,019,000 in the year ended December 31, 1998. Of this 	total amount, $440,820,000 is included in operating expenses, 	representing the write-off of the Company’s investment in 	Yugoslavia and related assets ($235,290,000), provisions for 	losses on accounts and notes receivable (including accounts and 	notes receivable from the Yugoslavian government) 	($203,519,000), and the write-off of certain investments 	($2,011,000). The losses related to Eastern Europe also include 	reductions in the value of certain inventories ($6,072,000) 	included in cost of product sales and a charge against interest 	income ($4,127,000). As a result of the seizure of the 	Company’s Yugoslavian operations, the Company 	deconsolidated the financial statements of ICN Yugoslavia and is 	currently accounting for its ongoing investments using the cost 	method. See “Management’s Discussion and Analysis of 	Financial Condition and Results of Operations - 	Foreign Operations.” 	
(2)
During 2001, the Company repurchased $117,559,000 	of its outstanding 8 3/4% Senior Notes and redeemed and 	repurchased $190,645,000 of its 9 1/4% Senior Notes, 	resulting in an extraordinary loss on early extinguishment of 	debt of $21,066,000, net of an income tax benefit of 	$11,850,000. In addition, the Company issued $525,000,000 of 	6 1/2% Convertible Subordinated notes in July 2001. 	
(3)
During 2000, the Company repurchased $84,355,000 	of its outstanding 9 1/4% Senior Notes and $12,830,000 of 	its outstanding 8 3/4% Senior Notes. The repurchase 	generated an extraordinary loss on early extinguishment of debt 	of $3,225,000, net of an income tax benefit of $1,737,000. 	
(4)
Dividends paid for 2001, 2000, 1999 and 1998 	include the fourth quarter distributions declared and paid in 	the first quarter of the following year. 	
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical accounting policies and estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles. The preparation of these statements requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including those related to product returns, collectibility of receivables, inventories, intangible assets, income taxes and contingencies and litigation. The Company’s actual results could differ from those estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. The Company earns royalty revenue at the time the products subject to the royalty are sold by a third party. The Company’s management performs an ongoing credit evaluation of its customers’ financial condition and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost and the remaining shelf life of goods on hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers future taxable income and other expected future amounts in determining the amount of valuation allowance necessary. In the event the Company determines that actual taxable income will be less than expected or other future events will not occur, an adjustment to the valuation allowance would be charged to income in the period such determination was made.
Results of Operations
Certain financial information for the Company’s business segments is set forth below. This discussion should be read in conjunction with the consolidated financial statements of the Company included elsewhere in this document. For additional financial information by business segment, see Note 12 of Notes to Consolidated Financial Statements for the year ended December 31, 2001.
Year Ended December 31, 2001 Compared 	to 2000
Revenues:
In 1995, the Company entered into an Exclusive License and Supply Agreement (“License Agreement”) with Schering-Plough Ltd. (“Schering-Plough”) whereby Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C (“HCV”) in combination with Schering-Plough’s interferon alpha-2b (the “Combination Therapy”). The License Agreement provided the Company an initial non-refundable payment and future royalty payments from sales of ribavirin by Schering-Plough, including certain minimum royalty rates. As part of the License Agreement, the Company retained the right to co-market ribavirin capsules in the European Union under its trademark Virazole®. In 1998, the Company sold to Schering-Plough its rights to co-market oral ribavirin for the treatment of hepatitis C in the European Union in exchange for increased royalty rates on sales of ribavirin worldwide. Accordingly, Schering-Plough currently has exclusive worldwide marketing rights for oral forms of ribavirin for hepatitis C and is responsible for all clinical development and regulatory activities. As part of the original agreement, Schering-Plough was required to purchase $42 million of the Company’s common stock. In 1999, after certain regulatory milestones were achieved, Schering-Plough purchased 2,041,498 shares of the Company’s common stock, fulfilling its obligation.
Schering-Plough has informed the Company that it believes royalties paid under the License Agreement should not include royalties on products distributed as part of an indigent patient marketing program. Schering-Plough claims that because it receives no revenue from products given to indigent patients, it should not have to pay royalties on these products under the License Agreement. The Company does not agree with Schering-Plough’s interpretation of the Agreement. However, in August 2001, Schering-Plough withheld approximately $11,628,000 from its royalty payment relating to the second quarter of 2001. The amount withheld was purportedly intended by Schering-Plough to be a retroactive adjustment of royalties previously paid to the Company through the third quarter of 2000 on products distributed as part of this indigent patient marketing program. Since the fourth quarter of 2000, Schering-Plough is withholding on a current basis all royalty payments purportedly related to this indigent patient marketing program. The Company recognized
the $11,628,000 of withheld royalty payments for the retroactive adjustment and $3,050,000 of royalty payments withheld for the fourth quarter of 2000 and the first quarter of 2001 as income. The Company has not established a reserve for these amounts, because in the opinion of management, collectibility is reasonably assured. Since the second quarter of 2001, the Company no longer recognizes any of these withheld royalty payments as income as the Company can no longer determine such amounts due to a lack of information provided by Schering-Plough. The Company has filed an arbitration claim seeking to prevent Schering-Plough from adjusting its royalty payments to the Company. However, if Schering-Plough were to successfully continue to exclude the royalties on products given to indigent patients from future royalty payments, royalties earned could be reduced in the same proportion as the historical adjustment.
Royalty revenues for the year ended December 31, 2001 were $136,989,000 compared to $155,100,000 for 2000, a decrease of 12%. The Company believes the decrease is primarily reflective of a slowdown in sales of RebetronTM by Schering-Plough as physicians awaited marketing authorization pending FDA review and clearance for the use of pegylated interferon with ribavirin, which occurred in August 2001. The launch of this combination therapy was delayed until October 2001. Royalties for the fourth quarter of 2001 increased by $23,989,000 as compared to the similar period in 2000.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the year ended December 31, 2001 were $173,674,000, compared to $120,587,000 for 2000. The increase in revenue of $53,087,000 (44%) includes sales of $30,066,000 attributable to the assets purchased from Medical Alliance in January 2001. Additionally, North American revenues benefited from an increase of $19,089,000 (35%) from sales of dermatalogical products, including Efudix/ Efudex®, Kinerase®, bleaches and oxsoralen. The increase in dermatological products included the introduction of Glyquin® in the fourth quarter of 2000, which contributed $7,270,000 to the increase.
In the Latin America Pharmaceuticals segment, revenues for the year ended December 31, 2001 were $128,218,000, compared to $127,485,000 for 2000. The increase of $733,000 includes sales of $2,806,000 attributable to the New Pharma acquisition in August 2001. This increase is partially offset by a decrease in sales volume.
ICN International
In the Western Europe Pharmaceuticals segment, revenues for the year ended December 31, 2001 were $206,376,000 compared to $187,206,000 for 2000, an increase of $19,170,000 (or 10%). The increase is primarily due to new product acquisitions of $4,902,000, revenues of $4,713,000 attributable to the 2000 acquisition of Solco and an increase in sales in Poland of $8,367,000. The increase in Poland is primarily due to stronger sales of the cardiology drugs Aclotin® and Bisocard® of $2,751,000 and price increases of other products.
In the Russia Pharmaceuticals segment, revenues for the year ended December 31, 2001 were $103,066,000, compared with $106,271,000 for 2000, a decrease of ($3,205,000) (or 3%). The decrease was primarily the result of a decline in the value of the ruble.
In the Asia, Africa and Australia Pharmaceuticals segment (“AAA”), revenues for the year ended December 31, 2001 were $49,826,000 compared to $45,133,000 for 2000, an increase of $4,693,000 (or 10%). The increase includes revenues of $5,872,000 attributable to the 2000 acquisition of Solco partially offset by lower sales of Ancobon® and Fluorouracil® due to interruptions in supplies of products caused by transitioning these products from third party manufacturers to in-house manufacturing.
In the Biomedicals segment, revenues for the year ended December 31, 2001 were $59,955,000 compared to $58,522,000 for 2000, an increase of $1,433,000 (or 2%). The increase is primarily due to an increase in sales in the Company’s dosimetry services product line which resulted from an increase in the customer base.
Gross Profit: Gross profit margin on product sales increased to 60% for the year ended December 31, 2001 compared to 59% for 2000. The gross profit margin for all regions was relatively consistent for 2001 and 2000.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were $320,472,000 for the year ended December 31, 2001, compared to $304,314,000 for 2000, an increase of $16,158,000 (5%). The increase reflects additional selling general and administrative expenses of $29,420,000 related to the acquisitions completed in 2001 and in the third quarter of 2000. The increase was partially offset by a decrease in legal and professional fees, which were higher in 2000 due to the Department of Justice investigation and Securities and Exchange Commission litigation. Additionally, general and administrative expense in Western and Eastern Europe decreased by $7,980,000 primarily due to cost cutting programs that were initiated in the fourth quarter of 2000.
Research and Development: Research and development expenses for the year ended December 31, 2001 were $30,474,000, compared to $18,769,000 in 2000. The increase of $11,705,000 reflects the continued expansion of research and development efforts, primarily in the areas of antiviral and anticancer drugs. Total research and development spending for 2001 and 2000 was $52,677,000 and $36,686,000, respectively, which included capital for new equipment and facilities, as well as accelerated research programs to focus on the pipeline and new product development.
Other (Income) Loss, Net, Including Translation and Exchange: Other (income) loss, net, including translation and exchange was ($1,168,000) for the year ended December 31, 2001 compared to $6,587,000 for 2000. In 2001, the Company recorded other income in connection with the licensing of LevovirinTM to F. Hoffmann-La Roche offset by translation and exchange losses of $3,832,000. Translation losses for 2001 principally consisted of translation losses of $1,621,000 related to the net monetary asset position of the Company’s Russian subsidiaries and transaction losses of $2,211,000. In 2000, translation losses principally consisted of translation losses of $3,525,000 related to the net monetary asset position of the Company’s Russian subsidiaries and transaction losses of $3,062,000.
Interest Income and Expense: Interest expense during the year ended December 31, 2001 decreased $4,563,000 compared to 2000, primarily due to the repurchase and redemption of the 8 3/4% and 9 1/4 Senior Notes during the fourth quarter of 2000 and in the second and third quarters of 2001. Interest income decreased from $12,542,000 in 2000 to $9,644,000 in 2001 as a result of the decrease in cash balance and decline in interest rates during 2001 as compared to 2000.
