20-F 1 d20f.htm SANOFI-SYNTHELABO ANNUAL REPORT ON FORM 20-F Sanofi-Synthelabo Annual Report on Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on June 23, 2003


SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 20-F

 


 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2002

 

Commission File Number: 001-31368

 


 

Sanofi-Synthélabo

(exact name of registrant as specified in its charter)

 

N/A

(translation of registrant’s name into English)

 

France

(jurisdiction of incorporation)

 

174, avenue de France, 75013 Paris, France

(address of principal executive offices)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Securities:


 

Name of each exchange

on which registered:


American Depositary Shares, each

representing one-half of one ordinary share, nominal

value €2 per share

  New York Stock Exchange
Ordinary shares, nominal value €2 per share  

New York Stock Exchange

(for listing purposes only)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

The number of outstanding shares of each of the issuer’s classes of capital or

common stock as of December 31, 2002 was:

ordinary shares:                    732,367,507

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    x         No    

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17        Item 18 x

 



Table of Contents

 

TABLE OF CONTENTS

 


 

Part I

   3

Item 1.

 

Identity of Directors, Senior Management and Advisers

   3

Item 2.

 

Offer Statistics and Expected Timetable

   3

Item 3.

 

Key Information

   4
   

A. Selected Financial Data

   4
   

B. Capitalization and Indebtedness

   9
   

C. Reasons for Offer and Use of Proceeds

   9
   

D. Risk Factors

   10

Item 4.

 

Information on the Company

   18
   

A. History and Development of the Company

   18
   

B. Business Overview

   19
   

C. Organizational Structure

   46
   

D. Property, Plants and Equipment

   46

Item 5.

 

Operating and Financial Review and Prospects

   50

Item 6.

 

Directors, Senior Management and Employees

   75
   

A. Directors and Senior Management

   75
   

B. Compensation

   80
   

C. Board Practices

   82
   

D. Employees

   83
   

E. Share Ownership

   84

Item 7.

 

Major Shareholders and Related Party Transactions

   87
   

A. Major Shareholders

   87
   

B. Related Party Transactions

   88
   

C. Interests of Experts and Counsel

   88

Item 8.

 

Financial Information

   89

Item 9.

 

The Offer and Listing

   91
   

A. Offer and Listing Details

   91
   

B. Plan of Distribution

   91
   

C. Markets

   92
   

D. Selling Shareholders

   93
   

E. Dilution

   93
   

F. Expenses of the Issue

   93

Item 10.

 

Additional Information

   94
   

A. Share Capital

   94
   

B. Memorandum and Articles of Association

   96
   

C. Material Contracts

   108
   

D. Exchange Controls

   108
   

E. Taxation

   108
   

F. Dividends and Paying Agents

   113
   

G. Statement by Experts

   113
   

H. Documents on Display

   113
   

I. Subsidiary Information

   113

Item 11.

 

Quantitative and Qualitative Disclosures about Market Risk

   114

Item 12.

 

Description of Securities other than Equity Securities

   117

 

1


Table of Contents

Part II

   123

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

   123

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

   123

Item 15.

 

Controls and Procedures

   123

Item 16.A.

 

Audit Committee Financial Expert

   123

Item 16.B.

 

Code of Ethics

   123

Item 16.C.

 

Principal Accountants’ Fees and Services

   123

Part III

   124

Item 17.

 

Financial Statements

   124

Item 18.

 

Financial Statements

   124

Item 19.

 

Exhibits

   124

 

2


Table of Contents

PART I

 

Item 1.    Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.    Offer Statistics and Expected Timetable

 

Not applicable.

 

3


Table of Contents

Item 3.    Key Information

 

A.    Selected Financial Data

 

Introduction

 

Our company is the result of the 1999 merger of two French companies, Sanofi and Synthélabo. While we have prepared consolidated financial statements for 2000, 2001 and 2002 and a consolidated balance sheet as of December 31, 1999, we did not prepare a consolidated statement of income or statement of cash flows for 1999, the year of the merger. Instead, each of Sanofi and Synthélabo prepared consolidated statements of income and cash flows for the first half of 1999, and we prepared consolidated statements of income and cash flows for the second half of 1999. We have presented those statements of income and cash flows below, but they do not provide information that is comparable to the information in our 2000, 2001 and 2002 statements of income and cash flows.

 

We have also prepared a pro forma income statement for the year ended December 31, 1999, based on the assumption that the merger of Sanofi and Synthélabo occurred on January 1, 1999 and that the sale of Sanofi’s beauty division occurred on December 31, 1998. The pro forma income statement data was prepared under French accounting rules applicable to pro forma financial information, and not in accordance with the regulations of the Securities and Exchange Commission applicable to pro forma financial statements. We have included certain data from the pro forma information below in order to reflect trends in our business during the period from 1999 to 2002. The methodology used to calculate our pro forma financial information is described in our registration statement on Form 20-F dated June 25, 2002 (SEC File No. 001-31368).

 

Our consolidated financial statements and those of our predecessor companies have been prepared in accordance with French generally accepted accounting principles, or French GAAP, and applicable French laws, which differ in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. These differences include, among other things:

 

    the treatment of the merger under U.S. GAAP as a purchase of Synthélabo by Sanofi and related subsequent accounting consequences;

 

    the treatment of certain provisions for restructuring;

 

    revenue recognition of a U.S. alliance under the operational management of Bristol-Myers Squibb; and

 

    the deferred income tax effect of our U.S. GAAP adjustments.

 

We have reconciled our net income and shareholders’ equity to U.S. GAAP. You should read Note F to our consolidated financial statements, which sets out the details of the reconciliation.

 

Unless otherwise indicated, U.S. dollar amounts in this annual report are translated using the December 31, 2002 Noon Buying Rate of $1.00 = €0.95.

 

4


Table of Contents

Selected Financial Data

 

The selected financial data set forth below have been derived from:

 

    our audited consolidated financial statements as of and for the years ended December 31, 2000, 2001 and 2002;

 

    our audited consolidated statement of income for the second half of 1999;

 

    our unaudited pro forma statement of income for the year ended December 31, 1999;

 

    the audited consolidated financial statements of Sanofi for the year ended December 31, 1998 and the six months ended June 30, 1999; and

 

    the audited consolidated financial statements of Synthélabo for the year ended December 31, 1998 and the six months ended June 30, 1999 (gross profit and operating profit data are unaudited as they are derived from management accounts and reflect classification differences to conform to the presentation of selected financial data for Sanofi for such periods).

 

The data derived from our pro forma statement of income are presented for illustration only, and do not necessarily reflect the actual results that would have been realized had Sanofi and Synthélabo operated on a combined basis for all of 1999. Due to the merger, the selected financial data for Sanofi and Synthélabo, as well as our selected financial data for the second half of 1999, are not comparable to our selected financial data for 2000, 2001 and 2002.

 

The first table below presents selected financial data for our company for the second half of 1999, and all of 2000, 2001 and 2002, as well as selected pro forma financial data for 1999. The second table presents selected financial data for Sanofi and Synthélabo for 1998 and the first half of 1999.

 

5


Table of Contents
     Six months ended
December 31,
   As of and for the year ended December 31,  
     1999    1999
   2000     2001     2002     2002  
    
   (pro forma
unaudited)


  
   
   
    U.S. $

 
     (millions of €, except per share data)  

Income statement data:

                                  

French GAAP

                                  

Net sales

   2,658    5,350    5,963     6,488     7,448     7,840  

Gross profit

   1,889    3,744    4,521     5,235     6,070     6,389  

Operating profit

   531    971    1,577     2,106     2,614     2,752  

Net income

   342    625    985     1,585     1,759     1,852  

Earnings per share (basic and diluted)(a)

   0.47    0.85    1.35     2.17     2.42     2.55  

Balance sheet data:(c)

                                  

French GAAP

                                  

Property, plant and equipment, net

   1,143         1,217     1,229     1,395     1,468  

Total assets

   6,824         7,845     9,967     9,459     9,957  

Long-term debt

   137         121     119     65     68  

Total shareholders’ equity

   3,578         4,304     5,768     6,035     6,353  

U.S. GAAP Data:(d)

                                  

French GAAP Net income

             985     1,585     1,759     1,852  
              

 

 

 

Purchase accounting adjustments

             (606 )   (445 )   (311 )   (327 )

Provisions and other liabilities

             (99 )   (23 )        

Revenue recognition – U.S. BMS alliance(b)

             (8 )   (136 )   117     123  

Other

             99     (50 )   23     24  

Income tax effects

             221     167     52     54  
              

 

 

 

U.S. GAAP Net income(b)

         592     1,098     1,640     1,726  
              

 

 

 

French GAAP Shareholders’ equity

             4,304     5,768     6,035     6,353  
              

 

 

 

Purchase accounting adjustments

             9,479     8,927     8,576     9,027  

Provisions and other liabilities

             110     35          

Revenue recognition – U.S. BMS alliance(b)

             (21 )   (160 )   (35 )   (37 )

Other

             (168 )   (456 )   (695 )   (732 )

Income tax effects

             (1,563 )   (1,365 )   (1,282 )   (1,349 )
              

 

 

 

U.S. GAAP Shareholders’ equity(b)

         12,141     12,749     12,599     13,262  
              

 

 

 

U.S. GAAP Earnings per share(b)

                                  

basic(a)

             0.82     1.52     2.30     2.42  

diluted(a)

             0.82     1.51     2.28     2.40  

(a)   Based on the weighted average number of shares outstanding in each year, equal to 731,143,218 shares in 1999, 731,441,746 shares in 2000, 732,005,084 shares in 2001 and 732,367,507 shares in 2002. Each ADS represents one-half of one share.
(b)   The columns for 2000 and 2001 are restated to reflect our U.S. GAAP net income and shareholders’ equity taking into account the restatements of the financial statements of certain alliance entities under the operational management of Bristol-Myers Squibb. The restatements, which are set forth under the heading “revenue recognition – U.S. BMS alliance,” for U.S. GAAP net income and shareholders’ equity, respectively, affected our share of the operating profits relating to the alliance entities. For additional information regarding these restatements, see Item 5 “Operating and Financial Review and Prospects — Overview — Alliances — Bristol-Myers Squibb.”
(c)   As discussed in Note B.2 to our consolidated financial statements included under Item 18, we changed our method of accounting for liabilities as of January 1, 2002. The impact of this change on shareholders’ equity was €24 million.
(d)   As discussed in Note F.3.1 to our consolidated financial statements included under Item 18, we applied Statement of Financial Accounting Standard 142, Goodwill and Other Intangible Assets, as of January 1, 2002.

 

     Sanofi

  Synthélabo

     Year ended
December 31,
1998(b)


  Six months
ended
June 30, 1999


  Year ended
December 31,
1998(b)


  Six months
ended
June 30, 1999


             (unaudited)(c)    
     (millions of €, except per share data)

Income statement data:

                

French GAAP

                

Net sales

   3,936   1,880   1,914   995

Gross profit

   2,774   1,264   1,406   734

Operating profit

   597   272   336   180

Net income

   323   146   193   109

Earnings per share (basic and diluted)(a)

   2.88   0.30   4.04   2.26

Balance sheet data:

                

French GAAP

                

Property, plant and equipment, net

   759   753   282   281

Total assets

   6,136   6,197   1,870   2,021

Long-term debt

   402   39   61   58

Total shareholders’ equity

   3,822   4,331   1,095   1,155

(a)   Due to the merger, per share data for Sanofi and Synthélabo are not meaningful.
(b)   Originally in French francs; amounts converted at the official rate of exchange, €1.00 = FF6.55957.
(c)   Gross profit and operating profit data are unaudited. All other data is audited.

 

6


Table of Contents

DIVIDENDS

 

We paid annual dividends for the years ended December 31, 1999, 2000, 2001 and 2002. Sanofi paid annual dividends for the year ended December 31, 1998. We expect that we will continue to pay regular dividends based on our financial condition and results of operations.

 

The following table sets forth information with respect to the dividends paid by Sanofi in respect of the year 1998 and by our company in respect of the years 1999, 2000, 2001 and 2002.

 

     1998

   

1999(2)


   2000

   2001

   2002

Net Dividend per Share (in euro)

   1.12 (1)   0.32    0.44    0.66    0.84

Net Dividend per Share (in U.S. $)

   1.00     0.28    0.39    0.59    0.88

(1)   The net dividend per share was converted into euro using the rate of exchange of €1.00 = FF 6.55957 fixed on December 31, 1998.

 

(2)   The lower dividend per share is a direct result of the increase in the number of shares outstanding as a result of the merger.

 

The declaration, amount and payment of any future dividends will be determined by majority vote of the holders of our shares at an ordinary general meeting, following the recommendation of our board of directors. Any declaration will depend on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by our shareholders. Accordingly, we cannot assure you that we will pay dividends in the future on a continuous and regular basis. Under French law, we are required to pay dividends approved by an ordinary general meeting of shareholders within nine months following the meeting where they are approved. The shares registered hereby are eligible for all dividends (if any) declared and approved.

 

In France, dividends are paid out of after-tax income. However, subject to possible changes in French law that are described in Item 10 under “Additional Information — Taxation,” French residents are entitled to a tax credit, known as the avoir fiscal, in respect of dividends they receive from French companies. Individuals are entitled to an avoir fiscal equal to 50% of the dividend. The avoir fiscal applicable to corporate investors generally is equal to 10% of the dividend. Dividends paid to non-residents normally are subject to a 25% French withholding tax and are not eligible for the benefit of the avoir fiscal. However, non-resident holders that are entitled to and comply with the procedures for claiming benefits under an applicable tax treaty may be subject to a reduced rate of withholding tax, and may be entitled to benefit from a refund of the avoir fiscal. See Item 10 “Additional Information — Taxation.” The information in the table above represents the net dividend paid, without regard to the avoir fiscal.

 

7


Table of Contents

EXCHANGE RATE INFORMATION  

AND THE EUROPEAN MONETARY SYSTEM

 

The European Monetary System

 

Under the provisions of the Treaty on European Union negotiated at Maastricht in 1991 and signed by the then 11 member states of the European Union in early 1992, a European Monetary Union, known as EMU, was implemented on January 1, 1999 and a single European currency, known as the euro, was introduced. As of December 31, 2002, the following 12 member states have adopted the euro as their national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The legal rate of conversion between the French franc and the euro was fixed on December 31, 1998 at €1.00 = FF 6.55957, and we have translated French francs into euros at that rate for periods before we adopted the euro for purposes of preparing our consolidated financial statements.

 

Exchange Rates

 

The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rates for the French franc in 1998, expressed in French francs per U.S. dollar, and for the euro from 1999 through June 13, 2003, expressed in U.S. dollar per euro. The information concerning the U.S. dollar exchange rate is based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”). We provide the exchange rates below solely for your convenience. We do not represent that French francs or euros were, could have been, or could be, converted into U.S. dollars at these rates or at any other rate. The Federal Reserve Bank of New York has ceased publishing the Noon Buying Rates for French francs and other constituent currencies of the euro. For information regarding the effect of currency fluctuations on our results of operations, see Item 5 “Operating and Financial Review and Prospects.”

 

     Period-end
        Rate        


   Average
Rate(1)


   High

   Low

     (French francs per U.S. dollar)

1998

   5.59    5.90    6.21    5.39

(1)   The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period.

 

     Period-end
        Rate        


   Average
Rate(1)


   High

   Low

     (U.S. dollar per euro)

1999

   1.01    1.06    1.18    1.00

2000

   0.94    0.92    1.03    0.83

2001

   0.89    0.89    0.95    0.84

2002

   1.05    0.95    1.05    0.86

2003 (through June 13, 2003)

   1.18    1.11    1.19    1.04

2002

                   

December

   1.05    1.02    1.05    0.99

2003

                   

January

   1.07    1.06    1.09    1.04

February

   1.08    1.08    1.09    1.07

March

   1.09    1.08    1.10    1.05

April

   1.12    1.09    1.12    1.06

May

   1.18    1.15    1.18    1.12

June (through June 13, 2003)

   1.18    1.18    1.19    1.17

(1)   The average of the Noon Buying Rates on the last business day of each month (or portion thereof) during the relevant period for year average; on each business day of the month (or portion thereof) for monthly average. On June 13, 2003, the Noon Buying Rate was $1 = €0.85 ($1.18 per €1).

 

8


Table of Contents

B.    Capitalization and Indebtedness

 

Not applicable.

 

C.    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

9


Table of Contents

D.    Risk Factors

 

Risks Relating to Our Company

 

We may not be able to expand our presence profitably in the United States, a market that is a key to our growth strategy, and where we are investing substantial resources.

 

We may not achieve our growth strategy if we do not profitably expand our presence in the United States, the world’s largest pharmaceuticals market. We have identified the United States, which accounted for 22.7% of our consolidated sales in 2002, as a potential major source of future growth and plan to expand significantly our direct presence in the United States in the coming years. For example, in April 2002, we purchased Pharmacia’s interest in the joint venture that sold Stilnox® (under the name Ambien®) and Kerlone® in the United States. We face a number of potential obstacles to profitable growth in the United States, including:

 

    A need to structure effectively our U.S. organization in relation to the size of the market.

 

    The targeting of new markets.

 

    The fact that the United States market is dominated by major U.S. pharmaceutical companies.

 

    Potential changes in health care reimbursement policies and possible cost control regulations in the United States.

 

We depend on third parties for the marketing of some of our products outside Europe. These third parties may act in ways that could harm our business.

 

We commercialize some of our products outside Europe in collaboration with other pharmaceutical companies. We currently have major collaborative arrangements with Bristol-Myers Squibb for the marketing of Plavix® and Aprovel® and with Organon, a subsidiary of Akzo Nobel, for the marketing of Arixtra®. We also have alliances with several Japanese companies for the marketing of our products in Japan. See Item 4 “Information on the Company — Business Overview — Marketing and Distribution.” When we commercialize our products through collaboration arrangements, we are subject to the risks that certain decisions, such as the establishment of budgets and promotion strategies, are subject to the control of our collaboration partners, and that deadlocks may adversely affect the activities conducted through the collaboration arrangements. For example, our alliances with Bristol-Myers Squibb are subject to the operational management of Bristol-Myers Squibb in some countries, including the United States. In March 2002, Bristol-Myers Squibb began a program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States, which had a negative impact on U.S. sales of Plavix® and Aprovel®. For additional information regarding the impact of the inventory reduction program on our results of operations, see Item 5 “Operating and Financial Review and Prospects.” In addition to these types of actions, we cannot be certain that our partners will perform their obligations as expected. Further, our partners might pursue their own existing or alternative technologies or product candidates in preference to those being developed or marketed in collaboration with us.

 

We depend on third parties for the manufacturing of the active ingredients for some of our products, including Stilnox®, Eloxatin® and Xatral®, three of our strategic products.

 

Although our general policy is to manufacture the active ingredients for our products ourselves, we subcontract the manufacture of some of our active ingredients to third parties, which exposes us to the risk of a supply interruption in the event that our suppliers experience financial difficulties or are unable to manufacture a sufficient supply of our products. The manufacture of the active ingredients for Stilnox®, Eloxatin® and Xatral®, which are three of our six strategic products, is currently done by third parties. See Item 4 “Information on the Company — Business Overview — Production and Raw Materials” for a description of these outsourcing arrangements. Although we have not experienced any problems in the past, if disruptions were to arise from problems with our manufacturers, this would impact our ability to sell our products in the quantities demanded by the market, and could damage our reputation and relationships with our customers. Even though we try to have backup sources of supply whenever possible, including by manufacturing backup supplies of our principle active ingredients at a second or third facility, we cannot be certain they will be sufficient if our principal sources become unavailable.

 

10


Table of Contents

Our collaborations with third parties expose us to risks that they will assert intellectual property rights on our inventions or fail to keep our unpatented technology confidential.

 

We occasionally provide information and materials to research collaborators in academic institutions or other public or private entities, or request them to conduct tests to investigate certain materials. In all cases we enter into appropriate confidentiality agreements with such entities. However, those entities might assert intellectual property rights with regard to the results of the tests conducted by their collaborators, and might not grant licenses to us regarding their intellectual property rights on acceptable terms.

 

We also rely upon unpatented proprietary technology, processes, know-how and data that we regard as trade secrets and protect them in part by entering into confidentiality agreements with our employees, consultants and certain contractors. We cannot be sure that these agreements or other trade secret protection will provide meaningful protection, or if they are breached, that we will have adequate remedies. You should read Item 4 “Information on the Company — Business Overview — Patents and Intellectual Property Rights” for more information about our patents and licenses.

 

We have two principal shareholders who continue to maintain a significant degree of influence.

 

Our two principal shareholders, L’Oréal and Total, owned 19.5% and 24.5% of our share capital, respectively, as of April 30, 2003. Our bylaws provide that our fully paid up shares that have been held in registered form for at least two years under the name of the same shareholder acquire double voting rights. As a result, as of April 30, 2003, L’Oréal and Total held shares representing 27.9% and 35.0%, respectively, of our voting rights, and are in a position to exert significant influence in the election of our directors and officers and other corporate actions that require shareholder approval. The ownership of a large percentage of our capital and voting rights by our two principal shareholders, who are also members of our board of directors, may have the effect of delaying, deferring or preventing a change in our control and may discourage bids for our shares.

 

Fluctuations in currency exchange rates could adversely affect our financial condition and results of operations.

 

Because we sell our products in numerous countries, our results of operations and financial condition could be adversely affected by fluctuations in currency exchange rates. We are particularly sensitive to movements in exchange rates between the euro and the U.S. dollar and, to a lesser extent, the Japanese yen. In 2002, approximately 22.7% of our consolidated sales were realized in the United States, and 4.2% were realized in Japan (the United States also represented 45.2% of our 2002 operating profit excluding unallocated costs). While we incur expenses in those currencies, the impact of these expenses does not fully offset the impact of currency exchange rates on our revenues. As a result, currency exchange rate movements can have a considerable impact on our earnings. When deemed appropriate, we enter into transactions to hedge our exposure to foreign exchange risks. These efforts, when undertaken, may fail to offset the effect of adverse currency exchange rate fluctuations on our results of operations. For more information concerning our exchange rate exposure, see Item 11 “Quantitative and Qualitative Disclosures About Market Risk.”

 

11


Table of Contents

Risks Relating to Our Industry

 

We invest substantial sums in research and development in order to remain competitive, and we may not recover these sums if our products are unsuccessful in clinical trials or fail to receive regulatory approval.

 

We need to invest heavily in research and development to remain competitive.

 

To be successful in the highly competitive pharmaceutical industry, we must commit substantial resources each year to research and development in order to develop new products. Even if our research and development efforts are fruitful, our competitors may develop more effective products or a greater number of successful new products. In 2002, we spent €1,218 million on research and development, amounting to approximately 16.4% of our consolidated net sales. Our ongoing investments in new product launches and research and development for future products could produce higher costs without a proportionate increase in revenues.

 

The research and development process is lengthy and carries a substantial risk of product failure.

 

The research and development process typically takes from 10 to 15 years from discovery to commercial product launch. This process is conducted in various stages, and during each stage there is a substantial risk that we will not achieve our goals and will have to abandon a product in which we have invested substantial amounts. For example, in order to develop a commercially viable product, we must demonstrate, through extensive pre-clinical and human clinical trials, that the compounds are safe and effective for use in humans. There is also no assurance that favorable results obtained in pre-clinical trials will be confirmed by later clinical trials, or that the clinical trials will establish sufficient safety and efficacy data necessary for regulatory approval. As of January 31, 2003, we had 52 compounds in pre-clinical and clinical development in our four targeted therapeutic areas, of which 23 were in phase II or phase III clinical trials. For additional information regarding clinical trials and the definition of the phases of clinical trials, see Item 4 “Information on the Company — Business Overview — Research and Development.” There can be no guarantee that any of these compounds will be proven safe or effective, or that they will produce commercially successful products.

 

After completing the research and development process, we must invest substantial additional resources seeking to obtain government approval in multiple jurisdictions, with no guarantee that approval will be obtained.

 

We must obtain and maintain regulatory approval for our pharmaceutical products from the European Union, United States and other regulatory authorities before the product may be sold in its markets. The submission of an application to a regulatory authority in a particular country or the European Union does not guarantee that it will grant a license to market the product. Each authority may impose its own requirements, including requiring local clinical studies, and may delay or refuse to grant approval, even though a product has already been approved in another country.

 

In our principal markets, the approval process for one or more indications of a new product is complex and lengthy, and typically takes from six months to two years from the date of application depending on the country. Moreover, if regulatory approval of a product is granted, the approval entails limitations on the indicated uses for which it may be marketed. A marketed product is also subject to continual review even after regulatory approval. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in marketing restrictions or withdrawal of the product, as well as possible legal sanctions. In addition, we are subject to strict government controls on the manufacture, labeling, distribution and marketing of our products. All of these factors can increase our costs of developing new products and the risk that we will not succeed in selling them successfully.

 

If we are unable to protect our proprietary rights, we may not compete effectively or operate profitably.

 

It is important for our success that we be able effectively to obtain, maintain and enforce our patents and other proprietary rights. Patent law relating to the scope of claims in the pharmaceutical field in which we

 

12


Table of Contents

operate is a continually evolving field of law and can be subject to some uncertainty. Accordingly, we cannot be sure that:

 

    new additional inventions will be patentable,

 

    patents for which applications are now pending will be issued to us, or

 

    the scope of any patent protection will be sufficiently broad to exclude competitors.

 

Additionally, third parties may challenge the validity of the patents issued or licensed to us, which may result in the invalidation of these rights. We currently have over 9,000 patents and patent applications worldwide, and we license-in more than 30 additional patents. We cannot be sure how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings.

 

In the first half of 2002, two pharmaceutical companies, Apotex and Dr. Reddy’s Laboratories, each filed an Abbreviated New Drug Application, or ANDA, with the U.S. Food and Drug Administration, or FDA, seeking to market a generic form of Plavix® in the United States and challenging certain U.S. patents relating to Plavix®. In March 2003, Apotex instituted a similar challenge in Canada. For additional information regarding ANDAs, see Item 4 “Information on the Company — Business Overview — Regulation.” We have filed suit against Apotex and against Dr. Reddy’s Laboratories for infringement of our patent rights. See Item 8 “Financial Information — Legal Proceedings.” The Plavix® patent rights are material to our company’s business, and if we were unsuccessful in asserting them or they were deemed invalid, any resulting introduction of a generic prescription version of Plavix® in the U.S. would reduce the price that we receive for this product and the volume of the product that we would be able to sell.

