<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 September 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 November 1, 1996 were 69,122,053.
<PAGE>
PART I: FINANCIAL INFORMATION
- - -----------------------------
ITEM 1: FINANCIAL STATEMENTS
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------------------------- ------------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 4 and 7) $ 59,135 $ 16,002
Short-term investments (Notes 4 and 7) 111,137 115,435
Accounts and contracts receivable 25,538 11,489
Interest receivable 2,365 1,648
Inventory (Note 5 ) 22,976 20,783
Prepaid expenses 1,316 2,959
Other current assets 671 653
------------------- ---------------
223,138 168,969
PROPERTY, PLANT AND EQUIPMENT (NOTE 7):
Land and buildings 72,039 72,980
Equipment, furniture, fixtures and
improvements 69,194 69,884
------------------- ---------------
141,233 142,864
Less accumulated depreciation (78,801) (74,727)
------------------- ---------------
62,432 68,137
LONG-TERM INVESTMENTS (NOTE 4) 27,167 5,769
INTANGIBLE AND OTHER ASSETS (NOTE 6) 35,659 17,409
------------------- ---------------
TOTAL ASSETS $348,396 $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)
September 30, December 31,
1996 1995
- - ------------------------------------------- --------------- ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,828 $4,126
Accrued expenses 29,507 26,139
Unearned revenues - 83
Note payable (Note 7 ) 7,059 7,500
Current portion of
long-term debt (Note 7 ) 15,141 18,289
-------------- --------------
56,535 56,137
Long-term debt (Note 7) 54,765 231,640
Other liabilities 1,280 1,286
Minority interest 3,319 617
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
69,120 and 58,538 issued and
outstanding at September 30, 1996 and
December 31,1995, respectively 691 585
Additional paid-in capital 1,049,372 770,068
Accumulated Deficit (824,495) (808,839)
Unrealized gain on marketable
securities 1,673 2,342
Cumulative foreign currency
translation adjustments 5,256 6,448
-------------- --------------
232,497 (29,396)
-------------- --------------
Total liabilities and
shareholders' equity $348,396 $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 September 30, 1996 1995
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $38,309 $15,860
Contracts 870 3,295
-------------- --------------
39,179 19,155
COSTS AND EXPENSES:
Cost of sales 17,652 7,271
Research and development 15,174 18,376
Marketing, general and administrative 8,537 7,643
-------------- --------------
41,363 33,290
OTHER INCOME (EXPENSES):
Interest income 2,332 2,425
Interest expense (1,631) (2,592)
Other income (expense) (152) 2,147
-------------- --------------
549 1,980
NET LOSS ($1,635) ($12,155)
============== ==============
LOSS PER SHARE ($0.02) ($0.21)
============== ==============
Weighted average number of shares
outstanding 68,940 58,347
============== ==============
</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 nine months ended September 30, 1996 1995
- - ---------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $89,545 $52,933
Contracts 2,102 10,971
------------ ------------
91,647 63,904
COSTS AND EXPENSES:
Cost of sales 42,760 23,996
Research and development 41,018 48,885
Marketing, general and administrative 23,822 22,228
------------ ------------
107,600 95,109
OTHER INCOME (EXPENSES):
Interest income 7,819 8,008
Interest expense (7,362) (12,424)
Litigation settlement 0 (3,750)
Other income (expense) (865) 1,665
------------ ------------
(408) (6,501)
LOSS BEFORE EXTRAORDINARY ITEM ($16,361) ($37,706)
------------ ------------
EXTRAORDINARY ITEM:
NET GAIN ON EXTINGUISHMENT OF DEBT 705 -
------------ ------------
NET LOSS ($15,656) (37,706)
============ ============
NET LOSS PER SHARE:
BEFORE EXTRAORDINARY ITEM ($0.25) ($0.65)
EXTRAORDINARY ITEM 0.01 -
------------ ------------
NET LOSS PER SHARE ($0.24) ($0.65)
============ ============
Weighted average number of shares
outstanding 65,584 58,125
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
For the nine months ended September 30, 1996 1995
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net loss ($15,656) ($37,706)
Adjustments to reconcile net loss to net cash
used for operating activities:
Net gain on extinguishment of debt (705) -
Net gain on long-term investments - (919)
Provisions for depreciation and amortization 10,483 12,628
Amortization of deferred income (83) (1,657)
Other 1,382 121
Changes in assets and liabilities:
Accounts and contracts receivable (14,140) (3,729)
Interest receivable (737) (1,359)
Inventory (3,017) (4,681)
Prepaid expenses (932) (1,362)
Other current assets (20) 186
Intangible and other assets (15,127) (1,380)
Accounts payable 782 (2,998)
Unearned revenue - 81
Accrued expenses and other liabilities 7,940 (386)
Other long-term liabilities (131) 283
---------- ----------
Net cash used for operating activities (29,961) (42,878)
Cash flows used for investing activities:
Purchases of investments (97,535) (108,893)
Sales of investments 83,050 106,400
Net purchases of fixed assets (2,889) (3,668)
---------- ----------
Net cash used for investing activities (17,374) (6,161)
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 34,356 17,003
Reduction of long-term debt and notes payable (69,242) (8,041)
---------- ----------
Net cash from financing activities 91,030 8,962
Effect of foreign currency translation (562) 334
---------- ----------
Net increase (decrease) in cash and cash equivalents 43,133 (39,743)
Beginning cash and cash equivalents 16,002 78,925
---------- ----------
Ending cash and cash equivalents $59,135 $39,182
========== ==========
</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 September 30, 1996 and December 31, 1995 and
the consolidated results of operations for the three and nine months ended
