<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 March 31, 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 May 1, 1997 were 69,663,123.
<PAGE>
PART I: FINANCIAL INFORMATION
- -----------------------------
ITEM 1: FINANCIAL STATEMENTS
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
MARCH 31, December 31,
1997 1996
- -------------------------- ---------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 4 and 7) $ 29,852 $ 55,953
Short-term investments (Notes 4 and 7) 129,939 120,362
Accounts and contracts receivable 32,651 27,440
Interest receivable 1,965 2,147
Inventory (Note 5) 24,186 23,815
Prepaid expenses 2,961 4,279
Other current assets 962 752
---------------- -----------------
222,516 234,748
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 70,142 71,607
Equipment, furniture, fixtures and
improvements 67,511 69,884
---------------- -----------------
137,653 141,491
Less accumulated depreciation (78,348) (79,954)
---------------- -----------------
59,305 61,537
LONG-TERM INVESTMENTS (NOTE 4) 12,254 9,502
INTANGIBLE AND OTHER ASSETS (NOTE 6) 49,113 35,334
---------------- -----------------
TOTAL ASSETS $343,188 $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)
MARCH 31, DECEMBER 31,
1997 1996
- -------------------------------------- ------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $7,647 $9,543
Accrued expenses 32,330 28,940
Unearned revenues - 100
Notes payable (Note 7) 6,383 6,897
------------- -------------
46,360 45,480
LONG-TERM DEBT (NOTE 7) 54,765 54,765
OTHER LIABILITIES 1,170 1,127
MINORITY INTEREST - 3,839
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
69,662 and 69,177 issued and
outstanding at March 31, 1997
and December 31, 1996, respectively 697 692
Additional paid-in capital 1,054,335 1,050,062
Accumulated deficit (818,331) (821,602)
Unrealized gain on marketable
securities 2,259 2,342
Cumulative foreign currency
translation adjustments 1,933 4,416
------------- -------------
240,893 235,910
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $343,188 $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 March 31, 1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $44,936 $21,710
Contracts 100 172
---------- ----------
45,036 21,882
COSTS AND EXPENSES:
Cost of sales 17,806 10,554
Research and development 14,337 12,548
Marketing, general and administrative 9,796 7,403
---------- ----------
41,939 30,505
OTHER INCOME (EXPENSES):
Interest income 2,154 2,265
Interest expense (997) (3,267)
Other income (expenses) (913) (73)
---------- ----------
244 (1,075)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 3,341 (9,698)
PROVISION FOR INCOME TAXES 70 -
---------- ----------
NET INCOME (LOSS) $3,271 ($9,698)
========= =========
NET INCOME (LOSS) PER SHARE $0.05 ($0.16)
========= =========
Weighted average common and dilutive equivalent
shares outstanding 71,659 59,944
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CENTOCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the three months ended March 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows used for operating activities:
Net income (loss) $3,271 ($9,698)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Provisions for depreciation and amortization 3,894 3,647
Amortization of deferred income - (60)
Other (1,126) 375
Changes in assets and liabilities:
Accounts and contracts receivable (6,733) (7,342)
Interest receivable 181 (1,230)
Inventory (1,793) (216)
Prepaid expenses 325 (723)
Other current assets (261) (292)
Intangible and other assets (13,909) (525)
Accounts payable (1,570) (781)
Accrued expenses and other liabilities 3,164 213
Other long-term liabilities (57) (49)
------------ ----------
Net cash used for operating activities (14,614) (16,681)
Cash flows used for investing activities:
Purchases of investments (116,695) (27,505)
Sales of investments 102,869 24,740
Purchases of fixed assets (1,856) (637)
------------ ----------
Net cash used for investing activities (15,682) (3,402)
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 3,958 11,500
Reduction of long-term debt and notes payable - (229)
------------ ----------
Net cash from financing activities 3,958 137,187
Effect of foreign currency translation 237 (121)
------------ ----------
Net (decrease) increase in cash and cash equivalents (26,101) 116,983
Beginning cash and cash equivalents 55,953 16,002
------------ ----------
Ending cash and cash equivalents $29,852 $132,985
============ ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<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 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 March 31, 1997 and December 31, 1996 and the
consolidated results of operations for the three months ended March 31, 1997 and
1996 and consolidated cash flows for the three months ended March 31, 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 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 to generate positive cash flow for the year ending December 31,
1997. Under the Company's strategy of entering into collaborative
6
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 the Food and Drug Administration, ("FDA") or other regulatory
approvals 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 cA2, (infliximab) anti-inflammatory agent, 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, if it were to
become the final judgment of the Court, would render the Company liable to pay
plaintiff approximately $4,000,000 plus interest and fees and expenses pursuant
to the license agreement. The Company and its counsel believe the jury's
findings are not supported by the evidence and law and have filed post-trial
motions, and, if necessary, will file an appeal. Accordingly, no provision has
been made in the accompanying financial statements for this matter. The Company
believes that the allegations of Velos are without merit and intends to continue
vigorously to defend this suit.
