<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission file number 0-11103
-------
CENTOCOR, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2117202
- - ------------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 Great Valley Parkway Malvern, Pennsylvania 19355-1307
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-651-6000
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
------- -------
Shares of Common Stock outstanding at August 1, 1996 were 68,635,975.
<PAGE>
Part I: Financial Information
- - -----------------------------
Item 1: Financial Statements
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
- - -------------------------------- ----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Notes 4 and 7) $ 59,887 $ 16,002
Short-term investments (Notes 4 and 7) 100,508 115,435
Accounts and contracts receivable 25,013 11,489
Interest receivable 1,994 1,648
Inventory (Note 5) 21,842 20,783
Prepaid expenses (Note 2) 13,331 2,959
Other current assets (Note 3) 16,102 653
-------- --------
238,677 168,969
Property, Plant and equipment (Note 7):
Land and buildings 72,021 72,980
Equipment, furniture, fixtures and
improvements 68,222 69,884
-------- --------
140,243 142,864
Less accumulated depreciation (76,654) (74,727)
-------- --------
63,589 68,137
Long-term investments (Note 4) 9,562 5,769
Intangible and other assets (Note 6) 24,807 17,409
-------- --------
Total assets $336,635 $260,284
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
- - -------------------------------------- ------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,423 $4,126
Due to Eli Lilly and Company (Note 3) 27,000 --
Accrued expenses 22,507 26,139
Unearned revenues -- 83
Note payable (Note 7) 7,059 7,500
Current portion of
long-term debt (Note 7) 15,274 18,289
----------- ----------
77,263 56,137
Long-term debt (Note 7) 54,765 231,640
Other liabilities 1,462 1,286
Minority interest 1,888 617
Shareholders' equity (Notes 2,3 and 7):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued -- --
Common Stock, $.01 par value,
100,000 shares authorized and
67,693 and 58,538 issued and
outstanding at June 30, 1996 and
December 31,1995, respectively 677 585
Additional paid-in capital 1,016,327 770,068
Deficit (822,860) (808,839)
Unrealized gain on marketable
securities 1,840 2,342
Cumulative foreign currency
translation adjustments 5,273 6,448
----------- ----------
201,257 (29,396)
----------- ----------
Total liabilities and
shareholders' equity $336,635 $260,284
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------
For the three months ended June 30, 1996 1995
- - -----------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $29,526 $17,754
Contracts 1,060 3,000
------------ ------------
30,586 20,754
Costs and expenses:
Cost of sales 14,554 8,071
Research and development 13,296 17,008
Marketing, general and administrative 7,882 7,120
------------ ------------
35,732 32,199
Other income (expenses):
Interest income 3,222 2,798
Interest expense (2,464) (4,868)
Litigation settlement -- (3,750)
Other income (expense) (640) (44)
------------ ------------
118 (5,864)
Loss before extraordinary item ($5,028) ($17,309)
------------ ------------
Extraordinary item:
Net gain on extinguishment of debt (Note 7) 705 --
----------- -----------
Net loss (4,323) (17,309)
=========== ===========
Net loss per share:
Before extraordinary item ($0.07) ($0.30)
Extraordinary item 0.01 --
------------ ------------
Net loss per share ($0.06) ($0.30)
=========== ===========
Weighted average number of shares
outstanding 67,645 58,258
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------
For the six months ended June 30, 1996 1995
- - -----------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $51,236 $37,073
Contracts 1,232 7,676
------------ ------------
52,468 44,749
Costs and expenses:
Cost of sales 25,108 16,696
Research and development 25,844 30,509
Marketing, general and administrative 15,285 14,614
------------ ------------
66,237 61,819
Other income (expenses):
Interest income 5,487 5,583
Interest expense (5,731) (9,832)
Litigation settlement -- (3,750)
Other income (expense) (713) (482)
------------ ------------
(957) (8,481)
Loss before extraordinary item ($14,726) ($25,551)
------------ ------------
Extraordinary item:
Net gain on extinguishment of debt (Note 7) 705 --
----------- -----------
Net loss ($14,021) ($25,551)
=========== ===========
Net loss per share:
Before extraordinary item ($0.23) ($0.44)
Extraordinary item 0.01 __
------------ ------------
Net loss per share ($0.22) ($0.44)
=========== ===========
Weighted average number of shares
outstanding 63,901 58,014
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
----------------------------------------------------------------------------------
For the six months ended June 30, 1996 1995
----------------------------------------------------------------------------------
Cash flows used for operating activities:
Net loss ($14,021) ($25,551)
Adjustments to reconcile net loss to net cash
used for operating activities:
Net gain on extinguishment of debt (705) --
Litigation reserve -- 3,750
Provisions for depreciation and amortization 7,067 8,663
Amortization of deferred income (74) (1,657)
Other 1,316 1,377
Changes in assets and liabilities:
Accounts and contracts receivable (14,177) (7,253)
Interest receivable (364) (859)
Inventory (2,073) (4,265)
Prepaid expenses (12,215) (1,057)
Other current assets (451) 228
Intangible and other assets (3,966) (1,185)
Accounts payable 1,426 (1,827)
Unearned revenue -- 123
Accrued expenses and other liabilities 127 988
Other long-term liabilities 176 508
------------ ------------
Net cash used for operating activities (37,934) (28,017)
Cash flows (used for) from investing activities:
Purchases of investments (40,445) (78,962)
Sales of investments 53,740 66,300
Net purchases of fixed assets (1,773) (2,968)
------------ ------------
Net cash (used for) from investing activities 11,522 (15,630)
Cash flows from financing activities:
Net proceeds from issuance of Common Stock relating
to Public offering 125,916 --
Net proceeds from other issuances of Common Stock 13,529 16,682
Reduction of long-term debt and notes payable (68,820) (7,977)
------------ ------------
Net cash from financing activities 70,625 8,705
Effect of foreign currency translation (328) 604
------------ ------------
Net increase (decrease) in cash and cash equivalents 43,885 (34,338)
Beginning cash and cash equivalents 16,002 78,925
------------ ------------
Ending cash and cash equivalents $59,887 $44,587
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 1
Basis of Presentation
Centocor, Inc. ("Centocor" or "the Company") is a biotechnology company that
develops therapeutic and diagnostic human health care products for
cardiovascular, autoimmune and infectious diseases and cancer. The Company
concentrates on research and development, manufacturing and market development,
with a primary technological focus on monoclonal antibodies, with additional
programs in genetic vaccines and peptides.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in Centocor, Inc.'s audited financial statements
in the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at June 30, 1996 and December 31, 1995 and the
consolidated results of operations for the three and six months ended June 30,
1996 and 1995 and consolidated cash flows for the six months ended June 30, 1996
and 1995. The results of operations and the cash flows are not necessarily
indicative of the results to be expected for the entire year.
