<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, 1997
------------------
[_] 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 3, 1997 were 70,100,525.
<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,
1997 1996
- ------------------------------------------------- ------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 4 and 8) $73,606 $55,953
Short-term investments (Note 4) 95,262 120,362
Accounts and contracts receivable 51,346 27,440
Interest receivable 1,724 2,147
Inventory (Note 5) 25,302 23,815
Prepaid expenses 1,061 4,279
Other current assets 537 752
------------- ------------
248,838 234,748
Property, plant and equipment:
Land and buildings 69,381 71,607
Equipment, furniture, fixtures and
improvements 73,488 69,884
------------- ------------
142,869 141,491
Less accumulated depreciation (78,045) (79,954)
------------- ------------
64,824 61,537
Long-term investments (Note 4) 15,060 9,502
Intangible and other assets (Note 6) 61,169 35,334
------------- ------------
Total assets $389,891 $341,121
============= ============
</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,
1997 1996
- ------------------------------------------ --------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,828 $9,543
Accrued expenses 44,191 28,940
Notes payable (Note 8) 6,000 6,897
Other current liabilities (Note 7) 15,800 100
--------------- --------------
75,819 45,480
Long-term debt (Note 8) 54,765 54,765
Other liabilities 1,174 1,127
Minority interest - 3,839
Shareholders' equity (Notes 2, 3 and 8):
Preferred Stock, $.01 par value,
10,000 shares authorized, none issued - -
Common Stock, $.01 par value,
100,000 shares authorized and
70,098 and 69,177 issued and
outstanding at September 30, 1997
and December 31, 1996, respectively 701 692
Additional paid-in capital 1,059,443 1,050,062
Accumulated deficit (813,170) (821,602)
Unrealized gain on marketable
securities 11,226 2,342
Cumulative foreign currency
translation adjustments (67) 4,416
--------------- --------------
258,133 235,910
--------------- --------------
Total liabilities and
shareholders' equity $389,891 $341,121
=============== ==============
</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, 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $50,171 $38,309
Contracts 1,230 870
----------- -----------
51,401 39,179
Costs and expenses:
Cost of sales 18,307 17,652
Research and development 18,821 15,174
Marketing, general and administrative 10,310 8,537
----------- -----------
47,438 41,363
Other income (expenses):
Interest income 2,493 2,332
Interest expense (978) (1,631)
Other income (expenses) (837) (152)
----------- -----------
678 549
----------- -----------
Income (loss) before provision for income taxes $4,641 ($1,635)
Provision for income taxes 200 -
----------- -----------
Net income (loss) $4,441 ($1,635)
=========== ===========
Net income (loss) per share $0.06 ($0.02)
=========== ===========
Weighted average common and dilutive equivalent
shares outstanding 71,965 68,940
=========== ===========
</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, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $146,114 $89,545
Contracts 3,966 2,102
------------ -----------
150,080 91,647
Costs and expenses:
Cost of sales 58,296 42,760
Research and development 50,450 41,018
Marketing, general and administrative 29,694 23,822
------------ -----------
138,440 107,600
Other income (expenses):
Interest income 7,095 7,819
Interest expense (2,940) (7,362)
Loss on sale of facility and related business (Note 11) (4,565) -
Other income (expenses) (2,508) (865)
------------ -----------
(2,918) (408)
------------ -----------
Income (loss) before income taxes and
extraordinary item 8,722 (16,361)
Provision for income taxes 290 -
------------ -----------
Income (loss) before extraordinary item 8,432 (16,361)
Extraordinary item:
Net gain on extinguishment of debt (Note 8) - 705
------------ -----------
Net income (loss) $8,432 ($15,656)
============ ===========
Net income (loss) per share:
Before extraordinary item $0.12 ($0.25)
Extraordinary item - 0.01
------------ -----------
Net income (loss) per share $0.12 ($0.24)
============ ===========
Weighted average common and dilutive equivalent
shares outstanding 71,704 65,584
============ ===========
</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, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net income (loss) $8,432 ($15,656)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Loss on sale of facility and related business 4,565 -
Net gain on extinguishment of debt - (705)
Provisions for depreciation and amortization 10,818 10,483
Amortization of deferred income - (83)
Other 3,345 1,382
Changes in assets and liabilities:
Accounts and contracts receivable (27,410) (14,140)
Interest receivable 406 (737)
Inventory (1,966) (3,017)
Prepaid expenses 212 (932)
Other current assets 185 (20)
Intangible and other assets (18,395) (15,127)
Accounts payable 1,020 782
Accrued expenses and other liabilities 14,802 7,940
Other long-term liabilities (53) (131)
------- -------
Net cash used for operating activities (4,039) (29,961)
Cash flows from (used for) investing activities:
Purchases of investments (55,250) (97,535)
Sales of investments 78,400 83,050
Sale of facility and related business 2,835 -
Purchases of fixed assets (14,726) (2,889)
------- -------
Net cash from (used for) investing activities 11,259 (17,374)
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 8,884 34,356
Reduction of long-term debt and notes payable - (69,242)
------- -------
Net cash from financing activities 8,884 91,030
Effect of foreign currency translation 1,549 (562)
------- -------
Net increase in cash and cash equivalents 17,653 43,133
Beginning cash and cash equivalents 55,953 16,002
------- -------
Ending cash and cash equivalents $73,606 $59,135
======= =======
</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 healthcare company whose
mission is to develop and commercialize novel therapeutic and diagnostic
products and services that solve critical needs in human health care. The
Company concentrates on research and development, manufacturing and market
development, with a primary technological focus on monoclonal antibodies and
DNA-based products.
