We discover, develop, manufacture, and sell products in one significant business
segment'pharmaceutical products. Operations of our animal health business segment
are not material to our financial statements. We manufacture and distribute our
products through owned or leased facilities in the United States, Puerto Rico,
and 17 other countries. Our products are sold in approximately 140 countries.
Most of the products we sell today were discovered or developed by our own
scientists, and our success depends to a great extent on our ability to continue
to discover and develop innovative new pharmaceutical products. We direct our
research efforts primarily toward the search for products to prevent and treat
human diseases. We also conduct research to find products to treat diseases
in animals and to increase the efficiency of animal food production.
In the United States, we distribute pharmaceutical products principally through
independent wholesale distributors. Our marketing policy is designed to assure
that products and relevant medical information are immediately available to
physicians, pharmacies, hospitals, and appropriate health care professionals
throughout the country. Three wholesale distributors in the United States '
AmerisourceBergen Corporation, Cardinal Health, Inc., and McKesson Corporation.
No other distributor accounted for more than 10'percent of consolidated net
sales. We also sell pharmaceutical products directly to the United States government
and other manufacturers, but those sales are not material.
We promote our major pharmaceutical products in the United States through sales
representatives who call upon physicians, wholesalers, hospitals, managed-care
organizations, retail pharmacists, and other health care professionals. We advertise
in medical and drug journals, distribute literature and samples of certain products
to physicians, and exhibit at medical meetings. In addition, we advertise certain
products directly to consumers in the United States and we maintain web sites
with information about all our major products. Divisions of our sales force
are dedicated to product lines or practice areas, such as primary care, neuroscience,
diabetes care, acute care, endocrinology, and oncology. We have entered into
licensing arrangements under which other companies market certain products manufactured
by us, such as Darvon, Sarafem, Axid, Keftab, Lorabid, and Permax.
Large purchasers of pharmaceuticals, such as managed-care groups and government
and long-term care institutions, account for a significant portion of total
pharmaceutical purchases in the United States. We have created special sales
groups to service managed-care organizations, government and long-term care
institutions, hospital contract administrators, and certain retail pharmacies.
In response to competitive pressures, we have entered into arrangements with
a number of these organizations providing for discounts or rebates on one or
more Company products or other cost-sharing arrangements.
Outside the United States, we promote our pharmaceutical products primarily
through sales representatives. While the products marketed vary from country
to country, neuroscience products constitute the largest single group in total
sales. Distribution patterns vary from country to country. In most countries,
we maintain our own sales and distribution organizations. In some countries,
however, we market our products through independent distributors.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing operations are
available from more than one source. We obtain certain raw materials principally
from only one source. In addition, three of our significant products are manufactured
by others: Actos by Takeda; ReoPro by Centocor; and Xigris by Lonza Biologics
(bulk product) and DSM, N.V. (finished product). If we were unable to obtain
certain materials from present sources, we could experience an interruption
in supply until we established new sources or, in some cases, implemented alternative
processes.
Competition
Our pharmaceutical products compete with products manufactured by many other
companies in highly competitive markets throughout the world. Our animal health
products compete on a worldwide basis with products of pharmaceutical, chemical,
and other companies that operate animal health divisions or subsidiaries.
Important competitive factors include product efficacy, safety, and ease of
use, price and demonstrated cost-effectiveness, marketing effectiveness, service,
and research and development of new products and processes. If competitors introduce
new products, delivery systems or processes with therapeutic or cost advantages,
our products can be subject to progressive price reductions or decreased volume
of sales, or both. Most new products that we introduce must compete with other
products already on the market or products that are later developed by competitors.
Manufacturers of generic pharmaceuticals typically invest far less in research
and development than research-based pharmaceutical companies and therefore can
price their products significantly lower than branded products. Accordingly,
when a branded product loses its market exclusivity, it normally faces intense
price competition from generic forms of the product. In many countries outside
the United States, patent protection is weak or nonexistent and we must compete
with generic or 'knockoff' versions of our products.
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