Note 2
Commitments and Contingencies
Liquidity and Capital Resources
-------------------------------
The Company has incurred significant operating expenses attempting to develop
therapeutic and diagnostic products. The Company's product sales have not
produced sufficient revenues to cover the Company's operating costs.
Consequently, the Company has experienced substantial net cash outflows, which
have been only partially offset by significant contract revenues received
through collaborative alliances with pharmaceutical companies and the Company's
financing activities.
The Company's future financial condition is highly dependent upon the
reduction of the Company's rate of net cash outflows and, ultimately, upon the
achievement of significant and sustained levels of therapeutic product sales.
During the year ended December 31, 1996, sales of the Company's products,
including ReoPro and Panorex, are not expected to generate sufficient revenue to
result in positive cash flow for the year. Under the Company's strategy of
entering into collaborative alliances with established pharmaceutical companies,
the Company generally shares sales revenues from products
7
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
covered by such arrangements with its partners. There can be no assurance that
those products, in conjunction with the Company's therapeutic product candidates
under development and diagnostic products, will achieve a level of sales
sufficient to generate positive cash flow from operations for the Company, given
the current and currently anticipated future scope of the Company's operations.
The level of future sales of both diagnostic and therapeutic products will be
dependent upon several factors, including, but not limited to, the timing and
extent of future regulatory approvals of the Company's products, approval and
commercialization of competitive products and ultimately the degree of
acceptance of the Company's products in the marketplace. There can be no
assurance that U.S. Food and Drug Administration ("FDA") or other regulatory
approvals expanding the authorized use of ReoPro and Panorex or permitting the
commercial sale of any of the Company's product candidates under development
will be obtained. Failure to obtain additional timely FDA or other regulatory
approvals for the use of ReoPro and Panorex or other product candidates will
have a material adverse effect on the Company.
Until significant and sustained levels of therapeutic product sales are
achieved, the Company expects that it will need to secure significant additional
funding in the future from collaborative arrangements with pharmaceutical
companies or from the capital markets. There can be no assurance that
sufficient additional funding will be available to the Company or that the
Company can obtain additional collaborations with established pharmaceutical
companies and receive payments for product rights and/or the achievement of
milestones under such collaborative agreements. Even if the Company obtains
such funding, there can be no assurance that such funding will be sufficient to
sustain the Company's operations until it generates positive cash flows from
operations.
Legal Proceedings
-----------------
In October 1992, the Company was served with a complaint filed by the Velos
Group, a Maryland partnership ("Velos") in the U.S. District Court for the
District of Maryland. The complaint primarily alleged that the Company breached
certain provisions of a license agreement between Velos and the Company pursuant
to which the Company has exclusive rights to U.S. Patent No. 5,057,598, as well
as various patent application and foreign patents. The patents and applications
include claims relating to monoclonal antibodies used in treating manifestations
of Gram-negative bacterial infections, the targeted indication of Centoxin. The
complaint also alleged that the Company failed to use its best efforts to
perfect and market Centoxin. The complaint sought declaratory relief and
monetary relief in excess of $100,000,000, and requested that the Company place
in escrow one-half of the amounts received by the Company in 1992 pursuant to
its agreements with Eli Lilly and Company ("Lilly"). The complaint did not seek
to terminate or rescind any of the Company's rights under the license agreement.
The Company answered the complaint and asserted affirmative defenses and
counterclaims on January 7, 1993, but the counterclaims and certain affirmative
defenses were dismissed on June 22, 1993 with leave to replead. On July 28,
1993, the Court permitted plaintiff to file an amended complaint that updated
some of the claims
8
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
in the original complaint but otherwise reasserted the basic factual allegations
and, with one minor exception, relied upon the same legal theories. On August
27, 1993, the Company filed its Answer, Affirmative Defenses and Counterclaim
for Damages and Equitable Relief, to the amended complaint. In the Amended
Answer, the Company again denied all of the allegations made by Velos and stated
certain affirmative defenses and counterclaims against Velos with respect to the
license agreement, based on theories of (i) failure of consideration, (ii) fraud
in the inducement and (iii) unilateral mistake as to facts, which mistake was
induced by the fraudulent misrepresentation of Velos. On September 22, 1993,
plaintiff moved to dismiss the Company's counterclaims and to strike certain of
the Company's affirmative defenses. On February 6, 1995, the motion was denied.
Discovery is in progress, and trial is scheduled for February 1997. The Company
moved for partial summary judgment with respect to the plaintiff's claim that
under its license agreement, Lilly is allegedly a sublicensee of Centocor,
thereby purportedly entitling plaintiff to a significant part of the funds paid
by Lilly to Centocor. That motion was granted and the plaintiff is seeking
rehearing. Plaintiff has moved for partial summary judgment with respect to
certain of the affirmative defenses and the Company's counterclaims. In
addition, the Company has moved for partial summary judgment dismissing the so-
called best efforts claim and plans to file motions to dismiss additional
claims. The Company believes that the allegations of Velos are without merit
and intends to vigorously defend this suit and to pursue its counterclaim.
On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden,
Centocor and Tocor II Inc. ("Tocor II") was filed in the Court of Common Pleas
of Chester County, Pennsylvania. The complaint alleges that the defendants
breached their fiduciary duties to Tocor II Unitholders by, among other things,
making an offer to exchange shares of the Company's Common Stock for Tocor II
Units, recommending acceptance of the exchange offer, and failing to maximize
shareholder value. The complaint sought, among other relief, an injunction
against consummation of the exchange offer, the establishment of a "truly
independent" special committee and the retention of a financial advisor to
consider the exchange offer, and an award of damages (including rescissionary
damages), costs and plaintiff's counsel fees. Plaintiff took no additional
action to obtain an injunction and the exchange offer was made and consummated.