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,
1996.
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, 1997 and December 31, 1996 and
the consolidated results of operations for the three and nine months ended
September 30, 1997 and 1996 and consolidated cash flows for the nine months
ended September 30, 1997 and 1996. 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. Consequently, the Company has
experienced substantial net operating 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 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 year
ending December 31, 1997, sales of the Company's products, primarily ReoPro,
would be expected to generate sufficient revenue to result in positive cash flow
for the year. However, due to the Company's capital expenditure plans to support
expected increases in its manufacturing activities, the Company does not expect
product sales alone to
7
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
generate positive cash flow for the year ending December 31, 1997. 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. 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 product approvals from the
Food and Drug Administration, ("FDA") or other regulatory agencies expanding the
authorized use of ReoPro and other products 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 or other product candidates, including the Company's Avakine(TM)
(infliximab) anti-inflammatory agent, formally known as cA2, will have a
material adverse effect on the Company.
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 applications and foreign patents. 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"). Over
the course of the litigation, plaintiff asserted eleven different claims for
relief and the Company asserted affirmative defenses and a counterclaim against
Velos with respect to the license agreement. After rulings on motions for
summary judgment filed by both sides, the majority of plaintiff's claims were
dismissed. The case proceeded to trial on February 18, 1997 on plaintiff's four
remaining claims under the license agreement and on the Company's affirmative
defenses and counterclaim. The parties agreed that plaintiff's claim for
attorneys fees under the license agreement would be severed to await the outcome
of the trial. On March 4, 1997, the jury returned a verdict which, had it become
the final judgment of the Court, would have rendered the Company liable to pay
plaintiff approximately $4,000,000 plus interest and fees and expenses pursuant
to the license agreement. The Company then filed post-trial motions. On
September 12, 1997, the Court entered judgement as a matter of law in Centocor's
favor, notwithstanding the verdict, with respect to one of Velos' claims that
would have resulted in liability of $2,972,806, but the Court denied the motions
relating to Centocor's affirmative defenses. The amended judgement against
Centocor was in the amount of $1,352,689. Both Centocor and Velos have appealed
the judgement. The Company believes that the allegations of Velos are without
merit and intends to continue vigorously to pursue and defend the appeals.
On December 23, 1993, a purported class action captioned Peter Cordaro v.
Hubert J.P.
8
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 was denied, plaintiff petitioned for
rehearing and that motion was denied. The parties have agreed to settle Mr.
Cordaro's individual claim for a nominal amount.
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., 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
Company purchased the Class A and Class C limited partners' interests in CPIII
in January 1997 and, purchased the Class B limited partnership interest in CPIII
in May 1997. See Note 6 -Intangible and other assets.
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 purported 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 (Centoxin) 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 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 was then refiled
in the Delaware Superior Court. Prior to the New York action, a similar suit
was filed by another former CPII partner, Jerome J. Petrisko, in the Court of
Common Pleas of Chester County, Pennsylvania. Petrisko was subsequently allowed
to intervene in the Delaware action and the Chester County action was dismissed.
The PaineWebber and Petrisko actions have been consolidated and the action has
been certified as a class action. Centocor has filed an affirmative defense and
counterclaim based on unjust enrichment which seek a setoff on any recovery by
the class. Discovery has been completed and the action is scheduled to go to
trial in March 1998. The Company believes that the allegations regarding
Centocor in these actions are without merit and intends to vigorously defend
them.
9
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
The suit by PaineWebber R&D II, L.P. ("PWR&DII") 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 Centocor Partners III, L.P.
("CPIII"). CPIII is named as a nominal defendant and the Company and Centocor
Development Corporation III ("CDCIII"), 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 the former CPIII limited partners 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 Development Corporation. 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 (later 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, CDCIII 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 Development
Corporation, later amended to add additional theories of liability and to name
PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his
complaint to assert claims against the persons appointed by PaineWebber to the
CDCIII Board of Directors. That motion was granted. Motions to disqualify
PWR&DII from serving as the derivative plaintiff were filed in July 1996 by
CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No
decision has been issued on those motions. The case brought by PWR&DII has been
settled, subject to final approval of the settlement by the Court. Abdo and
Pharmaceutical Partners II, L.P., a limited partnership which has purchased
CPIII limited partnership interests, objected to the settlement. They were
permitted to take discovery regarding the settlement and have sought to take
additional discovery. A hearing on the adequacy and fairness of the settlement
was held on September 4, 1997. No decision has been rendered.
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.