Income Taxes: The Company’s effective income tax rate for the year ended December 31, 2001 was 41% compared to 29% for 2000. The increase in the effective tax rate is primarily due to the recognition, during the second quarter of 2000, of deferred tax assets through the reduction of the related valuation allowance for capital loss carryforwards amounting to $12,250,000. Excluding this reduction in valuation allowance the effective rate in 2000 would have been 41%. The Company has announced its intention to restructure the Company and divide the Company into three separate publicly traded companies. This restructuring will include the sale of stock of the two newly formed companies, which is expected to result in a net capital gain. The Company will be able to utilize its capital loss carryforwards and some of its net operating loss carryforwards to offset a portion of the gain generated on the sale of stock. Ultimate realization of the deferred tax asset is dependent upon the Company generating sufficient capital gains prior to the expiration of the capital loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized.
The Company’s effective tax rate of 41% is higher than the U.S. Federal statutory tax rate of 35% due primarily to losses incurred by foreign subsidiaries for which the Company currently receives no tax benefit.
In Russia, the Company benefited from special tax relief that benefits pharmaceutical companies. Under this relief approximately 75% of the income generated in Russia related to the manufacture and sale of prescription medicines is exempt from taxation. This reduces the statutory rate to approximately 8%. Effective January 1, 2002, changes in the tax laws repealed the exemption that benefited pharmaceutical companies. The statutory rate will increase to 24% in 2002.
Year Ended December 31, 2000 Compared 	to 1999
Royalty Revenues: Royalty revenues for the year ended December 31, 2000 were $155,000,000 compared to $108,885,000 for 1999, an increase of 42%, reflective of additional sales of RebetronTM by Schering-Plough resulting from the 1999 and 2000 launches into certain European markets.
ICN Americas
In the North America Pharmaceuticals segment, revenues for the year ended December 31, 2000 were $120,587,000, compared to $145,809,000 for 1999. The decrease in revenue of $25,222,000 (17%) was primarily the result of lower unit sales of $37,288,000 (26%) primarily resulting from production and supply problems that affected Efudex® and Librax® and decreased sales of other ethical products partially offset by sales price increases of $12,066,000 (8%).
In the Latin America Pharmaceuticals segment, revenues for the year ended December 31, 2000 were $127,485,000, compared to $100,325,000 for 1999. The increase of $27,160,000 (27%) primarily reflects increases in sales volume of $17,128,000 (17%) including sales of Bedoyecta®, an injectable vitamin B-12 supplement, Virazole® (ribavirin), from the launching of OTO ENI, ear drops for external infectious and inflammatory otitis for pediatric use, and from the launching of a new line of dermatological products including MicroskinTM, MicroVITATM and MicroKATM.
ICN International
In the Western Europe Pharmaceuticals segment, revenues for the year ended December 31, 2000 were $187,206,000 compared to $185,417,000 for 1999, an increase of $1,789,000 (1%). In 2000, revenues include sales attributable to the Solco acquisition in the third quarter 2000 of $7,036,000, product acquisitions (1999) of $6,834,000 (4%) and the effect of an increase in sales prices of $13,591,000 (7%), offset by the negative impact of the stronger U.S. Dollar of $27,324,000 (15%).
In the Russia Pharmaceuticals segment, revenues for the year ended December 31, 2000 were $106,271,000, compared with $91,648,000 for 1999, an increase of $14,623,000 (16%). The increase was primarily the result of the expansion of the Company’s retail pharmacy business in 1999 of $13,324,000 (15%).
In the Asia, Africa and Australia Pharmaceuticals segment, revenues for the year ended December 31, 2000 were $45,133,000 compared to $54,131,000 for 1999, a decrease of $8,998,000 (17%). In 2000, revenues include sales attributable to the Solco acquisition in the third quarter of $7,037,000. The decrease, after excluding the sales from Solco ($16,035,000), is due to sales volume decrease of $10,820,000 (21%) resulting from the shift by the Company to new distribution channels a year ago resulting in higher than normal sales in the second quarter of 1999, and the termination of a joint venture agreement in China of $4,720,000 (8%).
In the Biomedicals segment, revenues for the year ended December 31, 2000 were $58,522,000 compared to $61,197,000 for 1999, a decrease of $2,675,000 (4%). The decrease is primarily due to lower sales volume in the Company’s diagnostics and research product lines, partially offset by increased revenues from dosimetry services.
Gross Profit: Gross profit margin on product sales decreased to 59% for the year ended December 31, 2000, compared to 60% for 1999. The decrease in gross profit margin is primarily due to lower gross profit margin in AAA. The gross profit margin for AAA was 42% in 2000 compared to 54% in 1999, reflecting a higher cost of goods purchased from toll manufacturers, which were purchased from SKB and Roche in 1999 and a decrease in gross profit margin of 6% in 2000 related to the termination of a joint venture in China. The gross profit margin for all other regions was relatively the same for 2000 and 1999.
Selling, General and Administrative Expenses: Selling, general and administrative expenses were $304,314,000 for the year ended December 31, 2000, compared to $252,207,000 for 1999, an increase of $52,107,000 (21%). In 1999, selling, general and administrative expenses included approximately $11,981,000 of costs associated with an asset revaluation in the Hungarian business. Excluding the asset revaluation charge
in 1999, selling, general and administrative expenses increased $64,088,000. This increase is primarily due to a rise in selling and advertising expenses of $28,184,000, an increase in corporate expenses, including compensation and legal expenses of $13,825,000 primarily due to a $9,250,000 reserve for potential legal settlements and all other related costs (see note 11 of Notes to the Consolidated Financial Statements), lease termination costs of approximately $3,000,000 and 1999 non-recurring reductions of expense of $6,131,000.
Research and Development: Research and development expenses for the year ended December 31, 2000 were $18,769,000, compared to $10,963,000 in 1999. The increase reflects the Company’s expanded and intensified research and development efforts in 2000. Total research and development spending for 2000 was $37 million, which included capital for new equipment and facilities, as well as accelerated research programs to focus on the pipeline and new product development.
Other (Income) Loss, Net, Including Translation and Exchange: Other (income) loss, net, including translation and exchange were $6,587,000 for the year ended December 31, 2000 compared to $11,823,000 for 1999. In the year of 2000, translation losses principally consisted of translation losses of $3,525,000 related to the net monetary asset position of the Company’s Russian subsidiaries and transaction losses of $3,062,000. In 1999, translation losses principally consisted of translation losses of $6,738,000 related to the net monetary asset position of the Company’s Russian subsidiaries and losses of $2,650,000 in Hungary and Poland resulting from foreign-denominated debt.
Interest Income and Expense: Interest expense during the year ended December 31, 2000 increased $4,413,000 compared to 1999, primarily due to interest on the $125,000,000 principal amount 8 3/4% Senior Notes issued in July 1999 partially offset by a reduction of debt during the second half of 1999 in the Company’s subsidiaries in Hungary, Poland and Czech Republic. Interest income increased from $8,894,000 in 1999 to $12,542,000 in 2000 as a result of the increase in cash generated during the second half of 1999.
Income Taxes: The Company’s effective income tax rate for the year ended December 31, 2000 was 29% compared to 21% for 1999. The increase in the effective tax rate results from higher taxable income in 2000 and the effect of the losses in Hungary and China for which no tax benefit was recorded partially offset by the recognition, during the second quarter of 2000, of deferred tax assets through the reduction of the related valuation allowance for capital loss carryforwards amounting to $12,250,000. During 1999, the Company reduced its valuation allowance for capital loss carryforwards by $25,286,000.
Liquidity and Capital Resources
During 2001, cash provided by operating activities totaled $138,112,000 compared to $181,684,000 in 2000. Operating cash flows reflect the Company’s net income of $64,134,000 and net non-cash charges (including depreciation, minority interest, foreign exchange gains and extraordinary loss) of $120,543,000, partially offset by working capital increases (after the effect of business acquisitions and currency translation adjustments) totaling approximately $46,565,000. The working capital increases principally consist of an increase of $43,150,000 in accounts receivable, an increase of $24,934,000 in prepaid expenses and other assets offset by an increase of $18,418,000 in income taxes payable.
The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost, and the remaining shelf life of goods on hand. The Company also evaluates the collectibility of its receivables at least quarterly. The Company’s methodology for establishing the allowance for bad debts varies with the regions in which it operates. With the exception of Russia, the allowance for bad debts is based upon specific identification of customer accounts and the Company’s best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. In Russia, the allowance for bad debts is based upon a combination of specific identification of customer account balances and an overall provision based upon anticipated developments and historical experience. In Russia, factors such as the economic crisis in August 1998 and the subsequent stabilization in the middle of 1999 were utilized in the analysis. Based upon this analysis, the Company recorded bad debt expense related to its Russian operations of $105,000, $1,824,000 and $8,125,000 for the years ended December 31, 2001, 2000 and 1999, respectively. As
of December 31, 2001 and 2000 the allowance for doubtful accounts for the Company’s Russian subsidiaries was $4,520,000 and $10,276,000, respectively. As of December 31, 2001, the Company believes that adequate provision has been made for inventory obsolescence and for anticipated losses on uncollectible accounts receivable.
Cash used in investing activities was $119,065,000 for 2001 compared to $90,795,000 for 2000. In 2001, net cash used in investing activities principally consisted of acquisitions totaling $49,981,000 and payments for capital expenditures of $68,802,000 principally representing an increase in the investment in research and development in North America and distribution facilities in Western Europe. In 2000, the Company made acquisitions of license rights, product lines and businesses amounting to $40,968,000 (net of acquired cash $4,613,000) and made capital expenditures of $49,330,000, principally representing an increase in the investment in research and development in North America and production equipment in Western Europe (including Poland, Hungary and the Czech Republic).
Cash provided by financing activities totaled $150,722,000 during 2001. Proceeds from issuance of long-term debt totaled $508,177,000 including net proceeds from an offering of $525,000,000 of 6 1/2% convertible subordinated notes due 2008 which the Company completed in July 2001. Proceeds from the exercise of stock options totaled $12,257,000. The Company used cash for payments on long-term debt of $345,701,000 principally consisting of the repurchase and redemption of $190,645,000 principal of its outstanding 9 1/4% Senior Notes and $117,559,000 principal of its outstanding 8 3/4% Senior Notes. Cash dividends paid on common stock totaled $24,002,000. During 2000, cash used in financing activities totaled $112,765,000, including payments on long-term debt of $105,901,000 (including the repurchase of $84,355,000 of the Company’s outstanding 9 1/4% Senior Notes and $12,830,000 of its outstanding 8 3/4% Senior Notes), payments of cash dividends on common stock of $22,665,000, and payments on notes payable of $7,911,000. These payments were offset by proceeds from the exercise of stock options of $14,568,000, proceeds from the issuance of notes payable of $5,724,000 and proceeds from long-term borrowings of $3,420,000.