September 30, 1996 and 1995 and consolidated cash flows for the nine months
ended September 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, since inception,
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
7
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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
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
for 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
8
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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 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
virtually complete, 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 most of plaintiff's 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 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.
Plaintiff's motion for class certification has been denied and plaintiff has
petitioned for rehearing. 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.)
9
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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.
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. Discovery is beginning and
plaintiff has moved for certification of a class of all former limited partners
of CPII. Prior to the dismissal of the New York action, a similar suit was filed
by another former CPII 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
10
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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.
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
11
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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 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.
The Company has an agreement which required it to make certain future
payments depending on the level of ReoPro sales. The Company paid such
obligation in 1996 and included such payment in intangible and other assets on
its consolidated balance sheets. Beginning in 1997, this payment will begin to
be reflected in operating results based upon ReoPro 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
12
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
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 no longer has 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.
Relationship with Fujisawa Pharmaceutical Co., Ltd.
---------------------------------------------------
On August 15, 1996, Centocor entered into an agreement with Fujisawa
Pharmaceutical Co., Ltd. ("Fujisawa"), appointing Fujisawa as the exclusive
distributor of ReoPro(TM), in Japan. As compensation for its appointment as
exclusive distributor, Fujisawa made a nonrefundable $15,000,000 payment to the
Company, and may make future milestone payments.
The Company and Fujisawa will co-develop ReoPro(TM) in Japan and jointly
file for Japanese product approval. Fujisawa shall bear all external costs
associated with the clinical development of ReoPro(TM) 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.
13
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
At September 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 $ 6,456 $ 1,673 $ - $ 8,129
===== ===== ====== =====
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
----- ----- ------ -----
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $ 93,225 $83 $(10) $ 93,298
Certificates of deposit 28,596 28,596
Corporate bonds and
commercial paper 16,398 3 (25) 16,376
-------- --- -- ------
$138,219 $86 $(35) $138,270
======= == == =======
</TABLE>
At September 30, 1996, these securities were classified as follows (in
thousands):
<TABLE>
<S> <C>
Cash equivalents $ 8,044
Short-term investments 111,137
Long-term investments 27,167
-------
$146,348
=======
</TABLE>
The Company has agreed to maintain investments of $27,260,000 as of
September 30, 1996 at certain banks as collateral for loans from those banks.
See Note 7.
14
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 5
INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials $ 5,548 $4,965
Work in process 10,320 9,382
Finished goods 7,108 6,436
------- ------
$22,976 $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.
Note 6
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Licenses $ 5,535 $4,126
Goodwill 5,244 5,502
Debt issuance costs 794 3,854
Prepaid royalties 1,594 1,697
Deferred charges 21,356 -
All other 1,136 2,230
----- ------
$35,659 $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.
15
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 7
DEBT
Notes Payable
Notes payable at September 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 3.23 percent per annum at September 30, 1996, payable in
Dutch guilders no later than December 19, 1996. These borrowings are secured by
investments at the lending bank of $7,260,000 (see "Loan Covenants").
Long-term debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 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 7,412 9,101
Long-term Note 7,729 9,188
-------- --------
69,906 249,929
Current Portion (15,141) (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
16
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
subordinated in right of payment to senior indebtedness at September 30, 1996 of
$22,200,000 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 September 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 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 $5,500,000 at September 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 September 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 September 30, 1996 totaled $20,000,000. The Company has
classified the $15,141,000 of debt secured by such investments as short-term. In
October 1996, the Company repaid the $15,141,000 to the lending bank to
eliminate all of the long-term notes and mortgage classified as current.