 

In recent years, governments faced with national crises have used pressure to obtain substantial concessions from pharmaceutical companies, including threatening compulsory licensing of products that they consider essential. While we support the efforts of national governments to combat major health care crises, if those efforts come at the expense of effective patent protection, the ability of our company and other pharmaceutical manufacturers to recover amounts spent on research and development will be adversely affected. In such event, we and other manufacturers might curtail our research and development expenditures, and as a result might not develop as many new products.

 

Our patents may be infringed, or we may infringe the patents of others.

 

Our competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement, we may file infringement claims, which are expensive and time consuming. Policing unauthorized use of our intellectual property is difficult, and we may not be able to prevent misappropriation of our proprietary rights. This risk is increased by the growth in the number of patent applications filed and patents granted in the pharmaceutical industry.

 

Product liability claims could adversely affect our business and results of operations.

 

Product liability is a significant commercial risk for us, and could become a more significant risk as we expand in the United States (where product liability claims can be particularly costly). Substantial damage awards have been made in certain jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. In addition, some pharmaceutical companies have recently withdrawn products from the market in the wake of significant product liability claims. Although we are not currently involved in any significant product liability cases claiming damages as a result of the use of our products, it is possible that such cases will be brought in the future. Further, there is a general trend in the insurance industry to exclude certain products from coverage. Although we maintain insurance to cover this risk, we cannot be certain that our insurance will be sufficient to cover all potential liabilities.

 

13


Table of Contents

We face uncertainties over pricing of pharmaceutical products.

 

The commercial success of our products depends in part on the extent to which the cost of our products are reimbursed. Price pressure is strong due to:

 

    a tendency of governments and private health care providers to favor generic pharmaceuticals;

 

    price controls imposed by governments in many countries; and

 

    parallel imports, in particular in the European Economic Area, a practice by which traders exploit price differentials among markets by purchasing in lower-priced markets for resale in higher-priced markets.

 

Price pressure is considerable in our two largest markets, Europe and the United States, which represented 57.7% and 22.7%, respectively, of our consolidated sales in 2002 (the United States also accounted for 45.2% of our 2002 operating profit excluding unallocated costs). Changes in the pricing environments in the United States or Europe (on an individual country basis) could have a significant impact on our revenues and operating profits. See Item 4 “Information on the Company — Business Overview — Pricing” for a description of certain regulatory pricing systems that impact our company.

 

Risks from the handling of hazardous materials could harm our operating results.

 

Pharmaceutical manufacturing activities, such as the chemical manufacturing of the active ingredients in our products and the related storage and transportation of raw materials, products and wastes exposes us to various risks, including:

 

    fires from inflammable substances;

 

    storage tank leaks and ruptures; and

 

    discharges or releases of toxic or hazardous substances.

 

These operating risks can cause personal injury, property damage and environmental contamination, and may result in:

 

    the shutdown of affected facilities and

 

    the imposition of civil or criminal penalties.

 

The occurrence of any of these events may significantly reduce the productivity and profitability of a particular manufacturing facility and harm our operating results.

 

Although we maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, we cannot assure you that this insurance will be adequate to cover fully all potential hazards incident to our business. For more detailed information on environmental issues, see Item 4 “Information on the Company — Business Overview — Health, Safety and Environment.”

 

Environmental liabilities and compliance costs may have a significant negative effect on our operating results.

 

The environmental laws of various jurisdictions impose actual and potential obligations on our company to remediate contaminated sites. These obligations may relate to sites:

 

    that we currently own or operate,

 

    that we formerly owned or operated, or

 

    where waste from our operations was disposed.

 

These environmental remediation obligations could significantly reduce our operating results. In particular, our accruals for these obligations may be insufficient if the assumptions underlying these accruals prove incorrect or if we are held responsible for additional, currently undiscovered contamination. Any shortfalls could have a material impact on our operating profits. See Item 4 “Information on the Company — Business Overview — Health, Safety and Environment” and “— Regulation” for additional information regarding our environmental policies.

 

14


Table of Contents

Furthermore, we are or may become involved in claims, lawsuits and administrative proceedings relating to environmental matters. An adverse outcome in any of these might have a significant negative impact on our operating results. Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and liabilities to our company and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby harming our business and operating results.

 

Risks Relating to an Investment in our Shares or ADSs

 

Foreign exchange fluctuations may adversely affect the U.S. dollar value of our ADSs and dividends (if any).

 

As a holder of ADSs, you may face some exchange rate risk. Our ADSs will trade in U.S. dollars and our shares will trade in euro. The value of the ADSs and our shares could fluctuate as the exchange rates between these currencies fluctuate. If and when we do pay dividends, they would be denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of ADSs upon conversion by the depositary of cash dividends, if any. Moreover, these fluctuations may affect the U.S. dollar price of the ADSs on the New York Stock Exchange, whether or not we pay dividends in addition to the amounts, if any, that you would receive upon our liquidation or upon the sale of assets, merger, tender offer or similar transactions denominated in euro or any other foreign currency other than U.S. dollars.

 

If you hold ADSs rather than shares it may be difficult for you to exercise some of your rights as a shareholder.

 

As a holder of ADSs, it may be more difficult for you to exercise your rights as a shareholder than it would be if you directly held shares. For example, if we offer new shares and you have the right to subscribe for a portion of them, the depositary is allowed, in its own discretion, to sell for your benefit that right to subscribe for new shares instead of making it available to you. Also, to exercise your voting rights, ADS holders must instruct the depositary how to vote their shares. Because of this extra procedural step involving the depositary, the process for exercising voting rights will take longer for you, as a holder of ADSs, than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting. For a detailed description of your rights as a holder of ADSs, you should read Item 12 “Description of Securities other than Equity Securities — Description of American Depositary Shares.”

 

Sales of our shares that will be eligible for sale in the near future may cause the market price of our shares or ADSs to decline.

 

At April 30, 2003, we had 732,450,981shares outstanding, approximately 44.05% of which are held by our two largest shareholders, Total and L’Oréal. Of the shares held by these shareholders on April 30, 2003, 38,157,539 shares are available for sale in the public market, and the remainder will become available for sale in the public market on December 1, 2004 when the shareholders’ agreement between those shareholders expires. Since the merger, and including in 2002, Total has gradually been reducing its shareholding in our company.

 

15


Table of Contents

Sales of a substantial number of our shares, or a perception that such sales may occur, could adversely affect the market price for our shares and ADSs. See Item 10 “Additional Information — Share Capital — Shares Eligible for Future Sale” for a more detailed description of the eligibility of our shares for future sale.

 

Because all of our directors and officers reside outside of the United States and a substantial portion of our assets are located in France, you may have difficulty enforcing certain rights.

 

All of our directors and officers reside outside the United States and a substantial portion of our assets is located in France. As a result, it may be difficult for you to effect service of process within the United States on such persons and to enforce against them, either inside or outside the United States, judgments obtained against them in U.S. courts, or to enforce in U.S. courts, judgments obtained against them in courts in jurisdictions outside the United States, in any action based on civil liabilities under the U.S. federal securities laws. Additionally, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in France. For additional information see Item 10 “Additional Information — Memorandum and Articles of Association — Enforceability of Civil Liabilities.”

 

16


Table of Contents

FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements. We may also make written or oral forward-looking statements in our periodic reports to the Securities and Exchange Commission on Form 6-K, in our annual report to shareholders, in our proxy statements, in our offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Examples of such forward-looking statements include:

 

    projections of operating revenues, net income, net earnings per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

    statements of our plans, objectives or goals, including those relating to products, clinical trials, regulatory approvals and competition;

 

    statements about our future economic performance or that of France, the United States or any other countries in which we operate; and

 

    statements of assumptions underlying such statements.

 

Words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Such factors, some of which are discussed under Item 3 “Key Information — Risk Factors” beginning on page 10, include but are not limited to:

 

    our ability to continue to expand our presence profitably in the United States;

 

    the success of our research and development programs;

 

    our ability to protect our intellectual property rights; and

 

    the risks associated with reimbursement of healthcare costs and pricing reforms, particularly in the United States and Europe.

 

We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.

 

Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update them in light of new information or future developments.

 

17


Table of Contents

Item 4.    Information on the Company

 

Introduction

 

We are an international pharmaceutical group engaged in the research, development, manufacture and marketing of pharmaceutical products for sale principally in the prescription market. In 2002, our consolidated net sales were €7,448 million ($7,840 million), our operating profit was €2,614 million ($2,752 million) and our net income was €1,759 million ($1,852 million). On the basis of 2002 sales, we are the second largest pharmaceutical group in France, the seventh largest pharmaceutical group in Europe and among the twenty largest pharmaceutical groups in the world (IMS data).

 

In our prescription pharmaceuticals business, we specialize in four therapeutic areas:

 

    Cardiovascular/Thrombosis. Our Cardiovascular/Thrombosis products include two of the fastest-growing products on the Cardiovascular/Thrombosis market today: the blood pressure medication Aprovel® and the anti-clotting agent Plavix®, as well as one of our newest products, the anti-thrombotic Arixtra®.

 

    Central Nervous System, or CNS. Our CNS medicines include Stilnox®, the world’s leading prescription insomnia medication, and Depakine®, one of the leading treatments for epilepsy.

 

    Internal Medicine. Our Internal Medicine products include Xatral®, a leading treatment for benign prostatic hypertrophy.

 

    Oncology. Our lead product in this strategic market is the cancer drug Eloxatin®, which is marketed in Europe as a first-line treatment against colorectal cancer and, since August 2002, in the United States as a second line treatment in combination with 5-FU/LV.

 

Our three leading products are Aprovel®, Plavix® and Stilnox®, which together accounted for 39.9% of our total consolidated net sales, or €2,973 million, in 2002.

 

We have a strong commitment to research and development. We have 14 research centers and have over 6,700 employees devoted to research and development. At January 31, 2003, we had 52 compounds in development in the four therapeutic areas, 23 of which were in phase II or phase III clinical trials.

 

The legal and commercial name of our company is Sanofi-Synthélabo. We are a French société anonyme, a form of limited liability stock company, formed in 1994 pursuant to the French commercial code for a term of 99 years. Our registered office is located at 174, avenue de France, 75013 Paris, France. Our telephone number is +33 (0)1 53 77 40 00.

 

A.   History and Development of the Company

 

Our company is the result of the 1999 merger of Sanofi and Synthélabo, two major French pharmaceutical companies. Since the merger, we have combined the resources of the two companies to expand our global presence, particularly in the United States, and to increase our focus on research and development for products with strong future potential. This year we are celebrating the thirtieth anniversary of our group worldwide.

 

Sanofi was founded in 1973 by Elf Aquitaine, a French oil company, when it took control of the Labaz Group (a pharmaceutical company) for diversification purposes. Sanofi launched its first major product on the market, Ticlid®, in 1978. At the time of the merger in 1999, Sanofi was the second largest pharmaceutical group in France in terms of sales. A majority of its share capital was owned by Elf Aquitaine, which was acquired by Total. Sanofi made a significant venture into the United States market in 1994, when it acquired the prescription pharmaceuticals business of Sterling Winthrop, an affiliate of Eastman Kodak.

 

Sanofi launched its first major product on the U.S. market, Aprovel®, in 1997, followed by Plavix® in 1998.

 

18


Table of Contents

Synthélabo was founded in 1970 through the merger of two French pharmaceutical laboratories, Laboratoires Dausse (founded in 1834) and Laboratoires Robert & Carrière (founded in 1899). In 1973, L’Oréal acquired the majority of its share capital and in 1988, Synthélabo launched two major products on the French market: Stilnox® and Xatral®. At the time of the merger, Synthélabo was the third largest pharmaceutical group in France in terms of sales. A majority of its share capital was still owned by the French cosmetics group L’Oréal. In 1993, Synthélabo launched Stilnox® in the United States under the brand name Ambien®. By 1994, Stilnox® had become the leading insomnia prescription medication worldwide according to IMS data.

 

Sanofi and Synthélabo agreed to merge at the end of 1998, and the merger became effective in the second quarter of 1999. Following the merger, Total and L’Oréal were the largest shareholders of the new group, although neither held a majority of the share capital. The two principal shareholders entered into a shareholders’ agreement that lasts until 2004. The terms of the shareholders’ agreement are described under Item 7 “Major Shareholders and Related Party Transactions — Major Shareholders.”

 

Part of our strategy following the merger was to concentrate on our core prescription pharmaceuticals business. To implement this strategy, we divested non-core businesses, including:

 

    in 1999, Sanofi’s beauty business, our diagnostics business, our animal health and nutrition business and an equity affiliate in the cheese business; and

 

    in 2001, our custom chemicals business and two medical equipment businesses, as well as our direct shareholding in Laboratoires de Biologie Végétale Yves Rocher.

 

For a description of our principal capital expenditures and divestitures since 1999, our expectations as to future capital expenditures and divestitures and the impact of the merger and these divestitures on our results of operations and financial condition, see Item 5 “Operating and Financial Review and Prospects.” We currently have no material capital expenditures or divestitures in progress.

 

B.   Business Overview

 

Strategy

 

We believe we have the potential to grow profitably by taking advantage of our focused portfolio of current and potential drugs centered around four targeted therapeutic areas. The key elements of our strategy to achieve these goals are to:

 

    Capitalize on our direct presence in the United States. We intend to continue to capitalize on our potential for growth in the U.S. market. We have increased our interest in the promotional activities and profitability of our alliance with Bristol-Myers Squibb that markets Aprovel® (under the name Avapro®) in the United States, and in April 2002 we purchased Pharmacia’s interest in the joint venture that markets Stilnox® (under the name Ambien®) in the U.S. and regained full U.S. marketing rights to Ambien®. We have also more than doubled our U.S. sales force in the past three years to 2,259 employees as at December 31, 2002, reducing our need to use third parties to market our products in the United States. We intend to use our increased sales force as a platform for the introduction and promotion of additional products in the U.S. market, such as oxaliplatin, which we have marketed under the brand name Eloxatin® since August 2002, and alfuzosin, which we expect to begin marketing in the second half of 2003.

 

    Capitalize on the sales potential of our six strategic products. We believe that each of Aprovel®, Plavix®, Stilnox® and Eloxatin® will continue to have strong growth potential and that Xatral® and Arixtra® have the potential to become leading products. We intend to make the necessary investment of marketing and other resources to fully promote these six strategic products.

 

   

Continue our strong commitment to research and development. As at January 31, 2003, we had 52 compounds in our research and development pipeline, of which 23 were in phase II or III clinical trials. We believe that the number of compounds in later stage development in our pipeline, together with our

 

19


Table of Contents

capabilities in the high technology areas of genomics, proteomics, high throughput screening, combinatorial chemistry and bioinformatics, gives us a solid foundation for developing future products. We intend to continue to focus our efforts on developing products to meet unmet medical needs in our four targeted therapeutic areas and to maintain our current high level of research and development spending as a percentage of revenues.

 

    Continue to improve operating margins. Since the merger in 1999, we have streamlined operations by divesting non-core businesses such as our beauty, diagnostics and animal health divisions. We believe that our new, focused structure gives us the opportunity to improve our profitability, and we intend to take advantage of this opportunity by targeting our promotional efforts on our higher margin products.

 

    Continue to enhance our presence worldwide. Over time, we intend to build progressively our presence in Japan and other targeted countries. Our strategy is to establish local subsidiaries and a local sales force, when possible. In Japan, due to market particularities, we may increase our marketing presence either through external growth or by transforming certain of our drug-specific joint ventures into broader partnership relationships for a variety of products.

 

    Seize appropriate opportunities for growth through selective mergers, acquisitions and strategic alliances. Where appropriate, we intend to continue to seize appropriate external growth opportunities for growth through selective mergers, acquisitions and strategic alliances.

 

Principal Products

 

Our principal products are prescription pharmaceuticals, which we group into four main therapeutic categories: Cardiovascular/Thrombosis, Central Nervous System, Internal Medicine and Oncology. The following table outlines our consolidated net sales by therapeutic area for the year ended December 31, 2002.

 

Consolidated Sales by Therapeutic Area

 

     Year Ended
December 31, 2002


 
     (millions of €)

   % of Net Sales

 

Prescription Pharmaceuticals*

           

Cardiovascular/Thrombosis

           

Aprovel®

   562    7.5 %

Plavix®

   987    13.3 %

Other

   1,355    18.2 %
    
  

Total

   2,904    39.0 %

Central Nervous System

           

Stilnox®/Ambien®/Myslee®

   1,424    19.1 %

Other

   985    13.2 %
    
  

Total

   2,409    32.3 %

Internal Medicine

           

Xatral®

   182    2.4 %

Other

   1,245    16.7 %
    
  

Total

   1,427    19.1 %

Oncology

           

Eloxatin®

   389    5.2 %

Other

   15    0.2 %
    
  

Total

   404    5.4 %

Other Pharmaceuticals

   304    4.2 %

Total consolidated net sales

   7,448    100.0 %
    
  


*   Our products include over 160 Cardiovascular/Thrombosis products, over 130 Central Nervous System products, over 500 Internal Medicine products and over 15 Oncology products worldwide. Other Pharmaceuticals includes all of our other pharmaceutical products that cannot be classified in our main therapeutic areas, such as our dental hygiene products.

 

20


Table of Contents

A number of our products, including four of our six strategic products (Plavix®, Aprovel®, Stilnox® and Arixtra®), are sold in certain countries through alliances that we have entered into with other pharmaceutical companies, or through licensees. Our consolidated revenues only reflect a portion of the total revenues realized by the alliances and licensees. In some cases, our revenue shares from the alliances are based on formulas that make our consolidated revenues grow at a different rate than the overall growth in sales of the products. In this annual report, we present both our consolidated revenues from products sold through alliances, and “developed sales,” which represent the overall sales of these products, including sales by our alliance partners and licensees. We believe that developed sales are a useful measurement tool because they demonstrate trends in the overall sales of our products in the market, without regard to the formulas under which our revenue shares are determined.

 

A drug can be referred to either by its international non-proprietary name, or INN, or by its brand name, which is normally exclusive to the company that markets it. In most cases, our brand names, which may vary from country to country, are protected by trademark registrations. In the description that follows, our products are generally referred to by the brand names that we use in France.

 

Prescription Pharmaceuticals

 

Our portfolio of prescription pharmaceuticals includes a range of innovative products with strong market positions in our four targeted therapeutic areas. In Thrombosis, we are the leader in the European and U.S. markets for anti-platelet agents based on total consolidated sales of our anti-atherothrombotic agent Plavix® (clopidogrel) and rank second in the European market for heparins with products including Fraxiparine® and Arixtra® (IMS data). In the Cardiovascular market, we rank second in the European market and third in the U.S. market for angiotensin II receptor antagonists based on annual sales of Aprovel® (IMS data). In the area of central nervous system disorders, according to IMS data, we are the leader in Europe and the U.S. and rank second in Japan based on total consolidated net sales of our product Stilnox® (zolpidem), the treatment of choice for sleep disorders.

 

In our prescription pharmaceuticals business, we specialize in four therapeutic areas: Cardiovascular/Thrombosis, Central Nervous System, Internal Medicine and Oncology. On an industry-wide basis, these four therapeutic areas account for more than half of worldwide pharmaceutical sales, according to IMS data. Certain of our products are sold both by us and, in selected markets, by our alliance partners and licensees, giving these products a broad, worldwide market presence. For a discussion of these arrangements, see Item 4 “Information on the Company — Business Overview — Marketing and Distribution — Alliances.” The following table outlines our leading prescription pharmaceuticals based on consolidated net sales for the year ended December 31, 2002. In some countries, our products have only been approved (or approval has only been sought) for a portion of the areas of use indicated in the table.

 

21


Table of Contents

Principal Prescription Pharmaceuticals

 

Year Ended December 31, 2002


Therapeutic Area / Product Name


   Consolidated
Net Sales


  

Drug Category/
Main Areas of Use


     (millions of €)     

Cardiovascular/Thrombosis

         

Cardiovascular Products

         

Aprovel® (irbesartan)

   562   

Angiotensin II receptor antagonist

•    Hypertension

Cordarone® (amiodarone)

   162   

Anti-arrhythmic agent

•    Treatment / prevention of cardiac arrhythmia (irregular heartbeat)

Tildiem® (diltiazem)

   141   

Calcium antagonist

•    Angina Pectoris

•    Hypertension

Corotrope® (milrinone)

   127   

Inotropic / vasodilator agent

•    Treatment of acute congestive heart failure

Kerlone® (betaxolol)

   77   

Beta-blocker

•    HypertensionAngina

•    Pectoris

Thrombosis Products

         

Plavix® (clopidogrel)

   987   

ADP receptor antagonist

•    Atherothrombosis

Fraxiparine® (nadroparin calcium)

   324   

Low molecular weight heparin

•    Venous thromboembolism (VTE)

Ticlid® (ticlopidine)

   137   

Platelet aggregation inhibitor

•    Thrombosis

Central Nervous System

         

Stilnox®(zolpidem)

   1,424   

Hypnotic

•    Sleep disorders

Depakine® (sodium valproate)

   267   

Anti-epileptic

•    Epilepsy

Solian® (amisulpride)

   135   

Neuroleptic

•    Schizophrenia

•    Dysthymia

Aspégic® (lysine acetylsalicylate)*

   108   

Antalgic/Antipyretic

•    Pain/Fever Relief

Dogmatil® (sulpiride)

   78   

Neuroleptic

•    Neurotic disorders

•    Psychosomatic disorders

•    Schizophrenia

Internal Medicine

         

Xatral® (alfuzosin)

   182   

Uroselective alpha1 blocker

•    Benign prostatic hypertrophy

Oncology

         

Eloxatin® (oxaliplatin)

   389   

Cytotoxic agent

•    Colorectal cancer


*   Includes sales of a different formulation of Aspégic® that is sold under the brand name Kardégic®, which is classified by IMS as a cardiovascular product.

 

22


Table of Contents

Four of our six strategic products are sold directly by us and through alliances. The figures above reflect only sales included in our consolidated net sales. In 2002, total worldwide developed sales of Plavix®, Aprovel®, Stilnox® and Arixtra® were €2,587 million, €1,068 million, €1,455 million and €10 million respectively.

 

Cardiovascular/Thrombosis

 

The Cardiovascular/Thrombosis market as a whole is the largest therapeutic area in the worldwide pharmaceutical market. According to IMS data, in the cardiovascular market, we rank second in the European market and third in the U.S. market for angiotensin II receptor antagonists with Aprovel® in terms of annual sales. We are number three in the European market for calcium antagonists with Tildiem® and are the leader in the European market for anti-arrhythmics with Cordarone® (IMS data). In Thrombosis, we rank first in the European and U.S. markets for anti-platelet agents with Plavix® and we are number two in the European market for heparins with Fraxiparine® according to IMS data.

 

Cardiovascular. Our main products for the treatment of cardiovascular disease are:

 

    Aprovel®/Avapro®(irbesartan; hypertension).    Aprovel® belongs to the most recent class of anti-hypertensives, angiotensin II receptor antagonists, and is indicated as a first line treatment for hypertension, or high blood pressure. Angiotensin II receptor antagonists, which are highly potent and generally well tolerated, act by blocking the effect of angiotensin, the hormone responsible for blood vessel contraction, thereby enabling blood pressure to return to normal. In addition to Aprovel®, we market CoAprovel®/Avalide® — a combination of irbesartan and hydrochlorothiazide, a diuretic that increases the excretion of water by the kidneys. These products achieve control of blood pressure in close to 90% of patients and with a very good safety profile.

 

Aprovel® was launched in 1997 and is now marketed in more than 80 countries, including the United States, through an alliance with Bristol-Myers Squibb, or BMS (under the brand name Avapro®). In Japan, where the product is licensed to BMS and Shionogi, an application for marketing authorization for the treatment of hypertension was submitted in October 2002.

 

In 2002, Aprovel® was approved for a new indication, the treatment of diabetic nephropathy, in both Europe (June 2002) and the United States (September 2002). These approvals were based on the results of the PRIME program, a clinical program that demonstrated that irbesartan protects type-2 diabetic hypertensive patients from the progression of renal impairment, at both early and more advanced stages of the disease. Following the announcement of the PRIME results, the American Diabetes Association (ADA) recommended the use of angiotensin receptor antagonists as a first-line treatment for renal disease in patients with type 2 diabetes.

 

We recently initiated two large-scale clinical programs, part of our life cycle management program for Aprovel®, that will enroll a total of 14,000 patients and that we expect to complete in 2006:

 

    I-PRESERVE, to evaluate the benefit of irbesartan in the treatment of a specific but common form of heart failure, heart failure with preserved systolic function or diastolic heart failure. In this type of heart failure, the contractile capacity of the ventricles is preserved, but ventricular filling is disturbed. This study was initiated in 2002 and is currently in the active stage of patient enrollment. We believe it is the largest clinical trial conducted in this specific disease to date.

 

    ACTIVE-I, to evaluate the efficacy of irbesartan, combined with clopidogrel (the active ingredient in Plavix®), in preventing complications in patients suffering from atrial fibrillation. We began this clinical program in April 2003.

 

23


Table of Contents
    Cordarone®/Ancaron® (amiodarone; cardiac rhythm disorders). Thirty-six years after its first marketing authorization was granted, Cordarone® remains a leading anti-arrhythmic drug for the treatment and prevention of cardiac rhythm disorders such as cardiac arrhythmia, or irregular heart beat. Cordarone® is also effective against potentially life-threatening supraventricular rhythm disorders, the most common of these being atrial fibrillation. Two clinical studies published in 2002, AMIOVIRT and CAT, demonstrated that Cordarone® is as effective as the implantation of a defibrillator in preventing sudden cardiac death in patients with idiopathic dilated cardiomyopathy, a rare disease that attacks the heart muscle. Cordarone® has a good cardiac safety profile and only exceptionally induces complications potentially associated with the use of anti-arrhythmics, such as Torsades de Pointe (a serious and potentially fatal ventricular rhythm disorder) or ventricular insufficiency. However, its effects on thyroid function limit its use. Cordarone® is available in more than 126 countries, including the United States where it is licensed to Wyeth (formerly American Home Products), and Japan where it is marketed under the brand name Ancaron® through joint venture with Taisho.