The following summarizes the Company’s contractual obligations at December 31, 2001, and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands):
The Company is in compliance with all covenants or other requirements set forth in its credit agreements or indentures. Further, the Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect the Company’s ability to obtain access to new credit facilities in the future and could increase the cost of such facilities.
The Company, through Ribapharm, expects to spend approximately $140 million over the next two years on research and development activities, which represents a substantial increase over the Company’s historic spending. The Company expects to fund the research and development spending with proceeds from the Schering-Plough royalties.
In connection with the license agreement of IL-12 from Roche, Roche is entitled to receive milestone payments of up to $24 million in connection with drug development and regulatory approvals and royalty payments from the Company if the drug is commercialized.
In connection with the license agreement for Hapavair BTM, the Company was required to pay a $2 million nonrefundable license fee, $1 million of which was paid in October 2001, the remaining $1 million will be paid in equal installments in April 2002 and October 2002. In addition, Metabasis Therapeutics, Inc. is entitled to receive milestone payments of up to $18 million in connection with drug development and regulatory approvals and royalty payments from the Company if the drug is commercialized.
The current economic environment in Russia continues to affect the Company’s operating cash flows in Russia, as some of the Company’s Russian customers continue to experience liquidity shortages. The Company may need to invest additional working capital in Russia to sustain its operations, to provide increasing levels of working capital necessary to support renewed growth and to fund the purchase or upgrading of facilities. The Company also has several preliminary acquisition prospects that may require significant funds through the year 2001. However, there can be no assurance that any such acquisitions will be consummated.
Management believes that the Company’s existing cash and cash equivalents and funds generated from operations will be sufficient to meet its operating requirements in the near term and to fund anticipated acquisitions, capital expenditures and increase research and development expenditures. The Company may also seek additional debt financing or issue additional equity securities to finance future acquisitions.
The Company is currently self-insured with respect to product liability claims. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a negative impact on the Company’s liquidity and financial performance.
Restructuring
The Company currently is in the process of implementing a restructuring plan to split its business into three separate publicly traded companies: Ribapharm Inc. (comprised of the Company’s royalty stream from ribavirin and the Company’s U.S. research and development operations) (“Ribapharm”), ICN International AG (comprised of the Company’s operations in Western Europe, Eastern Europe and AAA) (“ICN International”) and ICN Americas (comprised of the Company’s operations in North America, Latin America and the biomedicals business) (“ICN Americas”).
The Company intends for Ribapharm to become a separate publicly traded company. To achieve this objective, the Company intends to sell a minority of Ribapharm’s common stock in an underwritten public offering (the “Ribapharm IPO”). The shares to be sold in the Ribapharm IPO will be shares owned by the Company and the Company would recognize taxable income on the proceeds it receives. A portion of the proceeds from the Ribapharm IPO would be used to purchase all of the Company’s outstanding 8 3/4% senior notes in connection with an offer to purchase and consent solicitation (the “Tender Offer”). The Company has filed a registration statement, although not declared effective with the Securities and Exchange Commission to effect the Ribapharm IPO. Following the Ribapharm IPO, the Company is committed to distributing its remaining interest in Ribapharm to the Company’s stockholders on a tax-free basis. The distribution will be subject to a ruling from the U.S. Internal Revenue Service (“IRS”) compliance with all other legal and regulatory provisions including SEC regulations, Delaware Corporate Law provisions regarding the payment of dividends and compliance with applicable fraudulent conveyance laws and completion of the Tender Offer. Under one of the requirements for a tax free spin-off, the Company must distribute to its stockholders in the spin-off transaction stock representing at least 80% of the issued and outstanding common stock of Ribapharm. This requirement limits the number of shares of Ribapharm common stock that can be sold in the Ribapharm IPO or thereafter.
The Company may not undertake the Ribapharm IPO at all if the maximum number of shares that could be sold in the offering, taking into account the foregoing limitations, would not provide a sufficiently liquid market. On March 12, 2002, the Company filed a request with the IRS for a ruling that the spin-off will qualify as a tax free spin-off under U.S. tax laws. Typically, it takes four to six months from the date of submission of a ruling request for the Internal Revenue Service to make a determination. The Company cannot assure you that it will not take longer for the IRS to rule on the Company’s request or that the Internal
Revenue Service will issue a favorable ruling. Nor can the Company assure you that it will be able to obtain a favorable opinion from the Company’s counsel or that the IRS or a court will agree with the conclusions reached in that opinion. Furthermore, the Company’s commitment to effect the spin-off does not constitute a binding legal obligation to do so. There can be no assurance that the Ribapharm IPO or the spin-off will be completed.
The Company intends to sell up to a 40% interest in ICN International in an offering. The Company currently intends to apply for listing of the shares of ICN International on the Budapest Stock Exchange and global depositary receipts on the London Stock Exchange. Subject to market conditions and regulatory approvals the Company expects to complete the offering of ICN International as soon as practicable. There can be no assurance that an offering of ICN International will be completed.
In addition to continuing the Company’s operations in North America, Latin America and Biomedicals, ICN Americas will hold the remaining interests in ICN International and Ribapharm until such time as these interests are disposed of by ICN Americas, as discussed above.
Foreign Operations
Approximately 62%, 64%, and 64% of the Company’s revenues for the years ended December 31, 2001, 2000, and 1999 were generated from operations outside the United States. All of the Company’s foreign operations are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and currency exchange controls, fluctuations in the relative values of currencies, political instability and restrictive governmental actions. Changes in the relative values of currencies occur from time to time have and may, in certain instances, materially affect the Company’s results of operations. The effect of these risks remains difficult to predict. The Company does not currently provide any hedges on its foreign currency exposure and, in certain countries in which the Company operates, no effective hedging programs are available.
Russia
While the Russian economy continues to show improvement since the financial crisis that began in 1998, the economy continues to experience difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to a rate of 20.7 rubles to $1 at December 31, 1998. Throughout 1999, 2000 and 2001, the ruble continued to fluctuate, there is continued volatility in the debt and equity market, hyperinflation persists, confidence in the banking sector has yet to be restored and there continues to be general lack of liquidity in the economy. In addition, laws and regulations affecting businesses operating within Russia continue to evolve. Russia’s return to economic stability is dependent to a large extent on the effectiveness of the measures taken by the government, decisions of international lending organizations, and other actions, including regulatory and political developments, which are beyond the Company’s control.
At December 31, 2001, the ruble exchange rate was 30.1 rubles to $1 as compared with the rate of 28.2 rubles to $1 and 27.5 rubles to $1 as of December 31, 2000 and 1999, respectively. As a result of the change in the ruble exchange rate, the Company recorded translation losses of $1,621,000, $3,525,000 and $6,738,000, related to its Russian operations during 2001, 2000 and 1999, respectively. As of December 31, 2001, ICN Russia had a net monetary asset position of approximately $13,919,000, which is subject to foreign exchange loss as further declines in the value of the ruble in relation to the dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate amount of any future translation and exchange loss the Company may incur cannot presently be determined and such loss may have a negative impact on the Company’s results of operations. The Company’s management continues to work to manage its net monetary exposure. However, there can be no assurance that such efforts will be successful.
The Company’s Russian subsidiaries periodically engage in barter transactions related to the sale of its products in exchange for raw materials, other finished goods and costs or services incurred in the conduct of its operations. For each of the periods ended December 31, 2001, 2000, 1999, the Company’s Russian subsidiaries recorded approximately $4,000,000, $3,000,000 and $8,000,000, respectively, in revenue related to barter transactions.
The Company’s collections on accounts receivable in Russia have been adversely affected by the Russian economic situation. Prior to the August 1998 devaluation of the ruble, the Company had favorable experience with the collection of receivables from its customers in the region. Subsequently, the Company has taken additional steps to ensure the creditworthiness of its customers and the collectibility of accounts receivable by tightening its credit policies in the region. These steps include a shortening of credit periods, suspension of sales to customers with past-due balances and discounts for cash sales.
The Company believes that the economic and political environment in Russia has affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company’s customers, continue to experience liquidity problems as monetary policy has limited the money supply and Russian companies often lack access to an effective banking system. As a result, many Russian companies have limited ability to pay their debts, which has led to a number of business failures in the region. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms.
Yugoslavia
On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company’s 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision by the Ministry for Economic and Property Transformation that was reached on November 26, 1998, effectively reduced the Company’s equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on a unilaterally imposed recalculation of the Company’s original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, contrary to Yugoslavian law, without any notification to or representation by the Company. As a result, the Company had and continues to have no effective control over the operating and financial affairs of ICN Yugoslavia. Accordingly, the Company has deconsolidated the financial statements of ICN Yugoslavia as of November 26, 1998, and reduced the carrying value of its investment in ICN Yugoslavia to fair value, estimated to be zero.
The Company is currently engaged in arbitration proceedings through the International Chamber of Commerce International Court of Arbitration with the Republic of Serbia and the State Health Fund of Serbia in which the Company is seeking declaratory relief and damages arising out of the unlawful taking of the Company’s majority interest in ICN Yugoslavia. The State Health Fund of Serbia is seeking injunctive relief and damages based on alleged breached of the 1990 Foundation Agreement which led to the formation of ICN Yugoslavia. The resolution of these matters may affect the status of certain compounds contributed to ICN Yugoslavia by the Company in accordance with the Foundation Agreement. See Item 1 “Business - Research and Development.”
Argentina
At December 31, 2001, the Company’s Argentine subsidiary recorded a foreign currency translation adjustment of $5,142,000 on its net assets reflecting a 33% devaluation of the Argentine peso. This non-cash adjustment reduced stockholder’s equity. In addition, the Company’s Argentine subsidiary recognized a translation loss of $1,014,000, included in other loss, on net assets denominated in non-peso currencies.
Acquired Products
The majority of products acquired by the Company are mature products with no effective patents, either because of expirations or the absence of legal protections provided by the local governments in the respective markets. Under the Company’s ownership, price increases and additional advertising and promotions were planned for selected products, as the Company believes that they were not marketed to their greatest potential. The Company believes that some of these products in specific markets have an adequate growth potential, and intends to develop a product strategy for each product.
The Company believes that these products will continue to generate significant sales even without patent protection because the trademarks under which they are marketed are well-established and enjoy substantial customer brand-loyalty. Moreover, the relatively small sales volumes and market sizes for some of these products pose significant barriers to entry of generic competition.