A motion for class certification is pending. No trial date has been fixed. The
Company believes that the allegations set forth in the complaint are without
merit and intends to vigorously defend this suit.
In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by two
research and development partnerships formed in the mid-1980s by PaineWebber and
managed by it since then. The two PaineWebber partnerships (PaineWebber R&D
Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively,
investors in Centocor Partners II, L.P. ("CPII") and Centocor Partners III, L.P.
("CPIII"), research partnerships for which PaineWebber acted as the sales agent
and in other capacities. The Company purchased the limited partners' interests
in CPII in February 1992 and that partnership was then dissolved.
9
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court of
the State of New York, County of New York, and purports to be a class action on
behalf of all former limited partners of CPII. The complaint charges that some
portion of the $100 million paid by Lilly to the Company in July 1992
constituted revenues to the Company for the licensing, sublicensing or sale of
HA-1A and that the Company is obligated to pay a percentage thereof to the
former limited partners of CPII, in addition to amounts already paid. The
theories of recovery are similar to those asserted by Velos in 1992, as
described above. The Company moved to dismiss the New York suit on the ground
that it was brought in an inconvenient forum and that motion was granted. The
suit has been refiled in the Delaware Superior Court. Prior to the dismissal of
the New York action, a similar suit was filed by another former CP II partner in
the Court of Common Pleas of Chester County, Pennsylvania. That suit is in its
earliest stage. In an Amended Complaint, the plaintiff has now also named Paine
Webber Group, Inc. and Paine Webber Development Corporation as defendants. The
Company believes that the allegations of the plaintiffs in these actions are
without merit and intends to vigorously defend them.
The suit by PaineWebber R&D II, L.P., was filed in the Court of Chancery of
the State of Delaware. In the complaint in this action, the plaintiff seeks to
sue derivatively on behalf of CPIII. CPIII is named as a nominal defendant and
the Company and Centocor Development Corporation III ("CDC III"), a wholly owned
subsidiary of the Company which acts as the general partner of CPIII, are named
as defendants against whom relief is sought. The claim in this case is that at
least $25 million of the money paid by Lilly to the Company in 1992 represented
profits from the marketing of ReoPro, obligating the Company to pay a portion
thereof to CPIII, and that the Company is obligated to pay an increased
percentage of the profits from ReoPro to CPIII going forward. The Company
answered the complaint in the Delaware action and filed a cross-claim against
nominal defendant CPIII and a third-party complaint against PaineWebber Group
Inc. and PaineWebber. The cross-claim seeks an offset against any damages
awarded the partners based on theories of unjust enrichment and quasi contract.
The third-party claims (since amended to add additional theories of liability
and to make PaineWebber, Inc. an additional third-party defendant) seek to hold
the PaineWebber entities liable for some or all of any alleged injury to the
partnership. On November 1, 1995, an additional suit was commenced in the
Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII, against
the Company, CDC III and certain of their officers and directors. The complaint,
filed derivatively on behalf of CPIII, asserts claims, inter alia, for breach of
contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding
and abetting. The Company answered this complaint and also filed a cross-claim
against nominal defendant CPIII and a third party complaint against PaineWebber
Group Inc. and PaineWebber, since amended to add additional theories of
liability and to name PaineWebber, Inc. as a further third-party defendant.
Discovery is proceeding. A trial date has been fixed for January 1997. The
Company believes that the allegations of the plaintiffs in these suits are
without merit and intends to vigorously defend them.
While it is not possible to predict with certainty the eventual outcome of
these matters, the Company believes that the foregoing proceedings will not have
a material adverse effect on the Company.
10
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Partnerships
------------
Centocor has an exclusive option to purchase the limited partnership
interests in CPIII. Centocor's option to purchase the limited partnership
interests in CPIII is exercisable upon the earlier of (a) each limited partner
having received distributions related to sales of the CPIII products equal to
15% of the total capital contributions of such limited partner (approximately
$7,926,000 in the aggregate) and the expiration of at least 24 months after the
first commercial sale of a CPIII product or (b) the expiration of at least 48
months after the first commercial sale of a CPIII product; but, in any event,
not prior to the expiration of the then applicable long-term capital gains
holding period after the expenditure by the Company of all funds paid to it
pursuant to the Development Agreement with CPIII. Centocor commenced commercial
sales of ReoPro in January 1995. If the Company elects to exercise this option,
the Company must make an advance payment of approximately $13,598,000 in cash
or, at the Company's election, approximately $15,229,000 in shares of the
Company's Common Stock, and future payments generally of six percent of sales of
products developed by CPIII. If Centocor does not exercise this option, it will
have no rights to the technology or products developed on behalf of CPIII,
including ReoPro. The Company expects that the purchase option will become
exercisable during the first quarter of 1997.
The Company has entered into indemnity agreements with CPIII and the former
limited partners of Centocor Cardiovascular Imaging Partners, L.P. ("CCIP") and
CPII pursuant to which the Company would be obligated, under certain
circumstances, to compensate these parties for the fair market value of their
respective interests under any license agreements with the Company relating to
their respective products which are lost through the exercise by the United
States Government of any of its rights relating to the licensed technology. The
amount of any such loss would be determined annually by independent appraisal.
Royalties
---------
The Company is required to make certain future payments to the former limited
partners of CCIP and CPII based on sales, if any, of products developed by each
of the respective partnerships. Upon any exercise by the Company of its option
to acquire the limited partnership interests in CPIII, the Company would be
required to make future payments to the former limited partners of CPIII,
including payments based on any sales of ReoPro.
The Company has an agreement which requires it to make certain future royalty
payments depending on the level of ReoPro sales and, in the second quarter of
1996, the Company prepaid such royalties and included them as a prepaid expense
on it's consolidated balance sheets. Beginning in 1997, this prepaid royalty
payment will be reflected in operating results up to a designated level of sales
of ReoPro.
11
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
The Company has entered into agreements to support research at certain
research institutions. These agreements, which grant the Company licenses and/or
options to license certain technology resulting from the research, generally
require the Company to pay royalties to such institutions on the sales of any
products that utilize the licensed technology. Further, the Company has
licenses under certain patents, patent applications and technology and pays the
licensors or their licensees royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
Product Liability
-----------------
The testing and marketing of medical products entails an inherent risk of
product liability. The Company maintains limited product liability insurance
coverage. Centocor's business may be materially adversely affected by a
successful product liability claim in excess of any insurance coverage. There
can be no assurance that product liability insurance coverage will continue to
be available to Centocor in the future on reasonable terms or at all.