 

    Tildiem® (diltiazem; angina, hypertension). Among calcium antagonists, Tildiem® is considered a reference treatment for angina. Tildiem® works by increasing oxygen supply to the myocardium (the muscle surrounding the heart) through coronary vasodilatation, while simultaneously reducing oxygen needs by decreasing the heart rate and lowering peripheral artery resistance. Tildiem® thereby exhibits good anti-anginal efficacy, combined with a good safety profile. Our sustained release formulations of Tildiem® LP 200/300 mg provide 24-hour protection against ischemia with a single daily dose. This convenience of use improves both compliance and tolerability. Furthermore, a meta-analysis (a statistical analysis) showed that these formulations permit consistent regulation of heart rate: the faster the heart rate initially, the more it is slowed by Tildiem®. Additionally, the NORDIL study of morbidity and mortality associated with hypertension showed that Tildiem® was as effective as diuretics and beta-blockers (the reference treatment) in reducing cardiovascular complications. These results emphasize the value of treating hypertension with Tildiem® LP 200/300 mg. Tildiem® LP 200/300 mg is marketed in most European countries.

 

    Kerlone®/Kerlong® (betaxolol; hypertension, angina). Kerlone® is a cardioselective beta-blocker indicated for the treatment of hypertension and angina pectoris. A recent clinical trial, BETACAR, showed the ease of administration of Kerlone® in the treatment of patients with an altered cardiac function. Kerlone® is marketed in numerous European countries, in the United States and in Japan (under the brand name Kerlong®) by our joint venture with Mitsubishi.

 

    Corotrope®/Primacor®/Milrila® (milrinone; heart failure). Corotrope® combines positive inotropic properties (increasing the contractile force of the heart) with a vasodilatory action. Corotrope® is an effective treatment for advanced forms of heart failure as well as for certain less advanced forms that have been abruptly decompensated by a dietary change or intercurrent disease. Corotrope® is marketed in several European countries, in the United States (under the brand name Primacor®), where its patent came into the public domain in May 2002, and in Japan (under the brand name Milrila®) by our joint venture with Yamanouchi.

 

Thrombosis. Thrombosis occurs when a thrombus, or blood clot, forms inside a blood vessel. Left unchecked, a thrombus within a blood vessel can eventually grow large enough to block the blood vessel, preventing blood and oxygen from reaching the organ being supplied. Our principal products for the treatment of thrombosis are:

 

   

Plavix® (clopidogrel; atherothrombosis). Plavix®, a platelet adenosine diphosphate receptor antagonist, is indicated for the prevention of atherothrombotic events in patients with a history of recent myocardial infarction, recent ischemic stroke or documented peripheral arterial disease. Plavix® is currently the only drug indicated for the secondary prevention of atherothrombosis regardless of the location of the arteries initially affected (heart, brain, lower limbs). This broad indication is supported by the results of

 

24


Table of Contents

the CAPRIE study, the largest phase III study ever conducted with almost 20,000 patients enrolled. CAPRIE demonstrated the superior efficacy of Plavix® to acetylsalicylic acid, with a safety profile at least equally good.

 

Plavix® was launched in 1998, and is now marketed in over 75 countries, including the United States, through our alliance with BMS. In Japan, where it is being developed in partnership with Daiichi, we plan to submit an application for marketing authorization at the end of 2003.

 

The year 2002 was marked by three major events for Plavix®:

 

    U.S. and European health authorities approved an extension of indication to acute coronary syndrome. The approvals, based on the results obtained in the CURE clinical trial, were received in February 2002 (after a priority review procedure at the FDA) in the United States, and in September 2002 in Europe. This new indication was incorporated into the guidelines of the American Heart Association and the American College of Cardiology in March 2002, and in those of the European Society of Cardiology in September 2002. The CURE trial demonstrated that clopidogrel, when added to a standard therapy including or comprising acetylsalicylic acid, reduced the risk of atherothrombotic events (myocardial infarction, stroke and death from cardiovascular cause) by 20% with only a 1% increase in the rate of major hemorrhages and provided significant short- and long-term benefit in patients presenting an acute coronary syndrome. With more than 12,000 patients enrolled, CURE is the largest clinical trial ever conducted with patients presenting unstable angina or non-Q-wave myocardial infarction.

 

    The results of the CREDO clinical trial, announced in November 2002, confirmed the therapeutic value of Plavix® in the short- and long-term prevention of atherothrombotic events in patients having undergone coronary angioplasty, either with or without stenting. The CREDO trial, conducted in more than 2,000 patients, demonstrated the benefit of prolonged use of clopidogrel and showed that the risk of atherothrombotic events (myocardial infarction, stroke and death by cardiovascular cause) was reduced by 27% after one year.

 

    In September 2002, the CHARISMA trial began enrolling patients, and is expected to include a total of 15,000 patients. The objective of the CHARISMA trial is to demonstrate the value of using Plavix® when added to existing treatments in the primary prevention of cardiovascular events in patients at risk.

 

We have other major on-going clinical studies that are designed to support the long-term use of Plavix® by providing complementary data. These include:

 

    MATCH, assessing the benefit of clopidogrel combined with acetylsalicylic acid in the prevention of serious ischemic events in high-risk patients who have recently experienced a stroke or transient ischemic attack. Enrollment of the planned 7,600 patients was completed in the second half of 2002;

 

    CLARITY and COMMIT, evaluating the benefit of clopidogrel combined with acetylsalicylic acid in acute myocardial infarction;

 

    CAMPER, assessing the benefit of clopidogrel in patients with peripheral arterial disease who have undergone angioplasty or bypass surgery; and

 

    ACTIVE (A & W), assessing the value of clopidogrel in patients in the prophylactic treatment of thromboembolic events in patients with atrial fibrillation.

 

Our previously announced patient recruitment for the WATCH study, which is assessing the value of clopidogrel in patients suffering from heart failure, was stopped. The study is currently being performed on

 

25


Table of Contents

a smaller number of patients than initially expected due to a slow inclusion rate. The extensive core clinical program for Plavix®, including all completed, ongoing and planned studies, will enroll more than 100,000 patients.

 

    Arixtra® (fondaparinux sodium; venous thrombosis). Arixtra®, fondaparinux sodium, is a totally synthetic compound that has recently entered the low molecular weight heparin market, whose other products are generally animal sourced. Arixtra® is currently indicated for the prevention of venous thromboembolism, including deep vein thrombosis and pulmonary embolism, in patients who have undergone major orthopedic surgery of the lower limbs (a high risk situation). We co-developed Arixtra® with Organon (a subsidiary of Akzo Nobel), and believe that it represents a major advance in the prevention of venous thromboembolism. It is the first agent in a new class of anti-thrombotics, selective synthetic inhibitors of coagulation factor Xa, and works by interrupting a key step in the coagulation cascade, thereby preventing the formation of blood clots. Further, Arixtra® is obtained by chemical synthesis, which leads to a high level of purity. For both of these reasons, we believe Arixtra® constitutes a major technological and therapeutic advance.

 

We believe its development potential is substantial. Phase III studies, which included over 7,000 patients, demonstrated a major clinical benefit relative to the reference low molecular weight heparin. Irrespective of the orthopedic surgical procedure (hip replacement, hip fracture or knee surgery) and the characteristics of the patient, Arixtra® reduced the risk of a thromboembolic event by 55% without increasing the risk of clinically important bleeding. For patients undergoing surgery for hip fracture, the risk of deep-vein thrombosis was reduced to 8% with Arixtra® compared to around 20% with the reference treatment. The safety profile of the two treatments is similar.

 

We launched Arixtra® in February 2002 in the United States, where it was approved for the prevention of venous thromboembolic events after orthopedic surgery in December 2001 following a priority review. In March 2002, Arixtra® received its European marketing authorization for the same indication and launch has been rolling out in various countries since that time. In December 2002, the FDA modified the summary product characteristics for Arixtra® to provide an improved description of its profile, and approved Arixtra® for a new indication, extended prophylaxis of deep vein thrombosis, in June 2003. Arixtra® is currently the only anti-thrombotic agent indicated in the United States for the extended prophylaxis of deep vein thrombosis in patients undergoing hip fracture surgery. In Japan, the product is in phase IIb/III clinical development, and we currently plan to submit an application for marketing authorization in early 2004.

 

Because of the development potential of Arixtra®, we have implemented a life cycle management program to cover all segments of the thrombosis market:

 

    Extended prophylaxis. The results of the Pentifra Plus study demonstrated that Arixtra® administered for 28 days could significantly reduce the rate of venous thromboembolic events after surgery for hip fracture, the orthopedic surgery carrying the highest risk of such event. Based on these results, we submitted an application in December 2002 in both the United States and Europe for approval of Arixtra® for this new indication. In March 2003, U.S. authorities granted priority review to our application for this indication.

 

    Treatment of Venous Thromboembolism. In 2002, the completed MATISSE study, which enrolled over 4,000 patients, demonstrated that Arixtra® is as well-tolerated and at least as effective as the existing standard therapies for the treatment of deep vein thrombosis and pulmonary embolism (when compared to low weight molecular heparin and unfractionated heparin, respectively).

 

    Prevention of Venous Thrombosis. Our APOLLO and PEGASUS programs are currently studying Arixtra® in the prevention of venous thrombosis in other types of surgery, such as abdominal surgery. We are also studying Arixtra® for the prevention of venous thrombosis in medical patients at high risk of venous thromboembolic events who have not undergone surgery (our ARTEMIS program).

 

26


Table of Contents
    Acute Coronary Disease. We are studying Arixtra®’s effectiveness in acute coronary disease (unstable angina, coronary angioplasty, myocardial infarction). The initial efficacy results were confirmed by the Phase IIb Pentua trial, which were presented at the November 2001 scientific sessions of the American Heart Association. We believe that these studies provide a basis for expecting a good benefit to risk ratio when compared to existing therapies for acute coronary disease. A phase III clinical program that began in April 2003 (the Michelangelo program), will enroll 26,000 patients.

 

In the United States, Canada and Mexico, we market Arixtra® through our joint venture with Organon. In the rest of the world (apart from Japan), we market Arixtra® on our own.

 

    Ticlid® (ticlopidine; thrombosis). Ticlid® is indicated for the prevention of coronary or cerebrovascular ischemic events in patients at risk (following an initial ischemic stroke or transient ischemic attack, or symptomatic peripheral arterial disease). In combination with acetylsalicylic acid, Ticlid® is used as a standard prophylactic treatment against the risk of thrombosis (reocclusion of the dilated artery) in patients who have undergone coronary angioplasty with insertion of a stent. Ticlid® is marketed in over 75 countries, including the United States, where it is licensed to Roche, and in Japan (under the brand name Panaldine®), where it is licensed to Daiichi.

 

    Fraxiparine® (nadroparin calcium; venous and arterial thrombosis). Fraxiparine® is an injectable low-molecular-weight heparin. Launched in 1986, it is currently marketed in over 100 countries (excluding the United States and Japan). Fraxiparine’s® approved indications have expanded over the years. Initially indicated for the prevention of venous thromboembolic disease, Fraxiparine® is currently indicated for the treatment of this disease as well, and the treatment of acute coronary syndromes. We launched Fraxodi®, a curative treatment for venous thromboembolic disease administered as a once-a-day injection, in France in 1998. Fraxodi® is now marketed in most countries in Europe and Latin America. The once-a-day regimen permits shorter hospital stays, facilitates outpatient treatment and enhances overall patient recovery. A new indication of Fraxiparine® for the treatment of the acute phase of unstable angina in association with acetylsalicylic acid is now successfully registered in many countries, including the principal European markets, but excluding Japan and the United States.

 

Central Nervous System

 

In the Central Nervous System market, according to IMS data, we rank first in the European and U.S. markets for hypnotics with Stilnox® and are number three in Europe in the market for anti-epileptics, with drugs including Depakine®. In the market for neuroleptics, we rank third in Europe and fifth in Japan with drugs such as Dogmatil® and Solian® (IMS data). Key products in this therapeutic area include:

 

    Stilnox®/Ambien®/Myslee® (zolpidem; insomnia). Stilnox® is the leading hypnotic in the United States and Europe and is the second leading hypnotic in Japan (based on IMS data), and is sold in over 100 countries worldwide. Stilnox® is both chemically and pharmacologically distinct from benzodiazepines, and is distinguished by its selective binding exclusively to receptors that mediate hypnotic activity. Due to this characteristic, Stilnox® rapidly induces sleep that is qualitatively close to natural sleep and devoid of certain side effects that are characteristic of the benzodiazepine class as a whole. Its action lasts for 6 to 8 hours, and is generally well-tolerated, allowing the patient to awake with a reduced risk of impaired attention, decreased alertness or memory lapses throughout the day. The risk of dependence is minimal when Stilnox® is used at the recommended dosage and duration of use. Based on the results of an extensive program of eight clinical trials, which together enrolled over 6,000 patients, Stilnox® is currently the only hypnotic demonstrated to be suitable for use on an “as needed” basis depending upon each patient’s individual requirements. This mode of administration avoids the systematic intake of a hypnotic for patients who suffer only occasionally from insomnia.

 

       We believe that Stilnox® is also one of the leading studied hypnotics in the world as data on its efficacy and safety have been generated from 140 clinical trials that included 80,000 patients worldwide.

 

27


Table of Contents
       The year 2002 was marked by two key events for Stilnox®:

 

    In 2002, we acquired all of the rights to market Stilnox® in the United States when we acquired our interest in our former joint venture with Pharmacia, which previously marketed the product in the United States. Aggregate sales of Stilnox® in the United States (where it is sold under the brand name Ambien®) since its launch reached €1.2 billion by the end of 2002.

 

    Although launched only in December 2000, by March 2003, Stilnox® had achieved high market penetration in Japan, becoming the second leading hypnotic on the Japanese market (according to IMS data) where it is sold under the brand name Myslee® through our joint venture with Fujisawa. With a market share of 19.9% in March 2003 (according to IMS data), Japan is now the second-largest market for sales of Stilnox® (where it is sold under the brand name Myslee®).

 

    Depakine® (sodium valproate; epilepsy). Depakine® is a broad-spectrum anti-epileptic that has been prescribed for over 30 years. Numerous clinical trials, as well as long years of experience have shown that it is effective for all types of epileptic seizures and epileptic syndromes, and is generally well tolerated. Consequently, Depakine® remains a reference treatment for epilepsy worldwide. Furthermore, in contrast to findings sometimes reported with other anti-epileptic agents, Depakine® does not induce paradoxical aggravation of seizures. The Chrono® form (our prolonged release formulation) permits once-a-day administration in most cases, thereby improving compliance with treatment and overall patient care. We produce a wide range of formulations of Depakine®, permitting its adaptation to all types of patients. A new formulation of Depakine®, Chronospheres®, facilitating its use by children and the elderly, has already been approved in several European countries, and we plan to launch it gradually over the next few years as we register the product and reach agreement on pricing in those countries. Depakine® is marketed in over 100 countries, including the United States where it is licensed to Abbott. In 2002, we filed an application for marketing approval in Europe for Depakine Chrono® for use in the treatment of bipolar disorders.

 

    Dogmatil®/Dogmatyl® (sulpiride; neurotic and psychosomatic disorders). At low doses, Dogmatil® 50 mg, is used in numerous countries for the symptomatic treatment of neurotic and/or psychosomatic disorders. Its specific mechanism of action on central and peripheral dopaminergic receptors permits rapid improvement of the psychic state of the patient as well as relief of functional symptoms in patients who are difficult to treat. At higher doses, Dogmatil® 200/400 mg is also used for the treatment of psychotic states. Its good cardiovascular and neurological safety profile makes it particularly suitable for the treatment of elderly patients. Dogmatil® is available in over 90 countries, including Japan (marketed under the brand name Dogmatyl®) through a joint venture with Fujisawa.

 

    Solian® (amisulpride; schizophrenia). Solian® is an anti-psychotic with an atypical pharmacological profile. Its originality consists of its capacity to act selectively on D3/D2 dopaminergic receptors and its dual pre- and post-synaptic activity. Furthermore, its preferential action on the limbic system confers excellent neurological safety. Solian® is effective on all symptoms of schizophrenia, both positive and negative, irrespective of the phase of the disease, whether acute or chronic. At doses of 400 mg to 800 mg per day in patients with positive symptoms and associated depressive symptoms, and at the optimal daily dose of 100 mg in patients with dominant negative symptoms, the efficacy of Solian® is accompanied by a good safety profile. In 2002, we launched Solian® in a total of 12 countries, including Australia, Belgium and Spain. Solian® is available in over 50 countries worldwide, including the principal European markets.

 

    Aspégic® (lysine acetylsalicylate; fever, pain). Aspégic® is a salicylate with the original property of total and immediate solubility. This characteristic confers both very rapid efficacy as an analgesic, anti-pyretic and anti-inflammatory agent. We market Aspégic® in certain countries in Europe, Africa and the Middle East.

 

28


Table of Contents

In addition to these products, we also market products for the treatment of anxiety, and agitation and aggressiveness.

 

Internal Medicine

 

Our principal fields in this therapeutic area are urology, gastroenterology, respiratory disease, and the musculoskeletal system. Our leading product in this field is Xatral® (alfuzosin).

 

    Xatral® (alfuzosin; benign prostatic hyperplasia). Our research efforts resulted in the discovery of alfuzosin, the active ingredient in Xatral®, which we first launched in France in 1988. Xatral® belongs to the alpha1-blocker class, and was the first product of the class to be indicated uniquely and specifically for the treatment of the symptoms of benign prostatic hyperplasia, as well as the first marketed product capable of acting selectively on the urinary system. Due to this clinical uroselectivity, Xatral® is immediately effective, with no need for dose titration and shows good tolerability, particularly cardiovascular. Active from the first dose, it provides rapid and lasting symptom relief and improves patient quality of life.

 

       Besides this symptomatic action, the results of major clinical trials completed in 2002 have demonstrated the original contribution of Xatral® to the treatment of benign prostatic hyperplasia, and the prevention of its complications.

 

    The results of the first phase of the ALFAUR trial showed that Xatral® doubles the probability of restored capacity to urinate normally after an episode of acute urine retention in conjunction with catheter insertion. These are the first published results that demonstrate the capacity of Xatral® to prevent acute urinary retention, the principal complication of benign prostatic hyperplasia. We have filed preliminary applications for extension to this indication in the principal European countries.

 

    The results of another large international trial with over 800 patients have shown that Xatral® preserves sexual function in patients suffering from benign prostatic hyperplasia.

 

       Since its launch in 1988 in France, we have constantly worked on developing improvements to optimize the formulation of Xatral®. The new once-daily formulation of Xatral® has now been registered in over 70 countries and is currently marketed in 14 European countries and in more than 35 other countries worldwide. As of March 2003, we ranked fourth on the European market for prostatic diseases with our product Xatral® (IMS data). In June 2003, we received FDA approval for alfuzosin, and we expect to begin to market the product in the United States in the second half of 2003.

 

Our main products in gastroenterology are Primpéran® (metoclopramide), a leading treatment for nausea and vomiting, Ercefuryl® (nifuroxazide), an intestinal antiseptic with a broad anti-bacterial spectrum and Inipomp® (pantoprazole), a potent inhibitor of gastric acid secretion. We also market Mizollen® (mizolastine) and Virlix® (cetirizine), for the treatment of allergic reactions, and Myolastan® (tetrazepam), a muscle relaxant.

 

Oncology

 

Oncology is a new therapeutic area for our company, and one in which we expect to concentrate significant efforts in the future. Our first product in this therapeutic area is Eloxatin®.

 

    Eloxatin® (oxaliplatin; colorectal cancer). Eloxatin® is an innovative platinum agent, and is currently the only one to have demonstrated activity in colorectal cancer. Its recent introduction in the treatment of metastatic colorectal cancer has led to major progress, including both the prolongation of the median survival to 20 months when used as a first-line treatment in connection with 5-fluorouracil, or 5-FU, and enabling a significant proportion of patients with isolated hepatic metastases to undergo surgical resection due to the rapid and substantial reduction in the size of these metastases. Consequently, Eloxatin® gives these patients the hope of substantially prolonged survival.

 

29


Table of Contents
       In the United States, the FDA granted approval in August 2002 following a 46-day priority review for registration. This rapid review was on the basis of the results of a large U.S. trial conducted on patients in relapse after an initial treatment, which showed that treatment with oxaliplatin in combination with infusional 5-fluorouracil/leucovorin, or 5-FU/LV, succeeded in delaying disease progression and demonstrated a clinical benefit in terms of pain reduction, weight gain and improvement of general status.

 

       In data presented at the May 2002 meeting of American Society of Clinical Oncology, or ASCO, the N-9741 study, one of the largest randomized trials ever conducted in metastatic colorectal cancer, demonstrated survival benefit with first-line treatment with oxaliplatin. Conducted with the support of the U.S. National Cancer Institute, the study showed that the combination of oxaliplatin, the active ingredient in Eloxatin®, with 5-FU (the Folfox regimen) was more effective and better tolerated than irinotecan in combination with 5-FU (the IFL regimen, and current reference first-line treatment). Because of the prolongation of median survival of patients receiving oxaliplatin, the trial was prematurely discontinued, and all patients still enrolled in the trial were then treated with the oxaliplatin-based regimen. The final results of the N-9741 study were presented at the May 2003 meeting of the ASCO. We currently plan to submit an application for approval of Eloxatin® in combination with 5-FU as a first line treatment in the U.S. in 2003.

 

       Due to its tolerability, Eloxatin® is also being developed as an adjuvant treatment for non-metastatic colorectal cancer, to prevent relapse in patients whose recovery has not been achieved through surgery alone. The results of the Mosaic study, which studied the efficacy of Eloxatin® as an adjuvant, were presented at the May 2003 meeting of the ASCO. The study showed that the addition of oxaliplatin to the current post-surgery standard chemotherapy of 5-FU/LV for colon cancer reduces the risk of recurrence by 23% when compared to the standard treatment alone. We believe that this important result, coming 15 years after 5-FU/LV was established as the standard adjuvant treatment, is a major step towards curing more patients and was obtained without dramatically impacting safety. We currently plan to file an application for approval of oxaliplatin as an adjuvant treatment for colorectal cancer in the United States at the end of 2003, and in Europe in the second half of 2003.

 

       Its activity in colorectal cancer has also encouraged specialists to explore the value of Eloxatin® in the treatment of other tumors, particularly tumors of the digestive system, such as pancreatic cancer, but also ovarian and breast cancers, as well as certain hematological cancers.

 

       We in-license Eloxatin® from Debiopharm, and market it primarily as a first-line treatment in 60 countries in Europe, Asia and Latin America. We also market it as a second-line treatment in the United States.

 

    Fasturtec®/Elitek® (rasburicase; tumor lysis syndrome). Fasturtec® is a recombinant enzyme produced through genetic engineering and is the first biotechnology product discovered and developed entirely by our company. Fasturtec® works by converting uric acid, which is poorly soluble and nephrotoxic, into allantoin, a highly soluble compound that is readily eliminated through urination, thereby avoiding tumor lysis syndrome. Administered at the same time as chemotherapy, Fasturtec® allows clinicians to administer anti-cancer treatment in optimal conditions without delays or dose reductions that are often required due to tumor lysis syndrome. In February 2001, we obtained a European marketing authorization for Fasturtec®, and have launched it in several European countries, including Germany and the United Kingdom, beginning in May 2001. In April 2002, we received European authorization for an additional formulation of Fasturtec®, and in July 2002, Fasturtec® received FDA approval and was made commercially available in August 2002 under the brand name Elitek®. Fasturtec® is currently in clinical development in Japan.

 

   

Eligard® (leuprolide acetate; prostate cancer). Eligard® is a luteinizing hormone releasing hormone (LHRH) agonist indicated in the treatment of advanced prostate cancer that we in-license from Atrix. In

 

30


Table of Contents

January 2002, the FDA granted marketing approval for the one-month formulation in the treatment of prostate cancer. In July 2002, the three-month formulation received marketing approval from the FDA, and in February 2003, the four-month formulation received marketing approval from the FDA. We market Eligard® in the United States and Canada.

 

Generics

 

We also manufacture and market a variety of generics in France, Germany and the United Kingdom. These products cover various therapeutic classes, and are typically sold under their international non-proprietary names, or INNs, although in some cases they have a specific brand name. For example, we market Dialgirex®, a generic product used for aches and pains, in France and Monoflam®, an anti-inflammatory, in Germany.

 

Research and Development

 

We have a long tradition of commitment to research and development and many of our products have resulted from our own research and development activities. In 2002, we spent €1,218 million (16.4% of total consolidated net sales) on research and development.

 

We often enter into collaborative research and development arrangements with other pharmaceutical or biotechnology companies under which we fund research expenses in exchange for a right to use and market the products upon regulatory approval. Some of our collaboration agreements include those with Organon, Mitsubishi-Pharma Corp., Cephalon and IDM.

 

    Our joint project with Organon, a subsidiary of Akzo Nobel, for the development of anti-thrombotic oligosaccharides is continuing. This collaboration has already led to the development of Arixtra®.

 

    In 1998, we entered into an agreement with Mitsubishi-Pharma Corp. to identify new neuroprotective agents for use in the treatment of neurogenerative disorders. This agreement was recently renewed thorough the end of 2003.

 

    In December 2001, we entered into an agreement with Cephalon to have access to specific angiogenesis inhibitors that are potential anti-cancer agents, as well as to a research program aimed at identifying new compounds with a similar mechanism of action. Angiogenesis inhibitors are molecules that act by preventing the development of blood vessels in tumors. We have agreed to co-promote any drugs that are successfully developed in the United States, Canada and Mexico with Cephalon, and we have exclusive marketing rights to such drugs in Europe and the rest of the world (excluding Japan). Under the agreement, we made an upfront payment to Cephalon, share in the costs of development, will make milestone payments during the development process and pay royalties on sales of drugs that are successfully developed.

 

    In 2001, we signed a ten-year agreement with IDM to cooperate in cellular immunotherapy research for the development and marketing of immunologic treatments for cancers. Under this agreement, we have a right of first refusal to select up to twenty cell drugs from IDM’s line of products. IDM will undertake the preclinical development, and if we exercise our option, we will finance the clinical development and have worldwide marketing rights for the selected drugs if the clinical trials are successful. A first product under this agreement, Uvidem®, which targets melanoma, is currently in Phase II clinical development.