The Company estimated the remaining life of these products based on anticipated future profits assuming a constant profit margin for the remaining product cycle. It should be noted, however, any sales growth or increase in profitability attained by additional marketing efforts is expected to be relatively short-lived. After a temporary boost, these products will revert to their gradually declining trend in accordance with the product cycle model. The acquired products’ historical operating results demonstrated their ability to earn substantial excess profits. Excess profits are directly related to their competitive advantage primarily attributable to the product quality and reputation. The useful life was defined as the number of years for the forecasted annual product sales to reach 50% of the cumulative historical amount through the date of acquisition. During the forecasted period, only gradual declines are expected due to the absence of immediate threats from competition of generic or/and alternative products. Based upon the Company’s analysis, the useful lives of products acquired were estimated to be in the range of 10-18 years depending on the product acquired.
Inflation and Changing Prices
The effects of inflation are experienced by the Company through increases in the costs of labor, services and raw materials. The Company is subject to price control restrictions on its pharmaceutical products in the majority of countries in which it operates. While the Company attempts to raise selling prices in anticipation of inflation, the Company operates in some markets which have price controls that may limit its ability to raise prices in a timely fashion. Future sales and gross profit will be reduced if the Company is unable to obtain price increases commensurate with the levels of inflation.
The Russian government has instituted a process for establishing prices for pharmaceutical products, which may lead to price controls in the Russian market in the future. Currently, this process requires the Company to register the prices for certain of its products included on the government’s list of “products important for health.” The next procedure for registration includes the negotiation and approval of such prices between the Company and the relevant state bodies. The Company is currently working with all relevant state bodies to approve its prices and the Company is not presently able to determine the effect, if any, that this process may have on its results of operations. However, such developments could have a negative impact on the Company’s results of operations and cash flows in Russia.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union introduced the Euro. The conversion rates between the Euro and the participating nations’ existing legacy currencies were fixed irrevocably as of January 1, 1999. The Company adopted the Euro for business systems and reporting as of December 1, 2001. The adoption of the Euro did not have a material effect on the Company’s business, results of operations, financial position or liquidity.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS No. 142 goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. Application of the non-amortization provisions of SFAS No. 142 for goodwill is expected to result in an increase in operating income of approximately $3,400,000 in 2002. Changes in the estimated useful lives of intangible assets are not expected to result in a material effect on net income in 2002. At December 31, 2001, the Company had goodwill, net of amortization of approximately $45,739,000. Pursuant to SFAS No. 142, the Company will test its goodwill for impairment upon adoption, if impairment is
indicated, record such impairment as a cumulative effect of accounting change. The Company is currently evaluating the effect adoption may have on its consolidated results of operation and financial position.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. While the Company is currently evaluating the impact the adoption of SFAS No. 144 will have on its results of operations and financial position, it does not expect such impact to be material.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s business and financial results are affected by fluctuations in world financial markets. The Company evaluates its exposure to such risks on an ongoing basis, and reviews its risk management policy to manage these risks to an acceptable level, based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. The Company does not hold any significant amount of market risk sensitive instruments whose value is subject to market price and currency risk.
In the normal course of business, the Company also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analysis.
Interest Rate Risk: The Company currently does not hold financial instruments for trading or speculative purposes. The financial assets of the Company are not subject to significant interest rate risk due to their short duration. At December 31, 2001, the Company had $19,962,000 of foreign denominated debt that would subject it to both interest and currency risk. The principal financial liabilities of the Company that are subject to interest rate risk are its fixed-rate long-term debt (principally its 8 3/4% Senior Notes due 2008 and its 6 1/2% subordinated convertible notes due 2008) totaling approximately $722,593,000. The Company does not use any derivatives or similar instruments to manage its interest rate risk. A 100 basis-point increase in interest rates (approximately 14% of the Company’s weighted average interest rate on fixed-rate debt) affecting the Company’s financial instruments would have an immaterial effect on the Company’s 2001 pretax earnings. However, such a change would reduce the fair value of the Company’s fixed-rate debt instruments by approximately $38,300,000 as of December 31, 2001.
THE “SAFE HARBOR” STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION ACT OF
This Annual Report on Form 10-K contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Annual Report on Form 10-K and include statements regarding, among other matters, the Company’s growth opportunities, the Company’s acquisition strategy, the Company’s reorganization plans, regulatory matters pertaining to governmental approval of the marketing or manufacturing of certain of the Company’s products and other factors affecting the Company’s financial condition or results of operations. Stockholders are cautioned that any such forward looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from the future results, performance or achievements, expressed or implied in such forward looking statements. Such factors are discussed in this Annual Report on Form 10-K and also include, without limitation, the Company’s dependence on foreign operations (which are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange control, limitations on foreign participation in local enterprises, health-care regulations and other restrictive governmental conditions); the risk of operations in Eastern Europe, Latin America, as well as Russia and other countries in light of the unstable economic, political and regulatory conditions in such regions; the risk of potential claims against certain of the Company’s research compounds; the Company’s ability to successfully develop and commercialize future products; the limited protection afforded by the patents relating to ribavirin, and possibly on future drugs, techniques, processes or products the Company may develop or acquire; the potential impact of the Euro currency; the Company’s ability to continue its expansion plan and to integrate successfully any acquired companies; the results of lawsuits or the outcome of investigations pending against the Company; the Company’s potential product liability exposure and lack of any insurance coverage thereof; government regulation of the pharmaceutical industry (including review and approval for new pharmaceutical products by the FDA in the United States and comparable agencies in other countries) and competition.
QUARTERLY FINANCIAL DATA
Following is a summary of quarterly financial data for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts):
(1)
The net loss before extraordinary loss in the 	fourth quarter of 2000 is primarily due to a decrease in royalty 	revenue caused by a temporary slowdown in royalty revenue and an 	adjustment to actual from management’s estimate in the 	third quarter. In connection with the Grand Jury investigation 	and SEC litigation, the Company has recorded a reserve in the 	fourth quarter of $9,250,000 to cover the potential combined 	settlement liability and all other related costs. Additionally, 	the Company had increased research and development costs and a 	higher effective tax rate in the fourth quarter of 2000. 	
For the fourth quarter of 2000, dilutive options 	did not have an effect on the computation of diluted loss per 	share since they were anti-dilutive. 	
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 31, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ICN Pharmaceuticals, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of ICN Pharmaceuticals, Inc. (a Delaware corporation) and Subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion.
PRICEWATERHOUSECOOPERS LLP 	
Orange County, California
February 27, 2002
ICN PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2001, 2000 and 1999
(In thousands)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(In thousands)
The accompanying notes are an integral part of these consolidated statements.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Organization and Background
ICN Pharmaceuticals, Inc. and Subsidiaries (the “Company”) was formed in November 1994, as a result of the merger of ICN Pharmaceuticals, Inc., SPI Pharmaceuticals, Inc., Viratek, Inc. and ICN Biomedicals, Inc. (“Biomedicals”), in a transaction accounted for using the purchase method of accounting (the “Merger”). The Company is a global research based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products.
The Company currently is in the process of implementing a restructuring plan to split its business into three separate publicly traded companies: Ribapharm Inc. (comprised of the Company’s royalty stream from ribavirin and the Company’s U.S. research and development operations) (“Ribapharm”), ICN International AG (comprised of the Company’s operations in Western Europe, Eastern Europe and AAA) (“ICN International”) and ICN Americas (comprised of the Company’s operations in North America, Latin America and the biomedicals business) (“ICN Americas”).
2. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Investments in 20% through 50% owned affiliated companies are included under the equity method where the Company exercises significant influence over operating and financial affairs. Investments in less than 20% owned companies or investments in 20%-50% owned companies where the Company does not exercise significant influence over operating and financial affairs are recorded at the lower of cost or fair value. The accompanying consolidated financial statements reflect the elimination of all significant intercompany account balances and transactions.
Cash and Cash Equivalents: Cash equivalents include repurchase agreements, certificates of deposit, money market funds and municipal debt securities which have maturities of three months or less. For purposes of the consolidated statements of cash flows, the Company considers highly-liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The carrying amount of these assets approximates fair value due to the short-term maturity of these instruments. At December 31, 2001 and 2000, cash equivalents totaled $188,967,000 and $119,861,000, respectively.
Marketable Securities: The Company classifies its investments as available for sale. Changes in market values are reflected as unrealized gains and losses, calculated on the specific identification method, in accumulated other comprehensive income.
Allowance for Doubtful Accounts: The Company evaluates the collectibility of its receivables at least quarterly, based upon various factors including the financial condition and payment history of major customers, an overall review of collections experience on other accounts and economic factors or events expected to affect the Company’s future collections experience.
Inventories: Inventories, which include material, direct labor and factory overhead, are stated at the lower of cost or market. Cost is determined on a first-in, first-out (“FIFO”) basis. The Company evaluates the carrying value of its inventories at least quarterly, taking into account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company expects to obtain for its products in their respective markets compared with historical cost and the remaining shelf life of goods on hand.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. The Company primarily uses the straight-line method for depreciating property, plant and equipment over their estimated useful lives. Buildings and related improvements are depreciated from 7 - 50 years, machinery and equipment from 3 - 30 years, furniture and fixtures from 3 - 15 years and leasehold improvements and capital leases are amortized over their useful lives, limited to the life of the related lease.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company follows the policy of capitalizing expenditures that materially increase the lives of the related assets and charges maintenance and repairs to expense. Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and the resulting gain or loss is included in income.
Goodwill and Intangibles: The difference between the purchase price and the fair value of net assets acquired at the date of acquisition is included in the accompanying consolidated balance sheets as goodwill and intangibles. Intangible assets also include acquired product rights. Goodwill and intangibles amortization periods range from 5 to 20 years depending upon the nature of the business or product acquired. The Company periodically evaluates the carrying value of goodwill and intangibles including the related amortization periods. In evaluating goodwill, the Company determines whether there has been an impairment and the amount thereof, if any, by comparing the undiscounted future operating income of the acquired business with the carrying value of the goodwill. In evaluating acquired product rights and other intangible assets, the Company determines whether there has been impairment by comparing the anticipated undiscounted future operating income of the product line with its carrying value. If the undiscounted operating income is less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on a discounted cash flows analysis. Based on its review, the Company does not believe that any impairment of its goodwill and intangibles has occurred.
As of December 31, 2001 and 2000, goodwill and intangibles included the following:
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS No. 142 goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statement. Other intangible assets will continue to be amortized over their useful lives. Application of the non-amortization provisions of SFAS No. 142 for goodwill is expected to result in an increase in operating income of approximately $3,400,000 in 2002. At December 31, 2001, the Company had goodwill, net of amortization of approximately $45,739,000. Pursuant to SFAS No. 142, the Company will test its goodwill for impairment upon adoption and, if impairment is indicated, record such impairment as a cumulative effect of change in accounting principle. The Company is currently evaluating the effect that the adoption may have on its consolidated results of operation and financial position.