Royalties
---------
The Company is required to make certain future payments to the former
limited partners of Centocor Cardiovascular Imaging Partners, L.P. ("CCIP"),
CPII and CPIII based on sales of products
10
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
developed by each of the respective partnerships.
Centocor had an exclusive option to purchase the limited partnership
interests in CPIII. In 1997, the Company exercised this option and made an
advance payment of approximately $13,600,000 in cash to the former limited
partners of CPIII. The Company recorded the $13,600,000 advance payment to
the former limited partners of CPIII as a prepaid royalty, a component of
Intangible and other assets.
In June 1997, the Company announced that it has reached an agreement to
settle the litigation brought by PaineWebber R&D Partners II, L.P. on behalf of
CPIII, against Centocor arising out of Centocor's sales and distribution
agreement with Lilly with respect to ReoPro. The settlement is conditional on
Delaware Chancery Court approval. The agreement provides, among other things,
for Centocor to pay CPIII investors $10,800,000 from which attorney's fees and
expenses will be deducted, an additional $5,000,000, if and when cumulative
world-wide sales of ReoPro exceed $600 million, and a revision to the royalties
payable to the former CPIII partners. The Company has recorded these probable
payments to CPIII investors as a prepaid royalty, a component of Intangible and
other assets, in the second quarter of 1997.
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.
11
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 in June
1993, 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 no longer has the right to buy ReoPro for
resale in Japan; however, 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 shares of its Common
Stock to Lilly, at a price of $29.32 per share, which was the average of the
last reported sale price per share of the Company's Common Stock for the five
trading days immediately preceding the issuance of the shares.
Note 4
Cash equivalents and investments
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that the Company has both
the intent and ability to hold to maturity are carried at amortized cost.
Securities that the Company does not intend to hold to maturity are classified
either as "available for sale" or as "trading" and are carried at fair value.
Unrealized gains and losses on securities classified as available for sale are
carried as a separate component of shareholders' equity. Unrealized gains and
losses on specific securities classified as trading are reported as a component
of Other income (expenses).
At September 30, 1997, securities classified as trading, available for sale
and held to maturity are summarized below (in thousands).
12
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ----- -------- --------
<S> <C> <C> <C> <C>
Trading securities:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $20,969 $75 $- $21,044
Other short-term obligations 8,615 - - 8,615
Corporate bonds and
commercial paper 6,988 9 6,997
----- -- -- -----
$36,572 $ 84 $- $36,656
====== === == ======
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ----- -------- --------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $3,834 $11,226 $ - $15,060
===== ====== ======== ======
<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 $82,984 $155 $(287) $82,852
Certificates of deposit 7,550 - - 7,550
------ --- --- ------
$90,534 $155 $(287) $90,402
====== === ===== ======
At September 30, 1997, the carrying value of these securities were classified as follows
(in thousands):
Cash equivalents $31,928
Short-term investments 95,262
Long-term investments 15,060
------
$142,250
=======
</TABLE>
13
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
The Company has agreed to maintain investments with fair values of
$7,260,000 as of September 30, 1997 at the lending bank as collateral for loans
from that bank. See Note 8 - Debt.
Note 5
Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- ------------
<S> <C> <C>
Raw materials $ 4,948 $ 5,824
Work in process 12,258 7,948
Finished goods 8,096 10,043
------- -------
$25,302 $23,815
======= =======
</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
Intangible and other assets
Intangible and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Licenses $5,375 $ 5,378
Goodwill - 5,158
Prepaid royalties related
to CPIII 29,398 -
Deferred charges 22,434 23,026
Other 3,962 1,772
----- -----
$61,169 $35,334
====== ======
</TABLE>
Deferred charges at September 30, 1997 and December 31, 1996 include a
prepayment of certain future royalties and a prepayment associated with the
commercialization and market development of ReoPro. Prepaid royalties related to
CPIII at September 30, 1997 represent an advance payment of approximately
$13,600,000 in cash paid to the former limited partners of CPIII in connection
with the
14
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
purchase of the limited partnership interests in CPIII and an additional
$15,800,000 payable to the former limited partners of CPIII in connection with
the revision of future royalties. See Note 2 -Commitments and Contingencies.
In June 1997, the Company sold its diagnostic manufacturing facility in
Guildford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997, a component of which was
the write-off of goodwill on the facility and related business.
Licensing agreements 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 cash flows.
Note 7
Other current liabilities
In June 1997, the Company announced that it has reached an agreement to
settle the litigation brought by PaineWebber R&D Partners II, L.P. on behalf of
CPIII, against Centocor arising out of Centocor's sales and distribution
agreement with Lilly with respect to ReoPro. The settlement is conditional on
Delaware Chancery Court approval. The agreement provides, among other things,
for Centocor to pay CPIII investors $10,800,000 from which attorney's fees and
expenses will be deducted, an additional $5,000,000, if and when cumulative
world-wide sales of ReoPro exceed $600 million and a revision to the royalties
payable to the former CPIII partners. At September 30, 1997 the Company has
recorded a current liability for the $15,800,000 for these probable payments to
CPIII investors.