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
7
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 has
been denied. No trial date has been fixed. The Company believes that the
allegations set forth in the complaint are without merit and intends to
vigorously defend this suit.
In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary
of Paine Webber Group Inc., caused suits to be filed against the Company by two
research and development partnerships formed in the mid-1980s by PaineWebber and
managed by it since then. The two PaineWebber partnerships (PaineWebber R&D
Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively,
investors in Centocor Partners II, L.P. ("CPII") and Centocor Partners III, L.P.
("CPIII"), research partnerships for which PaineWebber acted as the sales agent
and in other capacities. The Company purchased the limited partners' interests
in CPII in February 1992 and that partnership was then dissolved. 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.
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 (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 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, which the
Company has opposed. Prior to the dismissal of 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. That suit will be held in
abeyance and plaintiff has been allowed to intervene in the Delaware action. The
Delaware action has been scheduled for trial in early 1998. The Company
believes that the allegations regarding Centocor in these actions are without
merit and intends to vigorously defend them.
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 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
8
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 parties in these suits are
considering ways and means to resolve the issues without further litigation.
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 developed by each of the respective
partnerships.
Centocor had an exclusive option to purchase the limited partnership
interests in CPIII. In January 1997, the Company exercised this option and made
an advance payment of approximately $13,598,000 in cash to the Class A and Class
C limited partners of CPIII. The Company recorded the $13.6 million advance
payment to the partners of CPIII as a prepaid royalty, a component of intangible
and other assets.
The Company has entered into agreements to support research at certain
research institutions.
9
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
These agreements, which grant the Company licenses and/or options to license
certain technology resulting from the research, generally require the Company to
pay royalties to such institutions on the sales of any products that utilize the
licensed technology. Further, the Company has licenses under certain patents,
patent applications and technology and pays the licensors or their licensees
royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs
represent a significant percentage of sales.
Product Liability
-----------------
The testing and marketing of medical products entails an inherent risk of
product liability. The Company maintains limited product liability insurance
coverage. Centocor's business may be materially adversely affected by a
successful product liability claim in excess of any insurance coverage. There
can be no assurance that product liability insurance coverage will continue to
be available to Centocor in the future on reasonable terms or at all.
Note 3
COLLABORATIVE ARRANGEMENTS
Relationship with Eli Lilly and Company
- ---------------------------------------
In July 1992, Centocor and Lilly entered into a Sales and Distribution
Agreement later amended in June 1993. Under that Agreement, as amended 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.
10
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
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 March 31, 1997, securities classified as trading, available for sale and
held to maturity are summarized below (in thousands).
<TABLE>
<CAPTION>
Carrying Unrealized Fair
Value Gains (Losses) Value
---------- ------- -------- --------
<S> <C> <C> <C> <C>
Trading securities:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $20,993 $ - $(146) $20,847
Other short-term obligations 576 - - 576
Corporate bonds and
commercial paper 8,543 - (40) 8,503
----- --- ---- -----
$30,112 $ - $(186) $29,926
====== === ===== ======
<CAPTION>
Estimated
Adjusted Unrealized Carrying
Cost Gains (Losses) Value
-------- ------- ------ ---------
<S> <C> <C> <C> <C>
Investments available for sale:
Equity securities $ 6,022 $2,259 $ - $ 8,281
====== ===== ===== =====
</TABLE>
11
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated
Carrying Unrealized Fair
Value Gains (Losses) Value
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Investments held to maturity:
Securities and obligations of
the U.S. Treasury and other
U.S. government agencies $119,393 $ 28 $ (118) $119,303
Certificates of deposit 8,103 - - 8,103
----- ---- ------- -----
$127,496 $ 28 $ (118) $127,406
======= ==== ======= =======
At March 31, 1997, these securities were classified as follows (in thousands):
Cash equivalents $ 23,510
Short-term investments 129,939
Long-term investments 12,254
--------
$165,703
========
</TABLE>
The Company has agreed to maintain investments with fair values of
$7,260,000 as of March 31, 1997 at the lending bank as collateral for loans from
that bank. See Note 7 - Debt.
Note 5
INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
December 31, 1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 5,279 $ 5,824
Work in process 10,334 7,948
Finished goods 8,573 10,043
------- -------
$ 24,186 $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.