Revenue Recognition: Revenues and related cost of product sales are recorded at the time of shipment or as services are performed, provided that collection of the revenue is reasonably assured. The Company earns royalty revenue as a result of the sale of product rights and technologies to third parties. Royalty revenue is earned at the time the products subject to the royalty are sold by the third party.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Barter Transactions: The Company periodically engages in barter transactions, primarily in Russia, related to the sale of its products in exchange for raw materials, other finished goods and costs of services incurred in the conduct of its operations. The Company accounts for these transactions in accordance with APB No. 29 “Accounting for Nonmonetary Transactions”, whereby the cost of the assets or service acquired is based upon the fair value of the asset surrendered or received whichever is more clearly evident. For each of the periods ended December 31, 2001, 2000 and 1999, the Company’s Russian subsidiaries recorded approximately $4,000,000, $3,000,000 and $8,000,000, respectively, in revenue related to barter transactions.
Foreign Currency Translation: The assets and liabilities of the Company’s foreign operations, except those in highly inflationary economies, are translated at end of period exchange rates. Revenues and expenses are translated at the average exchange rates prevailing during the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated in stockholders’ equity. The monetary assets and liabilities of foreign subsidiaries in highly inflationary economies are remeasured into U.S. dollars at end of period exchange rates and non-monetary assets and liabilities at historical exchange rates. In accordance with SFAS No. 52, Foreign Currency Translation, the Company has included in earnings all foreign exchange gains and losses arising from foreign currency transactions and the effects of foreign exchange rate fluctuations on subsidiaries operating in highly inflationary economies. Recorded losses from foreign exchange transactions amounted to $2,211,000, $3,062,000 and $5,085,000 for 2001, 2000 and 1999, respectively. Recorded losses from foreign exchange translation amounted to $1,621,000, $3,525,000 and $6,738,000 for 2001, 2000 and 1999, respectively.
Income Taxes: Income taxes are calculated in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company’s financial statements or tax returns. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than an enactment of changes in tax laws or rates.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Comprehensive Income: The Company has adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income represents foreign currency translation adjustments is presented as a component of accumulated comprehensive income.
The component of other comprehensive income has not been recorded net of any tax provision or benefit as the Company does not expect to realize any significant tax benefit or expense from this item.
Per Share Information: Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding. In computing diluted earnings per share, the weighted-average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities including options, warrants, and convertible debt or preferred stock, and income available to common stockholders is adjusted to reflect any changes in income or loss that would result from the issuance of the dilutive common shares.
The Company’s Board of Directors declared a quarterly cash distribution of $.075 per share for each fiscal quarter of 2001. During 2000, the Company’s Board of Directors declared a quarterly cash distribution of $0.0725 per share for each fiscal quarter. During 1999, the Company’s Board of Directors declared a quarterly cash distribution of $0.07 per share for each fiscal quarter.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock-Based Compensation: The Company has adopted the disclosure only provisions of SFAS No. 123 for stock options issued to employees. Compensation cost for stock-based compensation issued to employees has been measured using the intrinsic value method provided by Accounting Principles Board Opinion No. 25.
Reclassifications: Certain prior year items have been reclassified to conform with the current year presentation, with no effect on previously reported net income or stockholders’ equity.
New Accounting Pronouncement: In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. While the Company is currently evaluating the impact the adoption of SFAS No. 144 will have on its results of operations and financial position, it does not expect such impact to be material.
3. Acquisitions
On August 17, 2001, the Company acquired certain assets from an Argentine company, for a total cost of 23,774,000 Argentine pesos, of which $8,440,000 was paid in cash and the balance as a note payable ($9,584,000 as of December 31, 2001). The note is payable through February 2003 and accrues interest at 6% per annum. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company.
On January 1, 2001, the Company acquired certain assets from Medical Alliance, Inc., a provider of office based surgical services, for $14,445,000 in cash. The acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company.
During 2001, the Company acquired an additional 5.1% interest in a subsidiary in Hungary for $823,000 in cash, which increased the Company’s ownership to 96.4%.
On July 1, 2000, the Company acquired 100% ownership of the Swiss pharmaceuticals company Solco Basel AG for $30,368,000, of which $25,156,000 was paid in cash ($4,026,000 of cash was received as part of the Solco assets) and the balance in 125,000 shares of the Company’s common stock. Goodwill of $2,821,000 was recorded in connection with the acquisition and is being amortized over a 20 year estimated useful life. Under the terms of the Company’s agreement with the sellers, the Company has guaranteed a per share price initially at CHF 64 ($38.56 as of December 31, 2001), increasing at a rate of 4% per annum through June 30, 2002. If the holders of the shares sell any of the shares prior to June 30, 2002, the Company is entitled to one-half of any proceeds realized in excess of the guaranteed price. If the market price of the Company’s common stock is below the guaranteed price at the end of the guarantee period, the Company will be required to satisfy the aggregate guarantee amount by payment in cash. As of December 31, 2001 the aggregate guaranteed value of the shares held by the sellers exceeds the market value by approximately $1,080,000. This acquisition was accounted for as a purchase and is not material to the financial position or results of operations of the Company.
Product Acquisitions - In 2001 and 2000, the Company acquired the rights to certain products for the total consideration of $26,177,000 and $9,383,000, respectively. None of the above product acquisitions are material to the financial position or results of operations of the Company.
4. Related Party Transactions
In June 1996, the Company made a short-term loan to Mr. Milan Panic, the Chairman and CEO, in the amount of $3,500,000 for personal legal obligations. During August 1996, this amount was repaid to the Company. In connection with this transaction, the Company guaranteed $3,600,000 of demand debt of the Chairman with a third party bank, which is renewable by the Chairman annually until repaid. In addition to
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the guarantee, the Company deposited $3,600,000 with this bank as collateral to the Chairman’s debt, which will remain in place until such time as the Chairman repays his obligation to the bank. This deposit is recorded as a long-term asset on the consolidated balance sheet. The Company is not aware of the time frame in which the Chairman expects to repay this obligation. Interest paid by the Company on behalf of the Chairman was charged to the Chairman as compensation expense and amounted to $150,755, $160,916 and $163,166 for the years ended December 31, 2001, 2000 and 1999. The Company recognized interest income on the bank deposit of $109,511, $124,330 and $126,097 for the years ended December 31, 2001, 2000 and 1999. The Chairman has provided collateral to the Company’s guarantee in the form of a right to the proceeds of the exercise of options to acquire 150,000 shares with an exercise price of $15.17 and the rights to a $4,000,000 life insurance policy provided by the Company. In the event of any default on the debt to the bank, the Company has recourse that is limited to the collateral described above. Both the transaction and the sufficiency of the collateral for the guarantee were approved by the Board of Directors.
In January 2001, the Company made a loan to Mr. Adam Jerney, Chief Operating Officer and President of the Company, of $1,197,864 as part of a program adopted by the Board of Directors of the Company to encourage directors and officers of the Company to exercise stock options (the “Stock Option Program”). As of December 31, 2001, $318,329 was outstanding under the loan, which is collateralized by 41,427 shares of the Company’s common stock and is due in January 2003. In April 2001, the Company made a loan to Mr. Milan Panic, Chairman of the Board and Chief Executive Officer of the Company, of $2,731,519 as part of the Stock Option Program. The loan is collateralized by 286,879 shares of the Company’s Common Stock and is due in April 2004. These loans bear interest at a rate of 5.61% per annum in the case of Mr. Jerney and 4.63% per annum in the case of Mr. Panic, compounded annually. Interest is payable annually. These loans are non-recourse with respect to principal and full recourse to the obligor with respect to interest. As of December 31, 2001, the loans are included in the accompanying consolidated balance sheet as a reduction of stockholders’ equity.
In January 2002, Mr. Milan Panic exchanged 197,409 stock options with an exercise price of $17.99 and 169,578 stock options with an exercise price of $26.24 for 99,291 shares of the Company’s common stock valued at approximately $3,000,000. The Company will record this amount as compensation expense in the first quarter of 2002. The Company made a short-term loan to Mr. Milan Panic in connection with the exchange of options of $1,335,833. The loan is due January 18, 2003 and bears interest at a rate of 2.8% per annum payable annually.
5. Concentrations of Credit Risk
The Company is exposed to concentrations of credit risk related to its cash deposits and marketable securities. The Company places its cash and cash equivalents with respected financial institutions. The Company’s cash and cash equivalents and restricted cash include $191,000,000 and $120,000,000, at December 31, 2001 and 2000, respectively, held in time deposits, money market funds, and municipal debt securities through approximately ten major financial institutions. The Company is also exposed to credit risk on its accounts receivable balances in Russia as a result of the current economic situation. The Russian accounts receivable balances at December 31, 2001 and 2000 are $15,167,000 and $15,414,000, which is net of the allowances for doubtful accounts of $4,520,000 and $10,276,000, respectively.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Income Taxes
Pretax income from continuing operations before minority interest and extraordinary loss for each of the years ended December 31, consists of the following (in thousands):
The income tax (benefit) provision for each of the years ended December 31, consists of the following (in thousands):
The current federal tax provision has not been reduced for the tax benefit associated with the exercise of employee stock options. The 2001 and 2000 tax benefit of $7,844,000 and $2,721,000, respectively, were credited directly to additional capital.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The primary components of the Company’s net deferred tax asset at December 31, 2001 and 2000 are as follows (in thousands):
In connection with the Merger, the Company acquired approximately $226,000,000 of net operating loss carryforwards (“NOLs”). Included in the total acquired NOLs were $191,000,000 of domestic NOLs and $35,000,000 of foreign NOLs. Internal Revenue Service Code Section 382 imposes an annual limitation on the availability of domestic NOLs that can be used to reduce taxable income after certain substantial ownership changes of a corporation.
At December 31, 2001, the Company has domestic and foreign NOLs of approximately $106,764,000 and $11,823,000, respectively, and a capital loss carryforward of $72,736,000. The Company’s NOLs begin to expire in the year 2007 and the majority of capital loss carryforward expires in the year 2008.
In 2001 and 2000, the valuation allowance primarily relates to foreign net operating losses, primarily in Hungary, and a $12,548,000 tax benefit from the exercise of stock options included in the NOL carryforward. Ultimate realization of the deferred tax assets is dependent upon the Company generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s effective tax rate differs from the applicable U.S. statutory federal income tax rate due to the following:
In Russia, the Company benefited from special tax relief that benefits pharmaceutical companies. Under this relief, approximately 75% of the income generated in Russia related to the manufacture and sale of prescription medicines is exempt from taxation. This reduces the statutory rate to approximately 8%. Effective January 1, 2002, changes in the tax laws repealed the exemption that benefited pharmaceutical companies. The statutory rate will increase to 24% in 2002.