Note 8
Debt
Notes Payable
Notes payable at September 30, 1997 and December 31, 1996 consists of
$6,000,000 and $6,897,000, respectively, of borrowings under short-term notes at
an interest rate of 3.903 percent per annum at September 30, 1997, payable in
Dutch guilders no later than March 28, 1998. These borrowings are secured by
investments at the lending bank of $7,260,000.
Long-term debt
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
15
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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. The Company may be
required to redeem the 6 3/4% Convertible Debentures at their principal amount
at the option of the holders 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,
1997 and December 31,1996, $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.
Note 9
Income Taxes
A provision for income taxes of $200,000 and $290,000 was recorded for the
three and nine months ended September 30, 1997 respectively, representing
current federal and state income taxes. Realization of net deferred tax assets
related to the Company's loss carry forwards and other items is dependent on
future earnings, the extent of which remain uncertain, therefore, the Company
recorded a reserve against the asset of approximately $292,000,000. In addition,
pursuant to the Tax Reform Act of 1986, the annual utilization of these losses
may be limited. The Company will assess the adequacy of the valuation allowance
at each balance sheet date based on all available information at that time.
Note 10
Supplemental Information on Cash Flows
Interest paid for the three and nine months ended September 30, 1997 was
$1,852,000 as compared to $545,000 paid for the three months and $5,349,000 paid
for the nine months ended September 30, 1996. Interest payments in 1997 are
lower due principally to the conversion of the Company's 7 1/4% Convertible
Notes due February 2001 into the Company's Common Stock, the purchase of
$70,235,000 of the Company's 6 3/4% Convertible Debentures and the repayment of
mortgage loans in Europe in 1996.
Income tax payments for the three and nine months ended September 30, 1997
were $14,000 and $115,000 respectfully, as compared to $8,595 for the three
months and $13,195 paid for the nine months ended September 30, 1996,
respectfully.
Note 11
Sale of facility and related business
In June 1997, the Company sold its diagnostic manufacturing facility in
Guildford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.
Note 12
16
<PAGE>
Centocor, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
Subsequent Event
In October 1997, The Company announced that its subsidiary, Centocor
Diagnostics, Inc. ("Centocor Diagnostics") has filed a registration statement
with the Securities and Exchange Commission relating to a proposed initial
public offering by Centocor Diagnostics of shares of its Class A Common Stock.
The Company will not sell any shares of Centocor Diagnostics stock in the
offering. Upon completion of the offering, The Company expects that it will
maintain greater than 80% voting control of Centocor Diagnostics. The proceeds
of the offering will be used for capital expenditures related principally to
Centocor Diagnostics' cardiovascular diagnostic program, working capital,
product research and development, and other general corporate purposes.
17
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
General
Any statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 including economic, competitive, governmental,
technological and other factors which may affect the Company's business and
prospects, certain of which are described more fully below.
Centocor is a healthcare company whose mission is to develop and
commercialize novel therapeutic and diagnostic products and services that solve
critical needs in human health care. The Company concentrates on research and
development, manufacturing and market development, with a primary technological
focus on monoclonal antibodies and DNA-based products.
The Company, since inception, has incurred significant operating expenses
developing therapeutic and diagnostic products. The Company has also incurred
significant special charges. Historically, the Company's product sales have not
produced sufficient revenues to cover the Company's operating expenses.
Consequently, the Company has experienced substantial operating losses. The
Company's financial results have progressively improved throughout 1996
culminating with the Company achieving profitability in the fourth quarter. The
Company expects that its sales of therapeutic and diagnostic products in 1997
will provide sufficient revenues to cover operating expenses resulting in net
income for the year.
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 analysis, in December 1995 the Company halted two clinical
trials of ReoPro designed to expand its authorized use. The Company filed for
regulatory approvals in the United States for the expanded indications in
February 1997 and filed for additional regulatory approvals in Europe in April
1997.
In November 1997, the Company announced that the FDA has cleared the way
for the expanded use of ReoPro. The new labeling will allow physicians to use
ReoPro as adjunctive therapy to prevent cardiac ischemic complications in a
broad range of patients undergoing percutaneous coronary intervention ("PCI"),
as well as unstable angina patients not responding to conventional medical
therapy when PCI is planned within 24 hours. The expanded labeling allows
physicians to use ReoPro in a broader population of patients undergoing PCI
(balloon angioplasty, atherectomy, stent placement).
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 future ReoPro sales based upon the approved expanded
indications will depend upon the degree of market acceptance of ReoPro.
18
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Three months ended September 30, 1997 compared to the three months ended
September 30, 1996
The increase in sales for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 is principally due to the
increase in sales 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. For the three
months ended September 30, 1997, ReoPro sales to Lilly were $40,686,000 and
Lilly's announced sales to end-users were approximately $63,300,000. For the
three months ended September 30, 1996 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, 1997, the Company's sales of Panorex to Glaxo
Wellcome plc ("Glaxo Wellcome") were $1,835,000 as compared to zero for the
three months ended September 30, 1996. 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. The Company expects ReoPro end sales to increase in 1997 over 1996
levels as market acceptance continues to grow and this trend is expected to
continue into 1998. Panorex end sales in 1997 are also expected to increase as
compared to 1996 but Panorex sales to Glaxo Wellcome in 1997 are not expected to
have a significant impact on the Company's financial results.