 

We have entered into collaborative agreements for data-base sharing in the field of genomics with Human Genome Sciences and Genset as well as agreements with research centers specialized in combinatorial chemistry, high throughput screening and structural analysis and proteomics. In the field of functional genomics, we have entered into joint projects with Genfit, Genoway and Lifespan. We also have a joint project with CEREP for compound screening, as well as capabilities in bioinformatics.

 

31


Table of Contents

In 2002, we also began three cooperative research and development programs for Impact Malaria. Impact Malaria is a program created by a dedicated team within our company in order to develop and design new drugs for malaria that conform to WHO recommendations, and which are at prices adapted to the population for which they are intended. Impact Malaria also includes a follow-up aspect both to guarantee that the new drugs are used appropriately (through educational programs), and to ensure that the drugs are used by the populations for which they are intended.

 

We employ over 6,700 personnel in research and development and have 14 research facilities in 6 countries. At January 31, 2003, we had 52 compounds in our research and development pipeline, of which 23 were in phase II or III clinical trials. These 52 compounds include 49 projects for new chemical entities, 2 projects for additional indications for 2 of those new chemical entities (rimonabant and saredutant), and 1 project for an additional formulation of an existing product (Stilnox®).

 

We focus our research and development efforts on our four targeted therapeutic areas. The composition of our research and development pipeline by therapeutic area as of January 31, 2003 is outlined in the following table.

 

     Cardiovascular/
Thrombosis


   Central Nervous
System


   Internal
Medicine


   Oncology

   TOTAL

Phase III

   2    2    3    1    8

Phase IIb

   1    6    1    1    9

Phase IIa

   0    2    2    2    6

Phase I

   3    3    4    2    12

Pre-clinical

   3    7    6    1    17
    
  
  
  
  

TOTAL

   9    20    16    7    52
    
  
  
  
  

 

The research and development process historically takes from 10 to 15 years from discovery to initial product launch and is conducted in various stages. During the “pre-clinical” stage, research scientists perform pharmacology and toxicology studies in various animals. Before testing in humans, an application for the compound must be filed with and approved by the requisite regulatory authorities. Testing in humans is performed in different clinical phases to demonstrate the safety and efficacy of a new compound:

 

    Phase I. In clinical phase I, studies are performed on healthy human volunteers to obtain information concerning safety, preliminary dose-ranging, pharmacokinetics and preliminary interaction with other medications.

 

    Phase IIa. In clinical phase IIa, studies are performed to study the pharmacological activity of the dose range determined in the phase I studies and/or to assess preliminary therapeutic activity in patients.

 

    Phase IIb. In clinical phase IIb, the aim is to determine the risk ratio, i.e. to demonstrate the clinical activity and to determine the optimal dose in a larger and more varied population.

 

    Phase III. In clinical phase III, we verify the clinical efficacy of the compound on a large population of patients (usually between 3,000 and 5,000 volunteers). These studies involve control groups taking a reference compound or a placebo (an inactive compound identical in appearance to the study compound).

 

Together, phases II(b) and III typically take from three to five years to complete. Thereafter, an application containing all data for the proposed drug is sent to regulatory authorities for approval, which may take an additional six months to two years or longer. There are two types of further clinical trials: one called phase IIIb, where new indications are sought; and one called phase IV trials, which are generally carried out after product launch to continue to monitor the efficacy and safety of a new drug.

 

32


Table of Contents

The table below sets out, in summary form, our current principal projects in phase IIb or phase III clinical trials, together with the current projected filing dates for each product if phase III trials are successful. No assurance can be given that the products discussed below will complete the development process, that they will be filed for approval on the planned timetable or that they will ultimately receive the required governmental approvals necessary for commercial launch.

 

Principal Compounds in Phase IIb, III or IIIb Clinical Trials

 

Product


  

Indication


  

Status


  

Targeted Filing


Cardiovascular/Thrombosis

              

Arixtra®

(fondaparinux sodium)

   Acute coronary syndrome    Phase IIIb    2005
     Other venous thromboembolic events after surgery or in medical patients    Phase IIIb    2004

Dronedarone

   Atrial fibrillation    Phase III    2006

Idraparinux sodium

   Thromboembolic events    Phase III    2006

SR 121463

   SIADH (inappropriate secretion of anti-diuretic hormone syndrome), chronic heart failure, cirrohtic ascites    Phase IIb     

Central Nervous System

              

Xaliproden

   Alzheimer’s disease    Phase IIb/III    2006/2007

Rimonabant

   Smoking cessation    Phase III    end of 2004/2005

Stilnox® MR

   Insomnia    Phase IIIb    2004

Osanetant

   Schizophrenia    Phase IIb    2006/2007

Saredutant

   Depression/anxiety    Phase IIb    2006/2007

SR 58611

   Depression    Phase IIb    2006/2007

SL 65.1498

   Anxiety; muscular contractions    Phase IIb    2006/2007

Internal Medicine

              

Fumagillin

   Intestinal microsporidiosis    Phase III    2004 (Europe)

Rimonabant

   Obesity    Phase III    end of 2004-2005

Xatral® (alfuzosin)

   Acute urinary retention    Phase IIIb     

Saredutant

   Irritable bowel syndrome    Phase IIb     

Oncology

              

Eloxatin®

   Ovarian cancer (adjuvant)    Phase IIIb     

Tirapazamine

   Non small cell lung cancer    Phase III    2003/2004
(Europe / U.S.)

SR 31747

   Prostate/breast cancer    Phase IIb    2006/2007

 

Cardiovascular/Thrombosis

 

We currently have two principal products in phase IIIb, phase III or phase IIb clinical trials in the field of Cardiovascular/Thrombosis.

 

   

Idraparinux sodium (thromboembolic events; Phase III). Idraparinux sodium, like Arixtra®, belongs to the synthetic oligosaccharide family and is an injectable synthetic pentasaccharide, selectively inhibiting

 

33


Table of Contents

coagulation factor Xa. Idraparinux sodium has a demonstrated potency and long duration of action that permit a therapeutic regimen consisting of only one injection per week in humans. The results of the PERSIST phase IIb study, published in September 2002, compared idraparinux sodium with anti-vitamin K in the treatment of venous thrombosis and permitted selection of the 2.5mg dose and the initiation of two Phase III trials, VAN GOGH and AMADEUS, both of which will start in early 2003 and are expected to enroll over 10,000 patients. The VAN GOGH program will study idraparinux sodium in the treatment and secondary prevention of venous thromboembolic events in patients suffering from deep-vein thrombosis or pulmonary embolism. The AMADEUS program will study idraparinux sodium in the prevention of thromboembolic events associated with atrial fibrillation.

 

    Dronedarone (atrial fibrillation; phase III). The current reference anti-arrhythmic is still amiodarone, which we have marketed since the late 1960s under the brand name Cordarone®. With dronedarone, a potential successor to Cordarone®, our goal is to develop a new treatment that is at least as effective as amiodarone, but with improved tolerability. The first indication being developed for dronedarone is the prevention of recurrence of atrial fibrillation, the most common cardiac rhythm disorder. The usual treatment for acute atrial fibrillation is an external electric shock to the heart, which is then generally followed by a medicinal anti-arrhythmic agent to avoid recurrences, which are extremely common. In 2002, we initiated two Phase III programs to study both the efficacy and tolerability of dronedarone. The EURIDIS (Europe) and ADONIS (North and South America, Australia and South Africa) phase III trials are studying the efficacy of dronedarone in the prevention of recurrences in patients who have already experienced atrial fibrillation. Enrollment in these trials, together totaling 1,245 patients, was completed in August 2002. The other phase III trial we began during 2002, ANDROMEDA, was studying the tolerability of dronedarone in high-risk patients suffering from heart failure and impaired ventricular function. We stopped the ANDROMEDA trial in January 2003 after enrolling 627 patients instead of the planned 1,000 when an interim tolerability analysis indicated a higher potential risk of death in the group treated with dronedarone. We plan to develop a new protocol for the tolerability study after we complete a detailed analysis of all data gathered.

 

Central Nervous System

 

We currently have four principal products in phase III or phase IIb clinical trials in the field of Central Nervous System.

 

    Xaliproden (Alzheimer’s disease; phase II completed). Xaliproden is a non-peptide compound that activates the synthesis of endogenous neurotrophins. It is orally active as a single daily dose. Because xaliproden has both neurotrophic and neuroprotective properties, we believe it could be the first treatment capable of slowing the progression of Alzheimer’s disease, compared to current treatments for Alzheimer’s disease, which are purely symptomatic. So far, xaliproden’s efficacy as a curative or preventive treatment has been demonstrated in vitro and in vivo in numerous models of central or peripheral neurodegeneration. We completed phase II studies in 2002, which confirmed the tolerability of xaliproden in elderly subjects with Alzheimer’s disease. We currently plan to initiate an international Phase III development program in 2003.

 

      

Previously, we had also been developing xaliproden for use in the treatment of amylotrophic lateral sclerosis (Lou Gehrig’s disease), and had submitted an application for marketing authorization in June 2001 in Europe, where xaliproden has been qualified as an orphan drug for the treatment of this serious disorder. This application for authorization was based on the results of two phase III studies that were completed in 2000. Although the phase III trials demonstrated beneficial effects of xaliproden on respiratory function and the factors contributing to disease progression, the interpretation of the positive effect on respiratory function was complicated by the extent of the survival benefit, which was smaller than the studies were designed to detect. These results were not considered sufficiently robust to meet regulatory requirements for market approval and subsequently, we withdrew our application in 2002.

 

34


Table of Contents
 

We will continue to provide xaliproden to patients suffering from amylotrophic lateral sclerosis who are currently being treated in Europe and elsewhere in the world in the context of ongoing long-term studies as described in the study protocol and in conformity with the various national regulatory procedures.

 

    Osanetant (schizophrenia; phase II). We designed an original study protocol, METATRIAL, to evaluate the therapeutic activity of four compounds possessing novel mechanisms of action in patients with schizophrenia. Osanetant, an NK3 receptor antagonist, showed an activity and a profile close to those of haloperidol, the reference treatment, combined with very good tolerability. Based on these results, the phase II clinical investigation continued in 2002. Osanetant was also being developed for depression. However, the phase IIb trial evaluating the potential of osanetant in severe depression proved non-conclusive.

 

    SR58611 (depression; phase IIb/III). SR58611 is a beta3 adrenergic receptor antagonist. These substances stimulate neuronal activity in a specific region of the prefrontal cortex and could give rise to a new class of anti-depressants. In a phase IIa trial in patients suffering from severe, recurrent depression, SR58611 was observed to be superior to fluoxetine, a reference treatment, and was well-tolerated. The results of a phase IIb study comparing SR58611 to paroxetine, a reference treatment, demonstrated an efficacy and tolerability profile that were sufficiently encouraging to warrant further studies. We currently plan to begin two phase III trials in 2003.

 

    Rimonabant (smoking cessation; phase III). Rimonabant is a CB1 endocannabinoid receptor antagonist that we are studying as an aid both to quit smoking and for the long-term maintenance of abstinence from smoking. The results of a 10-week phase IIa trial completed in 2002 showed that rimonabant resulted in smoking cessation rates superior to those achieved with placebo. The trial also showed the patients receiving rimonabant lost an appreciable amount of weight in contrast to placebo-treated patients ceasing to smoke, who gained weight. Based on these results, and in agreement with the FDA, we began a large-scale phase III program, to include over 6,000 patients, in the United States and Europe in 2002. We are also studying the use of rimonabant for the treatment of obesity, see  “— Internal Medicine” below.

 

Internal Medicine

 

We currently have two principal products in phase III or phase IIb trials in the field of Internal Medicine.

 

    Rimonabant (obesity; phase III). Rimonabant is currently the only selective CB1 endocannabinoid receptor antagonist in clinical trials in humans for use in the treatment of obesity. Rimonabant appears to intervene at the center of central appetite, regulating systems by counteracting endogenous cannabinoids (endocannabinoids), such as anandamide. The important aspect of this mode of action is that it induces both a quantitative regulation of calorie consumption and a quantitative regulation of nutrition by diminishing the appetite for fatty foods, or foods with excessive sugar content. Studies to date so far have demonstrated that weight reduction is significant with rimonabant and that it has a good tolerability profile. We began phase III studies in August 2001, which have enrolled over 6,000 patients. These phase III studies include two large two-year studies, one in the United States and one in Europe, for which patient enrollment has been completed (4,200 patients total), to assess rimonabant in the reduction of weight and in the prevention of weight regain. The phase III studies also include two additional studies, each including close to 1,000 patients, which are designed to demonstrate the efficacy of rimonabant in obese patients suffering from diabetes or dyslipidemia, disorders aggravating the cardiovascular risk factors associated with obesity. We are also evaluating rimonabant as an aid to cease smoking, see “ — Central Nervous System” above.

 

35


Table of Contents
    Fumagillin (intestinal microspiridial infection; phase III). Fumagillin is currently in development for the treatment of intestinal diarrhea of parasitic origin (microsporidia). This kind of diarrhea is severe and can be life-threatening in patients whose immune systems have been weakened. In February 2002, fumagillin was included on the European Union’s list of orphan drugs.

 

Oncology

 

We currently have one principal product in phase III trials in the field of Oncology.

 

    Tirapazamine (non-small-cell lung cancer; phase III). Tirapazamine is an anti-cancer agent that is not directly cytolytic, but promotes the destruction of resistant hypoxic cells. This innovative mechanism of action is likely to diminish the rate of relapse. We expect to complete phase III trials on tirapazamine in combination with cisplatin and vinorelbine in non-small-cell lung cancer at the end of 2003. Clinical studies in other indications, such as ear, nose and throat cancers (particularly pharyngolaryngeal cancers) are ongoing.

 

Production and Raw Materials

 

Generally, we develop and manufacture the active ingredients that we use in our products. We have a general policy of producing the active ingredients for our principal products at our own plants rather than outsourcing production. Even though we must outsource certain production elements, we are committed to this general principle, which reduces our dependency on key suppliers.

 

In February 2001, we sold two manufacturing facilities to Dynamit Nobel, and we outsource to those facilities the production of the active ingredients used in Stilnox®, Kerlone®, Xatral®, Solian® and Tildiem®. Our outsourcing agreement requires us to purchase these ingredients from those facilities through 2004, at which point we may manufacture these ingredients ourselves or negotiate a new outsourcing agreement. Either we or Dynamit Nobel may terminate the outsourcing agreement in the event of a material breach that is not cured for any one of the active ingredients. Additionally, we may terminate the agreement for any one of the active ingredients if they continuously fail to meet specifications or are used in a product that is withdrawn from the market.

 

Among our other key products, we also depend on third parties in connection with the manufacture of Eloxatin®. Under the terms of our license agreement, we purchase the active ingredient from Debiopharm, and the production of the finished product is outsourced to two manufacturers.

 

Our principal manufacturing processes consist of three stages: the manufacture of active ingredients, the incorporation of those ingredients into products designed for use by the consumer and packaging. Each stage of the manufacturing process is carried out under carefully controlled conditions and is regulated by applicable legislation including, for facilities that produce products marketed in the United States, the U.S. Food and Drug Administration, or FDA. Wherever possible, we seek to have at least three plants approved for the production of key active ingredients and finished products. All of our major facilities are good manufacturing practice, or GMP, compliant in accordance with international guidelines.

 

We purchase a variety of raw materials for use in our manufacturing processes. When possible, we have a policy of maintaining multiple sources of supply for materials. In a few cases raw materials may be in short-supply. For example, there are limited supplies of a raw material used in the manufacture of Fraxiparine®. Nonetheless, we have not experienced any difficulty in obtaining a sufficient supply of raw materials in recent years and believe that we will be able to obtain supplies in sufficient quantities in the future. We are not exposed to any material risk related to the volatility of the prices of raw materials that we outsource.

 

Our main production facilities are located in France, Hungary, the United Kingdom and Spain, with additional facilities located in many other countries around the world including in Italy, Northern Africa, Eastern Europe, Asia and Latin America.

 

36


Table of Contents

Marketing and Distribution

 

Overview

 

We have our largest presence in Europe, which accounted for €4,297 million, or 57.7% of 2002 consolidated net sales. In Europe, France is our largest single country in terms of sales and accounted for 21.3% of our 2002 consolidated net sales. Other European countries accounted for 36.4% of our 2002 consolidated net sales, with Germany, Italy, the United Kingdom and Spain representing the largest European markets other than France. Our next largest market is the United States, which accounted for €1,689 million, or 22.7% of 2002 consolidated sales.

 

The following table breaks down our consolidated net sales by geographic market for 2001 and 2002.

 

       Year Ended December 31,

       2001

     2002

       (€ in millions)

Europe

             

France(1)

     1,487      1,584

Germany

     596      634

Italy

     433      444

Other

     1,361      1,635
      
    

Total Europe

     3,877      4,297
      
    

United States

     1,098      1,689

Other countries

     1,513      1,462
      
    

Total net sales

     6,488      7,448
      
    

(1)   Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana).

 

Our principal marketing activities have historically focused on Europe and have been conducted through our own subsidiaries. In the United States and Japan, which together with Europe make up the most significant part of the world pharmaceutical market, we have historically marketed most of our products through partnerships with other pharmaceutical companies. We have increased our presence in the U.S. market, by acquiring the remainder of the Lorex joint venture, which marketed Stilnox® (under the name Ambien®) and Kerlone® in the United States, from Pharmacia in April 2002, and by increasing our involvement in the promotional activities and profits of the alliance with Bristol-Myers Squibb that markets Aprovel® (under the name Avapro®) in the United States from October 2001. These alliances are described below under “ — Alliances” and Item 5 “Operating and Financial Review and Prospects — Overview — Financial Presentation of Alliances.” Our proprietary U.S. sales force, which numbered 2,259 as at December 31, 2002 has more than doubled over the last three years.

 

We manage the marketing process by integrating the marketing approach developed by our central strategic marketing group at our headquarters in Paris with that of our group companies in their local markets, enabling the central marketing strategy to be tailored to individual market needs. A major focus of our marketing strategy is to launch new products in the appropriate key world markets as rapidly as possible, subject to the constraints imposed by the extensive process of obtaining regulatory approvals. The launch of a major product is supported by participation in scientific conferences and exhibitions and by informing the medical community of the qualities, applications and limitations of the product. This process involves the presentation of information generated by clinical trials in a form tailored to each market.

 

37


Table of Contents

Direct Sales Force and Representative Offices

 

We market and promote our products primarily through our own sales force and also have representative offices in certain countries. The following table sets forth certain information about the geographical distribution of our sales force.

 

Sales Force by Region

 

     At December 31, 2002

 
     Sales Force

   % of Total

 

Europe

   5,071    46.0 %

United States

   2,259    20.5 %

Other Countries

   3,685    33.5 %
    
  

Total

   11,015    100.0 %
    
  

 

Alliances

 

We have two major alliances through which three of our six strategic products are marketed. The first, with Bristol-Myers Squibb, or BMS, governs the marketing of Aprovel® and Plavix®. The second, with Organon, a subsidiary of Akzo Nobel, governs the marketing of Arixtra®. In addition, until recently, Stilnox® was the subject of a major alliance. The alliance structures have had a significant impact on the effect that sales of these products have had on our financial condition and results of operations. The financial impact of these structures on our results of operations is described in detail under Item 5 “Operating and Financial Review and Prospects — Overview — Financial Presentation of Alliances.”

 

BMS

 

We market Aprovel® and Plavix® through a series of alliances with Bristol-Myers Squibb, or BMS. The alliance agreements include marketing and financial arrangements that vary depending on the country in which the products are marketed.

 

  There   are three principal marketing arrangements that are used in the BMS alliance:

 

    Co-marketing. Under a co-marketing system, each company markets the products independently under its own brand names.

 

    Exclusive Marketing. Under the exclusive marketing system, one company has the exclusive right to market the products.

 

    Co-promotion. Under a co-promotion system, the products are marketed through the alliance arrangements (either by contractual arrangements or by separate entities) under a single brand name.

 

Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world excluding Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals, and Plavix® is under development through an alliance between our company and Daiichi Pharmaceuticals Co., Ltd.

 

    Territory under our operational management. In the territory under our operational management, the marketing arrangements are as follows:

 

    We use the co-promotion system for most of the countries of Western Europe for Aprovel® and Plavix® and for certain Asian countries for Plavix®.

 

38


Table of Contents
    We use the co-marketing system in Germany, Italy, Spain and Greece for both Aprovel® and Plavix®.

 

    We have the exclusive right to market Aprovel® and Plavix® in Eastern Europe, Africa and the Middle East, and we have the exclusive right to market Aprovel® in Asia (excluding Japan).

 

    Territory under BMS operational management. In the territory under BMS operational management, the marketing arrangements are as follows:

 

    We use the co-promotion system in the United States and Canada, where the products are sold through the alliances under the operational management of BMS.

 

    We use the co-marketing system in Brazil, Mexico, Argentina, Colombia and Australia for Plavix® and Aprovel®.

 

    We have the exclusive right to market the products in certain other countries of Latin America.

 

In countries where the products are marketed by BMS on an exclusive or co-marketing basis, or through alliances under the operational management of BMS, we often sell the active ingredients for the products to BMS or such entities.

 

Organon

 

We have an alliance with Organon, a subsidiary of Akzo Nobel, covering the worldwide marketing of Arixtra®. Similar to our other alliances, the marketing and financial arrangements vary depending on the country in which Arixtra® is sold. We launched Arixtra® in the United States in February 2002 and we have been gradually launching the product in Europe beginning in the second and third quarters of 2002, with additional launches planned in 2003.

 

    North America. In the United States, Mexico and Canada, Arixtra® is sold by entities that we jointly control with Organon.

 

    Europe and Other Countries (excluding Japan). We have the exclusive right to market and sell Arixtra®.

 

Japan

 

In Japan, we market our products primarily through alliances or by licensing our products to others. Our most important alliances and licensing agreements in Japan are with Fujisawa for Stilnox® (launched in December 2000 under the brand name Myslee®), Dogmatil®, Tiapridal® and Primperan®; Daiichi for Ticlid®; Mitsubishi for Kerlone®; Taisho for Cordarone® and Yamanouchi for Corotrope®.

 

Other Countries

 

In order to strengthen our presence worldwide, we have entered into other types of marketing agreements, including alliances in Slovenia, China and Vietnam.

 

Patents, Intellectual Property and Other Rights

 

Trademarks

 

Our products are sold around the world under brand-name trademarks that we consider in the aggregate to be of material importance. It is our policy to register our trademarks worldwide, and to monitor the trademarks in our portfolio and defend them worldwide.

 

The degree of trademark protection varies country by country, as each state implements its own laws applicable to trademarks used in its territory. In some countries, trademark protection is primarily based on use,

 

39


Table of Contents

whereas in other countries, trademark rights may only be obtained by registration. Registrations are generally granted for a fixed term (typically ten years) and are renewable indefinitely, but in some instances may be subject to the continued use of the trademark. When trademark protection is based on use, it covers the products and services for which the trademark is used. When trademark protection is based on registration, it covers only the products and services designated in the registration. We usually register our trademarks so as to cover pharmaceutical products in class 5, although we sometimes are required, subject to local trademark law requirements, to further specify the type of product protected by the trademark. Additionally, in certain cases, we may enter into a coexistence agreement with a third party that owns potentially conflicting rights in order to better protect and defend our trademarks.

 

Patents

 

We currently own over 9,000 patents and patent applications worldwide, and we license-in approximately 30 patents. These patents cover:

 

    active ingredients,

 

    pharmaceutical formulations,

 

    product manufacturing processes,

 

    intermediate chemical compounds used in manufacturing, or

 

    therapeutic indications.

 

Patent protection for individual products typically extends for 20 years from the filing date in countries where we seek patent protection. This protection may be further extended in some countries, in particular in Europe, the United States and Japan. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. In most industrial countries, patent protection exists for new active substances and formulations, as well as for new indications and production processes. We monitor our competitors and vigorously challenge patent and trademark infringements.

 

The expiration of a product patent may result in significant competition from generic products against the covered product and, particularly in the U.S., can result in a dramatic reduction in sales of the pioneering product. In some cases, it is possible to continue to obtain commercial benefits from product manufacturing trade secrets, patents on processes and intermediates for the economical manufacture of the active ingredients, patents for special formulations of the product or delivery mechanisms, and conversion of the active ingredient to OTC products. In some countries, including Europe and the United States, many of our products may also benefit from a 5- to 10-year market exclusivity period. This exclusivity period operates independently of patent protection and may protect the product from generic competition even if the basic patent for the product has expired.

 

Among our 15 leading products, Aspégic, Cordarone®, Dogmatil® and Solian® no longer enjoy any kind of patent protection in major markets. For certain of our other leading products, including Fraxiparine®, Tildiem®, Ticlid® and Depakine®, we only have patent protection on a particular formulation of the drug or on a manufacturing process in certain countries as the main patent has expired. For Plavix® there are five U.S. patents, three expiring in 2003, 2011 and 2014, respectively, and two expiring in 2019, and three European patents, expiring in 2003, 2013 and 2019, respectively. Aprovel® is protected in the United States until 2011 and in Europe until 2012. Stilnox® began to lose some of its patent protection in 2002, as its main patents will expire in different countries beginning in 2002 through 2006. However, Stilnox® is patent protected in both the United States and Japan until 2006. Arixtra® has market exclusivity in the United States until 2006, and in Europe it will have data protection until 2012. Among our strategic products, Eloxatin® is marketed under a licensing agreement, as we do not own the Eloxatin® patents but in-license them from a third party for marketing. Those patents expire in 2013.

 

The most recent of our major pharmaceutical products to go off patent in major markets was Corotrope®, whose main patents expired in the United States in May 2002 (where it is sold under the brand name Primacor®).

 

40


Table of Contents

One of the main limitations on our operations in some countries outside the U.S. and Europe is the lack of effective intellectual property protection of our products. Under international agreements in recent years, global protection of intellectual property rights is improving. The TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights), which forms part of the General Agreement on Tariffs and Trade, requires developing countries to amend their intellectual property laws to provide patent protection for pharmaceutical products by the end of a 10-year transition period that expires on January 1, 2005, and a number of countries have already enacted such amendments. Although the situation has gradually improved, the lack of protection for intellectual property rights poses difficulties in certain countries.

 

In the United States, two pharmaceutical companies have filed Abbreviated New Drug Applications, or ANDAs, challenging our patents related to Plavix®. See Item 8 “Financial Information — Legal Proceedings.” An ANDA is an application by a generic manufacturer for an abbreviated approval of a generic product. See “— Regulation” below. We believe that our patent rights are valid and will vigorously defend them. Other than as described herein, we are not currently involved in any material patent or trademark litigation nor, to our knowledge, is any such litigation threatened.