In 2000, the provision for income taxes includes deferred tax benefits of $16,284,000 resulting from the recognition of certain deferred tax assets through the reduction of the valuation allowance, primarily related to the capital loss carryforward. The Company has announced its intention to reorganize into three separately held public companies which management expects will result in a net capital gain allowing utilization of the capital loss carryforward. The realization of the capital loss is dependent upon the Company generating sufficient capital gains prior to the expiration of the capital loss carryforwards.
The Company is aware of audits being conducted by various tax authorities. At this time the Company does not feel that they will result in material adjustments.
During 2001, no U.S. income or foreign withholding taxes were provided on the undistributed earnings of the Company’s foreign subsidiaries with the exception of the Company’s Panamanian subsidiary, Alpha Pharmaceuticals, since management intends to reinvest those undistributed earnings in the foreign operations. Included in consolidated retained earnings at December 31, 2001, is approximately $292,000,000 of accumulated earnings of foreign operations that would be subject to U.S. income or foreign withholding taxes, if and when repatriated.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Detail of Certain Accounts
At December 31, 2001, construction in progress primarily includes costs incurred for plant expansion projects in Russia and North America. At December 31, 2000, construction in progress includes costs incurred to date for the construction of a new research and development facility in North America and other plant expansion projects.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Debt
Long-term debt consists of the following (in thousands):
In 2001, the Company repurchased $117,559,000 principal amount of its 8 3/4% Senior Notes due 2008 (“8 3/4% Senior Notes”) and $1,667,000 principal amount of its 9 1/4% Senior Notes due 2005 (“9 1/4% Senior Notes”). In connection with these repurchases, the Company recorded an extraordinary loss on early extinguishment of debt of $13,374,000, net of an income tax benefit of $7,523,000.
In July 2001, the Company completed an offering of $525,000,000 of 6 1/2% Convertible Subordinated Notes (the “Convertible Subordinated Notes”) due 2008. The notes are convertible into the Company’s common stock at a conversion rate of 29.1924 shares per $1,000 principal amount of notes or $34.26 per share, subject to anti-dilution adjustments. Upon the earlier to occur of a public offering of Ribapharm common stock or a spin-off of Ribapharm (if either occurs), Ribapharm will become jointly and severally liable for the obligations under the Convertible Subordinated Notes. In the event of a spin-off of Ribapharm, converting note holders would receive the Company’s common stock and the number of shares of Ribapharm common stock the note holders would have received had the Convertible Subordinated Notes been converted immediately prior to the spin-off. On August 17, 2001, the Company redeemed the entire aggregate principal amount outstanding of $188,978,000 of the Company’s 9 1/4% Senior Notes at a redemption price of 104.625% of the principal amount thereof, plus accrued and unpaid interest. In connection with this redemption, the Company recorded an extraordinary loss on early extinguishment of debt of $7,692,000, net of an income tax benefit of $4,327,000.
During 2000, the Company repurchased $84,355,000 of its outstanding 9 1/4% Senior Notes for $89,880,000 cash and $12,830,000 of its outstanding 8 3/4% Senior Notes for $12,515,000 cash. The repurchase generated an extraordinary loss on early extinguishment of debt of $3,225,000, net of an income tax benefit of $1,737,000.
In July 1999 and August 1998, the Company completed private placements of $125,000,000 and $200,000,000 principal amount, respectively, of its 8 3/4% Senior Notes due 2008 (the “8 3/4% Senior Notes”). Net proceeds to the Company, after discounts and costs of issuance, were $118,485,000 and $190,821,000, respectively. The Company used a portion of the proceeds from the 1999 issuance for principal payments of long-term debt and short-term borrowings. In November 2001, all of the outstanding 8 3/4% Senior Notes were exchanged for registered 8 3/4% Senior Notes with identical terms.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The 8 3/4% Senior Notes are general unsecured obligations of the Company which rank pari passu in right of payment with all other unsecured senior indebtedness, and are senior to all subordinated indebtedness of the Company. Upon a change of control (as defined in the related indentures), the Company will be required to offer to repurchase the 8 3/4% Senior Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued interest thereon to the date of repurchase. Interest on the 8 3/4% Senior Notes is payable semi-annually. The indentures governing the 8 3/4% Senior Notes include certain covenants which may restrict the incurrence of additional indebtedness, the payment of dividends and other restricted payments, the creation of certain liens, the sale of assets, or the Company’s ability to consolidate or merge with another entity, subject to qualifications and exceptions. On February 21, 2002, the Company commenced a cash tender offer and consent solicitation for all of the outstanding 8 3/4% Senior Notes. The offer is contingent, at the option of the Company, on the completion of an initial public offering of Ribapharm.
The Company has mortgages totaling $13,360,000 payable in U.S. dollars and Swiss francs, collateralized by certain real property of the Company having a net book value of $6,664,000 at December 31, 2001.
Aggregate annual maturities of long-term debt are as follows (in thousands):
The estimated fair value of the Company’s debt, based on quoted market prices or on current interest rates for similar obligations with like maturities, was approximately $801,959,000 and $527,072,000 compared to its carrying value of $719,611,000 and $511,679,000 at December 31, 2001 and 2000, respectively.
The Company has short and long-term lines of credit aggregating $14,500,000 under which no borrowings were outstanding at December 31, 2001. The lines of credit provide for short-term borrowings and bear interest at variable rates based upon LIBOR (approximately 1.9% at December 31, 2001) or other indices.
10. Common Stock
During 2000, the Board of Directors and the stockholders each approved the Company’s Amended and Restated 1998 Stock Option Plan (the “Stock Option Plan”). The Stock Option Plan, as amended, provides for the granting of options to purchase a maximum of 11,604,000 shares (including 3,000,000 shares authorized in 1998) of the Company’s common stock to key employees, officers, directors, consultants and advisors of the Company. Options granted under the Stock Option Plan must have an option price not less than 85% of the fair market value of the Company’s common stock at the date of the grant, and a term not exceeding 10 years. Options vest ratably over a four year period from the date of the grant. Under the Stock Option Plan each nonemployee director is granted 15,000 options on each April 18.
The Company has adopted the disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for options granted under the Stock Option Plan. Had compensation cost for the Company’s Stock Option Plan been determined based on the fair value at the grant date for awards in 2001, 2000 and 1999 consistent with the provisions of SFAS No. 123, the Company’s net income and earnings per
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
share would have been the unaudited pro forma amounts indicated below (in thousands, except per share data):
The pro forma amounts were estimated using the Black-Scholes option-pricing model with the following assumptions:
The following table sets forth information relating to stock option plans during the years ended December 31, 2001, 2000 and 1999 (in thousands, except per share data):
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The schedule below reflects the number of outstanding and exercisable options as of December 31, 2001 segregated by price range (in thousands, except per share data):
Stock Repurchase Plan: In 1998, the Company’s Board of Directors authorized two stock repurchase programs. The first repurchase program authorized the Company to repurchase up to $10,000,000 of its outstanding common stock. The second authorized the Company to initiate a long-term repurchase program that allows the Company to repurchase up to 3,000,000 shares of its common stock. In executing the repurchase programs, the Company is limited by certain covenants contained in the indenture relating to the Company’s 8 3/4% Senior Notes. In the indenture, the Company is permitted to repurchase up to $10,000,000 of its common stock under the first program; however, repurchases under the second program will only be permitted as the Company generates cumulative net income, as provided for in the indenture. In 1998, the Company repurchased an aggregate of 200,000 shares of its common stock for $4,450,000. In March 1999, the Company repurchased additional shares of 223,967 of its common stock for $5,550,000, completing its first stock repurchase program. In December 1999, the Company repurchased additional shares of 390,200 of its common stock for $9,754,000, initiating the second stock repurchase program. No shares were repurchased in 2001 and 2000.
During 1999, the Company sold certain put options to an independent third party; the proceeds were used to purchase call options from the same party in a private placement transaction not requiring any net cash outlay at the time. The put options and the corresponding call options expired from August 2000 through December 2000. The Company, at its option, could make a physical settlement, a cash settlement, or a net share settlement of its positions under the put options and the call options. The Company received 46,014 shares of its common stock and paid $20,000 in cash to settle its positions under the put options and the call options.
Stockholder Rights Plan: The Company has adopted a Stockholder Rights Plan to protect stockholders’ rights in the event of a proposed or actual acquisition of 15% or more of the outstanding shares of the Company’s common stock. As part of this plan, each share of the Company’s common stock carries a right to purchase one one-hundredth (1/100) of a share of Series A Preferred Stock (the “Rights”), par value $0.01 per share, of the Company at a price of $125 per one one-hundredth of a share, subject to adjustment, which becomes exercisable only upon the occurrence of certain events. The Rights are subject to redemption at the option of the Board of Directors at a price of $0.01 per right until the occurrence of certain events. The Rights expire on November 1, 2004.
Long-term Incentive Plan: The Company has a long-term incentive plan, which provides for the issuance of shares of the Company’s common stock to senior executives. Shares issued under the long-term incentive plan are restricted and vest over a four-year period. In 2001, 2000 and 1999, no shares were issued under the plan. In 1998, approximately 319,000 shares of the Company’s common stock having a value of $10,466,000 were issued under this plan. Compensation expense for the value of the common shares issued is being recognized over the vesting period and is credited to additional capital. During 2001, 2000 and 1999, the Company recorded an other non-cash charge relating to the compensation expense of $2,333,000, $2,333,000
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
and $2,737,000, respectively. The amount expected to be recognized in 2002, assuming that all current participants in the long-term incentive plan remain in the plan through the vesting period, is $195,000.
Contingently Issuable Shares: Effective October 1, 1998, the Company issued 2,883,871 shares of its common stock to F. Hoffmann-La Roche (“Roche”) as part of the consideration for the rights to four pharmaceutical products. Under the terms of the agreement with Roche, the Company guaranteed to Roche a per share price initially at $31.00, increasing at a rate of 6% per annum through December 31, 2000. On February 28, 2001, the Company issued 92,975 shares of its common stock valued at approximately $2,723,000 in settlement of the guarantee.
Other: During 1999, the Company sold 2,041,498 shares of its common stock to Schering-Plough for $42,000,000. The sale was pursuant to the terms of a Stock Purchase Agreement made between the Company and Schering-Plough in 1995. See Note 15.