Diagnostic product sales for the three months ended September 30, 1997 were
$7,650,000 as compared to $10,566,000 for the three months ended September 30,
1996. In June of 1997, the Company completed the sale of its U.K. diagnostic
manufacturing facility and its related infectious disease product line. Oncology
diagnostic product sales for the three months ended September 30, 1997 were
$7,452,000 as compared to $9,630,000 for the three months ended September 30,
1996. This decrease was due primarily to a reduction in reagent sales, lower
kit volumes and, to a lesser extent, the unfavorable impact of foreign currency
fluctuations. Diagnostic product sales in 1997 and 1998 are expected to be lower
than sales levels achieved in 1996 primarily due to the sale of the infectious
disease product line, lower sales prices and the mix of products sold.
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, the
availability of production capacity, as well as the continued availability of
necessary raw materials and intermediate inputs into the production process,
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 and the
Company further expects that current distributors of its kits may increase sales
of their respective diagnostic kits
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
incorporating the Company's antibodies, which the Company expects will result in
reduced sales prices, and therefore revenues on certain diagnostic products. The
Company's revenues from sales of antibodies to partners are lower than revenues
from sales of its completed diagnostic kits.
The Company is also evaluating a number of business strategies to expand
and support both its therapeutic and diagnostic products and product candidates
including, but not limited to, access to instruments primarily in the
diagnostics area, directly participating in the promotion and marketing of
certain of the Company's products and product candidates and expanding the
Company's production capabilities. In order to implement such strategies the
Company may need to secure financing from the equity markets or from bank
relationships. There can be no assurance that such financing will be available
or that these business strategies, or any others, if implemented will be
successful in achieving increased product sales for the Company's therapeutic
and diagnostic products and product candidates.
Cost of sales increased for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 due primarily to the
increased sales 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 in
1997 over 1996 levels, the extent of which will depend primarily on the amount
and mix of products sold. This trend is expected to continue into 1998. Other
factors that can influence cost of sales include, but are not limited to,
exchange rate fluctuations, production losses, cell line yields, increases in
royalty obligations, amortization of prepaid royalties, the costs of raw
materials and production interruptions due to plant upgrades.
Research and development expenses for the three months ended September 30,
1997 increased as compared to the three months ended September 30, 1996 due
principally to increased clinical trial activities to expand the indications for
ReoPro and the continued development of the Company's Avakine (infliximab) anti-
inflammatory agent, formerly referred to as cA2. The level of the Company's
total research and development expenses in future periods will be dependent upon
the extent of clinical trial-related activities. Research and development
expenses are expected to increase in 1997 as compared to 1996 due to clinical
trial activities in connection with the continued expansion of ReoPro use for
additional indications including, but not limited to, acute myocardial
infarction, the use of ReoPro in conjunction with stents and in stroke. In
addition, clinical trial activities for Avakine, primarily phase III trials for
the Crohn's and severe rheumatoid arthritis indications either have begun or are
expected to begin in 1997. Research and development expenses in 1998 are also
expected to increase from 1997 levels due primarily to the above clinical
activities.
Marketing, general and administrative expenses for the three months ended
September 30, 1997 increased as compared to the three months ended September 30,
1996 due principally to ReoPro and Avakine market development efforts. The
levels of the Company's marketing, general and administrative expenses may
increase in future periods as compared to 1996 levels if the Company
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
expands its market development activities in connection with sales of
therapeutic and diagnostic products or directly undertakes the promotion,
marketing and sale of any of its therapeutic or diagnostic products. Marketing,
general and administrative expenses are expected to increase in 1997 as compared
to 1996 due primarily to the Company's increased investment in market
development for its therapeutic and diagnostic products. Marketing, general and
administrative expenses are expected to increase in 1998 as compared to 1997 due
primarily to the Company's increased investment in market development and
commercialization for its therapeutic and diagnostic products.
Interest income increased for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 due principally to
increased interest rates obtained on the Company's cash and 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 three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 due principally to the
conversion of the Company's 7 1/4% Convertible Notes due February 1, 2001 into
the Company's Common Stock, the purchase of $70,235,000 of the Company's 6 3/4%
Convertible Debentures and the repayment of mortgage loans in Europe. Interest
expense in future periods will depend upon the level of debt outstanding.
Other expenses increased for the three months ended September 30, 1997 as
compared to the three months ended September 30, 1996 due to an increase in
Centocor's share of the losses of a company in which Centocor has invested.
Centocor does not expect the future share in the income or losses of this
investee company to have a material impact on the Company.