Note 3
Collaborative Arrangements
Relationship with Eli Lilly and Company
---------------------------------------
In July 1992, Centocor and Lilly entered into a Sales and Distribution
Agreement later amended in June 1993. Under that Agreement, as amended, Centocor
is principally responsible for developing and manufacturing ReoPro, and Lilly
will assist Centocor in the regulatory filings and continued development of
ReoPro for various clinical indications. Also, in the event Centocor cannot
manufacture ReoPro or under certain other circumstances, such as material breach
of the agreement by or the bankruptcy of Centocor, Lilly has the option to
assume the manufacture of ReoPro and assure the continued supply of the product,
even to the extent of acquiring Centocor's related manufacturing assets at their
independently appraised values.
In June 1996, the Company and Lilly amended its Sales and Distribution
Agreement. Under the amendment, Lilly will no longer have the exclusive right to
buy ReoPro for resale in Japan. Lilly will maintain its exclusive right to buy
and resell ReoPro in the rest of the world. In July 1996, in consideration of
the amendment and other activities in connection with the commercialization and
market development of ReoPro, the Company issued 920,716 common shares to Lilly.
At June 30, 1996, the Company had a current liability to Lilly of $27,000,000
pending the final delivery of the shares.
12
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Centocor is in the final stages of discussions with a potential new marketing
partner in Japan.
Relationship with Glaxo Wellcome plc
------------------------------------
In November 1993, Centocor and Glaxo Wellcome plc ("Glaxo Wellcome") entered
into an alliance agreement for the development and marketing of certain of
Centocor's monoclonal antibody-based cancer therapeutic products, including
Panorex. In November 1994, Centocor and Glaxo Wellcome amended their alliance
agreement and Glaxo Wellcome became the exclusive worldwide distributor for
Panorex. Under the agreement, Glaxo Wellcome is responsible principally for the
continuing clinical development of Panorex, and Centocor is responsible
principally for manufacturing Panorex and securing regulatory approvals.
Note 4
Marketable Securities
The Company's equity investments classified as available for sale are carried
at estimated fair value with unrealized gains and losses recorded as a component
of shareholders' equity. The Company's other investments which the Company has
the ability and intent to hold to maturity are carried at amortized cost.
At June 30, 1996, securities classified as available for sale and held to
maturity are summarized below (in thousands):
<TABLE>
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $5,740 $1,840 $ - $7,580
======== ========== ========= =======
</TABLE>
13
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 53,947 $ 15 $ (46) $ 53,916
Certificates of deposit 28,589 - - 28,589
Corporate bonds and
commercial paper 23,198 4 (57) 23,145
-------- ---------- --------- --------
$105,734 $ 19 $(103) $105,650
======== ========== ========= ========
</TABLE>
At June 30, 1996, these securities were classified as follows (in thousands):
<TABLE>
<S> <C>
Cash equivalents $ 3,244
Short-term investments 100,508
Long-term investments 9,562
--------
$113,314
========
</TABLE>
The Company has agreed to maintain investments of $27,260,000 as of June 30,
1996 at certain banks as collateral for loans from those banks. See Note 7.
Note 5
Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw materials $ 5,156 $ 4,965
Work in process 8,606 9,382
Finished goods 8,080 6,436
------- -------
$21,842 $20,783
======= =======
</TABLE>
Inventories have various expiration dates. The Company continually
evaluates the extent of inventory reserves considered necessary based upon the
future regulatory and commercial status of such products. There can be no
assurance that reserves for inventories will not be required in the future.
14
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 6
Intangibles and Other Assets
Intangibles and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Licenses $ 4,047 $ 4,126
Goodwill 5,330 5,502
Debt issuance costs 834 3,854
Prepaid royalties 1,662 1,697
Deferred charges related to ReoPro 12,000 -
Other 934 2,230
------- -------
$24,807 $17,409
======= =======
</TABLE>
Licensing agreements, goodwill and other assets are reviewed for impairment
whenever events or circumstances provide evidence that suggest that the carrying
amount of the asset may not be recoverable. Impairment is evaluated by using
identified or expected cashflows.
Note 7
Debt
Notes Payable
Notes payable at June 30, 1996 and December 31, 1995 consists of $7,059,000
and $7,500,000, respectively, of borrowings under short-term notes at an
interest rate of 3.51 percent per annum at June 30, 1996, payable in Dutch
guilders no later than September 19, 1996. These borrowings are secured by
investments at the lending bank of $7,260,000 (see "Loan Covenants").
15
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- -------------
<S> <C> <C>
7-1/4 percent Notes $ - $106,640
6-3/4 percent Debentures 54,765 125,000
Mortgage Debt 7,545 9,101
Long-term Note 7,729 9,188
-------- --------
70,039 249,929
Current Portion (15,274) (18,289)
-------- --------
$ 54,765 $231,640
======== ========
</TABLE>
7-1/4 Percent Notes
On March 20, 1996, the Company called for redemption the 7-1/4%
Convertible Notes at a redemption price of 103.222 percent of the outstanding
principal amount. The outstanding principal amount of the 7-1/4% Convertible
Notes was $106,640,000 at December 31, 1995. The Company issued approximately
3,831,000 shares of common stock upon conversion of approximately $106,302,000
principal amount of the 7-1/4% Convertible Notes and paid $338,000 in cash to
redeem the remaining 7-1/4% Convertible Notes outstanding which were not
converted.
6-3/4% Convertible Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of
6-3/4% Convertible Debentures due October 16, 2001. The 6-3/4% Convertible
Debentures were initially convertible by the holders into approximately
2,049,000 shares of the Company's Common Stock at a conversion price of $61.00
per share at any time prior to redemption or maturity. The 6-3/4% Convertible
Debentures are subordinated in right of payment to senior indebtedness at June
30, 1996 of $15,274,000 and all future senior indebtedness of the Company. The
6-3/4% Convertible Debentures are redeemable by the Company for cash in whole
or in part until October 16, 2001 at amounts ranging up to 102 percent of the
principal amount of the 6-3/4% Convertible Debentures. The Company may be
required to redeem the 6-3/4% Convertible Debentures at their principal amount
at the option of the holders of the 6-3/4% Convertible Debentures in certain
limited circumstances, including a change in control of the Company.
