Medco Research, Inc.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 1-9771
MEDCO RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3318451
(State or other Jurisdiction of (I.R.S. Identification No.)
Employer incorporation or
organization)
85 T W Alexander Drive,
Research Triangle Park, North Carolina 27709
(Address of principal executive offices) (Zip Code)
(919) 549-8117
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock American Stock Exchange
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (b) 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
Indicate the number of shares outstanding of common stock, as of the
latest practical date. 11,007,247 as of August 4, 1995.
Pursuant to the Securities Exchange Act of 1934 Release 15502 and Rule
240.03 (b), the pages of this document have been numbered sequentially. The
total pages contained herein are 12 .
<PAGE>
<TABLE>
Medco Research, Inc.
Consolidated Balance Sheets
<CAPTION>
June 30 December 31
1995 1994*
(in thousands except per share data) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,284 $ 1,053
Investments
Securities available for sale 5,382 8,178
Securities held to maturity 17,732 15,960
Accounts and notes receivable:
Royalties 2,793 2,416
Joint development partner - 254
Other 1,706 106
Accrued interest income 262 405
Prepaid expenses 432 340
Total current assets 33,591 28,712
Investments held to maturity 10,712 15,563
Deferred asset 1,750 -
Property and equipment, at cost, net of
accumulated depreciation and amortization 305 315
Patent, trademark and distribution rights, at
cost, net of accumulated amortization 85 90
Total assets $46,443 $44,680
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,294 $ 1,585
Accrued royalties 2,645 2,244
Total current liabilities 4,939 3,829
Deferred revenue 2,170 1,950
Deferred royalty payments 2,550 -
Stockholders' equity
Common stock, no par value, authorized
40,000,000 shares, issued and outstanding
11,007,247 shares at July 30, 1995 and 51,262 51,376
11,020,947 at December 31, 1994
Unrealized gain (loss) on investment securities
available for sale 40 (292)
Accumulated deficit (14,518) (12,183)
Total stockholders' equity 36,784 38,901
Commitments and contingencies
Total liabilities and stockholders' equity
$46,443 $44,680
</TABLE>
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
<PAGE>
<TABLE>
Medco Research, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 1995 June 30 1994 June 30 1995 June 30 1994
(in thousands except per share data)
<S> <C> <C> <C> <C>
Revenues:
Royalty revenue $2,824 $2,042 $5,292 $3,987
Interest income 578 575 1,165 1,028
Other income (loss) - (6) - (6)
3,402 2,611 6,457 5,009
Costs and expenses:
Royalty expense 1,412 1,021 2,646 1,994
Research and development costs 2,107 1,559 3,627 2,798
General and administrative expenses 1,906 1,145 2,519 2,057
5,425 3,725 8,792 6,849
Loss before income taxes (2,023) (1,114) (2,335) (1,840)
Provisions for income taxes - - - -
Net loss (2,023) (1,114) (2,335) (1,840)
Net loss per share $(0.18) $(0.10) $(0.21) $(0.16)
Weighted average number of common shares and
common share equivalents outstanding
11,007 11,175 11,008 11,179
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
(in thousands, except share data)
Common Stock
Unrealized gain
(loss) on
Number of investment
shares securities Accumulated
issued Amount available deficit Total
for sale
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 11,020,947 $51,376 $(292) $(12,183) $38,901
Stock repurchased and retired (13,700) (158) (158)
Compensation expense related to
stock options 44 44
Unrealized gain (loss) on
investment securities
available for sale 332 332
Net Loss (2,335) (2,335)
Balance at June 30, 1995 11,007,247 $51,262 $40 $(14,518) $36,784
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
SIX MONTHS ENDED
June 30 June 30
1995 1994
(in thousands except per share data)
<S> <C> <C>
Operating activities
Net loss $(2,335) $(1,840)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment
58 44
Amortization of patent, trademark and
distribution rights 5 5
Loss (gain) on sale of equipment - 6
Loss (gain) on investments available for
sale (6) -
Net amortization of investment discount (339) (197)
Settlement payment from Fujisawa 2,000 -
Settlement payment to Abbott (2,000) -
Compensation expense related to stock
options 44 -
Changes in operating assets and liabilities:
Accounts and notes receivable (1,723) 68
Prepaid expenses (92) 33
Accounts payable and accrued expenses 709 607
Accrued royalty expense 401 78
Accrued interest income 143 56
Deferred asset (1,750) -
Deferred royalty payment 2,550 -
Deferred royalty income 220 950
Net cash used in operating activities $(2,115) $(190)
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(continued)
<CAPTION>
SIX MONTHS ENDED
June 30 JUNE 30
1995 1994
(in thousands except per share data)
<S> <C> <C>
Investing activities
Purchase of securities held to maturity $(36,892) $(27,899)
Purchase of securities available for sale (178) (5,000)
Sale of securities available for sale 3,312 -
Maturity of securities held to maturity 39,484 31,034
Principal repayments on securities held to
maturity 826 527
Purchases of property and equipment (48) (38)
Proceeds from sale of equipment - 1
Net cash provided by (used in) investing
activities 6,504 (1,375)
Financing activities
Purchase of stock for retirement (158) (122)
Net cash used in financing activities (158) (122)
Increase (decrease) in cash and cash equivalents 4,231 (1,687)
Cash and cash equivalents at beginning of period 1,053 12,656
Cash and cash equivalents at end of period $5,284 $10,969
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Medco Research, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim financial statements have been prepared by Medco
Research, Inc. (the "Company") in accordance with generally accepted accounting
principles. Certain disclosures and information normally included in financial
statements have been condensed or omitted. In the opinion of the management of
the Company, these financial statements contain all adjustments (all of a
recurring nature) necessary for a fair presentation for the interim periods.