The Company expects its effective tax rate in 1997 to range between 2% and
5%. The effective tax rate in 1997 is heavily influenced by the ability of the
Company to use net operating loss carry forwards or other potential tax benefits
from prior years to offset its future tax liability.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996
The increase in sales for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 is principally due to the
increase in sales 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. For the nine
months ended September 30, 1997, ReoPro sales to Lilly were $116,552,000 and
Lilly's announced sales to end-users were approximately $174,900,000. For the
nine months ended September 30, 1996 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, 1997, the Company's sales of Panorex to Glaxo Wellcome plc
("Glaxo Wellcome") were $4,913,000 as compared to $2,073,000 for the nine months
ended September 30, 1996. The level of the
21
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
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. The Company expects ReoPro end sales to increase in 1997
over 1996 levels as market acceptance continues to grow and this trend is
expected to continue into 1998. Panorex end sales in 1997 are also expected to
increase as compared to 1996 but Panorex sales to Glaxo Wellcome in 1997 are not
expected to have a significant impact on the Company's financial results.
Diagnostic product sales for the nine months ended September 30, 1997 were
$25,369,000 as compared to $31,308,000 for the nine months ended September 30,
1996. In June of 1997, the Company completed the sale of its U.K. diagnostic
manufacturing facility and its related infectious disease product line. Oncology
diagnostic product sales for the nine months ended September 30, 1997 were
$24,191,000 as compared to $28,574,000 for the nine months ended September 30,
1996. This decrease was due primarily to a reduction in reagent sales, lower kit
unit volumes and, to a lesser extent, the unfavorable impact of foreign currency
fluctuations. Diagnostic product sales in 1997 and 1998 are expected to be lower
than sales levels achieved in 1996 primarily due to the sale of the infectious
disease product line, lower sales prices and the mix of products sold.
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, the
availability of production capacity, as well as the continued availability of
necessary raw materials and intermediate inputs into the production process,
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 and the
Company further expects that current distributors of its kits may increase sales
of their respective diagnostic kits incorporating the Company's antibodies,
which the Company expects will result in reduced sales prices, and therefore
revenues on certain diagnostic products. The Company's revenues from sales of
antibodies to partners are lower than revenues from sales of its completed
diagnostic kits.
The Company is also evaluating a number of business strategies to expand
and support both its therapeutic and diagnostic products and product candidates
including, but not limited to, access to instruments primarily in the
diagnostics area, directly participating in the promotion and marketing of
certain of the Company's products and product candidates and expanding the
Company's production capabilities. In order to implement such strategies the
Company may need to secure financing from the equity markets or from bank
relationships. There can be no assurance that such financing will be available
or that these business strategies, or any others, if implemented will be
successful in achieving increased product sales for the Company's therapeutic
and diagnostic products and product candidates.
22
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Cost of sales increased for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 due primarily to the
increased sales of ReoPro and ReoPro production losses incurred in the second
quarter of 1997. 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 in 1997 over 1996
levels, the extent of which will depend primarily on the amount and mix of
products sold. This trend is expected to continue into 1998. Other factors that
can influence cost of sales include, but are not limited to, exchange rate
fluctuations, production losses, cell line yields, increases in royalty
obligations, amortization of prepaid royalties, costs of raw materials and
production interruptions due to plant upgrades.
Research and development expenses for the nine months ended September 30,
1997 increased as compared to the nine months ended September 30, 1996 due
principally to increased clinical trial activities to expand the indications for
ReoPro and the continued development of the Company's Avakine anti-inflammatory
agent. The level of the Company's total research and development expenses in
future periods will be dependent upon the extent of clinical trial-related
activities. Research and development expenses are expected to increase in 1997
as compared to 1996 due to clinical trial activities in connection with the
continued expansion of ReoPro use for additional indications including, but not
limited to, acute myocardial infarction, the use of ReoPro in conjunction with
stents and in stroke. In addition, clinical trial activities for Avakine,
primarily phase III trials for the Crohn's and severe rheumatoid arthritis
indications either have begun or are expected to begin in 1997. Research and
development expenses in 1998 are also expected to increase from 1997 levels due
primarily to the above clinical activities.
Marketing, general and administrative expenses for the nine months ended
September 30, 1997 increased as compared to the nine months ended September 30,
1996 due principally to ReoPro and Avakine market development efforts. The
levels of the Company's marketing, general and administrative expenses may
increase in future periods as compared to 1996 levels if the Company expands its
market development activities in connection with sales of therapeutic and
diagnostic products or directly undertakes the promotion, marketing and sale of
any of its therapeutic or diagnostic products. Marketing, general and
administrative expenses are expected to increase in 1997 as compared to 1996 due
primarily to the Company's increased investment in market development for its
therapeutic and diagnostic products. Marketing, general and administrative
expenses are expected to increase in 1998 as compared to 1997 due primarily to
the Company's increased investment in market development and commercialization
for its therapeutic and diagnostic products.
Interest income decreased for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 due principally to a
decrease in the interest rates obtained on the Company's cash and 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.
23
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Interest expense decreased for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 due principally to the
conversion of the Company's 7 1/4% Convertible Notes due February 1, 2001 into
the Company's Common Stock, the purchase of $70,235,000 of the Company's 6 3/4%
Convertible Debentures and the repayment of mortgage loans in Europe. Interest
expense in future periods will depend upon the level of debt outstanding.