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.
17
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- - --------------------------------------------------------------------------------
Note 8
CONTRACT REVENUES
Pursuant to the Company's agreements with Tanabe Seiyaku Co. Ltd. The
Company recognized revenues of $1,000,000, for the nine months ended September
30, 1996 upon the achievement of milestones relating to the development of
CenTNF.
Pursuant to the Company's agreements with Lilly, the Company recognized
revenues of $3,095,000 and $9,095,000 for the three and nine months ended
September 30, 1995 upon the achievement of milestones related to the development
of ReoPro.
Note 9
INCOME TAXES
The Company has net operating loss carryforwards available in the United
States for federal income tax purposes of approximately $606,000,000 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 September 30, 1996.
Note 10
SUPPLEMENTAL INFORMATION ON CASH FLOWS
Interest paid for the nine months ended September 30, 1996 and 1995 was
$5,349,000 and $14,053,000, respectively.
Income tax payments for the nine months ended September 30, 1996 and 1995
were $13,195 and $9,000, respectively.
Unrealized gains on equity investments classified as available for sale at
September 30, 1996 and 1995 were $1,673,000 and $2,342,000, 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 September 30, 1996 compared to the three months ended
September 30, 1995
The increase in sales for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 is principally due to the
increase in sales of ReoPro to Lilly.
For the three months ended September 30, 1996, ReoPro sales to Lilly were
$27,743,000 and Lilly's announced sales to end-users were approximately
$38,500,000. For the three months ended September 30, 1995 ReoPro sales to Lilly
were $1,636,000. The Company had no sales of Panorex to Glaxo Wellcome for the
three months ended September 30, 1996 as excess inventory levels held by Glaxo
Wellcome continue to be reduced through sales to end users. The Company's sales
of Panorex to Glaxo Wellcome for the three months ended September 30, 1995 were
$2,680,000. 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 September 30, 1996 were approximately
$10,566,000 as compared to $11,514,000 for the three months ended September 30,
1995. An increase in the unit volume of
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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 September 30, 1996 as compared to the three
months ended September 30, 1995. Diagnostic sales for the three months ended
September 30, 1995 also included an initial reagent sale to a new customer
within the oncology product line.
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 September 30,
1996 as compared to the three months ended September 30, 1995 was due to the
achievement of $3,095,000 from certain milestones in 1995 pursuant to the
Company's agreements with Lilly.
Cost of sales increased for the three months ended September 30, 1996 as
compared to the three months ended September 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 and into 1997, the extent of which will depend
primarily on the volume and mix of products sold.
Research and development expenses for the three months ended September 30,
1996 decreased as compared to the three months ended September 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 September
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
September 30, 1996 increased as compared to the three months ended September 30,
1995 primarily due to increased ReoPro market development efforts and ongoing
litigation expenses. The levels of the Company's marketing, general and
administrative expenses may increase in future periods as compared to current
levels
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
dependent upon the degree of litigation expenses incurred and if the Company
expands its market development activities in connection with sales of
therapeutic and diagnostic products.
Interest income decreased for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 due principally to the
decrease in the Company's average investment balances for the three months ended
September 30, 1996. 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 three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 due principally to the
conversion of the Company's 7 1/4% Convertible Subordinated Notes due February
1, 2001 and the Company's purchase of $70,235,000 of the 6 3/4% Convertible
Debentures. Interest expense in future periods will depend upon the level of
debt outstanding.
Other income decreased for the three months ended September 30, 1996 as
compared to the three months ended September 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.
Nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995
The increase in sales for the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995 is principally due to the
continued increase in sales of ReoPro. ReoPro sales commenced in January 1995.
For the nine months ended September 30, 1996, ReoPro sales to Lilly were
$56,164,000 and Lilly's announced sales to end-users were approximately
$98,500,000. For the nine months ended September 30, 1995 ReoPro sales to Lilly
were $14,083,000. The Company's sales of Panorex to Glaxo Wellcome for the nine
months ended September 30, 1996 were $2,073,000 as compared to $5,764,000 for
the nine months ended September 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 nine months ended September 30, 1995
included initial launch period quantities. Diagnostic product sales for the
nine months ended September 30, 1996 were approximately $31,308,000 as compared
to $33,020,000 for the nine months ended September 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 nine months ended September 30, 1996 as compared to
the nine months ended September 30, 1995. Diagnostic sales for the nine months
ended September 30, 1995 also included an
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
initial reagent sale to a new customer within the oncology product line.