These statements should be read in conjunction with the financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
In September 1993, the Company, along with Kemper Securities Group, Inc. and
Vector Securities International, Inc., were named in two class action lawsuits
filed in the United States District Court, Northern District of Illinois. The
suits allege that the Company and the other defendants violated Section 10 (b)
of the Securities Exchange Act of 1934 and Rule 10 (b) (5) promulgated
thereunder and made negligent misrepresentations in connection with the
Company's January 1992 secondary stock offering and otherwise during the period
November 19, 1990 through April 28, 1993. In September 1994, the Company's
motion to dismiss was granted. Plaintiffs appealed in October 1994. On May 16,
1995 the United States Court of Appeals for the 7th Circuit reversed the
dismissal. The case is in the prediscovery stage, and therefore it is not
possible at this time to evaluate the outcome; however, the Company's management
believes the class action lawsuits are totally without merit and has instructed
its counsel to take all appropriate action to vigorously defend the Company.
In May 1995, the litigation pending between Fujisawa USA, Inc. (Fujisawa) and
the Company, regarding the rights to manufacture and market Adenoscan(R) in the
United States and Canada, was settled and the Company and Abbott Laboratories,
Inc. (Abbott) terminated their manufacturing and marketing agreements regarding
the Adenoscan(R) drug and settled Medco's outstanding obligations thereunder.
Pursuant to the settlement agreement with Fujisawa, the December 21, 1988 Joint
Development and License Agreement between the parties remains in full force and
effect except as expressly amended and Fujisawa remains the Company's exclusive
licensee to manufacture and market Adenoscan(R) in the United States and Canada.
Fujisawa agreed to pay the Company within fifteen days after FDA marketing
clearance of Adenoscan(R) the sum of $2 million, representing certain research
and development expenses incurred by the Company, and to pay the Company
royalties of 29 percent of Adenoscan net sales in the United States and Canada
for the first five years after the commencement of commercial sales in each
territory. Thereafter Fujisawa would pay the Company royalties of 25% of sales
until June 10, 2007 at which time Fujisawa would have a paid up license within
such territories.
Fujisawa also agreed to pay royalties to the Company in respect of periods of
more than thirty days in which it is unable to fulfill Adenoscan(R) orders for
reasons other than force majeure and other specified events, such royalties to
be at the then prevailing rate based on the average daily sales of Adenoscan(R)
during the preceding twelve months. Fujisawa also agreed generally to maintain
an inventory of at least six months of Adenoscan(R) finished product and
work-in-process, to be stored at multiple locations, to provide the Company
within one year with data necessary to qualify Fujisawa's Melrose Park, Illinois
plant as an alternate Adenoscan(R) manufacturing facility and to use its best
efforts to identify and provide data to the Company to qualify with the FDA an
alternate supplier of the adenosine raw material necessary for the manufacture
of Adenoscan(R). The parties also agreed as soon as practicable to enter into
an agreement to jointly develop adenosine based products having indications as
cardioprotective agents, such as MEDR 640, and for that purpose Fujisawa would
grant to the Company an exclusive sublicense under U.S. patent 4,880,783 under
which Fujisawa is the exclusive licensee. Fujisawa would have exclusive
manufacturing and marketing rights in the U.S., Canada, Mexico and other
territories to be agreed upon and it would pay the Company 25% of net sales
within the territories. The companies would share equally all costs of
development and any royalties due to third parties.