 

Competition

 

The pharmaceutical industry in which we operate is highly competitive. Over the last few years, the pharmaceutical industry has experienced increased vertical and horizontal consolidation. In addition to the consolidation, significant changes in marketing conditions are occurring in the European, U.S. and Japanese pharmaceutical markets, including decreased pricing flexibility, increased cost control measures, and the impact of managed care, especially with respect to product selections and pricing concessions. As a result of these factors, the breadth of products that we offer and our distribution capabilities have become increasingly important.

 

The pharmaceutical market is generally defined by three types of competition:

 

    competition among pharmaceutical companies to develop new patented products for a specific therapeutic indication;

 

    competition among patented pharmaceutical products for a specific therapeutic indication; and

 

    competition among original products with generic bioequivalent products following the loss of patent protection.

 

We compete with other pharmaceutical companies to develop new and innovative pharmaceutical products. We may develop new technologies and new patented products entirely internally, or we may enter into collaborative research and development arrangements to have access to additional new technologies. When we compete for new technologies through outside research and development collaborative arrangements, we compete directly with large pharmaceutical companies. Some of these companies have substantially greater resources than our company, and may be able to offer more attractive milestone payment or other terms. Additionally, as many of these companies have a larger U.S. sales force and consequently a larger presence in the U.S. market, the largest market for pharmaceuticals, they may be more attractive partners for the smaller pharmaceutical companies that are typically compensated with royalty payments of sales of products developed.

 

Once a patented product is on the market, it competes directly with other products that have been developed for the same therapeutic indication. For example, Plavix®, Aprovel®, Stilnox®, Eloxatin®, Xatral® and Arixtra®, among others, may face competition from existing products or other products that have recently appeared on the market or are in later-stage development by other companies. Plavix®, for example, has always faced competition from acetylsalicylic acid, and a combination of acetylsalicylic acid and dipyridamole (Asasantin®/Aggrenox®) (Boehringer-Ingelheim GmbH). Aprovel® competes directly with Cozaar® (Merck & Co., Inc.) and Diovan®

 

41


Table of Contents

(Novartis AG), Stilnox® competes directly with Sonata® (Wyeth), Eloxatin® competes directly with Campto®/Camptosar® (Aventis/Pfizer), Xatral® competes with Flomax® (Abbott Laboratories/ Boehringer-Ingelheim GmbH), Proscar® (Merck & Co., Inc.) and Hytrin® (Abbott Laboratories) and Arixtra® competes directly with low molecular weight heparins, notably Lovenox® (Aventis).

 

Finally, when a pharmaceutical product loses patent protection, it typically faces competition from generic products, which generally are priced much lower than the original product. We thus compete directly on price with generic product manufacturers for sales once one of our products loses patent protection. For example, since Corotrope®’s U.S. patent protection expired in May 2002, it has faced direct competition from generics. As expected, this competition has led to a significant drop in sales in the United States of Corotrope® (where it is sold under the brand name Primacor®).

 

Pricing

 

In addition to the normal competitive forces that affect the level of prices, a further constraint exists in the form of price controls in most countries where we sell our products. These controls arise either by law or because the government or other healthcare providers in a particular jurisdiction are the principal purchasers of the product or reimburse purchasers for the cost of the product. Price control mechanisms operate differently from jurisdiction to jurisdiction and can result in large price differentials between markets, which may be aggravated by currency fluctuations (apart from countries of the European Monetary Union, which have had the same currency since January 1, 2002). These price differentials can also be exploited by traders (parallel importers) who purchase branded products in lower-priced markets for resale in higher-priced markets.

 

In recent years, cost-control efforts by public authorities have led to a tightening of reimbursement policies in most of the countries in which we operate, particularly in Western Europe, where state controlled healthcare programs (with reimbursement of a percentage of health expenses by the state) are common. Direct cost control measures can take a variety of forms, including mandatory price reductions (or failure to approve price increases), increases in the percentages to be paid by patients (the “co-pay”), exclusion of certain products from lists of reimbursable products, benchmarking of reimbursement prices based on the lowest priced therapy available in a category, cost-benefit analysis of prescription pharmaceuticals, encouragement of the growth of generic drug markets and consideration of the price paid in other countries for the same product. For example, in Italy, many cost-containment measures were introduced in September 2001, and in April 2002, a 5% reduction in the price of all medicines was introduced. In Germany, retail pharmacists were authorized to substitute up to 5.5% of their sales with products imported from countries with lower prices during 2002.

 

In Europe, in certain countries, governments also influence the price of pharmaceutical products indirectly through control of national healthcare systems that fund a significant portion of the cost of such products. In France, for example, a government authority sets the price level for reimbursable medications taking into account the scientific value of the product, as well as the individual agreements signed between the governmental authority and the pharmaceutical companies. Every five years (to be reduced to three years in the near future for all products), the reimbursement and price of new products on the list are reviewed. The price of a product depends on the benefits it provides in rendering medical treatment (including innovations) as well as an economic analysis when compared to existing treatments. In 2002, a new French law provided for the introduction of a system of reference prices for medicines likely to be subject to generic competition and provides for the progressive end to reimbursement of products that have insufficient “medical benefit” (service medical rendu). As a first step, in April 2003 a list including more than 600 products judged to have a weak or moderate medical benefit was officially issued. Although none of our top fifteen products was included on this list, certain of our non-core products that we sell in France were named, and thus their reimbursement rate will be reduced from 65% to 35%.

 

In Japan, the National Health Ministry bi-annually reviews the prices of certain pharmaceutical products (which review in the past has resulted in regular price reductions). In the United States, there are currently no

 

42


Table of Contents

price controls over private sector pharmaceutical purchases; however, federal and state legislation requires drug manufacturers to pay rebates on certain drugs to state Medicaid agencies based on each state’s reimbursement of pharmaceutical products under the Medicaid program. We also must give discounts or rebates in the United States on purchases or reimbursements of pharmaceutical products by certain other federal and state agencies and programs. Further healthcare reforms continue to be considered in both the United States and other jurisdictions and depending on their form, if adopted, could have a material effect on our operations in the future. In the absence of new government regulation, managed care has become a potent force in the market place that increases downward pressure on prices of pharmaceutical products.

 

Regulation

 

The international pharmaceutical industry is highly regulated. National and supranational regulatory authorities administer numerous laws and regulations covering the testing, approval, manufacturing, importation, exportation, labeling and marketing of drugs, and also review the quality, safety and efficacy of pharmaceutical products. Of particular importance is the requirement to obtain and maintain regulatory approval for a pharmaceutical product from a country’s national regulatory authority before such product may be marketed in that country. These regulatory requirements are a major factor in determining whether a substance can be developed into a marketable product and the amount of time and expense associated with such development.

 

The submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Furthermore, each regulatory authority may impose its own requirements and may refuse to grant, or may require additional data before granting, an approval, even though the relevant product has been approved in another country. Regulatory authorities also have administrative powers that include product recalls, seizure of products and other sanctions.

 

Europe, the United States and Japan all have very high standards for technical appraisal. The time taken to obtain approval varies by country, but generally takes from six months to, in some cases, several years from the date of application, depending on the quality of data produced, the degree of control exercised by the regulatory authority, the efficiency of its review procedures and the nature of the product. In recent years, intensive efforts have been made among the United States, the European Union, or EU, and Japan to harmonize registration requirements. Many pharmaceutical companies are now able to prepare a common technical document, or CTD, that can be used in each jurisdiction for a particular product. However, the requirement in many countries (including Japan and several member-states of the EU) to negotiate selling prices or reimbursement levels with government regulators can substantially extend the time to market after initial approval is granted.

 

In the EU, there are two main procedures for application for marketing authorization, namely the Centralized Procedure and the Mutual Recognition Procedure. In the Centralized Procedure, applications are made to the European Agency for the Evaluation of Medicinal Products for an authorization that is valid across all EU member-states. The Centralized Procedure is mandatory for all biotechnology products and optional for other new chemical compounds or innovative medicinal products. In the Mutual Recognition Procedure, a first authorization is granted by a single EU member-state. Subsequently, mutual recognition of this first authorization is sought from the remaining EU member-states. National authorizations are only possible for products intended for commercialization in a single EU member-state only, or for line extensions to existing national product licenses.

 

In the United States, applications for drug registration are submitted to and reviewed by the U.S. Food and Drug Administration, or FDA. The FDA has broad regulatory powers over all pharmaceutical products that are intended to be, and which are, commercialized in the United States. To commercialize a product in the U.S., a new drug application (“NDA”) is filed with the FDA with data that sufficiently demonstrate the drug’s quality, safety and efficacy. A supplemental new drug application (“sNDA”) must be filed for the approval of a new indication of a previously registered drug.

 

43


Table of Contents

Generic drug manufacturers may file an abbreviated new drug application (“ANDA”). These applications are “abbreviated” because generic manufacturers need only demonstrate that their product is bioequivalent (i.e., that it performs in the same manner as the innovator’s drug). Consequently, the length of time for development of such product can be considerably shorter than for the innovator’s drug.

 

Once marketing authorization is granted, the new pharmaceutical (or new indication) may be prescribed by physicians. Thereafter, the drug owner must submit periodic reports to regulatory authorities, including any cases of adverse reactions. For some medications, regulatory authorities may require additional studies (Phase IV) to evaluate long-term effects or to gather information on the use of the product under special conditions. In addition, manufacturing facilities must also be approved by regulatory authorities, and are subject to periodic inspections. In addition to local regulatory approvals, a non-U.S. manufacturing facility that exports products for sale in the United States must be approved by the FDA, and is also subject to periodic FDA inspection.

 

In addition to the regulatory approval of our products, all of our manufacturing facilities must be Good Manufacturing Practice (or GMP) compliant. GMP is a term that is used internationally to describe a set of principles and procedures that, when followed by manufacturers of therapeutic goods, helps ensure that the products manufactured will have the required quality for human use. A basic tenet of GMP is that quality cannot be tested in a batch of product but must be built into all stages of the manufacturing process. These quality system regulations include requirements related to the methods used in, and the facilities and controls used for, designing, manufacturing, packaging, labeling and storing pharmaceutical products, including guidelines relating to the installing and servicing of the equipment used in their manufacture. Compliance with specified GMP requirements is used by most countries as the basis for licensing manufacturers of pharmaceutical products.

 

Health, Safety and Environment

 

Our manufacturing and research operations are subject to increasingly stringent health, safety and environmental laws and regulations. Such laws and regulations are complex and rapidly changing. We have made, and intend to continue to make, necessary expenditures for compliance with them. Our expenditures related to health, safety and environmental compliance vary from year to year. In 2002, we invested approximately €23 million in health, safety and environmental compliance, compared to €11 million in 2001. The increase in our health, safety and environmental spending is principally due to the implementation of various new initiatives at our sites, whereas in 2001 we were primarily in the final phases of projects initiated in the previous years. While we cannot predict with certainty the future costs for compliance, we believe that our designated provisions are adequate based on currently available information. However, given the inherent uncertainties in projecting environmental liabilities we cannot guarantee that additional costs will not be incurred beyond the amounts accrued.

 

The environmental laws and regulations that we are subject to may require us to remove or mitigate the effects of the disposal or release of chemical substances at our various sites. Under some of these laws and regulations, a current or previous owner or operator of a property may be held liable for the costs of removal or remediation of hazardous substances on, under or in its property, or transported from its property to third party sites, without regard to whether the owner or operator knew of, or caused the presence of, the contaminants. The current or previous owner may also be liable regardless of whether the practices that resulted in the contamination were legal at the time they occurred.

 

Because certain of our manufacturing sites have an extended history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on us in the future. As is typical for companies involved in the pharmaceutical industry, soil and groundwater contamination has occurred in the past at some of our sites, and might occur or be discovered at other sites. Two of our French sites are currently included on a list of potentially contaminated land and sites on a database known as the BASOL, which is maintained by the Directions Régionales de l’Industrie, de la Recherche et de l’Environnement (or DRIRE), the French equivalent of the EPA. In connection with an audit conducted in 1999 and 2000 at the request of the DRIRE, an assessment

 

44


Table of Contents

of the groundwater contamination was conducted at our Sisteron site, and we are now in the process of rehabilitating the site in cooperation with the DRIRE. We also have been identified as having potential liability for investigation and cleanup at several other sites, and we have established reserves for the currently-known sites and for contractual guarantees for environmental liabilities for sites that we have sold. These reserves are in amounts that are not material to our results of operations.

 

We believe that we are not currently subject to liabilities for non-compliance with applicable environmental, health and safety laws and regulations that would materially and adversely affect our business, financial condition or results of operations. We also believe that we are in substantial compliance with environmental, health and safety laws and regulations and that we have obtained all material environmental permits required for the operation of our facilities. We are committed to providing safe and environmentally sound work places that will not adversely affect the health or environment of our employees or the communities in which we operate.

 

We have implemented a health, safety and environment policy that promotes the health and well-being of our employees and respect for our environment. We consider this policy to be an integral element of our commitment to social responsibility. The key points of this policy are summarized below.

 

Health. From the development of compounds to the launch of new drugs, our research scientists continuously assess the effect of our products on human health. We make this expertise available to our employees through two committees responsible for chemical and biological risk assessment. Our COVALIS committee classifies all chemical and pharmaceutical products handled within the group and sets workplace exposure limits for each of them. To date, 659 active pharmaceutical ingredients and 435 synthesis intermediates have been assessed. Our TRIBIO Committee classifies all biological agents according to their degree of pathogenicity and establishes guidelines for their containment and the preventive measures to be respected throughout our operations.

 

Safety. We have a rigorous policy in place to identify and evaluate risks and to develop preventive measures and methods for checking their efficacy. Additionally, we invest in training schemes that are designed to ensure that a concern for safety is built into all professional activities. We implement these policies worldwide to ensure the safety to our employees and protect their health. Each project, be it research, development or manufacturing, is subject to evaluation procedures incorporating the chemical substance and processes data from the COVALIS and TRIBIO committees discussed above. Our preventive measures are designed primarily to reduce the number and seriousness of industrial accidents involving our permanent and temporary employees or employees of outside contractors. We believe that these efforts have been a success as we have seen a significant improvement in our safety results since the merger.

 

Our Sisteron site, discussed above, has been identified on a list of sites that are subject to increased levels of safety inspections due to the safety concerns associated with the nature of its manufacturing processes (which include the use of toxic and inflammable substances).

 

Environment. Our environmental policy’s core objectives are to implement clean manufacturing processes, minimize the use of natural resources and reduce the environmental impact of our business. In order to optimize and improve our environmental performances, we are working towards obtaining ISO 14001 certification. Two sites were certified in 2002, and three additional sites were certified in 2003. This objective is an integral part of the strategy of continuous improvement practiced in all of our establishments through the annual implementation of health, safety and environment progress plans, known as PASS. We believe that this strategy clearly expresses the commitment of both management and individuals to health, safety and environment.

 

Our recent environmental protection efforts have targeted reduction in water consumption, improvement in performance of water treatment installations, reduction in air emissions of power-generating units and in the release of volatile organic compounds, and reduction or improved recycled ratios in waste materials. Even with our increased production volume, we have achieved considerable improvements in each of these areas.

 

45


Table of Contents

Insurance

 

We have set up two worldwide insurance programs with reputable internationally recognized firms. These programs are designed to cover general and product liability, property damage and business interruption, plus damage to goods in transit. In addition to these general programs, we have also taken out other insurance policies for specifically identified risks or to take into account local requirements.

 

Although we were able to maintain our liability coverage at sufficient levels in 2002, there is a general trend in the insurance industry since 2002 of introducing new exclusions that are aimed at certain products, and of raising the level of deductibles. This market trend did not affect property cover and business interruption policies to the same degree, however these policies were subject to reductions and some significant exclusions related to the perceived terrorism threat and natural events. In order to address this market trend, we formed a Bermuda-based mutual insurance company in May 2003 with six other major makers of medicinal products.

 

C.    Organizational Structure

 

The table below sets forth our significant subsidiaries and affiliates as of the date of this annual report. For a complete list of our consolidated subsidiaries, see Note E to our consolidated financial statements, included under Item 18 “Financial Statements.”

 

Significant Subsidiary or Affiliate


   Country

   Ownership
Interest


 

Sanofi-Synthélabo Inc.

   United States    100 %

Sanofi Winthrop Industrie

   France    100 %

Lorex Inc.

   United States    100 %

 

D.   Property, Plants and Equipment

 

Our principal executive offices are located in Paris, France. We operate our business through a number of offices, research facilities and production sites throughout the world.

 

We both own and lease our facilities. We have entered into leasing agreements with respect to real estate properties located in France, at Gentilly, Chilly Mazarin, and Bagneux. These real estate properties are composed of buildings constructed pursuant to the lease agreements, under which we pay periodic rent and have a purchase option exercisable at expiration. We are responsible for all repairs, taxes and other costs during the term of the leases. The leases are classified as debt in our consolidated balance sheet.

 

In 2002, we spent €423 million primarily to increase capacity at our various manufacturing sites for new products. We believe that our production plants and research facilities are well maintained and generally adequate to meet our needs for the foreseeable future.

 

46


Table of Contents

Below is a summary of our principal manufacturing, distribution, research and development and administrative facilities. In addition to these principal sites, we have 94 additional facilities throughout the world that serve their local and regional markets.

 

Facility


   Size (m2)

  

Principal Use


Manufacturing

         

Ambarès, France (near Bordeaux)

Sanofi Winthrop Industrie

1, rue de la Vierge

BP 599

33440 Ambarès, France

   62,200   

Pharmaceutical Manufacturing

(primarily Plavix®, Aprovel®, Depakine® and Cordarone®)

Amilly, France (near Orléans)

Sanofi-Winthrop Industrie

196, rue du Maréchal Juin

Zone Industrielle – Amilly

45208 Montargis Cedex, France

   25,800    Chemical and Pharmaceutical Manufacturing and storage (primarily Aspégic®)

Aramon, France (near Avignon)

Sanofi Chimie

Route d’Avignon

30390 Aramon, France

   47,200   

Chemical Manufacturing

(primarily irbesartan, amiodarone and fondaparinux sodium)

Colomiers, France (near Toulouse)

Sanofi Winthrop Industrie

1-3 Allée de la Neste

BP 319

31773 Colomiers cedex, France

   16,200   

Pharmaceutical Manufacturing

(primarily Depakine®)

Notre–Dame de Bondeville, France

(near Rouen)

Sanofi Winthrop Industrie

1, rue de l’Abbaye

76960 Notre–Dame de Bondeville, France

   42,600   

Chemical and Pharmaceutical Manufacturing

(primarily Fraxiparine®, Depakine®, Eloxatin® (packaging), Arixtra® and fondaparinux sodium)

Quetigny, France (near Dijon)

Sanofi Winthrop Industrie

6, boulevard de l’Europe

21800 Quetigny, France

   27,400   

Pharmaceutical Manufacturing

(primarily Stilnox®, Tildiem®, Plavix® and Solian®)

Sisteron, France (near Marseille)

45, chemin de Meteline

BP 15

04201 Sisteron Cedex, France

   60,100   

Chemical Manufacturing

(primarily clopidogrel, ticlopidine and fondaparinux sodium)

Tours, France

30-36, avenue Gustave Eiffel

37100 Tours cedex, France

   26,300   

Pharmaceutical Manufacturing

(primarily Stilnox®, Tildiem®, Aprovel® and Xatral®)

Alcobendas (near Madrid)

Sanofi-Synthélabo SA

Avda. de la Industria, 31

Poligono Industrial

28108 Alcobendas, Spain

   12,100   

Pharmaceutical Manufacturing

(primarily Dogmatil®)

 

47


Table of Contents

Facility


   Size (m2)

  

Principal Use


Csanyikvolgy, Hungary

Chinoin Pharmaceuticals Works Co. Ltd

P.O.B. 5653510

Miskolc

Csanyikvolgy

Hungary

   11,100   

Pharmaceutical Manufacturing

(primarily Fraxiparine® and Arixtra®)

Fawdon, England (near Newcastle)

Sanofi Winthrop Ltd.

Fawdon Manufacturing Centre

Edgefield Avenue, Fawdon

Newcastle Upon Tyne, NE3 3TT

England

   49,400   

Pharmaceutical Manufacturing

(primarily Plavix®, Aprovel®, Depakine® and Cordarone®)

Riells, Spain (near Barcelona)

Sanofi-Synthélabo

Carretera de la Batlloria a Hostarlich

KM 1,4

17404 Riells y Viabrea (Girona), Spain

   15,200   

Pharmaceutical Manufacturing

(primarily Ticlid® and Cordarone®)

Ujpest, Hungary (near Budapest)

Chinoin Pharmaceutical and

Chemical Works Co. Ltd.

TO U 1-5 P.O.B. 110

1325 Budapest

Hungary

   122,300   

Chemical and Pharmaceutical Manufacturing

(primarily Ticlid®)

Verès, Hungary

Chinoin

Levai utca 5

Veresgyhaz H-2112

Hungary

   13,300    Pharmaceutical Manufacturing

Research and Development

         

Alnwick, U.K. (near Newcastle)

Willowburn Avenue

Alnwick

Northumberland, NE66 NQ

England

   12,600    Research

Bagneux, France (near Paris)

Sanofi-Synthélabo Recherche

31, avenue Paul Vaillant Couturier

92200 Bagneux, France

   21,700    Research

Chilly-Mazarin, France (near Paris)

1, avenue Pierre Brossolette

91385 Chilly-Mazarin cedex, France

   61,800   

Research, as well as distribution

(primarily for the French consumer products market)

 

48


Table of Contents

Facility


   Size (m2)

  

Principal Use


Great Valley, PA, United States

Sanofi-Synthélabo Research

a division of Sanofi-Synthelabo Inc.

9, Great Valley Parkway

Malvern, PA 19355

U.S.A.

   25,000    Research

Porcheville, France (near Paris)

2-8, rue de Royen

Zone Industrielle de Limay

78440 Porcheville, France

   24,300    Research

Montpellier, France

Sanofi-Synthélabo Recherche

371, rue du Professeur Joseph Blayac

34184 Montpellier cedex 04, France

   50,200    Research

Strasbourg, France

Sanofi-Synthélabo Recherche

18, rue d’Ankara

67080 Strasbourg, France

   7,400    Research

Toulouse, France

Sanofi-Synthélabo Recherche

195, route d’Espagne

31306 Toulouse, France

   19,400    Research

Distribution

         

Amilly, France (near Orléans)

Sanofi-Winthrop Industrie

196, rue du Maréchal Juin

Zone Industrielle – Amilly

45208 Montargis Cedex, France

   16,500    Distribution center for pharmaceutical products

St. Loubes, France (near Bordeaux)

Sanofi Winthrop Industrie site No. 4

Z.I. La Lande

7, rue des Genets

BP 53

33451 Saint Loubes cedex, France

   14,600    Distribution center for pharmaceutical products

Office Space

         

Sanofi-Synthélabo

174, avenue de France,

Paris, France

   17,100    Headquarters

Sanofi-Synthélabo

74-82, avenue de Raspail

Gentilly, France (near Paris)

   29,300    Administrative offices and other operational activities

Sanofi-Synthélabo, Inc.

90 Park Avenue

New York, NY

U.S.A.

   18,000    Administrative offices, U.S. headquarters

 

49


Table of Contents

Item 5.    Operating and Financial Review and Prospects

 

You should read the following discussion in conjunction with our financial statements and the notes thereto included in this annual report under Item 18. Our financial statements have been prepared in accordance with French GAAP, which differ in certain significant respects from U.S. GAAP. Note F to our audited financial statements provides a description of the principal differences between French GAAP and U.S. GAAP as they relate to our company, and reconciles our shareholders’ equity and net income to U.S. GAAP as of and for each of the years ended December 31, 2000, 2001 and 2002. Unless otherwise indicated, the following discussion relates to our French GAAP financial information.

 

The following discussion contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See Item 3 “Key Information — Forward-Looking Statements.”

 

Overview

 

Our company is in a period of substantial growth. Our net sales in 2002 were €7,448 million, representing an increase of 14.8% compared to 2001, or an increase of 12.8% excluding the impact of changes in the scope of consolidation and exchange rates. Our 2001 net sales were 8.8% higher than our 2000 net sales, or 15.2% higher excluding the impact of changes in the scope of consolidation and exchange rates.

 

Our growth has been driven principally by the following factors:

 

    rapid growth of our three lead products, Plavix®, Aprovel® and Stilnox®, which together accounted for net sales of €1,320 million in 2000, €1,914 million in 2001 and €2,973 million in 2002; and

 

    our increased presence in the United States, which accounted for 14.9% of our net sales in 2000, 16.9% in 2001 and 22.7% in 2002.

 

In addition, a portion of our net sales growth has been due to our increased interest in the entity that markets Stilnox® in the United States.

 

We have also improved our operating margins over the last three years. Operating profit represented 26.4% of net sales in 2000, 32.5% in 2001 and 35.1% in 2002. The principal reasons for our improved operating margins have been:

 

    strong growth in our top 15 products;

 

    the sale of non-core businesses that had comparatively lower operating margins than our core pharmaceuticals business; and

 

    our increased financial interest in operating profits resulting from sales of Stilnox® and Aprovel® in the United States.

 

In 2002, our improved operating margin was achieved despite the adverse impact of a program by Bristol Myers Squibb, which has operational management of the entity that markets Plavix® and Aprovel® in the United States, to reduce wholesaler inventories beginning in March 2002.

 

Our operating margins have improved despite a significant increase in our research and development expenses. In 2002, we had research and development expenses of €1,218 million, which represented an 18.1% increase over €1,031 million in 2001, which itself represented a 9.1% increase over 2000. The 2002 figure represented 16.4% of our net sales.

 

50


Table of Contents

Our activities generate significant operating cash flow, which has historically been sufficient to fund our investment needs and to allow us to pay dividends. At the end of 2002, we had a net cash position of €2,029 million. We do not anticipate needing cash resources other than those generated by our operations to fund our activities.