11. Commitments and Contingencies
On August 11, 1999, the United States Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California captioned Securities and Exchange Commission v. ICN Pharmaceuticals, Inc., Milan Panic, Nils O. Johannesson, and David C. Watt, Civil Action No. SACV 99-1016 DOC (ANx) (the “SEC Complaint”). The SEC Complaint alleges that the Company and the individual named defendants made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading and engaged in acts, practices, and courses of business which operated as a fraud and deceit upon other persons in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The SEC Complaint concerns public disclosures made by the Company with respect to the status and disposition of the Company’s 1994 New Drug Application for ribavirin as a monotherapy treatment for chronic hepatitis C (the “NDA”). The FDA did not approve this new drug application. The SEC Complaint seeks injunctive relief, unspecified civil penalties, and an order barring Mr. Panic from acting as an officer or director of any publicly-traded company. A pre-trial schedule has been set which requires the end of discovery by August 1, 2002, and the commencement of trial on May 6, 2003. The Company and the SEC appeared before a settlement judge, for the purpose of settlement negotiations. Pending completion of these negotiations, the courts have stayed discovery for 90 days. There can be no assurance that the SEC litigation will be settled by mutual agreement or what the amount of any settlement may ultimately be. In the event a settlement is not reached, the Company will vigorously defend any litigation.
On December 17, 2001, the Company pled guilty in the United States District Court for the Central District of California to a single felony count for securities fraud for omitting to disclose until February 17, 1995, the existence and content of a letter received from the FDA in late 1994 regarding the unapprovable status of the Company’s 1994 NDA for ribavirin as a monotherapy treatment for chronic hepatitis C. This guilty plea was entered pursuant to a plea agreement with the United States Attorney for the Central District of California to settle a six-year investigation. The Company paid a fine of $5,600,000 and became subject to a three-year term of probation. The plea agreement provides that the Office will not further prosecute the Company and will not bring any further criminal charges against the Company or any individuals, except one non-officer employee of the Company, relating to any matters that have been the subject of the investigation and will close its investigation of these matters.
The conditions of the probation require the Company to create a compliance program to ensure no future violations of the federal securities laws and to pre-clear with the FDA any public communication by the Company concerning any matter subject to FDA regulation. The terms of the compliance program include the
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company retaining an expert to review its procedures for public communications regarding FDA matters and to develop written procedures for these communications. The compliance program also requires preparation of an annual report by the expert on the Company’s compliance with the written procedures and annual certification by the Company’s management that the Company is complying with the expert’s recommendations.
In connection with the Grand Jury investigation and SEC litigation, the Company recorded a reserve in the fourth quarter of 2000 of $9,250,000 to cover the potential combined settlement liability and all other related costs. The $5,600,000 fine paid by the Company has been charged against the reserve.
On or about February 9, 1999, the Company commenced an action in the United States District Court for the District of Columbia against the Republic of Serbia, the State Health Fund of Serbia, and the Federal Republic of Yugoslavia seeking damages in the amount of at least $500 million and declaratory relief arising out of the unlawful taking of the Company’s majority ownership interest in ICN Yugoslavia. On or about March 9, 1999, the State Health Fund of Serbia commenced an arbitration against the Company by filing a Request for Arbitration with the International Chamber of Commerce International Court of Arbitration in Paris, seeking unspecified injunctive relief and unquantified damages based upon alleged breaches by the Company of the November 1990 Foundation Agreement which led to the foundation of ICN Yugoslavia.
On April 27, 1999, the Company filed its answer and counterclaims against the State Health Fund of Serbia. At the same time, the Company also filed a Request for Arbitration with the ICC International Court of Arbitration against the Republic of Serbia and the Federal Republic of Yugoslavia. This request seeks declaratory relief and damages arising out of the unlawful taking of the Company’s majority ownership interest in ICN Yugoslavia and the State Health Fund of Serbia’s failure to pay for goods sold and delivered. Thereafter, the action in the United States District Court for the District of Columbia was dismissed without prejudice pending the outcome of the ICC arbitration proceedings. On February 23, 2001, the arbitration panel issued decisions that the State Health Fund of Serbia is a proper party to the ICC arbitration, that the issue of jurisdiction over the Republic of Serbia in the ICC arbitration will be joined to the merits of the case, and that there is no jurisdiction over the Federal Republic of Yugoslavia in the ICC arbitration. The Company intends to prosecute vigorously its claims against the Federal Republic of Yugoslavia, the Republic of Serbia, and the State Health Fund of Serbia, and to defend against the State Health Fund of Serbia’s claims against the Company. An evidentiary hearing before the arbitration panel is scheduled for July 2002.
The Company is a party to a legal matter at one of its distribution companies in Russia. The matter involves a claim relating to non-payment under a contract entered into in January 1995, prior to the Company’s acquisition of this Russian distribution company. The claimant is seeking to recover $6,200,000 in damages, plus expenses. Due to the complex and changing legal environment in Russia, the Company can not estimate the range or amount of possible loss, if any, that may be incurred. The Company intends to vigorously defend this matter, however, an adverse decision could have a material effect on the results of operations of the Company.
The Company is a party to other pending lawsuits or subject to a number of threatened lawsuits. While the ultimate outcome of pending and threatened lawsuits cannot be predicted with certainty, and an unfavorable outcome could have a negative impact on the Company, at this time in the opinion of management, the ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
Product Liability Insurance: The Company is currently self-insured with respect to product liability claims and could be exposed to possible claims for personal injury resulting from allegedly defective products. While to date no material adverse claim for personal injury resulting from allegedly defective products has been successfully maintained against the Company, a substantial claim, if successful, could have a negative impact on the results of operations and cash flows of the Company.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Benefits Plans: The Company has a defined contribution plan that provides all U.S. employees the opportunity to defer a portion of their compensation for payout at a subsequent date. The Company can voluntarily make matching contributions on behalf of participating and eligible employees. The Company’s expense related to such defined contribution plan was not material in 2001, 2000 and 1999.
Other: Milan Panic, the Company’s Chairman of the Board and Chief Executive Officer, is employed under a contract expiring December 31, 2002 that provides for, among other things, certain health and retirement benefits. The contract is automatically extended at the end of each term for successive one year periods unless either the Company or Mr. Panic terminates the contract upon six months prior written notice. Mr. Panic, at his option, may provide consulting services upon his retirement and will be entitled, when serving as a consultant, to participate in the Company’s medical and dental plans. The consulting fee shall not at any time exceed the annual compensation as adjusted, paid to Mr. Panic. Upon Mr. Panic’s retirement, the consulting fee shall not be subject to further cost-of-living adjustments.
The Company has employment agreements with eleven other key executives which contain “change in control” benefits. Upon a “change in control” of the Company as defined in the contract, the employee shall receive severance benefits equal to three times salary or for the chairman five times salary and other benefits. As of December 31, 2001, the Company’s obligation, assuming a change in control had occurred would be $28,681,000 for all employment contracts.
12. Business Segments and Geographic Data
The Company is a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. The Company is organized and operates in the Pharmaceuticals group and the Biomedicals group. The Pharmaceuticals group produces and markets a variety of pharmaceutical products worldwide and derives royalty revenues from sales of certain of its products by a third party under a license agreement. The Biomedicals group markets research products and related services, immunodiagnostic reagents and instrumentation, and provides radiation monitoring services.
In 2001, the principal markets for the Company’s pharmaceutical products were North America, Western Europe (including Poland, Hungary and the Czech Republic), Russia and Latin America, which represented approximately 20%, 24%, 12% and 15%, respectively, of the Company’s revenues for the year. Approximately 62%, 64%, and 64% of the Company’s revenues for the years ended December 31, 2001, 2000 and 1999, respectively, were generated from operations outside the United States. The Company’s foreign operations are subject to certain risks inherent in conducting business abroad, including possible nationalization or expropriation, price and exchange controls, limitations on foreign participation in local enterprises, health-care regulation, and other restrictive governmental actions.
Changes in the relative values of currencies take place from time to time and may materially affect the Company’s results of operations. Their effects on the Company’s future operations are not predictable. The Company does not currently provide any hedges on its foreign currency exposure and, in certain countries in which the Company operates, no effective hedging programs are available.
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which requires reporting certain financial information according to the “management approach.” This approach requires reporting information regarding operating segments on the basis used internally by management to evaluate segment performance. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company is organized into business units on the basis of geographic region. In applying SFAS No. 131, these business units have been aggregated into seven reportable segments based on similar long-term economic characteristics. The accounting policies of the segments are the same as those described in Note 2. The Company evaluates segment performance based on income from operations, which excludes intersegment sales as well as interest income and expense and foreign exchange gains and losses. The Company allocates amortization on the product rights acquired from Roche and SKB among the segments where the related revenues are reported; the unamortized cost of such acquired product rights is included in assets of the North America Pharmaceuticals segment.
The tables below present information about reported segments and geographic data for the years ended December 31, 2001, 2000 and 1999 (in thousands):
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operating income for 2001, 2000 and 1999 did not include any revenues or expenses related to the Company’s investment in ICN Yugoslavia.
(1)
Includes noncash capital expenditures of $1,556 	for 1999. 	
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Geographic Data
(1)
Latin American region is principally Mexico. 	
Revenues are attributed to the countries based upon the country of domicile of the Company’s subsidiary which made the sale, with the exception of certain sales exported from the United States into the Asia, Africa, and Australia region, where the sales are attributed to the region based upon the location of the customer. Long-lived assets principally consist of property, plant and equipment, acquired product rights and goodwill.
13. ICN Yugoslavia
On February 6, 1999, the government of the Federal Republic of Yugoslavia, acting through the Federal Ministry of Health and/or the Ministry of Health of Serbia, seized control of the Company’s 75% owned subsidiary, ICN Yugoslavia. This action, based on a decision by the Ministry for Economic and Property Transformation that was reached on November 26, 1998, effectively reduced the Company’s equity ownership of ICN Yugoslavia from 75% to 35%. The Ministry of Economic and Property Transformation decision was based on the unilaterally imposed recalculation of the Company’s original capital contribution to ICN Yugoslavia. Subsequent to the seizure, the Commercial Court of Belgrade issued an order stating that a change in control had occurred. These actions were taken, contrary to Yugoslavian law, without any notification to or representation by the Company. As a result, the Company had and continues to have no effective control over the operating and financial affairs of ICN Yugoslavia. Accordingly, the Company deconsolidated the financial statements of ICN Yugoslavia as of November 26, 1998 and reduced the carrying value of the Company’s investment in ICN Yugoslavia to its fair value, estimated to be zero. The Company did not recognize any income or expense related to its investment in Yugoslavia in 2001, 2000 and 1999.