In June 1997, the Company sold its diagnostic manufacturing facility in
Guildford, England and its related infectious disease product line. In
connection with the transaction the Company recorded a one-time charge to
earnings of $4,565,000 in the second quarter of 1997.
Other expenses increased for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996 due to an increase in
Centocor's share of the losses of a company in which Centocor has invested.
Centocor does not expect the future share in the income or losses of this
investee company to have a material impact on the Company.
The Company expects its effective tax rate in 1997 to range between 2% and
5%. The effective tax rate in 1997 is heavily influenced by the ability of the
Company to use net operating loss carry forwards or other potential tax benefits
from prior years to offset its future tax liability.
Per Share Calculations
At September 30, 1997, approximately 3,879,000 shares of the Company's
Common Stock were issuable upon exercise of outstanding options and warrants and
upon vesting of restricted stock awards. When dilutive, options and warrants are
included as share equivalents using the treasury stock method. 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.
The shares issuable upon conversion of the 6 3/4% Convertible Debentures
were not included in the per share calculations for the periods presented since
to do so would have been anti dilutive. 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 the conversion of the Company's 7 1/4% Convertible Notes
and in July 1996, the Company issued 920,716 shares 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial
24
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Accounting Standards No. 128 Earnings per Share ("Statement 128"). This
Statement replaces the presentation of primary EPS with a presentation of basic
EPS and requires the dual presentation of basic and diluted EPS on the face of
the income statement of all entities with complex capital structures. Statement
128 also requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted.
Had Statement 128 been adopted, basic and diluted EPS for the three and
nine months ended September 30, 1997 would have been $0.06 and $0.12 per share,
respectfully.
Liquidity and Capital Resources
The Company has incurred significant operating expenses attempting to
develop therapeutic and diagnostic products. Consequently, the Company has
experienced substantial net operating 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 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 year
ending December 31, 1997, sales of the Company's products, primarily ReoPro,
would be expected to generate sufficient revenue to result in positive cash flow
for the year. However, due to the Company's capital expenditure plans to support
expected increases in its manufacturing activities, the Company does not expect
product sales alone to generate positive cash flow for the year ending December
31, 1997. 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. 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 product
approvals from the FDA, or other regulatory agencies expanding the authorized
use of ReoPro and other products 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
or other product candidates, including Avakine, will have a material adverse
effect on the Company.
At September 30, 1997, the Company had cash, cash equivalents and
investments of $183,928,000, including equity investments of $15,060,000. For
the nine months ended September 30, 1997, the Company had negative cash flows
from operations of $4,039,000 primarily related to the advance payment of
approximately $13,600,000 to the former limited partners of CPIII in January
1997.
25
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
The Company's total cash flows for the nine months ended September 30, 1997
included the receipt of $8,884,000 from the exercise of 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. At
September 30, 1997 the Company has a note payable of $6,000,000 which is secured
by investments at the lending bank of $7,260,000. The Company's total cash, cash
equivalents and investments decreased by $1,889,000 from December 31, 1996,
principally as a result of the negative cashflows from operations and
investments in fixed assets partially offset by the cash received from the
exercise of options and an unrealized gain on one of the Company's investments
classified as available for sale. The Company believes that its cash, cash
equivalents and investments will be sufficient to fund its operations through at
least the end of 1998.
Accounts Receivable at September 30, 1997 increased as compared to December
31, 1996 due to increased sales of ReoPro to Lilly.
Inventory at September 30, 1997 increased as compared to December 31, 1996
due primarily to increased production of ReoPro and Avakine partially offset by
the sale of the Company's U.K. diagnostic manufacturing facility and related
infectious disease product line in the second quarter of 1997.
Gross property, plant and equipment at September 30, 1997 increased as
compared to December 31, 1996, principally due to the investment of $14,726,000
for the purchase of property and equipment partially offset by the impact of
exchange rates on property and equipment denominated in foreign currencies and
the sale of the Company's U.K. manufacturing facility and infectious disease
business in the second quarter of 1997. The Company expects its total
investments in property, plant and equipment to be approximately $25,000,000 in
1997 to support its manufacturing capacity expansion plans. The Company also
expects to significantly increase its investments in property plant and
equipment in 1998 in connection with such plans. The Company continually
evaluates the future needs for its facilities and equipment. There can be no
assurance that losses resulting from reserves to reduce the carrying value of
certain fixed assets will not be required in the future.
Long-term investments at September 30, 1997 increased as compared to
December 31, 1996 principally due to an increase in the carrying value of an
investment classified as available for sale. In 1996 the Company acquired an
investment, ChromaVision Medical Systems Inc. as compensation for its prior
research, commercialization efforts and the exchange of a commercialization
license. The Company's historical basis in this investment was $770,000 and it
is currently valued at $9,988,000 at September 30,1997. Unrealized gains and
losses on securities classified as available for sale are carried as a separate
component of shareholders' equity.