In the second quarter of 1996, the Company purchased $70,235,000 of its
6-3/4% Convertible Debentures which were subsequently retired. At June 30,
1996, $54,765,000 of the 6-3/4% Convertible Debentures remain outstanding and
are convertible into approximately 898,000 shares of the Company's
16
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
common stock.
Long-term Notes
The Company borrowed $7,729,000 under a 9-1/2% percent long-term note which
is payable in Dutch guilders. A Netherlands loan, with an outstanding balance
of approximately $5,632,000 at June 30, 1996, is payable in Dutch guilders and
bears interest at an annual rate of 8-1/4% percent through its final maturity
date of September 30, 2011. At June 30, 1996 and December 31, 1995 these loans
are classified as short-term debt (see "Loan Covenants").
Loan Covenants
The Company is required to maintain certain investments at the lending bank,
which at June 30, 1996 totaled $20,000,000. The Company has classified the
$15,274,000 of debt as short-term. Additionally, $7,059,000 of the Company's
short-term debt is secured by investments at the lending bank of $7,260,000. If
cash flows continue to be negative, the Company's ability to service its debt
may be impaired.
Net Gain on Extinguishment of Debt
In the second quarter of 1996, the Company purchased and retired $70,235,000
principal amount of the 6-3/4% Convertible Debentures due October, 2001. The
6-3/4% Convertible Debentures were purchased at less than face value resulting
in an extraordinary gain of $3,475,000. Partially offsetting the extraordinary
gain are charges of $2,770,000 relating to the writeoff of debt issuance costs.
Note 8
Contract Revenues
Pursuant to the Company's agreements with Tanabe Seiyaku Co. Ltd.
("Tanabe"), the Company recognized revenues of $1,000,000, for the three and six
months ended June 30, 1996 upon the achievement of milestones relating to the
development of CenTNF.
Pursuant to the Company's agreement with Lilly, the Company recognized
revenues of $3,000,000 and $6,000,000 for the three and six months ended June
30, 1995 upon the achievement of milestones related to the development of
ReoPro.
17
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 9
Income Taxes
The Company has net operating loss carryforwards available in the United
States for federal income tax purposes of approximately $604,000,000 which will
begin to expire at various dates from the year 2005 to 2011. Net operating loss
carryforwards may also be subject to various annual and other limitations on
the amounts to be utilized.
Realization of net deferred tax assets related to the Company's loss
carryforwards and other items is dependent on future earnings, which are
uncertain. Accordingly, a valuation reserve was recorded by the Company and,
therefore, the Company had no net deferred tax assets at June 30, 1996.
Note 10
Supplemental Information on Cash Flows
Interest paid for the six months ended June 30, 1996 and 1995 was $4,764,000
and $9,365,000, respectively.
Income tax payments for the six months ended June 30, 1996 and 1995 were
$4,600 and $9,000, respectively.
18
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
Any statements released by Centocor that are forward looking are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that forward looking statements
involve risks and uncertainties which may affect the Company's business and
prospects, including economic, competitive, governmental, technological and
other factors discussed in the Company's filings with the Securities and
Exchange Commission.
Results of Operations
General
Centocor is a biotechnology company, which, since inception, has incurred
significant operating expenses developing therapeutic and diagnostic products.
The Company has also incurred significant special charges. To date, product
sales have not produced sufficient revenues to cover the Company's operating
expenses. Consequently, the Company has experienced substantial operating
losses.
The Company commenced commercial sales of two therapeutic products in 1995:
ReoPro in January 1995 and Panorex in February 1995. Because of positive
findings at interim analyses, in December 1995 the Company halted two clinical
trials of ReoPro designed to expand its authorized use. After completing the
data analyses for these trials, the Company expects to seek additional
regulatory approvals in the United States and Europe for expanded indications.
The level of the Company's research and development expenses has been primarily
dependent upon the extent of clinical trial activity. Further, the impact on
the level of sales of ReoPro of the early termination of these two trials will
depend upon the timing and extent of any future regulatory approvals and the
degree of market acceptance of ReoPro. The Company is highly dependent upon the
ability of its marketing partners to develop and expand the markets for both
ReoPro and Panorex.
Three months ended June 30, 1996 compared to the three months ended June 30,
1995
The increase in sales for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 is principally due to the
increase in sales of ReoPro to Lilly.
For the three months ended June 30, 1996, ReoPro sales to Lilly were
$18,497,000 and Lilly's announced sales to end-users were approximately
$37,200,000. For the three months ended June 30, 1995 ReoPro sales to Lilly were
$4,535,000. The Company's sales of Panorex to Glaxo Wellcome for the three
months ended June 30, 1996 were $634,000 as compared to $1,753,000 for the three
months ended June 30, 1995 as excess inventory levels held by Glaxo Wellcome
continue to be reduced through sales to end users. The level of the Company's
sales of ReoPro to Lilly and of Panorex to Glaxo Wellcome is dependent upon the
orders placed and the levels of inventory maintained by each of these marketing
partners. Diagnostic product sales for the three months ended June 30, 1996 were
approximately $10,395,000 as compared to $11,430,000 for the three months ended
June 30, 1995. An increase in the unit volume of diagnostic products on
automated diagnostic platforms, offset by sales price reductions on certain
diagnostic products resulted in the decrease in diagnostic sales for the three
months ended June 30, 1996 as compared to the three months ended June 30, 1995.
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
The level of future sales of both diagnostic and therapeutic products
will be dependent upon several factors, including, but not limited to, the
timing and extent of future regulatory approvals of the Company's products,
approval and commercialization of competitive products and ultimately the degree
of acceptance of the Company's products in the marketplace. For the Company's
diagnostic products, the level of sales is also dependent upon the extent of and
timing of reagent sales to marketing partners developing new automated
instruments, as well as the mix of completed diagnostic kit sales and sales of
antibody to collaborative partners who pay the Company for such antibody upon
sales of their respective diagnostic kits incorporating the Company's antibody.
The Company is currently attempting to expand its diagnostic distribution
channels to include additional distributors on a non-exclusive basis, which the
Company expects will result in reduced sales prices on certain diagnostic
products. The Company's gross margins from sales of antibodies to partners are
higher than its gross margin from sales of its completed diagnostic kits.