 

Sources of Revenues and Expenses

 

Revenues. Our principal source of revenues is the sale of pharmaceutical products. We sell these products directly, through alliances and through licensees throughout the world. When we sell products directly, we record sales revenues as part of our consolidated revenues. When we sell products through alliances, the revenues reflected in our consolidated financial statements are based on the overall level of sales of the products and on the arrangements governing those alliances. We describe our principal alliances below under “—Financial Presentation of Alliances.” When we sell products through licensees, we receive royalty income that we record as a reduction in our cost of goods sold, as discussed further below.

 

Cost of Goods Sold. Our cost of goods sold consists primarily of the cost of purchasing active ingredients and raw materials, labor and other costs relating to our manufacturing activities, packaging materials and distribution costs, as well as government charges that we are required to pay in some countries.

 

Our cost of goods sold also includes our net royalties relating to license agreements for products. We have license agreements under which we distribute products that are patented by other companies and license agreements under which other companies distribute products that we have patented. When we pay royalties, we record them in cost of goods sold, and when we receive royalties, we record them as reductions in our cost of goods sold.

 

Operating Profit. Our operating profit consists of gross profit less research and development costs, selling and general expenses and items that we record as “other operating income / (expense), net.” We expense all of our research and development costs as incurred. Our “other operating income / (expense), net” relates primarily to profit sharing arrangements with partners under joint ventures and alliance agreements for the commercialization of products. The effects of these profit sharing arrangements are reflected in operating profit. See “ — Financial Presentation of Alliances” below for a description of these arrangements.

 

Treatment of Milestone Payments Under Licensing Agreements

 

When we enter into a licensing agreement with respect to products under development, we frequently pay the patent owner an up-front payment and/or payments for reaching certain development milestones. If the product has not yet received regulatory approval, we record these payments as additions to our research and development expenses. If the product has already received regulatory approval or the payment is made upon receipt of regulatory approval, we record the payment as an addition to our intangible assets, which is amortized over the shorter of the useful life of the product and the duration of the relevant license.

 

Presentation of Net Sales

 

In the discussion below, we present our net sales for each period, and we break down our net sales among various categories, such as by therapeutic class, product and geographical area. We refer to our historical sales as “reported” sales. In addition to reported sales, we also present and discuss two other non-GAAP indicators that we believe are useful measurement tools to explain changes in our reported net sales:

 

   

Comparable Sales. When we refer to the change in our net sales on a “comparable” basis, we mean that we exclude the impact of exchange rate fluctuations and changes due to acquisitions and divestitures of entities and rights to products. For any two periods, we exclude the impact of exchange rates by recalculating net sales for the earlier period on the basis of exchange rates used in the later period. We

 

51


Table of Contents

exclude the impact of acquisitions by including sales for a portion of the prior period equal to the portion of the current period during which we owned the entity or product rights based on sales information we receive from the party from whom we make the acquisition. Similarly, we exclude sales in the relevant portion of the prior period when we have sold an entity or rights to a product.

 

    Developed Sales. When we refer to “developed sales” of our products, we mean all sales worldwide, including those that are made through our alliances but that are not included in our consolidated net sales (as described under “ — Financial Presentation of Alliances” below). Our alliance partners provide us information regarding their sales in order to allow us to calculate developed sales. We believe that developed sales are a useful measurement tool because they demonstrate trends in the overall presence of our products in the market.

 

Impact of Exchange Rates

 

We report our financial statements in euros. Because we earn a significant portion of our revenues in countries where the euro is not the local currency, our results of operations can be significantly impacted by exchange rate movements between the euro and other currencies, primarily the U.S. dollar and, to a lesser extent, the Japanese yen. Our net sales can also be affected by extraordinary movements in currencies in countries that do not account for a large portion of our net sales, as was the case in Latin America in 2002. As a general policy, we do not specifically hedge foreign currency net investments, but rather engage in various foreign currency transactions to reduce our exposure to the risks arising from fluctuations in exchange rates and to protect our operating margins. Hedging instruments relate to assets and liabilities existing at the balance sheet date and, in some cases, to commitments related to future transactions as determined in our annual forecast process. In 2002, we earned 22.7% of our revenues in the United States and 4.2% in Japan. A decrease in the value of the U.S. dollar or the yen against the euro would have a negative impact on our revenues, which would not likely be offset by an equal reduction in our costs and therefore would negatively impact our operating profits.

 

Financial Presentation of Alliances

 

Our revenues, expenses and operating profits are affected significantly by the presentation of our alliances in our financial statements. We have a major alliance with Bristol-Myers Squibb that covers two of our six strategic products, Aprovel® and Plavix®, and which had a significant impact on the presentation of our results of operations in 2002. Additionally, we have a major alliance with Organon (a subsidiary of Akzo Nobel) for the development and marketing of Arixtra®, one of our six strategic products. That alliance is likely to have a significant impact on our results of operations in the future. We also have an alliance for Stilnox®, one of our six strategic products, in Japan and we had an alliance for Stilnox® in the United States until April 2002.

 

The Bristol-Myers Squibb Alliance

 

The two products that are subject to the Bristol-Myers Squibb alliance, Aprovel® and Plavix®, accounted for an aggregate of €737 million of consolidated net sales in 2000, €1,128 million of consolidated net sales in 2001 and €1,549 million of consolidated net sales in 2002. Total developed sales of the two products amounted to an aggregate of €1,944 million in 2000, €2,957 million in 2001 and €3,655 million in 2002.

 

The proportion of developed sales of these products represented by our consolidated revenues from these products varies from year to year because differences in the marketing arrangements for these products from country to country impact the presentation of sales of these products. There are three principal marketing arrangements that are used:

 

    Co-marketing. Under the co-marketing system, each company markets the products independently under its own brand names. We record our own sales and related costs in our consolidated financial statements.

 

52


Table of Contents
    Exclusive Marketing. Under the exclusive marketing system, one company has the exclusive right to market the products. We record our own sales and related costs in our consolidated financial statements.

 

    Co-promotion. Under the co-promotion system, the products are marketed through the alliance arrangements (either by contractual arrangements or by separate entities) under a single brand name. The accounting treatment of the co-promotion arrangement depends upon who has majority ownership and operational management in that territory, as discussed below.

 

The alliance arrangements include two royalty streams that are applied on a worldwide basis (excluding Japan), regardless of the marketing system and regardless of which company has majority ownership and operational management:

 

    Discovery Royalty. We earn a discovery royalty on all sales of Aprovel® and Plavix® regardless of the marketing system. The discovery royalty is reflected in our consolidated statement of income in our gross profit, which results in an increase in our gross margin.

 

    Development Royalty. In addition to the discovery royalty, we and BMS are each entitled to a development royalty related to certain know-how and other intellectual property in connection with sales of Aprovel® and Plavix®. Each legal entity that markets products pays a development royalty. We record development royalties paid to BMS in our consolidated statement of income as an increase to our cost of goods sold in countries where we consolidate sales of the products. We record development royalties that we receive as a reduction to our cost of goods sold in countries where BMS consolidates sales of the products.

 

In 2002, we received an aggregate of €425 million in royalties under the alliance arrangements, and we paid BMS an aggregate of €37 million in royalties under the alliance arrangements.

 

Under the alliance arrangements, there are two territories, one under our operational management and the other under the operational management of BMS. The territory under our operational management consists of Europe and most of Africa and Asia, while the territory under the operational management of BMS consists of the rest of the world excluding Japan. In Japan, Aprovel® is under development through agreements between BMS and the Japanese pharmaceutical company Shionogi Pharmaceuticals, and Plavix® is under development through an alliance between our company and Daiichi Pharmaceuticals Co., Ltd.

 

    Territory under our operational management. In the territory under our operational management, the marketing arrangements are as follows:

 

    We use the co-promotion system for most of the countries of Western Europe for Aprovel® and Plavix® and for certain Asian countries for Plavix®. We record 100% of all alliance revenues and expenses in our consolidated financial statements. We also record, as selling and general expenses, payments to BMS for the cost of BMS’s personnel involved in the promotion of the products. BMS’s share of the operating profit of the alliances is recorded as “other operating income / (expense), net” and thus is deducted from our operating profit.

 

    We use the co-marketing system in Germany, Italy, Spain and Greece for both Aprovel® and Plavix®.

 

    We have the exclusive right to market Aprovel® and Plavix® in Eastern Europe, Africa and the Middle East, and we have the exclusive right to market Aprovel® in Asia (excluding Japan).

 

53


Table of Contents
    Territory under BMS operational management. In the territory under BMS operational management, the marketing arrangements are as follows:

 

    We use the co-promotion system in the United States and Canada, where the products are sold through the alliances under the operational management of BMS. There are different arrangements applicable to each of the two products in these countries:

 

    Aprovel®. With respect to Avapro® (the brand name used in the United States for Aprovel®), in October 2001, we entered into an agreement to increase our participation in the promotional activities and profitability of Aprovel® in the United States. To date, we have made payments to BMS totaling $350 million out of a maximum $500 million that may be paid between 2001 and 2004 under this agreement. In addition to our profit share recorded under “other operating income/(expense), net,” we also receive payments from BMS for the cost incurred for our personnel in connection with the promotion of the product (which are deducted from our consolidated selling and general expenses).

 

    Plavix®. With respect to Plavix®, we record our share of the alliance’s operating profit under “other operating income / (expense), net,” with the result that our operating profit is increased by this amount. We also record payments from BMS for the cost of our personnel in connection with the promotion of the product as a deduction from our selling and general expenses.

 

    We use the co-marketing system in Brazil, Mexico, Argentina, Colombia and Australia for Plavix® and Aprovel®.

 

    We have the exclusive right to market the products in certain other countries of Latin America.

 

In countries where the products are marketed by BMS on an exclusive or co-marketing basis, or through alliances under the operational management of BMS, we also earn revenues from the sale of the active ingredients for the products, which we record as sales in our consolidated statement of income.

 

Certain alliance entities under the operational management of BMS, including in particular the entities that market Plavix® and Aprovel® in the United States, have restated their financial statements for the year ended December 31, 2001 and prior periods. Those entities have determined that certain product shipments made between 1999 and 2002 to certain wholesalers should have been recorded under the consignment model, rather than recording revenues at the time of those shipments. This is because the entities determined that the risks and rewards of ownership of the products were not transferred to the wholesalers at the time of shipment, because excess incentives resulted in the wholesalers carrying inventories in excess of their ordinary course of business levels, and the incentives covered substantially all of the costs to the wholesalers of carrying those inventories. Under the consignment model, the alliance entity records the invoiced sales price as deferred revenue at the time of shipment, and classifies the inventory held by the wholesale customer as consigned inventory at the alliance entity’s cost of the inventory. Revenues are recognized when the inventory is no longer subject to incentive arrangements or, at the latest, when they would be recognized under the first-in-first-out method.

 

The restatements of the alliance entity financial statements did not result in a similar restatement of our financial statements prepared in accordance with French GAAP, because they relate to a revenue recognition method that is specific to U.S. GAAP. We have, however, restated our financial statements prepared in accordance with U.S. GAAP to reflect the restatement of the alliance entity financial statements. The U.S. GAAP restatements are quantified under “U.S. GAAP Reconciliation and Presentation Differences” below.

 

In March 2002, BMS began a program to reduce excess wholesaler inventories with respect to certain of the products that it markets, including Plavix® and Aprovel®. As a result of the inventory workdown program, sales of these products in the United States were adversely affected, and as a consequence the amount we report as

 

54


Table of Contents

“developed sales,” and our share of the operating profit of the alliance entities that market these products in the United States, were adversely affected in 2002. The impact of the inventory workdown program in 2002 is detailed under “Results of Operations – Year ended December 31, 2002 compared with year ended December 31, 2001.” The inventory workdown program continued to have an impact on U.S. sales of Plavix® and Aprovel® in the first quarter of 2003, particularly given that it did not commence until the second quarter of 2002. However, BMS has announced that it expects full year 2003 U.S. sales of Plavix® and Aprovel® to be in line with overall prescription growth, and wholesaler inventory levels at the end of 2003 to be approximately the same as at the end of 2002.

 

The Arixtra® Alliance with Organon

 

Our alliance with Organon covers the commercialization of Arixtra® on a worldwide basis. We launched Arixtra® in the United States in February 2002 and began rolling it out in Europe in the second half of 2002. The treatment of the alliance varies by geographical region, as follows:

 

    North America. In the United States, Mexico and Canada, Arixtra® is sold by entities that we jointly control with Organon. We consolidate the sales and related expenses of Arixtra® using the proportional consolidation method based upon our 50.0% ownership interest in the alliance.

 

    Europe and Other Countries (excluding Japan). We have the exclusive right to market and sell Arixtra®, and we will include 100% of our sales in these countries in our consolidated net sales. We will pay a royalty to Organon based on sales of Arixtra®, which we will record as cost of goods sold.

 

Stilnox® Marketing Arrangements

 

The impact on our financial results of sales of Stilnox® has been significantly impacted by the treatment of two marketing arrangements for the product, one of which is in Japan and the other of which was in the United States until we acquired our partner’s interest in the arrangement in April 2002. In 2000, 2001 and 2002, we recorded consolidated sales of Stilnox® of €582 million, €786 million and €1,424 million, respectively, compared to total developed sales of the product of €920 million, €1,215 million and €1,455 million, respectively.

 

In Japan, we market Stilnox® (under the brand name Myslee®) through a joint venture with Fujisawa. Until the end of 2001, we fully consolidated the joint venture. Beginning in 2002, we recorded our 51% interest in the joint venture on the basis of the proportional consolidation method, pursuant to which we included our share of the revenues and expenses of the joint venture in the appropriate line items of our consolidated financial statements. The change occurred because we modified our contract with Fujisawa, as a result of which we no longer have exclusive control of the joint venture.

 

In the United States, until April 16, 2002 we marketed Stilnox® (as well as Kerlone®) through Lorex, a joint venture with Pharmacia. On April 16, 2002 we purchased Pharmacia’s interest in Lorex for €670 million. In December 2001 we signed an agreement with Pharmacia giving us exclusive control over Lorex. As a result, we fully consolidated Lorex beginning as of December 31, 2001, and we recorded Pharmacia’s share of the net income of Lorex from January 1, 2002 through April 15, 2002 as a minority interest.

 

In 2000 and 2001, we recorded our 49% interest in Lorex on the basis of the proportional consolidation method. However, while our ownership in Lorex was 49%, our entitlement to the operating profit of Lorex was 40% in 2000 and 47% in 2001. We recorded the difference between our proportionately consolidated revenues and operating expenses and our actual financial interest in the operating profits of the joint venture under “other operating income/(expense), net”. We also recorded royalties that we received from Lorex as a deduction from our cost of sales.

 

55


Table of Contents

Divestitures

 

During the past few years, we have sold a number of non-core businesses as part of our strategy of focusing on our pharmaceuticals business. In 2001, we sold our custom chemicals subsidiary, Sylachim (effective for accounting purposes as of January 1, 2001), our two medical equipment businesses, Porgès (effective as of January 1, 2001) and Ela Medical (effective as of May 1, 2001), and our direct shareholding in Laboratoires de Biologies Végétale Yves Rocher (effective as of December 18, 2001). Total proceeds from these divestitures, excluding the repayment of inter-company loans, were €588 million.

 

In 2001, the contribution to our consolidated net sales of Ela Medical was €39 million, or less than 1% of our consolidated net sales of €6,488 million for the same period. In 2000, Ela Medical, Porgès and Sylachim had combined net sales of €243 million. The direct shareholding in Laboratoires de Biologie Végétale Yves Rocher was classified as an investment in a non-consolidated company.

 

Results of Operations

 

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

 

Developed Sales

 

Developed sales of our products were €9,585 million in 2002, representing a 9.6% increase over 2001. On a comparable basis, developed sales increased by 14.5% between 2001 and 2002. Our three leading products, Plavix®, Stilnox® and Aprovel® had combined developed sales of €5,110 in 2002, a 22.5% increase over 2001, or 27.3% on a comparable basis. Sales of these three products accounted for 53.3% of total developed sales of our products, compared to 47.7% in 2001. Developed sales were impacted by Bristol-Myers Squibb’s program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States, beginning in March 2002.

 

The following table sets forth developed sales of our three leading products broken down into our three geographic markets:

 

     Year Ended December 31,

   % change

 
    

2001

Reported


  

2001

Comparable


  

2002

Reported


   Reported

    Comparable

 
     (€ in millions)  

Plavix®/Iscover®

                           

Europe

   520    531    754    45.0 %   42.0 %

United States

   1,333    1,270    1,565    17.4 %   23.2 %

Other Countries

   180    156    268    48.9 %   71.8 %
    
  
  
            
     2,033    1,957    2,587    27.3 %   32.2 %

Aprovel®/Avapro®/Karvea®

                           

Europe

   388    397    512    32.0 %   29.0 %

United States

   392    374    373    (4.8 %)   (0.3 %)

Other Countries

   144    127    183    27.1 %   44.1 %
    
  
  
            
     924    898    1,068    15.6 %   18.9 %

Stilnox®/Ambien®/Myslee®

                           

Europe

   143    146    139    (2.8 %)   (4.8 %)

United States

   1,004    954    1,208    20.3 %   26.6 %

Other Countries

   68    60    108    58.8 %   80.0 %
    
  
  
            
     1,215    1,160    1,455    19.8 %   25.4 %

Total three leading products

   4,172    4,015    5,110    22.5 %   27.3 %
    
  
  
            

Total developed sales

   8,746    8,368    9,585    9.6 %   14.5 %
    
  
  
            

 

56


Table of Contents

Developed sales of Plavix® were €2,587 million in 2002, a 27.3% increase over developed sales of €2,033 million in 2001. In the United States, developed sales of Plavix® were €1,565 million, a 17.4% increase over 2001, or 23.2% on a comparable basis, adjusting for the impact of the dollar. Plavix® sales in the United States, which are included in the developed sales totals but are not reflected in our consolidated net sales, were impacted by the BMS inventory workdown program. In addition, sales at the end of 2002 benefited from orders from wholesalers, which anticipated a price increase in early 2003. Overall United States demand for Plavix® increased in 2002 with a 35% increase in overall prescription volume from 2001 to 2002 (based on IMS retail and mail-order data). In addition, prices increased for the product in the United States. In Europe and in Other Countries, developed sales of Plavix® increased by 45.8% in 2002 compared to 2001.

 

Developed sales of Aprovel® were €1,068 million in 2002, a 15.6% increase over the 2001 figure of €924 million. In the United States, developed sales were €373 million, a decrease of 4.8% compared to 2001, or 0.3% on a comparable basis, adjusting for the impact of the dollar. As with Plavix®, U.S. sales of Aprovel® are not included in our consolidated net sales, although they are included in developed sales. Notwithstanding the decrease in the United States, which was due to the BMS inventory workdown program, overall demand for Aprovel® was up, with a 13% increase in overall prescription volume from 2001 to 2002 (based on IMS retail and mail-order data). Favorable price movements in the United States also had a positive effect. In Europe and in Other Countries, developed sales of Aprovel® increased by 30.6% in 2002 compared to 2001.

 

Worldwide developed sales of Stilnox® were €1,455 million in 2002, an increase of 19.8% over 2001. In the United States, developed sales were €1,208 million, a 20.3% increase over 2001. On a comparable basis, adjusting for the impact of the dollar, the increase was 26.6%. Overall demand grew strongly in 2002, with a 19% increase in overall prescription volume from 2001 to 2002 (based on IMS retail and mail-order data), as well as favorable price movements in the United States. In Europe and in Other Countries, developed sales of Stilnox® increased by 17.1% in 2002 compared to 2001, largely due to the success of the product in Japan, where it had achieved a 16% market share (according to IMS data) by December 2002.

 

Net Sales

 

Our net sales in 2002 were €7,448 million, representing a 14.8% increase compared to net sales of €6,488 million in 2001. On a comparable basis, our net sales increased by 12.8% from 2001 to 2002, after taking into account the impact of changes in the scope of consolidation and currency exchange rate fluctuations.

 

Changes in the scope of consolidation, which increased sales by 4.5 percentage points, are principally related to our switch from the proportional consolidation method (49%) to 100% consolidation of the Lorex joint venture (following our acquisition of exclusive control over the joint venture), which was partially offset by the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan, as well as the deconsolidation of Ela Medical beginning in May 2001.

 

Currency exchange rate fluctuations reduced sales by approximately 2.5 percentage points. The decline of the U.S. dollar against the euro represented 0.8 percentage points of the decrease, 0.5 percentage points was due to the decline of the Japanese yen against the euro and 1 percentage point was due to currency devaluations in Latin America.

 

57


Table of Contents

Markets. We divide our sales into three markets: Europe, the United States and Other Countries. The following table breaks down our 2001 and 2002 consolidated net sales by market.

 

     Year Ended December 31,

   % change

 
    

2001

Reported


  

2001

Comparable


  

2002

Reported


   Reported

    Comparable

 
     (€ in millions)  

Europe

                           

France(1)

   1,487    1,466    1,584    6.5 %   8.0 %

Germany

   596    592    634    6.4 %   7.1 %

Italy

   433    428    444    2.5 %   3.7 %

Other

   1,361    1,357    1,635    20.1 %   20.5 %
    
  
  
            

Total Europe

   3,877    3,843    4,297    10.8 %   11.8 %

United States

   1,098    1,437    1,689    53.8 %   17.5 %

Other Countries

   1,513    1,325    1,462    (3.4 %)   10.3 %
    
  
  
            

Total net sales

   6,488    6,605    7,448    14.8 %   12.8 %
    
  
  
            

(1)   Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana).

 

Our 2002 net sales in Europe were €4,297 million, an increase of 10.8% over 2001. The healthy growth in Europe in 2002 was despite the implementation of health-care cost containment measures in Germany and Italy in 2002. Europe represented approximately 57.7% of our total consolidated net sales in 2002, compared to 59.8% in 2001.

 

In Europe, we recorded strong sales growth despite the impact of new cost containment measures implemented by the governments in Germany and Italy. Outside of our three largest countries, France, Germany and Italy, our sales growth was uniformly strong, with the largest growth recorded in Spain, Belgium, Hungary, Greece and Turkey, each of which experienced growth of more than 20%. In Spain, where we recorded €358 million of sales in 2002, growth in sales of Plavix®, Aprovel® and Eloxatin® offset the loss of patent protection for Stilnox®.

 

In the United States, we had €1,689 million of consolidated net sales in 2002, representing a 53.8% increase over 2001. The difference between reported growth and comparable growth in the United States reflects primarily the inclusion of 100% of the sales of Stilnox® in the United States beginning in 2002. The launch of Eloxatin® in the United States in August 2002 resulted in U.S. sales of the product of €116 million in 2002, helping to offset declining sales of Corotrope® (sold under the brand name Primacor®), which began to face competition from generics in 2002. Our strong reported U.S. sales growth is despite the weakening of the U.S. dollar against the euro. The United States represented approximately 22.7% of our total consolidated net sales in 2002 compared to 16.9% in 2001.

 

Outside the United States and Europe, we recorded €1,462 million of sales, representing a 3.4% decrease compared to 2001, but a 10.3% increase on a comparable basis. The reason for the difference between reported and comparable sales is mainly due to the switch from 100% consolidation of our joint venture with Fujisawa to 51% proportional consolidation, as well as the weakness of the Japanese yen and certain Latin American currencies. Our growing presence in Asia helped offset the effects of the continued economic crisis in Latin America. The Other Countries represented 19.6% of our total consolidated net sales in 2002, compared to 23.3% in 2001.

 

Products. Our fifteen largest products had €5,100 million in total consolidated net sales in 2002, representing an increase of 28.3% over 2001. Sales of our top 15 products represented approximately 68.5% of our total consolidated net sales in 2002, compared to approximately 61.3% in 2001.

 

58


Table of Contents

The main reason for this growth was the strong performance of our three leading products, Plavix®, Aprovel® and Stilnox®, which together had total net sales of €2,973 million, an increase of 55.3% over 2001 on a reported basis, or 32.1% on a comparable basis. Sales of our three leading products represented 39.9% of our total consolidated net sales compared to 34.1% in 2001 on a comparable basis.

 

The following table breaks down our consolidated net sales of by product.

 

          Year ended December 31,

   % change(1)

 
         

2001

Reported


  

2001

Comparable


  

2002

Reported


   Reported

    Comparable

 
          (€ in millions)  

Product

   Therapeutic Area                            

Stilnox®

   Central Nervous System    786    1,135    1,424    81.3 %   25.5 %

Plavix®

   Cardiovascular/Thrombosis    705    697    987    39.8 %   41.5 %

Aprovel®

   Cardiovascular/Thrombosis    423    419    562    32.8 %   34.0 %

Eloxatin®

   Oncology    196    194    389    99.2 %   101.3 %

Fraxiparine®

   Cardiovascular/Thrombosis    297    294    324    8.9 %   10.1 %

Depakine®

   Central Nervous System    243    240    267    9.8 %   11.0 %

Xatral®

   Internal Medicine    148    147    182    23.1 %   24.3 %

Cordarone®

   Cardiovascular/Thrombosis    162    157    162    (0.1 %)   3.1 %

Tildiem®

   Cardiovascular/Thrombosis    152    151    141    (7.4 %)   (6.9 %)

Ticlid®

   Cardiovascular/Thrombosis    205    205    137    (33.2 %)   (33.2 %)

Solian®

   Central Nervous System    116    115    135    16.7 %   17.2 %

Corotrope®

   Cardiovascular/Thrombosis    237    226    127    (46.1 %)   (43.5 %)

Aspégic® and derivatives

   Central Nervous System    100    101    108    7.6 %   6.7 %

Dogmatil®

   Central Nervous System    124    86    78    (37.2 %)   (9.0 %)

Kerlone®

   Cardiovascular/Thrombosis    82    81    77    (6.9 %)   (5.0 %)
         
  
  
            

Total of top 15 Products

   3,976    4,248    5,100    28.3 %   20.1 %
         
  
  
            

Others

        2,512    2,357    2,348    (6.5 %)   (0.4 %)
         
  
  
            

Total consolidated net sales

   6,488    6,605    7,448    14.8 %   12.8 %
         
  
  
            

(1)   These percentages are calculated on the basis of figures that have not been rounded.

 

Stilnox® was our largest product in terms of consolidated net sales and our second fastest growing product (on a comparable basis it was our fourth fastest growing product). The difference between reported growth of Stilnox® (81.3%) and comparable growth (25.5%) is principally the result of consolidation of 100% of sales of Stilnox® in the United States in connection with our repurchase of Lorex joint venture in 2002.