Intangible and other assets at September 30, 1997 increased as compared to
December 31, 1996 resulting primarily from the advance payment of approximately
$13,600,000 to the former limited
26
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
partners of CPIII in January 1997. In June 1997, the Company announced that it
has reached an agreement to settle the litigation brought by PaineWebber R&D
Partners II, L.P. on behalf of CP III, against Centocor arising out of
Centocor's sales and distribution agreement with Lilly with respect to ReoPro.
The settlement is conditional on Delaware Chancery Court approval. The agreement
provides, among other things, for Centocor to pay CP III investors $10,800,000
from which attorney's fees and expenses will be deducted, an additional
$5,000,000, if and when cumulative world-wide sales of ReoPro exceed $600
million and a revision to the royalties payable to the former CPIII partners.
The Company expects to pay the $15,800,000 in 1998. The Company has recorded
these probable payments to CP III investors as a prepaid royalty, a component of
Intangible and other assets in the second quarter of 1997.
The Company has entered into indemnity agreements with the former limited
partners of CCIP, CPII and CPIII 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.
In October 1997, The Company announced that its subsidiary, Centocor
Diagnostics, has filed a registration statement with the Securities and Exchange
Commission relating to a proposed initial public offering by Centocor
Diagnostics of shares of its Class A Common Stock. The Company will not sell any
shares of Centocor Diagnostics stock in the offering. Upon completion of the
offering, The Company expects that it will maintain greater than 80% voting
control of Centocor Diagnostics. The proceeds of the offering will be used for
capital expenditures related principally to Centocor Diagnostics' cardiovascular
diagnostic program, working capital, product research and development, and other
general corporate purposes.
Legal Proceedings
The Company is subject to certain litigation, as more fully described in
Note 2 to 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.
Foreign Currency
Certain of the Company's sales are denominated in currencies other than the
U.S. dollar. Additionally, the Company conducts operations in countries other
than the United States, primarily its manufacturing facility in Leiden, The
Netherlands. The Company's consolidated financial statements are denominated in
U.S. dollars, and, accordingly, changes in the exchange rate between foreign
currencies and the U.S. dollar will affect the translation of financial results
of foreign subsidiaries into U.S. dollars
27
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
for purposes of reporting the Company's consolidated financial results. To date,
exchange rate fluctuations have not had a material net effect on the Company's
financial results. The Company does not currently engage in any derivatives
transactions as a hedge against foreign currency fluctuations.
28
<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
--------
11 Computation of Earnings (Loss) per Common Share
(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, 1997:
Date of Report Item Covered
-------------- ------------
None.
29
<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 14, 1997 /s/David P. Holveck
------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 /s/Dominic J. Caruso
------------------------------
Dominic J. Caruso
Vice President- Finance
and Chief Financial Officer
(principal financial and
accounting officer)
<PAGE>
Exhibit 11
CENTOCOR, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(unaudited)
(in thousands, except per share data)
Computation of Earnings (Loss) Per Common Share
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Primary:
Weighted average shares
outstanding 69,915 68,940 69,707 65,584
Net effect of dilutive stock
option and warrants based on
the treasury stock method using
average market price 2,050 -- 1,997 --
-------- -------- -------- --------
Totals 71,965 68,940 71,704 65,584
======== ======== ======== ========
Net income (loss) $4,441 ($1,635) $8,432 ($15,656)
======== ======== ======== ========
Per share amount $0.06 ($0.02) $0.12 ($0.24)
======== ======== ======== ========
Fully diluted:
Weighted average shares
outstanding 69,915 68,940 69,707 65,584
Net effect of dilutive stock
option and warrants based on
the treasury stock method using
quarter end market price which
is greater than average market
price 2,267 -- 2,188 --
-------- -------- -------- --------
Totals 72,182 68,940 71,895 65,584
======== ======== ======== ========
Net income (loss) $4,441 ($1,635) $8,432 ($15,656)
======== ======== ======== ========
Per share amount $0.06 ($0.02) $0.12 ($0.24)
======== ======== ======== ========
Note: Common stock equivalents which would have an antidilutive effect on the
calculations of per share data are not included in the above analysis.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTOCOR,
INC. CONSOLIDATED BALANCE SHEETS AND CENTOCOR, INC. CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 73,606
<SECURITIES> 95,262
<RECEIVABLES> 53,070
<ALLOWANCES> 0
<INVENTORY> 25,302
<CURRENT-ASSETS> 248,838
<PP&E> 142,869
<DEPRECIATION> 78,045
<TOTAL-ASSETS> 389,891
<CURRENT-LIABILITIES> 75,819
<BONDS> 54,765
0
0
<COMMON> 701
<OTHER-SE> 257,432
<TOTAL-LIABILITY-AND-EQUITY> 389,891
<SALES> 146,114
<TOTAL-REVENUES> 150,080
<CGS> 58,296
<TOTAL-COSTS> 58,296
<OTHER-EXPENSES> 87,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,940
<INCOME-PRETAX> 8,722
<INCOME-TAX> 290
<INCOME-CONTINUING> 8,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,432
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