The decrease in contract revenues for the three months ended June 30,
1996 as compared to the three months ended June 30, 1995 was due to the
achievement of $3,000,000 from certain milestones in 1995 pursuant to the
Company's agreements with Lilly. Contract revenues for the three months ended
June 30, 1996 consisted primarily of $1,000,000 related to the achievement of
certain CenTNF milestones pursuant to the Company's agreements with Tanabe.
Cost of sales increased for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 due primarily to an increase in
the volume of ReoPro. The Company is required to make certain royalty payments,
based on sales of products, which payments represent a significant percentage of
cost of sales. The Company expects an increase in cost of sales throughout
1996, the extent of which will depend primarily on the volume and mix of
products sold.
Research and development expenses for the three months ended June 30,
1996 decreased as compared to the three months ended June 30, 1995 due
principally to the capitalization as inventory in 1996 of certain costs
associated with the manufacture of ReoPro. For the three months ended June 30,
1995 such costs were not associated with the production of inventory and
therefore were expensed as research and development expenses. The level of the
Company's total research and development expenses in future periods will be
dependent upon the extent and timing of future clinical trial-related
activities.
Marketing, general and administrative expenses for the three months
ended June 30, 1996 increased as compared to the three months ended June 30,
1995 primarily due to increased ReoPro market development efforts. The levels
of the Company's marketing, general and administrative expenses may increase in
future periods as compared to current levels if the Company expands its market
development activities in connection with sales of therapeutic and diagnostic
products.
Interest income increased for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 due principally to the increase
in the Company's average investment balances as a result of the public equity
offering in the first quarter. Interest income in future periods will depend
primarily on the level of the Company's investments and the rates of return
obtained on such investments.
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
Interest expense decreased for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 due principally to the
conversion of the Company's 7-1/4% Convertible Subordinated Notes due February
1, 2001. Interest expense in future periods will depend upon the level of debt
outstanding.
Other expenses increased for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995 due to a decrease in the equity
in earnings of a company in which Centocor has an equity investment. As the
investee company's operating results fluctuate from period to period, Centocor's
equity in its earnings will also fluctuate. The Company does not expect any
significant income from this investment in the near future.
Six months ended June 30, 1996 compared to the six months ended June 30,
1995
The increase in sales for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995 is principally due to the continued increase
in sales of ReoPro. ReoPro sales commenced in January 1995.
For the six months ended June 30, 1996, ReoPro sales to Lilly were
$28,421,000 and Lilly's announced sales to end-users were approximately
$60,000,000. For the six months ended June 30, 1995 ReoPro sales to Lilly were
$12,447,000. The Company's sales of Panorex to Glaxo Wellcome for the six months
ended June 30, 1996 were $2,073,000 as compared to $3,084,000 for the six months
ended June 30, 1995 as excess inventory levels held by Glaxo Wellcome continue
to be reduced through sales to end users. The level of the Company's sales of
ReoPro to Lilly and of Panorex to Glaxo Wellcome is dependent upon the orders
placed and the levels of inventory maintained by each of these marketing
partners, which in the six months ended June 30, 1995 included initial launch
period quantities. Diagnostic product sales for the six months ended June 30,
1996 were approximately $20,742,000 as compared to $21,506,000 for the six
months ended June 30, 1995. An increase in the unit volume of diagnostic
products on automated diagnostic platforms, offset by sales price reductions on
certain diagnostic products resulted in the decrease in diagnostic sales for the
six months ended June 30, 1996 as compared to the six months ended June 30,
1995.
The Company expects therapeutic product sales, primarily of ReoPro to
increase in the second half of 1996 as compared to the first half as market
acceptance continues to grow. Panorex sales are expected to be lower in the
second half of 1996 as compared to the first half as Glaxo Wellcome continues to
reduce excess inventory levels through sales to end users. Diagnostic product
sales are expected to continue at about the same level as in the first half of
the year.
The level of future sales of both diagnostic and therapeutic products will
be dependent upon several factors, including, but not limited to, the timing and
extent of future regulatory approvals of the Company's products, approval and
commercialization of competitive products and ultimately the degree of
acceptance of the Company's products in the marketplace. For the Company's
diagnostic products, the level of sales is also dependent upon the extent of and
timing of reagent sales to marketing partners developing new automated
instruments, as well as the mix of completed diagnostic kit sales and sales of
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
antibody to collaborative partners who pay the Company for such antibody upon
sales of their respective diagnostic kits incorporating the Company's antibody.
The Company is currently attempting to expand its diagnostic distribution
channels to include additional distributors on a non-exclusive basis, which the
Company expects will result in reduced sales prices on certain diagnostic
products. The Company's gross margins from sales of antibodies to partners are
higher than its gross margin from sales of its completed diagnostic kits.
The decrease in contract revenues for the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995 was primarily due to the
achievement of certain milestones in 1995 primarily pursuant to the Company's
agreements with Lilly. The level of contract revenues in future periods will
depend primarily upon the extent to which the Company enters into other
collaborative contractual arrangements, if any, and its achievement of
milestones under current arrangements.
Cost of sales increased for the six months ended June 30, 1996 as compared
to the six months ended June 30, 1995 due primarily to an increase in the volume
of ReoPro sales. The Company is required to make certain royalty payments,
based on sales of products, which payments represent a significant percentage of
cost of sales. The Company expects an increase in cost of sales throughout
1996, the extent of which will depend primarily on the amount and mix of
products sold.
Research and development expenses for the six months ended June 30, 1996
decreased as compared to the six months ended June 30, 1995 due principally to
the capitalization as inventory in 1996 of certain costs associated with the
manufacture of ReoPro and Panorex. For the six months ended June 30, 1995 such
costs were not associated with the production of inventory and therefore were
expensed as research and development expenses. The level of the Company's total
research and development expenses in future periods will be dependent upon the
extent of future clinical trial-related activities. The Company expects total
research and development expenses for 1996 to be below total 1995 levels
primarily due to the above mentioned manufacturing capitalization.
Marketing, general and administrative expenses for the six months ended June
30, 1996 increased as compared to the six months ended June 30, 1995 primarily
due to ReoPro market development efforts. The levels of the Company's marketing,
general and administrative expenses may increase in future periods as compared
to current levels if the Company expands its market development activities in
connection with sales of therapeutic and diagnostic products.