 

Consolidated net sales of Plavix® were €987 million in 2002, an increase of 39.8% over 2001. The continued strong level of growth in Plavix® is due to the approval of a new indication in 2002, as the product was approved in Europe and the United States for the treatment of acute coronary syndrome. In addition, Plavix ® was included on a list of recommended cardiologic therapies both in Europe and the United States.

 

Consolidated net sales of Aprovel® were €562 million in 2002, an increase of 32.8% over 2001. Much of the growth was realized in Europe where Aprovel® became the second product in its class, angiotensin II receptor antagonists, in terms of sales (according to IMS data).

 

Consolidated net sales of Eloxatin® were €389 million, an increase of 99.2% over 2001. This strong growth is principally a result of the launch of Eloxatin® in the U.S. market in August 30, 2002, as well as overall growth in Europe and Other Countries.

 

Consolidated net sales of Xatral® increased by 23.1%, as sales of the product were boosted by the early success of the once-a-day formulation that was gradually launched in various countries in Europe in 2002.

 

59


Table of Contents

Among our other top 15 products, we recorded strong growth in sales of Fraxiparine®, Depakine® and Solian®. Sales of Ticlid® declined due to migration to sales of Plavix®, while Corotrope® sales were adversely affected by the expiration of the product’s patent in the United States. The decline in sales of Dogmatil®, and the difference between recorded and comparable sales of Dogmatil®, resulted from the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan, while the consolidation of sales of Kerlone® in the United States (through the Lorex venture) offset the impact of the weakening of the U.S. dollar and the Japanese Yen.

 

Consolidated net sales of other products in our product portfolio decreased by 6.5% to €2,348 million in 2002, although they remained essentially stable on a comparable basis, declining by only 0.4%. The main reason for the difference between reported and comparable sales is the deconsolidation of Ela Medical in May 2001, and the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan.

 

Consolidated net sales of Arixtra® were €9.1 million, due to slower penetration than expected in its narrowly defined initial indication. Our program to enlarge its approved indications is progressing, with the filing at the end of 2002 of an application to approve its use in the long-term preventive treatment of venous thrombo-embolic (or VTE) events following orthopedic surgery.

 

Therapeutic Areas.

 

The following table breaks down our consolidated net sales by therapeutic area:

 

     Year Ended December 31,

   % change

 
    

2001

Reported


  

2001

Comparable


  

2002

Reported


   Reported

    Comparable

 
     (€ in millions)  

Therapeutic area:

                           

Cardiovascular/Thrombosis

   2,625    2,583    2,904    10.6 %   12.4 %

Central Nervous System

   1,810    2,087    2,409    33.1 %   15.4 %

Internal Medicine

   1,465    1,399    1,427    (2.6 %)   2.0 %

Oncology

   208    206    404    94.2 %   96.1 %
    
  
  
            

Total

   6,108    6,275    7,144    17.0 %   13.8 %

Other

   380    330    304    (20.0 %)   (7.9 %)
    
  
  
            

Total consolidated net sales

   6,488    6,605    7,448    14.8 %   12.8 %
    
  
  
            

 

Cardiovascular/Thrombosis sales were €2,904 million in 2002, representing approximately 39.0% of our total consolidated net sales. The sales growth in this category reflects primarily the increase in sales of Plavix® and Aprovel®, which offset the decline in sales of Ticlid® and Corotrope®.

 

Central Nervous System sales were €2,409 million in 2002, representing approximately 32.3% of our total consolidated net sales. The main reason for the difference between reported and comparable sales in this category is the consolidation of 100% of the sales of Stilnox® in the United States in 2002.

 

Internal Medicine sales were €1,427 in 2002, accounting for approximately 19.2% of our total consolidated net sales in 2002. The slight decline in sales in this category was principally a result of the switch to the proportional consolidation method (51%) for our joint venture with Fujisawa in Japan.

 

Oncology sales were €404 million in 2002, representing approximately 5.4% of our total consolidated net sales. The robust growth in this category was mainly due to the nearly doubling in sales of Eloxatin® in 2002.

 

“Other” sales were €304 million in 2002, a decrease of 20.0% on a reported basis, or 7.9% on a comparable basis. The main reason for the difference is the deconsolidation of Ela Medical in May 2001.

 

60


Table of Contents

Gross Profit

 

Our gross profit was €6,070 million in 2002, an increase of 15.9% compared to 2001, and represented 81.5% of our total consolidated net sales in 2002, compared to 80.7% in 2001. Using 2001 exchange rates, our gross margin would have been 82.1% in 2002.

 

This improvement in our gross margin is mainly due to improvements in our productivity, which we estimate accounted for a 0.6 percentage point increase, as well as strong performance from our top 15 products and overall improvements in our product mix, which also accounted for a 0.6 percentage point increase. These gains were partially offset by reductions in revenues received due to Bristol-Myers Squibb’s program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States, which had a negative impact of 0.4 percentage points. The full consolidation of Lorex was offset by the loss of sales of bulk active ingredients to the joint venture, such that it had a neutral effect on our gross margin.

 

Operating Profit

 

Our operating profit was €2,614 million in 2002, representing a 24.1% increase compared to our operating profit in 2001 of €2,106 million. The weak U.S. dollar exchange rate against the euro had a negative impact on our operating profit, which would have increased by 30.1% over 2001 if exchange rates had remained constant.

 

Operating profit in 2002 represented 35.1% of consolidated net sales, while in 2001 operating profit was 32.5% of consolidated net sales. This improvement in our operating margins was driven principally by the change in consolidation method of the Lorex joint venture, as well as improvements in our overall product mix and productivity, which was partially offset by the negative effects of Bristol-Myers Squibb’s program to reduce inventory levels of Plavix® and Aprovel® at wholesalers in the United States.

 

The following table breaks down our operating profit for 2001 and 2002 among its principal components.

 

     Year ended December 31

 
     2001

    2002

 
     Amount

    % of Sales

    Amount

    % of Sales

 
     (€ in millions)  

Net sales

   6,488     100.0 %   7,448     100.0 %

Cost of goods sold

   (1,253 )   (19.3 %)   (1,378 )   (18.5 %)
    

 

 

 

Gross profit

   5,235     80.7 %   6,070     81.5 %

Research and development expenses

   (1,031 )   (15.9 %)   (1,218 )   (16.4 %)

Selling and general expenses

   (2,306 )   (35.5 %)   (2,428 )   (32.6 %)

Other operating income/(expense), net

   208     3.2 %   190     2.6 %
    

 

 

 

Operating profit

   2,106     32.5 %   2,614     35.1 %
    

 

 

 

 

Research and development expenses increased to €1,218 million in 2002, representing 16.4% of our total consolidated net sales, and an 18.1% increase over 2001. Using 2001 exchange rates, the increase in our research and development expenses would have been 20.4%. The increase in spending was principally due to clinical trials that are underway both for new indications for products that are already on the market, such as Plavix®, Arixtra®, Eloxatin® and Xatral®, as well as for new products in development, such as rimonabant, dronedarone, tirapazamine, and the new sustained release formulation of Stilnox®, zolpidem MR. Some of the increase is also attributable to development agreements signed in 2001 and 2002 with IDM and Cephalon, which are described in Item 4 “Information on the Company — Research and Development.”

 

61


Table of Contents

Selling and general expenses were €2,428 million in 2002, a 5.3% increase from €2,306 million in 2001. Using 2001 exchange rates, our selling and general expenses would have increased by 8.0%. The relatively modest increase is the result of several factors:

 

    the incurrence in the last quarter of 2001 of significant costs relating to putting in place in the United States the commercial teams necessary to permit us to take over fully the marketing of Stilnox® and to launch Arixtra®;

 

    an adjustment in our sales efforts in Latin America as a result of the economic and monetary crisis;

 

    increased sales in Europe; and

 

    an overall improvement in the productivity of our medical visits in all geographic markets.

 

These factors more than offset an increase in marketing expenses that we incurred in order to develop the principal products in our portfolio.

 

Our “other operating income/(expense), net,” declined by 8.6% from €208 million (or 3.2% of our net sales) in 2001 to €190 million (or 2.6% of our net sales) in 2002. As discussed above, this item reflects principally operating profits of our alliances to which we are entitled or to which our partners are entitled. The decrease was due primarily due to two factors: the rapid growth of Plavix® and Aprovel® in Europe, which increased the amount paid to Bristol-Myers Squibb under our alliance arrangements; and a decrease in operating profit from Plavix® and Aprovel® in the United States due to Bristol-Myers Squibb’s wholesaler inventory workdown program. These were both offset by the fact that we no longer had to pay Pharmacia its share of the profits from our Lorex joint venture, which we repurchased in April 2002. The profits paid to Pharmacia equaled €14 million in 2001, and were recorded under “minority interests.”

 

Our operating profit improved in all of our markets. The following table breaks down our 2001 and 2002 operating profit by geographical market.

 

     Year Ended December 31,

 
     2001

    2002

    % change

 
     (€ in millions)  

Europe

   1,427     1,633     14.4 %

United States

   1,311     1,781     35.9 %

Other Countries

   456     522     14.5 %

Unallocated costs(1)

   (1,088 )   (1,322 )   21.5 %
    

 

     

Total operating profit

   2,106     2,614     24.1 %
    

 

     

(1)   Unallocated costs consists mainly of a portion of our research and development expenses and of our administrative expenses.

 

Among our three geographical segments, operating profit grew most rapidly in the United States, which accounted for 45.2% of our operating profit excluding unallocated costs compared to 41.0% in 2001. The increase in the United States was due principally to the change in the consolidation method of our Lorex joint venture as well as the other factors that resulted in our sales increase in the United States discussed above.

 

Unallocated costs increased by 21.5% in 2002 over 2001 principally as a result of the increase in our research and development expenses.

 

Amortization and Impairment of Intangibles

 

Our amortization and impairment of intangibles increased from €68 million in 2001 to €129 million in 2002. This increase was principally due to amortization of the intangible assets relating to our October 2001 payment to

 

62


Table of Contents

Bristol-Myers Squibb in exchange for an increase in our participation in the promotional activities and profitability of the alliance relating to U.S. sales of Aprovel® and the amortization of the U.S. rights to Stilnox® in connection with our acquisition of the Lorex joint venture in April 2002.

 

Net Financial Income/(Expense)

 

Net financial income/(expense) decreased from €102 million in 2001 to €85 million in 2002. This decrease was due primarily to three factors: a €46 million provision for treasury shares allocated to our stock option plans, which relates entirely to the difference, evaluated on a plan by plan basis, between the market value of our shares and the average price paid to acquire the shares on the market and our average share price (€57.10) in December 2002; a decrease in returns from investments following reductions in interest rates by an average of 1.1 percentage points, with average investments remaining constant over the past two years; and an increase in returns from exchange rate hedging transactions due to the decrease in the value of the U.S. dollar against the euro (€47 million in 2002 compared to €5 million in 2001).

 

Exceptional Income

 

Exceptional income decreased significantly from €281 million to €10 million in 2002. This significant decrease is principally due to the fact that in 2001, we sold our interest in Laboratoires de Biologie Végétale Yves Rocher, which resulted in a gain of €158 million. In 2002, exceptional income represented mainly gains from sales of stock in the United States.

 

Income Taxes

 

Income taxes decreased by €96 million, from €842 million in 2001 to €746 million in 2002. Our effective tax rate was 28.9% in 2002, compared to 34.8% in 2001. The decrease was principally attributable to a decrease in the French tax rate and, in particular, the tax rate applied to royalty payments; the adjustment of prior tax returns resulting in the recovery of €53 million following a tax audit; and the impact of the integration of the Lorex joint venture, a tax transparent company that we acquired in April 2002 (for which our income tax charge includes only the amount allocated to our company, even though we consolidated Lorex fully in 2002).

 

Our effective tax rate for the first half of 2002, which was affected by the last two elements mentioned above, was 25.8%. Our effective tax rate increased to 31.6% for the second half of 2002.

 

Minority Interests

 

Income attributable to minority interests was €87 million in 2002 and represents primarily Pharmacia’s share of the profits of the Lorex joint venture from January 1, 2002 through April 14, 2002. Because the Lorex joint venture is tax transparent, “minority interests” does not include the corresponding taxes.

 

Net Income

 

As a result of the foregoing, our net income increased 11.0% from €1,585 million in 2001 to €1,759 million in 2002. Net income before exceptional items and goodwill amortization was €1,758 million, an increase of 27.8% compared to 2001. Using 2001 exchange rates, the increase would have been 31.2%.

 

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

 

In the discussion that follows, we give breakdowns on the basis of “net pharmaceutical sales” rather than on the basis of total consolidated sales, as is the case for the comparison of 2001 and 2002. The reason for this difference is that we sold substantially all of the businesses that generated non-pharmaceutical sales in 2000 and 2001, so those sales are no longer significant. We believe that analyzing changes in “net pharmaceutical sales”

 

63


Table of Contents

for 2000 and 2001 provides a more meaningful comparison with the trends in total consolidated sales in 2001 and 2002, than would be the case if we were to restate the figures from the earlier periods.

 

Net Sales

 

Our net sales in 2001 were €6,488 million, representing an 8.8% increase compared to net sales of €5,963 million in 2000. On a comparable basis, our net sales increased by 15.2% from 2000 to 2001, after taking into account the impact of divestitures (described above), which reduced sales by approximately €293 million, and currency exchange rate fluctuations, which reduced sales by approximately €36 million, as the strength of the U.S. dollar was offset by weakness in the Japanese yen. Net sales of pharmaceuticals were €6,339 million in 2001, an increase of 14.6% above €5,532 in 2000, or an increase of 15.5% on a comparable basis.

 

Markets. Our 2001 net pharmaceutical sales in Europe were €3,756 million, representing approximately 59.2% of our total consolidated net pharmaceutical sales. Our largest single country in terms of sales was France, where we recorded €1,414 million in net pharmaceutical sales in 2001, representing 22.3% of our total consolidated net pharmaceutical sales. Sales in the United States, our second largest country in terms of sales, accounted for 17.1% of our 2001 total net pharmaceutical sales.

 

The following table breaks down our 2000 and 2001 consolidated net sales of pharmaceutical products by market.

 

     Year Ended December 31,

   % change

 
     2000
Reported


   2000
Comparable


   2001
Reported


   Reported

    Comparable

 
     (€ in millions)  

Europe

                           

France(1)

   1,313    1,307    1,414    7.7 %   8.2 %

Germany

   534    538    593    11.1 %   10.2 %

Italy

   374    371    429    14.9 %   15.7 %

Other

   1,146    1,142    1,320    15.2 %   15.6 %
    
  
  
            

Total Europe

   3,367    3,358    3,756    11.6 %   11.9 %
    
  
  
            

United States

   832    849    1,083    30.1 %   27.6 %

Other Countries

   1,333    1,283    1,500    12.5 %   16.9 %
    
  
  
            

Total net pharmaceutical sales

   5,532    5,490    6,339    14.6 %   15.5 %
    
  
  
            

(1)   Includes French overseas territories (Guadeloupe, Martinique, Réunion and French Guyana).

 

Our pharmaceutical sales growth reflects our strong sales growth in markets worldwide. The United States was our fastest growing region in percentage terms, while Europe accounted for the largest growth in absolute terms.

 

Our U.S. sales growth was driven primarily by the strength of Stilnox® (sold under the brand name Ambien® by Lorex), as well as Corotrope® (sold under the brand name Primacor®) and sales of clopidogrel, the active ingredient in Plavix®, to the BMS alliances responsible for U.S. sales (reflecting the strong growth of Plavix® in the U.S. market). The difference between reported growth and comparable growth in the United States reflects primarily the strengthening of the U.S. dollar, as well as the sale of our product Prenate® in 2001.

 

In Europe, our sales growth was particularly strong in Italy, as well as in Spain (where sales grew by 31.6%), which became our fourth largest European country in terms of sales in 2001 (€295 million). We also increased sales in France, our largest country in terms of sales, where we had volume growth due principally to the strength of our lead products.

 

64


Table of Contents

Outside the United States and Europe, we recorded strong sales growth in Central and Eastern Europe, where sales increased by 57.6%, as well as in Asia and the Middle East, where our sales grew by 25.8%. We also recorded strong sales growth in Japan, principally due to the successful launch of Stilnox® in December 2000 (under the brand name Myslee®) by our joint venture with Fujisawa, although this growth was impacted by the weakness of the Japanese yen. Similarly, strong volume growth in Latin America was not fully reflected in our sales growth due to the weakness of the Brazilian real.

 

Products.    Our three leading products, which together accounted for 30.2% of our total net pharmaceutical sales in 2001, or €1,914 million, were Plavix®, Aprovel® and Stilnox®. Their 2001 combined sales represent an increase of 45.1% compared with 2000. Our five largest products accounted for approximately 32.3% of net sales in 2000 and 38.7% of net sales in 2001, our ten largest products accounted for approximately 47.9% in 2000 and 53.7% in 2001, and our fifteen largest products accounted for approximately 57.4% in 2000 and 62.7% in 2001.

 

The following table breaks down our consolidated net sales of pharmaceutical products by product.

 

          Year ended December 31,

   % change(1)

 
          2000
Reported


   2000
Comparable


   2001
Reported


   Reported

    Comparable

 
          (€ in millions)  

Product

   Therapeutic Area                            

Stilnox®

   Central Nervous System    582    592    786    34.9 %   32.7 %

Plavix®

   Cardiovascular/Thrombosis    437    436    705    61.4 %   61.7 %

Aprovel®

   Cardiovascular/Thrombosis    300    298    423    40.9 %   42.1 %

Fraxiparine®

   Cardiovascular/Thrombosis    255    256    297    16.6 %   16.3 %

Depakine®

   Central Nervous System    211    214    243    14.9 %   13.7 %

Corotrope®

   Cardiovascular/Thrombosis    180    184    237    31.2 %   28.5 %

Ticlid®

   Cardiovascular/Thrombosis    235    235    205    (12.5 %)   (12.5 %)

Eloxatin®

   Oncology    141    139    196    38.7 %   40.7 %

Cordarone®

   Cardiovascular/Thrombosis    156    152    162    4.2 %   6.4 %

Tildiem®

   Cardiovascular/Thrombosis    154    153    152    (1.6 %)   (1.0 %)

Xatral®

   Internal Medicine    120    120    148    23.4 %   24.1 %

Dogmatil®

   Central Nervous System    134    126    124    (7.1 %)   (1.1 %)

Solian®

   Central Nervous System    93    92    116    24.4 %   25.1 %

Aspégic® and derivatives

   Central Nervous System    100    100    100    0.0 %   0.0 %

Kerlone®

   Cardiovascular/Thrombosis    77    73    82    7.6 %   12.4 %

Others

        2,357    2,320    2,363    0.3 %   1.9 %
         
  
  
            

Total consolidated net pharmaceutical sales

   5,532    5,490    6,339    14.6 %   15.5 %
         
  
  
            

(1)   These percentages are calculated on the basis of figures that have not been rounded.

 

Our Three Lead Products. Consolidated sales of each of our three lead products, Plavix®, Aprovel® and Stilnox®, grew substantially between 2000 and 2001. Plavix® and Aprovel® sales increased primarily from growth in volume, particularly in Europe and the United States reflecting the fact that they are relatively new drugs that have not yet reached maturity. Stilnox® growth is principally due to strong sales in the United States through our Lorex joint venture, as well as a strong performance in Japan where it was launched in December 2000 through a joint venture with Fujisawa (under the brand name Myslee®). A portion of sales growth for each of our three lead products is due to a 5-7% price increase for each of these products in the United States.

 

   

Plavix® was our fastest growing product in terms of sales and our second largest product by overall consolidated net sales in 2001. Plavix® represented 7.9% of total consolidated net pharmaceutical sales

 

65


Table of Contents

in 2000 and 11.1% in 2001. Developed sales of Plavix® were €2,033 million in 2001, representing an increase of 58.9% compared to developed sales of €1,279 million in 2000. Plavix® sales in the United States are included in the developed sales totals but are not reflected in our consolidated net sales.

 

    Aprovel® was our second fastest growing product and our third largest product by overall consolidated net sales in 2001. Aprovel® represented 5.4% of total consolidated net pharmaceutical sales in 2000 and 6.7% in 2001. Developed sales of Aprovel® were €924 million in 2001, an increase of 38.9% on a reported basis over the 2000 figure of €665 million. As with Plavix®, we do not include U.S. sales of Aprovel® in our consolidated net sales, although they are included in developed sales.

 

    Stilnox® was our largest product in terms of consolidated net sales and our fourth fastest growing product. Stilnox® represented 12.4% of our consolidated net pharmaceutical sales in 2001, up from 10.5% in 2000. Developed sales increased 32.0% on a reported basis, from €920 million in 2000 to €1,215 million in 2001. Our consolidated net sales include our proportionate share of United States sales of Stilnox®.

 

Other Products. Eloxatin® continued to experience steady growth following its launch in 1999 in Europe, with sales increasing by 38.7% over 2000. Sales of Ticlid® declined as anticipated, as the product is being gradually replaced by Plavix®. Dogmatil® sales were adversely affected in 2001 by the weakness of the Japanese yen, resulting in a significant difference between the year-on-year change on a reported basis and on a comparable basis. Both Xatral® and Solian® experienced strong growth in 2001, due primarily to the introduction of a new formulation, in the case of Xatral®, as well as growth resulting from the 1997 approval of an additional indication in the case of Solian®.

 

Therapeutic Areas. Cardiovascular/Thrombosis sales accounted for €2,625 million in 2001, representing approximately 41.4% of our consolidated net sales of pharmaceutical products, an increase of 20.9% over 2000. This growth essentially reflects the increase in sales of Plavix® and Aprovel®, two of our lead products. Central Nervous System and Internal Medicine accounted for approximately 28.5% and 23.1% of our 2001 consolidated net pharmaceutical sales, respectively.

 

The following table breaks down our consolidated net sales of pharmaceutical products by therapeutic area:

 

     Year Ended December 31,

   % change

 
     2000
Reported


   2000
Comparable


   2001
Reported


   Reported

    Comparable

 
     (€ in millions)  

Therapeutic area:

                           

Cardiovascular/Thrombosis

   2,171    2,159    2,625    20.9 %   21.6 %

Central Nervous System

   1,583    1,571    1,807    14.2 %   15.1 %

Internal Medicine

   1,411    1,390    1,465    3.8 %   5.4 %

Oncology

   155    151    208    33.9 %   37.3 %
    
  
  
            

Total

   5,319    5,271    6,105    14.8 %   15.8 %

Other

   213    219    234    9.5 %   6.6 %
    
  
  
            

Total consolidated net pharmaceutical sales

   5,532    5,490    6,339    14.6 %   15.5 %
    
  
  
            

 

Operating Profit

 

Our operating profit was €2,106 million in 2001, representing a 33.5% increase compared to our operating profit in 2000 of €1,577 million. Operating profit in 2001 represented 32.5% of consolidated net sales, while in

 

66


Table of Contents

2000 operating profit was 26.4% of consolidated net sales. This improvement in our operating margins was driven principally by higher gross margins, which improved from 75.8% in 2000 to 80.7% in 2001, and our increased profit shares in our alliances, which we record under “other operating income/(expense), net.”

 

The following table breaks down our operating profit for 2000 and 2001 among its principal components.

 

     Year ended December 31

 
     2000

    2001

 
     Amount

    % of Sales

    Amount

    % of Sales

 
     (€ in millions)  

Net sales

   5,963     100.0 %   6,488     100.0 %

Cost of goods sold

   (1,442 )   (24.2 %)   (1,253 )   (19.3 %)
    

 

 

 

Gross profit

   4,521     75.8 %   5,235     80.7 %

Research and development expenses

   (945 )   (15.9 %)   (1,031 )   (15.9 %)

Selling and general expenses

   (2,016 )   (33.8 %)   (2,306 )   (35.5 %)

Other operating income/(expense), net

   17     0.3 %   208     3.2 %
    

 

 

 

Operating profit

   1,577     26.4 %   2,106     32.5 %
    

 

 

 

 

Our gross margin improved from 75.8% in 2000 to 80.7% in 2001, principally due to the increased royalty payments from our alliance partners with respect to our three lead products and, to a lesser extent, to the divestiture of non-core businesses with relatively low gross margins. The improvement in our margins is also due to strong performance from our top 15 products as well as overall improvements in our product mix.

 

Research and development expenses increased to €1,031 million in 2001, a 9.1% increase over 2000, although they remained unchanged as a percentage of our net sales. The increase in spending was principally due to seven new active ingredients entering into the development phase and clinical trials both for new indications for products that are already on the market, such as Plavix®, Arixtra®, Eloxatin® and Xatral®, as well as for new products in development.

 

Selling and general expenses increased in 2001 to 35.5% of our net sales compared with 33.8% of our net sales in 2000, reflecting principally increased costs due to the expansion of our sales force in the United States as well as increased marketing in Japan in connection with the launch of Stilnox® (under the brand name Myslee®).

 

We realized a significant increase in “other operating income/(expense), net,” which reflects principally operating profits of our alliances to which we are entitled or to which our partners are entitled, as discussed above. The increase was due primarily to three factors:

 

    an increase in operating profits from our BMS alliance relating to Plavix®, reflecting significant increases in developed sales of Plavix® in the United States;

 

    the increase in our participation in the promotional activities and profitability of our alliance with BMS relating to sales of Aprovel® (under the brand name Avapro®) in the United States; and

 

    an increase in our profit share in the Lorex joint venture (up to 47.0% from 40.0% in 2000), which reduced the difference between our proportionately consolidated revenues and operating expenses and our actual financial interest in the operating profits of the joint venture. See “Overview — Financial Presentation of Alliances — Lorex Joint Venture” above.

 

67


Table of Contents

Among our three geographical segments, operating profit grew most rapidly in the United States, principally due to the impact of the factors described above with respect to our alliances. The United States accounted for 41.0% of our operating profit excluding unallocated costs. Europe’s operating profit was 44.7% excluding unallocated costs. The following table breaks down our 2000 and 2001 operating profit by geographical market.

 

     Year Ended December 31,

 
     2000

    2001

    % change

 
     (€ in millions)  

Europe

   1,190     1,427     19.9 %

United States

   835     1,311     57.0 %

Other Countries

   440     456     3.7 %

Unallocated costs(1)

   (888 )   (1,088 )   22.5 %
    

 

     

Total operating profit

   1,577     2,106     33.5 %
    

 

     

(1)   Unallocated costs consists mainly of a portion of our research and development expenses and of our administrative expenses.