12
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------
Note 6
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following: (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Licenses $ 5,846 $ 5,378
Goodwill 5,072 5,158
Debt issuance costs 716 755
CPIII advance payment 13,598 -
Deferred charges 22,870 23,026
Other 1,011 1,017
------- -------
$49,113 $35,334
======= =======
</TABLE>
Deferred charges at March 31, 1997 and December 31, 1996 include a
prepayment of future royalties and a prepayment associated with the
commercialization and market development of ReoPro. An advance payment of
$13,598,000 was made in January 1997 to the former Class A and Class C limited
partners of CP III.
Licensing agreements, goodwill and other assets are reviewed for impairment
whenever events or circumstances provide evidence that suggest that the carrying
amount of the asset may not be recoverable. Impairment is evaluated by using
identified or expected cashflows.
Note 7
DEBT
Notes Payable
Notes payable at March 31, 1997 and December 31, 1996 consists of
$6,383,000 and $6,897,000, respectively, of borrowings under short-term notes at
an interest rate of 3.644 percent per annum at March 31, 1997, payable in Dutch
guilders no later than September 27, 1997. These borrowings are secured by
investments at the lending bank of $7,260,000.
13
<PAGE>
Centocor, Inc. And Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
----------------------------------------------------------------
Long-term debt
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 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 March 31,
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 8
INCOME TAXES
A provision for income taxes of $70,000 was recorded for the three months
ended March 31, 1997 representing current federal income taxes. Realization of
net deferred tax assets related to the Company's loss carryforwards and other
items is dependent on future earnings, which remain uncertain and therefore the
Company recorded a reserve against the asset of approximately $294,000,000. 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 9
SUPPLEMENTAL INFORMATION ON CASH FLOWS
There was no interest paid for the three months ended March 31, 1997 as
compared to $4,516,000 paid for the three months ended March 31, 1996 due
principally to the conversion of the Company's 7 1/4% Convertible Notes due
February 2001 into the Company's Common Stock and the repayment of mortgage
loans in Europe.
Income tax payments for the three months ended March 31, 1997 and 1996 were
approximately $81,000 and $4,600, respectively.
14
<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 biotechnology 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 analyses, 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. 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 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.
Three months ended March 31, 1997 compared to the three months ended March 31,
1996
The increase in sales for the three months ended March 31, 1997 as compared
to the three months ended March 31, 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
15
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
expand the markets for both ReoPro and Panorex. For the three months ended March
31, 1997, ReoPro sales to Lilly were $35,263,000 and Lilly's announced sales to
end-users were $51,700,000. For the three months ended March 31, 1996 sales to
Lilly were $9,924,000 and Lilly's announced sales to end-users were $22,800,000.
For the three months ended March 31, 1997, the Company's sales of Panorex to
Glaxo Wellcome plc ("Glaxo Wellcome") were $929,000 as compared to $1,439,000
for the three months ended March 31, 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 as market
acceptance continues to grow and therefore the Company expects its sales of
ReoPro to Lilly to increase in 1997 over 1996 levels. 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 March 31, 1997 were
$8,744,000 as compared to $10,347,000 for the three months ended March 31, 1996.
The decrease in sales for the three months ended March 31, 1997 as compared to
the three months ended March 31, 1996 is primarily related to a 1996 stocking
order to a customer and the reduction in the sales price of certain of the
Company's diagnostic products. Diagnostic product sales in 1997 are expected to
be at least at the same level as sales levels achieved in 1996.
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 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 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
16
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
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 March 31, 1997 as
compared to the three months ended March 31, 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, the extent
of which will depend primarily on the amount and mix of products sold. Other
factors that can influence cost of sales include, but are not limited to,
exchange rate fluctuations, unplanned production losses, cell line yields,
increases in royalty obligations, costs of raw materials and production
interruptions due to plant upgrades.
Research and development expenses for the three months ended March 31, 1997
increased as compared to the three months ended March 31, 1996 due principally
to increased clinical trial activities to expand the indications for ReoPro and
the continued development of the Company's cA2 (infliximab) 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 cA2, primarily
phase III trials for the Crohn's and severe rheumatoid arthritis indications are
expected to begin in 1997. The Company also expects to incur additional clinical
trial expenses in 1997 in support of continued Panorex development primarily in
the United States and Europe.
Marketing, general and administrative expenses for the three months ended
March 31, 1997 increased as compared to the three months ended March 31, 1996
due principally to ReoPro and cA2 market development efforts and litigation
expenses. 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.
Interest income decreased for the three months ended March 31, 1997 as
compared to the three months ended March 31, 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.
Interest expense decreased for the three months ended March 31, 1997 as
compared to the three
17
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
months ended March 31, 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 income (expenses) increased for the three months ended March 31, 1997
as compared to the three months ended March 31, 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 carryforwards or other potential tax benefits
from prior years to offset its future tax liability.