14. ICN Russia
The Company’s Russian operations generated 12%, 13%, and 12% of the Company’s total revenues for the years 2001, 2000 and 1999, respectively.
While the Russian economy continues to show improvement since the financial crisis that began in 1998, the economy continues to experience difficulties. In 1998, the ruble fell sharply from a rate of 6.3 rubles to $1 to a rate of 27.5 rubles to $1 by the end of 1999. To date, the ruble continues to fluctuate, there is continued volatility in the debt and equity markets, hyperinflation persists, confidence in the banking sector has yet to be restored and there continues to be general lack of liquidity in the economy. In addition, laws and regulations affecting businesses operating within Russia continue to evolve. Russia’s return to economic stability is dependent to a large extent on the effectiveness of the measures taken by the government, decisions of international lending organizations, and other actions, including regulatory and political developments, which are beyond the Company’s control.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2001, the ruble exchange rate was 30.1 rubles to $1 as compared with the rate of 28.2 rubles to $1 and 27.5 rubles to $1 as of December 31, 2000 and 1999, respectively. As a result of the change in the ruble exchange rate, the Company recorded translation and exchange losses of $1,621,000, $3,525,000 and $6,738,000, related to its Russian operations during 2001, 2000 and 1999, respectively. As of December 31, 2001, ICN Russia had a net monetary asset position of approximately $13,919,000, which is subject to foreign exchange loss as further declines in the value of the ruble in relation to the dollar occur. Due to the fluctuation in the ruble exchange rate, the ultimate amount of any future translation and exchange loss the Company may incur cannot presently be determined and such loss may have a negative impact on the Company’s results of operations. The Company’s management continues to manage its net monetary exposure.
The Company’s collections on accounts receivable in Russia have been adversely affected by the Russian economic situation. Prior to the August 1998 devaluation of the ruble, the Company had a favorable experience with the collection of receivables from its customers in the region. Subsequently, the Company has taken additional steps to ensure the creditworthiness of its customers and the collectibility of accounts receivable by tightening its credit policies in the region. These steps include a shortening of credit periods, suspension of sales to customers with past-due balances and discounts for cash sales.
The Company believes that the economic and political environment in Russia has affected the pharmaceutical industry in the region. Many Russian companies, including many of the Company’s customers, continue to experience liquidity problems as monetary policy has limited the money supply, and Russian companies often lack access to an effective banking system. As a result, many Russian companies have limited ability to pay their debts, which has led to a number of business failures in the region. In addition, the devaluation has reduced the purchasing power of Russian companies and consumers, thus increasing pressure on the Company and other producers to limit price increases in hard currency terms.
15. Agreement with Schering-Plough Corporation
On July 28, 1995, the Company entered into an Exclusive License and Supply Agreement (the “License Agreement”) and a Stock Purchase Agreement (the “Agreement”) with Schering-Plough Corporation (“Schering-Plough”). Under the License Agreement, Schering-Plough licensed all oral forms of ribavirin for the treatment of chronic hepatitis C (“HCV”) in combination with Schering-Plough’s interferon alpha-2b. The License Agreement provided the Company an initial non-refundable payment and future royalty payments to the Company from sales of ribavirin by Schering-Plough, including certain minimum royalty rates. As part of the initial License Agreement, the Company retained the right to co-market ribavirin capsules in the European Union under its trademark Virazole®. In addition, Schering-Plough was obligated to purchase up to $42,000,000 in common stock of the Company upon the achievement of certain regulatory milestones. Under the Agreement, Schering-Plough is responsible for all clinical developments worldwide. In 1998, the Company sold to Schering-Plough its right to co-market oral ribavirin for the treatment of HCV in the European Union, in exchange for increased royalty rates on sales of ribavirin worldwide. In addition, the Company received a one-time payment of $16,500,000 from Schering-Plough in consideration for the sale to Schering-Plough of the additional marketing rights in the European Union, in settlement of past royalties, and as reimbursement for expenses incurred by the Company in preparation for the launch of ribavirin capsules in the European Union.
Schering-Plough has informed the Company that it believes that royalties paid under the License Agreement should not include royalties on products distributed as part of an indigent patient marketing program. If Schering-Plough were to apply the proposed adjustment retroactively since the inception of the License Agreement, the adjustment to royalty revenue would be approximately $15,000,000. Further, if Schering-Plough were to successfully apply the proposed adjustment to future royalties payments, royalties earned could be reduced in the same proportion as the historical adjustment. In its second quarter royalty payment due on August 30, 2001, Schering-Plough withheld $11,628,000 related to royalties on indigent
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
patient sales that were paid to the Company prior to the fourth quarter of 2000. Accordingly, $14,628,000 is currently due from Schering-Plough related to royalties recorded as revenue on indigent patient sales. As of December 31, 2001, no reserve has been established for this receivable as management believes collectibility is reasonably assured. Effective for the second quarter of 2001, the Company no longer recognizes revenue on products distributed as part of the indigent marketing program. The Company has filed an arbitration claim to prevent Schering-Plough from adjusting its royalty payments to the Company.
In November 2000, the Company entered into an agreement that provides Schering-Plough with certain rights to license various products the Company may develop. Under the terms of the strategic agreement, Schering-Plough has the option to exclusively license on a worldwide basis up to three compounds that the Company may develop for the treatment of hepatitis C on terms specified in the agreement. The option does not apply to Levovirin™ or Viramidine™. The option is exercisable as to a particular compound at any time prior to the start of Phase II clinical studies for that compound. Once it exercises the option with respect to a compound, Schering-Plough is required to take over all developmental costs and responsibility for regulatory approval for that compound.
Under the terms of the agreement, the Company also granted Schering-Plough the right of first/last refusal to license compounds relating to the treatment of infectious diseases (other than hepatitis C) or cancer or other oncology indications as well as the right of first/last refusal with respect to Levovirin™ and Viramidine™ (collectively, the “Refusal Rights”). Under the terms of the Refusal Rights, if the Company intends to offer a license or other rights with respect to any of these compounds to a third party, the Company is required to notify Schering-Plough. At Schering-Plough’s request, the Company is required to negotiate in good faith with Schering-Plough on an exclusive basis the terms of a mutually acceptable exclusive worldwide license or other form of agreement on commercial terms to be mutually agreed upon. If the Company cannot reach an agreement with Schering-Plough, the Company is permitted to negotiate a license agreement or other arrangement with a third party. Prior to entering into any final arrangement with the third party, the Company is required to offer substantially similar terms to Schering-Plough, which terms Schering-Plough has the right to match.
If Schering-Plough does not exercise its option or Refusal Rights as to a particular compound, the Company may continue to develop that compound or license that compound to other third parties. The agreement with Schering-Plough will terminate the later of 12 years from the date of the agreement or the termination of the 1995 license agreement with Schering-Plough. The agreement was entered into as part of the resolution of claims asserted by Schering-Plough against the Company, including claims regarding the Company’s alleged improper hiring of former Schering-Plough research and development personnel and claims that the Company was not permitted to conduct hepatitis C research.
In June 2001, the Company licensed Levovirin™ to Roche. The Company’s agreement with Schering-Plough granted Scering-Plough Refusal Rights for Levovirin™. Although the Company believes it has complied with the Refusal Rights, Schering-Plough may allege that the Company has not complied with the Refusal Rights to Levovirin™.
In February and December 1999, Schering-Plough purchased 1,141,498 and 900,000 shares of the Company’s common stock for $27,000,000 and $15,000,000, respectively, pursuant to the Stock Purchase Agreement entered into in connection with the License Agreement.
16. Supplemental Cash Flow Disclosures
In 1999, the Company recorded an other non-cash charge of $1,000,000 related to the abandonment of unproductive assets.
ICN PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth the amounts of interest and income taxes paid during 2001, 2000 and 1999 (in thousands):
17. Subsequent Events
On March 11, 2002, the Company entered into an agreement to acquire Circe Biomedical, Inc., a development stage company, for $26,000,000, of which $6,000,000 will be paid in cash and the balance in shares of the Company’s common stock. The transaction is subject to approval under the Hart-Scott-Rodino Anti-trust Improvements Act of 1976. Additionally, the Company will pay milestone payments and royalties if a product is successfully developed. In connection with this purchase the Company estimates that approximately $12,000,000 will be allocated to in-process research and development because the technological feasibility of the product under development has not been established and no future alternative uses exist. The final purchase price allocation will be completed once a detailed evaluation of the fair market value of the assets acquired and liabilities assumed has been performed. The Company will record a charge for in-process research and development when the acquisition is completed.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(1)
These amounts represent acquisition-date balances 	of allowances for doubtful receivables and reserves for 	inventory obsolescence of acquired companies. 	
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required under this Item is set forth under the captions “Information Concerning Nominees and Directors” and “Executive Officers” in the Company’s definitive Proxy Statement to be filed in connection with the Company’s 2000 annual meeting of stockholders (the “Proxy Statement”) and is incorporated by reference.
Item 11.
Item 11. Executive Compensation
The information required under this Item is set forth under the caption “Executive Compensation and Related Matters” in the Proxy Statement and is incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is set forth under the caption “Ownership of the Company’s Securities” in the Proxy Statement and is incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is set forth under the captions “Executive Compensation and Related Matters” and “Certain Transactions” in the Proxy Statement and is incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Financial Statements of the Registrant are listed in the index to Consolidated Financial Statements and filed under Item 8, “Financial Statements and Supplementary Data”, included elsewhere in this Form 10-K.
	2. Financial 	Statement Schedule
Financial Statement Schedule of the Registrant is listed in the index to Consolidated Financial Statements and filed under Item 8, “Financial Statements and Supplementary Data,” included elsewhere in this Form 10-K.
	3. Exhibits
*
None of the other indebtedness of the Registrant 	exceeds 10% of its total consolidated assets. The Registrant 	will furnish copies of the instruments relating to such other 	indebtedness upon request. 	

Management Compensation. 	
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the following report on Form 8-K were filed by the Registrant.
	1. Current report on Form 8-K dated 	December 11, 2001 (the date of the earliest event 	reported), filed on December 12, 2001, for the purpose of 	reporting , under Item 5, the Registrant’s 	announcement of the settlement of the Grand Jury investigation. 	
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICN PHARMACEUTICALS, INC. 	
By
/s/ MILAN PANIC 	
Milan Panic 	
Chairman of the Board and
Chief Executive Officer
Date: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
*
None of the other indebtedness of the Registrant 	exceeds 10% of its total consolidated assets. The Registrant 	will furnish copies of the instruments relating to such other 	indebtedness upon request. 	

Management Compensation.