 

Net Financial Income/(Expense)

 

Net financial income/(expense) increased from €18 million in 2000 to €102 million in 2001. This increase was due primarily to interest income earned on cash flow from operations and on the proceeds from the divestitures that we made in 2001.

 

Amortization and Impairment of Intangibles

 

Our amortization and impairment of intangibles increased from €35 million in 2000 to €68 million in 2001. This increase was principally due to amortization of the intangible assets relating to our October 2001 payment to BMS in exchange for an increase in our participation in the promotional activities and profitability of the alliance relating to U.S. sales of Aprovel®.

 

Exceptional Income

 

Exceptional income increased from €46 million to €281 million in 2001. This significant increase is principally due to the sale of our interest in Les Laboratoires de Biologie Végétale Yves Rocher for €316 million in December 2001, which resulted in the recognition of a capital gain of €125 million on the sale, as well as the sale of Sylachim, Ela Medical, Porgès, Dentoria and two products, Prenate® and Gabitril®.

 

Income Taxes

 

Income taxes increased by 37.8%, from €611 million in 2000 to €842 million in 2001. The increase was principally attributable to the growth in our income before income taxes, partially offset by a reduction in our effective tax rate. Our effective tax rate was 34.8% in 2001, compared to 38.0% in 2000.

 

Net Income

 

As a result of the foregoing, our net income increased from €985 million in 2000 to €1,585 million in 2001. Earnings per share increased from €1.35 in 2000 to €2.17 in 2001 in each case on a basic and diluted basis.

 

Liquidity and Capital Resources

 

Our operations generate significant positive cash flow. We fund our investments primarily with operating cash flow and pay regular dividends on our shares. Our financial debt is limited, and we had a net cash position as of December 31, 2002.

 

68


Table of Contents

Cash Flow

 

For the year ended December 31, 2002, our activities generated €2,260 million of cash flow, an increase of 30.5% compared to €1,732 million recorded in 2001. The increase reflected primarily the growth in our net income, as well as the fact that our 2001 net income included significant capital gains. At the same time, our working capital requirements increased by €584 million in 2002. This increase reflects principally a €413 million tax payment in 2002, much of which reflected the payment of a payable recorded in 2001. The increase also reflects the terms of payments relating to transactions with our alliance partners, such as sales of active ingredients. As a result of the increase in working capital requirements, our cash flow from operations decreased from €1,818 million in 2001 to €1,676 million in 2002.

 

We used €1,409 million of cash in our investing activities during the year ended December 31, 2002, a €1,296 million increase compared to €113 million in 2001. The difference was principally the result of our acquisition of the remaining 51% of the Lorex joint venture in April 2002 for €670 million, and the remainder relates to a payment made to BMS with respect to the increase in our interest in Aprovel® in the United States. Our investments in tangible fixed assets (principally manufacturing facilities and, to a lesser extent, research sites) increased from €283 million in 2001 to €423 million in 2002, resulting mainly from an increase in production capacity for new products. Proceeds from asset sales declined from €492 million in 2001 to €22 million in 2002.

 

In 2002, we used €1,591 million in connection with our financing activities, reflecting primarily the acquisition of our shares under a share buy back program (€1,170 million) and the payment of dividends on our shares (€476 million). Our borrowings were essentially unchanged in 2002.

 

Financial Debt

 

Our financial debt amounted to approximately €416 million at December 31, 2002, of which €351 million was short-term debt. Most of the long-term debt consisted of capital lease obligations. As of December 31, 2002, we had €11 million of long-term debt maturing in 2004 and €8 million of long-term debt maturing in 2005. Since December 31, 2002, our financial debt has not changed materially.

 

As of December 31, 2002, our cash and cash equivalents were €2,465 million. As a result, our net cash position was €2,049 million as of that date.

 

Contractual Obligations and Other Commercial Commitments

 

We have various contractual obligations and other commercial commitments arising from our operations. These obligations and commitments are more fully described in this annual report under various headings and in this Item 5. We do not consider our aggregate contractual obligations and other commercial commitments as of December 31, 2002 to be significant.

 

The following table lists the aggregate maturities of our contractual obligations given as of December 31, 2002.

 

Contractual obligations given

 

         

Payments due by Period


    
     Total

  

Under 1 Year


  

1-5 Years


   Over 5 Years

     (in millions of €)

Long-term debt, excluding capital lease obligations

   63    49        8        6

Capital lease obligations (including interest)

   72    9        29        34

Operating leases

   425    70        191        164

Irrevocable purchase obligations

   65    60        5       

Other long-term obligations

   202    33        128        41
    
  
  
  

Total

   827    221        361        245
    
  
  
  

 

69


Table of Contents

As of December 31, 2002, we had given a total of €66 million in commercial commitments, €37 million of which is payable within one year, €9 million of which is payable between one to five years, and €20 million of which is payable in more than five years from such date. Otherwise, we have no outstanding commercial commitments. For additional information regarding our commercial commitments, see Note D.18 to our financial statements included under Item 18.

 

In addition, we may have payments due to our research and development partners under collaborative agreements. These agreements typically cover multiple products, and give us the option to participate in development on a product-by-product basis. When we exercise our option with respect to a product, we pay our collaborative partner a fee and receive intellectual property rights to the product in exchange. We also are generally required to fund some or all of the development costs for the products that we select, and to make payments to our partners when those products reach development milestones.

 

Our principal collaborative agreements are:

 

    a collaboration agreement with Organon to develop anti-thrombotic oligosaccharides (in continuation of the work that resulted in the development of Arixtra®), under which we have agreed to make payments to Organon for the rights to market products outside the United States, Canada and Mexico that include phased payments to Organon up to a maximum of $100 million if additional indications are approved, minimum royalties of $75 million for sales,

 

    three licensing agreements under which we have agreed to pay aggregate minimum royalties of €17 million;

 

    a collaboration agreement with Cephalon for the development of angiogenesis inhibitors, in respect of which the payment for the first product could reach $32 million;

 

    an agreement with Immuno-Designed Molecules to develop cellular immunology therapies for cancer under which our payments could reach €32 million for each of up to 20 products, at our option, over 10 years, and under which we acquired €20 million in shares of IDM in 2002 and have also agreed to subscribe for an additional €10 million of shares in the future; and

 

    an agreement with Mitsubishi-Pharma Corp to develop neuroprotective agents for use in the treatment of neurogenerative disorders.

 

Because of the uncertain nature of development work, it is impossible to predict if we will exercise an option for a product or if the relevant milestones will be achieved. For this reason, it is impossible to estimate the maximum aggregate amount that we will actually pay in the future under our outstanding collaborative agreements. Given the nature of our business, it is highly unlikely that we will exercise all options for all products or that all milestones will be reached.

 

Liquidity

 

We expect that our existing cash resources will be sufficient to finance our ongoing activities and investments for the next several years. We do not anticipate any significant increase in our capital expenditures in 2003 compared with recent years, and we have no current plans that would result in a significant increase for the next several years.

 

We do not anticipate any significant change in our sources of liquidity in the future, as our operating cash flow should remain substantial so long as our consolidated earnings continue to grow. We do not anticipate needing to increase our borrowings significantly, unless we undertake a major acquisition that would require us to change our financing strategy. While we cannot be certain that our earnings will continue to grow as they have

 

70


Table of Contents

in the past, we are not aware of any currently existing circumstances that would be likely to materially and adversely affect our consolidated earnings in the near future. Moreover, a major reduction in earnings or a very large increase in our expenses would be required in order for our operating cash flow to be insufficient to fund our ongoing liquidity requirements. Even if this were to occur, our low level of financial debt would provide us with a significant source of potential liquidity.

 

U.S. GAAP Reconciliation and Presentation Differences

 

We prepare our consolidated financial statements in accordance with French GAAP, which differ in certain significant respects from U.S. GAAP. As a result, our net income and shareholders’ equity is different under U.S. GAAP and under French GAAP. For a detailed discussion of the differences between French GAAP and U.S. GAAP as they relate to our consolidated net income and shareholders’ equity, see Note F to our audited consolidated financial statements included under Item 18.

 

Net Income

 

The following table sets forth our net income under French GAAP and U.S. GAAP for the periods indicated. The columns for 2000 and 2001 are “restated” to reflect our U.S. GAAP taking into account the restatements of the financial statements of certain alliance entities under the operational management of BMS, as described above under “Overview — Alliances — Bristol-Myers Squibb.” The restatements, which are set forth under the heading “revenue recognition — U.S. BMS alliance,” affected our share of the operating profits and royalties relating to the alliance entities.

 

     Year Ended December 31,

 
     2000

    2001

    2002

 
     (restated)     (restated)        
     (in millions of €)  

French GAAP net income

   985     1,585     1,759  

Purchase accounting adjustments

   (606 )   (445 )   (311 )

Provisions and other liabilities

   (99 )   (23 )    

Revenue recognition – U.S. BMS alliance

   (8 )   (136 )   117  

Other

   99     (50 )   23  

Income tax effects

   221     167     52  
    

 

 

U.S. GAAP net income

   592     1,098     1,640  
    

 

 

 

    Purchase accounting. The principal purchase accounting adjustment, amounting to a charge of €527 million in 2000, €364 million in 2001 and €265 million in 2002, relates to the business combination of Sanofi and Synthélabo. Under French GAAP, the transaction was accounted for as a merger. As a result, no goodwill was recorded in connection with the merger, and existing assets and liabilities of Sanofi and Synthélabo were revalued to adjust them to their value to our company. Under U.S. GAAP, the business combination is accounted for as a purchase, with Sanofi deemed the acquirer of Synthélabo. As a result, the transaction resulted in the recognition of significant goodwill and intangible assets. The difference in net income in 2000 and 2001 was principally the result of amortization of goodwill and identified intangible assets. Beginning in 2002, we no longer amortize goodwill, but instead test goodwill annually for impairment, in accordance with Statement of Financial Accounting Standards No. 142. As a result, in 2002 this item reflects primarily the amortization of intangible assets.

 

      

Our net income was also affected by the purchase accounting treatment under U.S. GAAP of Sanofi’s acquisition of the human healthcare division of Eastman Kodak, Sterling Winthrop, in 1994. Under French GAAP, no goodwill or intangibles associated with the acquisition of Sterling Winthrop are reflected in our consolidated financial statements. Under U.S. GAAP, a portion of the purchase price

 

71


Table of Contents
 

was allocated to identified intangible assets, which are being amortized over periods ranging from 8 to 20 years. This difference amounted to €51 million in 2000 and €52 million in 2001 and €46 million in 2002.

 

    Provisions and other liabilities. In connection with the merger, under French GAAP we recorded certain provisions, principally in respect of anticipated restructuring costs. Under U.S. GAAP, which has more restrictive criteria, certain of these charges do not qualify for provisioning under U.S. restructuring rules and were charged to expense in 2000 or 2001. This was the primary factor that led to a reduction of €99 million in net income in 2000 and €23 million in 2001.

 

Presentation Differences

 

In addition to the foregoing, there are differences in presentation between our French GAAP and U.S. GAAP financial statements, which have no impact on our net income or shareholders’ equity, but instead impact classification and display. The principal presentation differences are the following:

 

    Under U.S. GAAP, our Lorex joint venture was accounted for using the equity method until December 31, 2001. Under French GAAP, until December 31, 2001, we accounted for Lorex using the proportionate consolidation method, which means that we presented our share of the assets, liabilities, equity, revenue and expense of the joint venture in each major caption of our balance sheet and statement of income.

 

    Under French GAAP, the alliance entities majority-owned by BMS are presented in a manner similar to the equity method, with our share of the operating profit recorded under “other operating income/ (expense)” in our statement of income. Alliance entities that we majority-own are consolidated, with BMS’ share of the operating profit recorded as a charge under “other operating income/(expense)” in our statement of income. Under U.S. GAAP, the alliance entities majority-owned by BMS are presented as equity method investees, with our share of the operating profits recorded as income from equity method investees in our statement of income. Alliance entities that we majority-own are fully consolidated, with BMS’ share of the operating profit presented in minority interests in our statement of income.

 

    Restructuring charges and certain other items are treated as exceptional income or expenses under French GAAP but are treated as operating income or expenses under U.S. GAAP. As a result, these items impact our operating income under U.S. GAAP, while they do not impact our operating income under French GAAP.

 

    Under French GAAP, we record royalties received under licenses and specific government levies related to the pharmaceuticals sector paid in certain countries in “cost of goods sold.” Under U.S. GAAP, license royalties are reflected as “revenues,” and specific government levies related to the pharmaceuticals sector are reflected in “selling and general expense.”

 

72


Table of Contents

Shareholders’ Equity

 

The following table sets forth our shareholders’ equity under French GAAP and U.S. GAAP as of the dates indicated. The columns for 2000 and 2001 are restated to reflect our U.S. GAAP shareholders’ equity taking into account the restatements of the financial statements of certain alliance entities under the operational management of BMS, as described above under “Overview — Alliances — Bristol-Myers Squibb.” The restatements, which are set forth under the heading “Revenue recognition — U.S. BMS alliance,” affected our share of the operating profits relating to the alliance entities.

 

     As of December 31,

 
     2000

    2001

    2002

 
     (restated)     (restated)        
     (in millions of €)  

French GAAP shareholders’ equity

   4,304     5,768     6,035  

Purchase accounting adjustments

   9,479     8,927     8,576  

Provisions and other liabilities

   110     35      

Revenue recognition – U.S. BMS alliance

   (21 )   (160 )   (35 )

Other

   (168 )   (456 )   (695 )

Income tax effects

   (1,563 )   (1,365 )   (1,282 )
    

 

 

U.S. GAAP shareholders’ equity

   12,141     12,749     12,599  

 

The principal factor affecting the determination of our shareholders’ equity under U.S. GAAP was the purchase accounting treatment of the merger, which resulted in shareholders’ equity under U.S. GAAP being €9,201 million more than the corresponding French GAAP figure in 2000, €8,761 million more in 2001 and €8,465 million more in 2002. This difference was partially offset by the impact of the income taxes, which decreased our U.S. GAAP shareholders’ equity compared to the corresponding French GAAP figure by €1,563 million in 2000, €1,365 million in 2001 and €1,282 million in 2002.

 

Recent Accounting Pronouncements

 

The U.S. Financial Accounting Standards Board, or FASB, issued the following recent accounting pronouncements in 2002, which are applicable to our company:

 

    Statement of Financial Accounting Standars, or SFAS, No. 143, Accounting for Asset Retirement Obligations;

 

    SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities;

 

    FASB Interpretation No. 45, Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; and

 

    FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.

 

For details regarding these recent accounting pronouncements and their expected impact on our future financial results, please see Note F.3.6 to our financial statements included under Item 18.

 

Critical Accounting and Reporting Policies

 

Our consolidated financial statements are affected by the accounting and reporting policies that we use. Certain of our accounting and reporting policies are critical to an understanding of our results of operations and financial condition, and in some cases the application of these critical policies can be significantly affected by the estimates, judgments and assumptions made by management during the preparation of our consolidated financial

 

73


Table of Contents

statements. The accounting and reporting policies that we have identified as fundamental to a full understanding of our results of operations and financial conditions are the following:

 

    Treatment of Alliances. Our policies with respect to alliances are discussed above under “Overview – Financial Presentation of Alliances” and “Overview — Sources of Revenues and Expenses.” While our treatment of alliances does not require us to make significant estimates, an understanding of our income statement requires an understanding of the presentation of the results of our alliances, including the presentation of royalties paid and received in our cost of sales, and the presentation of our share of profits from our alliances under “Other operating income / (expense), net.”

 

    Impairment Testing. We test our intangible assets periodically for impairment. The most significant intangible assets that we test for impairment are those resulting from the U.S. GAAP treatment of business combinations, as discussed above under “ — U.S. GAAP Reconciliation and Presentation Differences — Net Income.” We test for impairment on the basis of the same objective criteria that are used for the initial valuation. Our initial valuation and ongoing tests are based on the relationship of the value of our projected future cash flows associated with the asset to either the purchase price of the asset (for its initial valuation) or the recorded value of the asset (for ongoing tests). The determination of the underlying assumptions related to the recoverability of intangible assets is subjective and requires the exercise of considerable judgment. Any changes in key assumptions about our business and prospects, or changes in market conditions, could result in an impairment charge.

 

    Pension and Retirement Benefits. We recognize our pension and retirement benefit commitments as liabilities on the basis of an actuarial estimate of the potential rights vested in employees and retirees as of the balance sheet date, net of the valuation of funds to meet these obligations. We prepare this estimate on an annual basis taking into account actuarial assumptions, including life expectancy, staff turnover, salary growth, long-term return on plan assets, retirement and discounting of amounts payable. Depending on the assumptions and estimates used, the pension and post-retirement benefit expense could vary within a range of outcomes and have a material effect on reported earnings.

 

    Deferred Taxes. We account for deferred taxes using the liability method, whereby deferred income taxes are recognized on tax loss carry-forwards, and the difference between the tax and carrying amount of assets and liabilities. We calculate our deferred tax assets and liabilities using enacted tax rates applicable for the years during which we estimate that the temporary differences are expected to reverse. We record a provision when it is more likely than not that the realization of the deferred tax assets will not occur.

 

74


Table of Contents

Item 6.    Directors, Senior Management and Employees

 

A.   Directors and Senior Management

 

Directors

 

In accordance with our bylaws (statuts), we are managed by our Board of Directors (conseil d’administration), which must be composed of a minimum of 3 and a maximum of 18 members. Each member of the Board of Directors is appointed for a term of 5 years and we cannot have more than 1/3 of our Directors be older than 70 years of age. Under French law, the Board of Directors has broad authority to take actions in the name of Sanofi-Synthélabo within the scope of our corporate purpose (subject to the authority expressly reserved by law to the shareholders). In accordance with our bylaws, each director must be the direct legal owner of at least one of our shares throughout his or her term of office.

 

In 2002, our Board of Directors was composed of 12 members. Total, through its subsidiary Elf Aquitaine, and L’Oréal, our major shareholders, are parties to a shareholders’ agreement that includes provisions relating to the composition of our Board of Directors. See Item 7 “Major Shareholders and Related Party Transactions — Major Shareholders — Shareholders’ Agreement.” This agreement provides that four of the members are chosen from among candidates proposed by Total, three are chosen from among candidates proposed by L’Oréal, two are chosen by mutual agreement between Total and L’Oréal from among our corporate officers, and three are chosen by mutual agreement between Total and L’Oréal from among candidates independent of Total, L’Oréal and our company. In practice and with the consent of Total and L’Oréal, the actual composition of our Board of Directors has varied slightly from that contemplated in the agreement.

 

The names and positions of the members of our Board of Directors in 2002, their ages, business experience, dates of initial appointment, the year in which their term expires and information on their principal business activities outside our company are as follows:

 

Jean-François Dehecq

   Age:    63

Chairman and Chief

Executive Officer

  

First elected:

Term expires:

  

May 18, 1999

2004

     Principal occupation:    Chairman and Chief Executive Officer of Sanofi-Synthélabo
     Other directorships and
business experience:
   Director of Air France, Pechiney and Société Financière des Laboratoires de Cosmétologie Yves Rocher

René Barbier de la Serre

   Age:    62

Director

   First elected:    May 18, 1999
     Term expires:    2004
     Principal occupation:    Retired
     Other directorships and
business experience:
   Former Executive Vice Chairman of CCF; Former Chairman Conseil des Marchés Financiers; Chairman of TAWA UK Ltd.; Director of Crédit Lyonnais and Schneider Electric; Member of the Supervisory Boards of Pinault-Printemps-Redoute, Compagnie Financière St. Honoré and Euronext N.V.

Robert Castaigne

   Age:    56

Director

   First elected:    February 21, 2000
     Term expires:    2004
     Principal occupation:    Chief Financial Officer of Total
     Other directorships and business experience:    Director of Atofina, Compagnie Générale de Géophysique, Elf Aquitaine and Hutchinson

 

75


Table of Contents

Pierre Castres Saint Martin

     Age:      67

Director

     First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Retired
       Other directorships and
business experience:
    

Former Deputy General Manager of L’Oréal;

Director of Fimalac and SEB; Chairman of Supervisory Board of Group Marc de Lacharrière, Member of Supervisory Board of Arc International

Thierry Desmarest

     Age:      57

Director

     First elected:      February 21, 2000
       Term expires:      2004
       Principal occupation:      Chairman and Chief Executive Officer of Total and Elf Aquitaine
       Other directorships and
business experience:
     Member of Supervisory Boards of Areva and L’Air Liquide

Lord Douro

     Age:      57

Director

     First elected:      May 22, 2002
       Term expires:      2007
       Principal occupation:      Chairman, Richemont Holdings (UK) Limited
       Other directorships and
business experience:
     Chairman, Framlington Holdings Ltd.; Director of Compagnie Financière Richemont, Global Asset Management Worldwide and of Pernod Ricard S.A.

Pierre-Gilles de Gennes

     Age:      70

Director

     First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Professor at the Collège de France
       Other directorships and
business experience:
     Member of Supervisory Boards of L’Air Liquide and Rhodia; Nobel Prize in Physics (1991)

Hervé Guérin

     Age:      61

Director

     First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Retired
       Other directorships and
business experience:
     Former Chairman and Chief Executive Officer of Synthélabo prior to the merger; Former Vice Chairman and Managing Director of Sanofi-Synthélabo; Director of Ethypharm, Chairman of Supervisory Board of Human Health Investments (H2i)

Elf Aquitaine, Director

permanent representative:

             

Jean-Paul Léon

     Age:      65
       First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Retired
       Other directorships and
business experience:
     Former CFO, Executive Vice President Corporate Strategy of Sanofi prior to the merger; Director of Société Financière des Laboratoires de Cosmétologie Yves Rocher

 

76


Table of Contents

Lindsay Owen-Jones

     Age:      57

Director

     First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Chairman and Chief Executive Officer of L’Oréal
       Other directorships and
business experience:
     Director of BNP Paribas (France) and Gesparal (France); Vice President and Member of Supervisory Board of L’Air Liquide (France); Director and Chairman of Galderma Pharma (Switzerland)

L’Oréal, Director

permanent representative:

             

Michel Somnolet

     Age:      63
       First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Advisor to the Chairman and Chief Executive Officer of L’Oréal (France)
       Other directorships and
business experience:
     Former Vice President, General Management, Administration and Finance of L’Oréal (France), Director of L’Oréal (France); Chairman and Director of Geral Inc. (USA), Director of L’Oréal USA Inc. (USA); Member of Supervisory Board of L’Oréal Maroc (Morocco) and Director of Eramet (France)

Bruno Weymuller

     Age:      54

Director

     First elected:      May 18, 1999
       Term expires:      2004
       Principal occupation:      Executive Vice President, Strategy and Risk Assessment of Total
       Other directorships and
business experience:
     Director of Elf Aquitaine and Technip

 

Our May 19, 2003 shareholders’ meeting approved the appointment of Mr. Gérard Van Kemmel, 63 years old, to a 5-year term on our board of directors. Mr. Van Kemmel is currently serving as President of Novell for Europe, the Middle East and Africa.

 

None of our directors has any family relationship with any of our other directors or member of our senior management. None of our directors has entered into a service contract with our company or any of our subsidiaries providing for benefits upon termination of his service as a director.

 

Senior Management

 

The names, positions and business experience of our senior officers are as follows:

 

Jean-Francois Dehecq is our Chairman and Chief Executive Officer. Mr. Dehecq has a degree from the Ecole Nationale des Arts et Metiers. He began his career as a mathematics professor and then served in the Army as a research scientist at the Nuclear Propulsion Department. From 1965 until 1973, he served in a variety of positions at the Société Nationale des Pétroles d’Aquitaine (SNPA) before joining Sanofi as Managing Director (Directeur Général) in 1973. From 1982 to 1988, Mr. Dehecq served as Vice President and Managing Director (Vice Président Directeur Général) of Sanofi, before being appointed Chairman and Chief Executive Officer (Président Directeur Général) of Sanofi in 1988. Following the merger in 1999, he was appointed to his present position. Mr. Dehecq sits on the board of directors of Air France and Pechiney. From 1988 through 1999, he also served as Managing Director of Health for the Elf Aquitaine Group.

 

77


Table of Contents

Gérard Le Fur is our Senior Executive Vice President and Executive Vice President, Scientific Affairs. Mr. Le Fur has degrees in both pharmacy and science. He began his career at Laboratoires Pharmuka as Chief of Laboratories and later served as Assistant Director of Research and Development before joining Laboratoires Rhône–Poulenc as Director of Biology. He began his career at Sanofi in 1986 as Assistant Director of Research and Development, and was named Director of Research and Development in 1995, prior to being named to Executive Vice President, Scientific Affairs in June 1999 following the merger. He was appointed Senior Executive Vice President (Directeur Général Délégué) by our Board of Directors on December 11, 2002.

 

Pierre-Jean Lepienne is our Executive Vice President, Corporate Affairs. He has a degree from the Ecole Supérieure de Commerce of Paris, a diploma in Economics and Finance from the University of Saõ Paulo and completed graduate studies in finance at Stanford University. Mr. Lepienne began his career at Robert et Carrière Laboratory as General Secretary, and then served as Chief Financial Officer (Directeur Financier), a position that he continued to hold once it became the Synthélabo Group. Mr. Lepienne later served as President of Synthélabo Pharmacie and as Executive Vice President and Director of Synthélabo S.A. before being named to his present position in 1999 following the merger.

 

Hanspeter Spek is our Executive Vice President, Operations. He graduated from business school in Germany and then completed an apprenticeship. In 1974, Mr. Spek completed a management training program for Pfizer International and then joined Pfizer RFA as a junior product manager. He served in various positions at Pfizer RFA, including as manager of the marketing division. Mr. Spek joined Sanofi Pharma GmbH, Sanofi’s German affiliate, in 1985 as Marketing Director, and served in various positions in Germany and then at Sanofi in France, before being named Senior Vice President Europe following the merger in 1999. He served as Executive Vice President, International Operation from October 2000 until January 2003, when he was named to his present position.

 

Jean-Claude Armbruster is our Senior Vice President, Corporate Human Resources. Mr. Armbruster has both a diploma (DES) and a bachelors degree (maîtrise) in private law and a diploma (DES) in criminal science. He joined Sanofi’s legal staff in 1980 and served in a variety of positions, including Director of Human Resources at Sanofi, prior to being named t