PER SHARE CALCULATIONS
At March 31, 1997, approximately 3,965,000 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 antidilutive. 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 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.
18
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Had Statement 128 been adopted for the first quarter of 1997, basic and diluted
EPS would have been computed as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Income Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $3,271 69,517 $0.05
Incremental shares from assumed
exercise of dilutive options and warrants - 2,142 -
---------- ------ ---------
Diluted EPS $3,271 71,659 $0.05
========== ====== =========
</TABLE>
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 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 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 the Food
and Drug Administration, ("FDA") or other regulatory approvals 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 cA2, will have a material
adverse effect on the Company.
At March 31, 1997, the Company had cash, cash equivalents and investments
of $172,045,000, including equity investments of $8,281,000. For the three
months ended March 31, 1997, the Company
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
had negative cash flows from operations of $14,614,000 primarily related to the
advance payment of $13,598,000 to the Class A and Class C limited partners of
CPIII in January 1997. The Company's total cash flows for the three months ended
March 31, 1997 included the receipt of $3,958,000 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 March 31,1997 the Company has a note payable of $6,383,000
which is secured by investments at the lending bank of $7,260,000. The
Company's total cash, cash equivalents and investments decreased by $13,772,000
from December 31, 1996, principally as a result of the negative cashflows from
operations. The Company believes that its cash, cash equivalents and
investments will be sufficient to fund its operations through at least the end
of 1997.
Accounts Receivable at March 31, 1997 increased as compared to December 31,
1996 due to increased sales of ReoPro to Lilly.
Inventory at March 31, 1997 increased as compared to December 31, 1996 due
primarily to the increase in production of ReoPro.
Gross property, plant and equipment at March 31, 1997 decreased as compared
to December 31, 1996, principally due to the impact of exchange rates on
property and equipment denominated in foreign currencies partially offset by the
investment of $1,856,000 for the purchase of property and equipment. The Company
expects to increase its investments in property, plant and equipment by up to
approximately $30,000,000 in 1997 to support its manufacturing capacity
expansion plans. Presently, the Company also maintains certain idle or under-
utilized facilities. The Company continually evaluates the future needs for its
facilities and equipment. There can be no assurance that losses resulting from
sales, or reserves to reduce the carrying value, of certain fixed assets will
not be required in the future.
Long-term investments at March 31, 1997 increased as compared to December
31, 1996 principally due to the purchase of securities with maturities in excess
of one year classified as held to maturity.
Intangible and other assets at March 31, 1997 increased as compared to
December 31, 1996 resulting primarily from the advance payment to the Class A
and Class C limited partners of CPIII in January 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.
20
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
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 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.
21
<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 March 31, 1997:
Date of Report Item Covered
-------------- ------------
None.
22
<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: May 14, 1997 /s/ David P. Holveck
-----------------------------------
David P. Holveck
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ Dominic J. Caruso
-----------------------------------
Dominic J. Caruso
Vice President- Finance
and Chief Financial Officer and
Acting General Manager Diagnostics
Division (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
<TABLE>
<CAPTION>
For the three months ended March 31, 1997 1996
-------- --------
<S> <C> <C>
PRIMARY:
Weighted average shares outstanding 69,517 59,944
Net effect of dilutive stock option and warrants
based on the treasury stock method using
average market price 2,142 -
-------- --------
Totals 71,659 59,944
======== ========
Net income (loss) $3,271 ($9,698)
======== ========
Per share amount $ 0.05 ($0.16)
======== ========
FULLY DILUTED:
Weighted average shares outstanding 69,517 59,944
Net effect of dilutive stock option and warrants
based on the treasury stock method using
average market price which is greater than
quarter-end market price 2,142 -
-------- --------
Totals 71,659 59,944
======== ========
Net income (loss) $3,271 ($9,698)
======== ========
Per share amount $ 0.05 ($0.16)
======== ========
</TABLE>
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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 29,852
<SECURITIES> 129,939
<RECEIVABLES> 34,616
<ALLOWANCES> 0
<INVENTORY> 24,186
<CURRENT-ASSETS> 222,516
<PP&E> 137,653
<DEPRECIATION> 78,348
<TOTAL-ASSETS> 343,188
<CURRENT-LIABILITIES> 46,360
<BONDS> 54,765
0
0
<COMMON> 697
<OTHER-SE> 240,196
<TOTAL-LIABILITY-AND-EQUITY> 343,188
<SALES> 44,936
<TOTAL-REVENUES> 45,036
<CGS> 17,806
<TOTAL-COSTS> 17,806
<OTHER-EXPENSES> 24,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 997
<INCOME-PRETAX> 3,341
<INCOME-TAX> 70
<INCOME-CONTINUING> 3,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,271
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
