Bausch & Lomb 1999 Annual Report

Information Concerning Forward-Looking Statements When
used in this discussion, the words “anticipate,” “should,”
“expect,” “estimate,” “project” and similar expressions are
intended to identify forward-looking statements. The forwardlooking
statements contained in this report are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements involve predictions of
future company performance, and are thus dependent on a
number of factors affecting the company’s performance. Where
possible, specific factors that may impact performance materially
have been identified in connection with specific forward-looking
statements. Additional risks and uncertainties include, without
limitation, the impact of competition and general economic
conditions in the global vision care and ophthalmic surgical and
pharmaceuticals markets, where the company’s businesses
compete, changes in global and localized economic and political
conditions (for example, the company does business in Asia and
Brazil, where recently, economies and associated currency risks
have been volatile), changing trends in practitioner and consumer
preferences and tastes, changes in technology, medical
developments relating to the use of the company’s products, legal
proceedings initiated by or against the company, changes in
government regulation of the company’s products and operations,
changes in private and regulatory schemes providing for
the reimbursement of patient medical expenses, difficulties or
delays in the development, production, testing, regulatory
approval, marketing of products, the effect of changes within the
company’s organization, and such other factors as are described
in greater detail in the company’s filings with the Securities and
Exchange Commission, including its 1999 Annual Report on
Form 10-K.
Purchased In-Process Research
And Development
In connection with the 1998 acquisitions of Chiron Vision and
Storz, the company immediately expensed $41 ($28 for Storz
and $13 for Chiron Vision) of the combined purchase price of
these businesses, representing amounts for in-process research
and development (IPR&D). The expensed IPR&D represented
the value of projects that had not yet reached technological feasibility
and for which the assets to be used in such projects had no
alternative future uses (See Note 2 – Acquisitions). The company
expects that products developed arising from the acquired
IPR&D will begin to generate sales and positive cash flows in the
time frames discussed in the following paragraphs. However,
development of these technologies remains a significant risk due
to the remaining effort to achieve technical viability, rapidly
changing customer markets, uncertain standards for new products
and significant competitive threats from numerous companies.
See the future 17 Bausch & Lomb
Failure to bring the products associated with these projects to
market in a timely manner could result in a loss of market share
or a lost opportunity that could have a material adverse impact on
the company’s businesses and operating results.
The company estimated the fair value of the purchased
IPR&D for each of these acquisitions using an income approach.
Such methodology involved estimating the fair value of the purchased
IPR&D using the present value of the estimated after-tax
cash flows expected to be generated as a result of these projects
and using risk-adjusted discount rates and revenue forecasts as
appropriate. The selection of the discount rate was based on
consideration of the company’s weighted average cost of capital,
as well as other factors, including the useful life of each project,
anticipated profitability levels of each project and the uncertainty
surrounding successful development of each project
known at the time. The amount expensed was also impacted by
the percentage of completion for each project. The company
expects to fund all R&D efforts, including acquired IPR&D,
from cash flow from operations.
Set forth below are descriptions of certain acquired IPR&D
projects, including their status at the end of 1999:
Storz At the beginning of 1998, the company acquired Storz,
a leading manufacturer of high-quality ophthalmic surgical
instruments, surgical and diagnostic equipment, intraocular lens
(IOL) implants and ophthalmic pharmaceuticals. The allocation
of $28 of the $370 purchase price to IPR&D represented its
estimated fair value using the methodology described above. The
$28 was allocated to the following projects: Cidofovir, $12;
Ocuvite, $10 and other technologies, $6.
Cidofovir – The company estimated that revenues attributed
to Cidofovir, a broad spectrum anti-viral agent for the
treatment of ocular infections, were expected to average in excess
of $50 per year for the six years beginning in 2001. The discount
rate and stage of completion used to derive the IPR&D amount
were 18% and 32%, respectively. During 1998 and 1999 the
company spent approximately $3 on R&D efforts for this
product. Product development, however, has been discontinued
due to a failure to meet expected performance attributes.
Consequently, the company will not realize its forecasted
revenues from this project.
Ocuvite – Revenues attributed to alternative formulations
of a currently marketed product, Ocuvite, a high-potency
vitamin/mineral supplement, were expected to total approximately
$37 for the three years ending in 2004, and then average
approximately $40 annually through 2011. The discount rate
and stage of completion used to derive the IPR&D amount
were 22% and 54%, respectively. The company believes
development costs and revenue projections made at the time of
acquisition are still valid.