Interest income decreased for the six months ended June 30, 1996 as compared
to the six months ended June 30, 1995 due principally to a decrease in interest
rates on investments and a decrease in the Company's average investment
balances. Interest income in future periods will depend primarily on the level
of the Company's investments and the rates of return obtained on such
investments.
Interest expense decreased for the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995 due principally to the conversion
of the Company's 7-1/4% Convertible Notes due February 1, 2001. Interest
expense will no longer be incurred on these notes. Interest expense in the
second half of 1996 is expected to be lower than reported in the first half due
to both the conversion of
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
the 7-1/4% Convertible Notes and the purchase of $70,235,000 of the 6-3/4%
Convertible Debentures.
Other expenses increased for the six months ended June 30, 1996 as compared
to the six months ended June 30, 1995 due to a decrease in the Company's equity
in earnings of a company in which Centocor has an equity investment. As the
investee company's operating results fluctuate from period to period, Centocor's
equity in its earnings will also fluctuate. The Company does not expect any
significant income from this investment in the near future.
Per Share Calculations
At June 30, 1996, approximately 4,660,488 shares of the Company's
Common Stock were issuable upon exercise of outstanding options and warrants and
upon vesting of restricted stock awards. Options, warrants, and stock awards are
considered Common Stock equivalents for purposes of per share data. The Company
uses the weighted average number of shares outstanding in calculating per share
data. The effect of Common Stock issuable upon the exercise of Common Stock
equivalents is reflected in the per share data calculation only if the effect
would be dilutive. The approximately 898,000 shares issuable upon conversion of
the 6-3/4% Convertible Debentures are not considered Common Stock equivalents
and are not included in the calculation of primary per share data but are
included in the calculation of fully diluted per share data if their effect is
dilutive.
No Common Stock equivalents or shares issuable upon conversion of the
6-3/4% Convertible Debentures were included in the per share calculations for
any periods presented since to do so would have been antidilutive as the Company
has recorded net losses in all periods presented. In March 1996, the Company
completed a public offering of 4,025,000 shares and in April 1996 the Company
issued 3,450,000 shares as a result of conversion of the Company's 7-1/4%
Convertible Notes. These shares have been included in the per share
calculations and, depending upon the market value of the Company's Common Stock
and its results of operations for such periods, the Company may be required to
include its then outstanding Common Stock equivalents as well as shares issuable
upon the conversion of the 6-3/4% Convertible Debentures in its calculations of
per share data for such periods if the effect would be dilutive.
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
Liquidity and Capital Resources
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. The Company's product sales have
not produced sufficient revenues to cover the Company's operating costs.
Consequently, the Company has experienced substantial net cash outflows, which
have been only partially offset by significant contract revenues received
through collaborative alliances with pharmaceutical companies and the Company's
financing activities.
The Company's future financial condition is highly dependent upon the
reduction of the Company's rate of net cash outflows and, ultimately, upon the
achievement of significant and sustained levels of therapeutic product sales.
For the six months ended June 30, 1996, sales of the Company's products,
including ReoPro and Panorex, did not generate sufficient revenue to result in
positive cash flow. Under the Company's strategy of entering into collaborative
alliances with established pharmaceutical companies, the Company generally
shares sales revenues from products covered by such arrangements with its
partners. There can be no assurance that those products, in conjunction with
the Company's therapeutic product candidates under development and diagnostic
products, will achieve a level of sales sufficient to generate positive cash
flow from operations for the Company, given the current and currently
anticipated future scope of the Company's operations. The level of future sales
of both diagnostic and therapeutic products will be dependent upon several
factors, including, but not limited to, the timing and extent of future
regulatory approvals of the Company's products, approval and commercialization
of competitive products and the degree of acceptance of the Company's products
in the marketplace. There can be no assurance that FDA or other regulatory
approvals expanding the authorized use of ReoPro and Panorex or permitting the
commercial sale of any of the Company's product candidates under development
will be obtained. Failure to obtain additional timely FDA or other regulatory
approvals for the use of ReoPro and Panorex or other product candidates will
have a material adverse effect on the Company.
Until significant and sustained levels of therapeutic product sales
are achieved, the Company may need to secure significant additional funding in
the future from collaborative arrangements with pharmaceutical companies or from
the capital markets. There can be no assurance that sufficient additional
funding will be available to the Company or that the Company can obtain
additional collaborations with established pharmaceutical companies and receive
payments for product rights and/or the achievement of milestones under such
collaborative agreements. Even if the Company obtains such funding, there can
be no assurance that such funding will be sufficient to sustain the Company's
operations until it generates positive cash flows from operations.
At June 30, 1996, the Company had cash, cash equivalents and
investments of $169,957,000, including equity investments of $7,580,000. For the
six months ended June 30, 1996, the Company had negative cash flows from
operations of $37,934,000. The Company's total cash flows for the six months
ended June 30, 1996 included the receipt of $125,916,000, net of stock issuance
costs, from a public offering of 4,025,000 shares of the Company's Common Stock
and the receipt of $13,529,000 from the exercise of warrants and options to
purchase shares of the Company's Common Stock. The extent and timing of future
warrant and option exercises, if any, are primarily dependent upon the market
price of the
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
Company's Common Stock and general financial market conditions, as well as the
exercise prices and expiration dates of the warrants and options.
The Company's total cash, cash equivalents and investments increased
by $32,751,000 from December 31, 1995, principally as a result of cash received
from the stock offering and the exercise of warrants and options as discussed
above partially offset by the purchase of $70,235,000 of the Company's 6-3/4%
Convertible Debentures in the second quarter. In the first quarter of 1996, the
Company completed a public equity offering of 4,025,000 shares of common stock.
The net proceeds to the Company from the offering were $125,916,000. Upon
completion of the offering, the Company initiated redemption of the remaining
7-1/4% Convertible Notes due February 2001 most of which were converted into
common stock in the second quarter of 1996. At June 30, 1996, the 7-1/4%
Convertible Notes were eliminated. Also in the second quarter, the Company
purchased $70,235,000 of the 6-3/4% Convertible Debentures. At June 30, 1996,
$54,765,000 of the 6-3/4% Convertible Debentures remain outstanding. The
Company believes that its cash, cash equivalents and investments will be
sufficient to fund its operations through at least the end of 1996.