The Company expects therapeutic product sales, primarily of ReoPro to
increase in the fourth quarter 1996 as compared to the third quarter 1996 as
market acceptance continues to grow. Panorex sales are expected to be lower in
1996 as compared to 1995 as Glaxo Wellcome continues to reduce excess inventory
levels through sales to end users. Diagnostic product sales in 1996 are
expected to be at about the same level as in 1995.
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 nine months ended September 30,
1996 as compared to the nine months ended September 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 nine months ended September 30, 1996 as
compared to the nine months ended September 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 as compared to 1995, the extent of which will
depend primarily on the amount and mix of products sold.
Research and development expenses for the nine months ended September 30,
1996 decreased as compared to the nine months ended September 30, 1995 due
principally to the capitalization as inventory in 1996 of certain costs
associated with the manufacture of ReoPro. For the nine months ended September
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
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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 nine months ended
September 30, 1996 increased as compared to the nine months ended September 30,
1995 primarily due to ReoPro market development efforts and ongoing litigation
expenses. 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. The Company expects total marketing,
general and administrative expenses for 1996 to be above total 1995 levels
primarily due to the above mentioned market development and litigation expenses.
Interest income decreased for the nine months ended September 30, 1996 as
compared to the nine months ended September 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 nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995 due principally to the
conversion of the Company's 7 1/4% Convertible Notes due February 1, 2001 and
the purchase of the Company's $70,235,000 of the 6 3/4% Convertible Debentures.
Interest expense in future periods will depend upon the level of debt
outstanding.
Other income decreased for the nine months ended September 30, 1996 as
compared to the nine months ended September 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 September 30, 1996, approximately 4,052,000 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
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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, in April 1996 the Company issued 3,450,000 shares
as a result of conversion of the Company's 7 1/4% Convertible Notes and in July
1996, the Company issued 920,716 in connection with its agreements with Lilly.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating expenses, since inception,
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 nine months ended September 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 for 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
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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 September 30, 1996, the Company had cash, cash equivalents and
investments of $197,439,000, including equity investments of $8,129,000. For the
nine months ended September 30, 1996, the Company had negative cash flows from
operations of $29,961,000. The Company's total cash flows for the nine months
ended September 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, $15,000,000 in connection with its agreements with Fujisawa and
the receipt of $19,356,000 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 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
$60,233,000 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 third quarter of 1996, the
Company received $15,000,000 in connection with its agreements with Fujisawa. 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. Also in the second quarter, the Company purchased $70,235,000 of the
6 3/4% Convertible Debentures. At September 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 1997.
The Company is required to maintain certain investments at the lending
bank, which at September 30, 1996 totaled $20,000,000. The Company has
classified the $15,141,000 of debt secured by such investments as short-term. In
October 1996, the Company repaid the $15,141,000 to the lending bank to
eliminate all of the long-term notes and mortgage classified as current.
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 September 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 $2,889,000 for the purchase of property improvements and
equipment. At the Company's present level of operations, the Company currently
maintains idle
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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 September 30, 1996 increased as compared to December
31, 1995 primarily due to increased sales of ReoPro to Lilly.
Long-term investments at September 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 maturity.
Intangible and other assets increased as compared to December 31, 1995
resulting primarily 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.
On August 15, 1996, Centocor entered into an agreement with Fujisawa,
appointing Fujisawa as the exclusive distributor of ReoPro(TM), in Japan. As
compensation for its appointment as exclusive distributor, Fujisawa made a
nonrefundable $15,000,000 payment to the Company, and may make future milestone
payments.
The Company and Fujisawa will co-develop ReoPro(TM) in Japan and jointly
file for Japanese product approval. Fujisawa shall bear all external costs
associated with the clinical development of ReoPro(TM) in Japan.
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
26
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- - --------------------------------------------------------------------------------
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.
27
<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 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 September 30, 1996:
Date of Report Item Covered
-------------- ------------
August 15, 1996 5
28
<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: November 13, 1996 /s/David P. Holveck
------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 /s/Dominic J. Caruso
------------------------------
Dominic J. Caruso
Vice President- Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR,
INC. CONSOLIDATED BALANCE SHEET. CENTOCOR, INC. CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
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<SECURITIES> 111,137
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<PP&E> 141,233
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0
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<COMMON> 691
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<INCOME-PRETAX> (16,361)
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