The Company is required to maintain certain investments at the lending
bank, which at June 30, 1996 totaled $20,000,000. The Company has classified
the $15,274,000 of debt as short-term. Additionally, $7,059,000 of the Company's
short-term debt is secured by investments at the lending bank of $7,260,000. If
cash flows continue to be negative, the Company's ability to service its debt
may be impaired.
Gross plant and equipment at June 30, 1996 decreased as compared to
December 31, 1995, principally due to the impact of exchange rates on property
and equipment denominated in foreign currencies partially offset by the
investment of $1,773,000 for the purchase of property improvements and
equipment. At the Company's present level of operations, the Company currently
maintains idle facilities and equipment. The Company continually evaluates the
future needs for its facilities and equipment. There can be no assurance that
reserves to reduce the carrying value of certain property, plant and equipment
will not be required in the future.
Accounts receivable at June 30, 1996 increased as compared to December
31, 1995 primarily due to increased sales of ReoPro to Lilly.
The Company has an agreement which requires it to make certain future
royalty payments depending on the level of ReoPro sales. In the second quarter
of 1996, the Company prepaid such royalties, therefore, prepaid expenses at June
30, 1996 increased as compared to December 31, 1995.
Other current assets increased as compared to December 31, 1995
resulting from the amendment to the Company's Sales and Distribution Agreement
with Lilly and other activities in connection with the commercialization and
market development of ReoPro.
Long-term investments at June 30, 1996 increased as compared to
December 31, 1995, principally due to the purchase of securities with maturities
in excess of one year classified as held to
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
- - --------------------------------------------------------------------------------
of Operations
- - -------------
maturity.
Intangible and other assets increased as compared to December 31, 1995
resulting from the amendment to the Company's Sales and Distribution Agreement
with Lilly and other activities in connection with the commercialization and
market development of ReoPro.
In consideration of the amendment to the Sales and Distribution
Agreement and other activities in connection with the commercialization and
market development of ReoPro, Centocor issued 920,716 common shares to Lilly in
July 1996. At June 30, 1996, the Company had a current liability to Lilly of
$27,000,000 pending the final delivery of the shares.
Centocor has an exclusive option to purchase the limited partnership
interests in CPIII. Centocor's option to purchase the limited partnership
interests in CPIII is exercisable upon the earlier of (a) each limited partner
having received distributions related to sales of the CPIII products equal to
15% of the total capital contributions of such limited partner (approximately
$7,926,000 in the aggregate) and the expiration of at least 24 months after the
first commercial sale of a CPIII product or (b) the expiration of at least 48
months after the first commercial sale of a CPIII product; but, in any event,
not prior to the expiration of the then applicable long-term capital gains
holding period after the expenditure by the Company of all funds paid to it
pursuant to the Development Agreement with CPIII. Centocor commenced commercial
sales of ReoPro in January 1995. If the Company elects to exercise this option,
the Company must make an advance payment of approximately $13,598,000 in cash
or, at the Company's election, approximately $15,229,000 in shares of the
Company's Common Stock, and future payments generally of six percent of sales of
products developed by CPIII. If Centocor does not exercise this option, it will
have no rights to the technology or products developed on behalf of CPIII,
including ReoPro. The Company expects that the purchase option will become
exercisable during the first quarter of 1997.
The Company has entered into indemnity agreements with CPIII, the
former limited partners of CCIP and CPII pursuant to which the Company would be
obligated, under certain circumstances, to compensate these parties for the fair
market value of their respective interests under any license agreements with the
Company relating to their respective products which are lost through the
exercise by the U.S. government of any of its rights relating to the licensed
technology. The amount of any such loss would be determined annually by
independent appraisal.
Legal Proceedings
The Company is subject to certain litigation, as more fully described
in Note 2 of the Company's Consolidated Financial Statements. While it is not
possible to predict with certainty the eventual outcome of these matters, the
Company believes that such legal proceedings will not have a material adverse
effect on the Company.
26
<PAGE>
Part II OTHER INFORMATION
Item 1: Legal Proceedings
See Note 2 to the Company's Consolidated Financial Statements, which is
incorporated herein by reference.
Item 4: Submission of Matters to a Vote of Security Holder.
(a) The Annual Meeting of Shareholders was held on May 15, 1996 at the
Company's principal office at 200 Great Valley Parkway, Malvern,
Pennsylvania.
(b) With respect to the election of directors for a term of one year
expiring on the date of the 1997 annual meeting of shareholders,
each nominee was elected with the following vote:
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Each Director From Each Director
------------------- -------------------
<S> <C> <C>
Anthony B. Evnin 46,892,056 260,569
William F. Hamilton 46,889,650 262,975
David P. Holveck 46,886,449 266,176
Antonie T. Knoppers 46,866,998 285,627
Ronald A. Matricaria 46,887,465 265,160
Hubert J.P. Schoemaker 46,891,840 260,785
Richard D. Spizzirri 46,862,896 289,729
Lawrence Steinman 46,025,864 1,126,761
Jean C. Tempel 46,888,854 263,771
</TABLE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
The Registrant has filed the following reports on Form 8-K since
the beginning of the quarter ended June 30, 1996:
Date of Report Item Covered
-------------- ------------
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Centocor, Inc.
(Registrant)
Date: August 14, 1996 /s/David P. Holveck
---------------------- ------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1996 /s/Dominic J. Caruso
---------------------- ------------------------------
Dominic J. Caruso
Vice President-Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR,
INC. CONSOLIDATED BALANCE SHEETS CENTOCOR, INC. CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 59,887
<SECURITIES> 100,508
<RECEIVABLES> 27,007
<ALLOWANCES> 0
<INVENTORY> 21,842
<CURRENT-ASSETS> 238,677
<PP&E> 140,243
<DEPRECIATION> 76,654
<TOTAL-ASSETS> 336,635
<CURRENT-LIABILITIES> 77,263
<BONDS> 54,765
0
0
<COMMON> 677
<OTHER-SE> 200,580
<TOTAL-LIABILITY-AND-EQUITY> 336,635
<SALES> 51,236
<TOTAL-REVENUES> 52,468
<CGS> 25,108
<TOTAL-COSTS> 25,108
<OTHER-EXPENSES> 41,129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,731
<INCOME-PRETAX> (14,726)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,726)
<DISCONTINUED> 0
<EXTRAORDINARY> 705
<CHANGES> 0
<NET-INCOME> (14,021)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