The Company agreed to pay Abbott a royalty of two percent of net sales of
Adenoscan(R) for the first five years of commercial sales, up to a maximum of
$5.35 million, of which $2 million was payable within fifteen days after FDA
marketing clearance of Adenoscan(R) as an advance royalty payment and the
remainder payable based upon actual sales of Adenoscan(R). The Company also
agreed that if at the conclusion of the five year period Abbott had not received
an aggregate of $5.35 million, including the $2 million advance, Medco would pay
Abbott any deficiency. Abbott relinquished all claims to royalty payments in
excess of that amount. Finally, the Company agreed to pay Abbott $330,560 for
the reimbursement of research and development and other expenses incurred in
connection with Adenoscan(R). The Company expensed $330,560 in the first quarter
of 1995.
In connection with the accounting for these settlements, the Company has
recorded the $5.35 million due to Abbott as an obligation and the $5.35 million
of royalties to be earned and paid by Fujisawa as a deferred asset. The Company
has recorded the $2 million received from Fujisawa as a reduction of the asset
and the $2 million paid to Abbott as a reduction of the liability, during the
three months ended June 30, 1995. Included in liabilities at June 30, 1995 is
an accrued liability (current and non-current portion) of $3.35 million relating
to the balance of the Company's guaranteed royalty obligation to Abbott.
Included in assets at June 30, 1995 is a deferred asset (current and non-current
portion) of $3.35 million relating to royalties to be received by the Company
from Fujisawa and paid by the Company to Abbott. Four percent of the royalties
of 29% of Adenoscan(R) net sales received by the Company will be applied to the
deferred asset of $3.35 million and 25% will be recognized as royalty revenue.
At such time, if any, during the first five years that the deferred asset is
fully recovered, the Company thereafter will recognize royalty revenue of 29%
through the end of the five year period. The Company will write-off any portion
of this deferred asset at such time, if any, in which it becomes probable that
the incremental 4% royalty revenue will be insufficient to recover the remaining
balance of this deferred asset.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Medco Research, Inc.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's operating results and financial
position during the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
Second Quarter and Six Months of 1995 Compared To Second Quarter
and Six Months of 1994
Operating Results. The second quarter resulted in a loss of $2.0 million or
$(0.18) per share, and a six month loss of $2.3 million or $(0.21) per share,
compared to losses of $1.1 million or $(0.10) per share, and $1.8 million or
$(0.16) per share, for the year earlier periods.
Revenue. The Company's royalty revenue for the second quarter 1995 increased
38% and 33% for the first six months over the comparable periods of 1994,
reflecting increased sales of Adenocard(R) by Fujisawa, the Company's North
American licensee, and increased sales of Adenocor by Sanofi. Fujisawa is
responsible for substantially all of the royalty revenue to the Company.
However, there is no assurance that the Adenocard(R) sales trend or level will
continue in future quarters. Investment income increased 13% during the first
six months of 1995 as compared to the first six months of 1994.
Costs and Expenses. Total costs and expenses for the second quarter 1995
increased 46% and 28% for the first six months over the comparable periods of
1994.
Royalty expense, which represents one-half of royalty revenue earned by the
Company from Adenocard(R) sales and is payable to the University of Virginia
Alumni Patents Foundation from which the Company acquired exclusive rights to
Adenocard(R), increased 38% during the second quarter and 33% during the six
months, corresponding to the increase in royalty revenue.
Research and Development expenditures for the second quarter 1995 were $2.1
million and $3.6 million for the first six months of 1995, compared to $1.6
million and $2.8 million for the comparable periods of 1994, an increase of 35%
and 30%, respectively. This largely reflects the advanced stages of testing for
BiDil(R) and ViaScint(TM) as these products near NDA submissions targeted for
year-end. Research and Development costs are expected to continue increasing
during the immediate future as a result of the Company's pursuit of filing two
NDA's and the development of new product opportunities.
General and administrative expenses for the second quarter 1995 were $1.9
million and $1.1 million for the comparable period of 1994, an increase of 66%.
General and administrative expenses for the first six months were $2.5 million
and $2.1 million for the comparable period of 1994, an increase of 22%. These
increases are attributed to the accounting treatment, resulting in one-time
charges, associated with three separate events from the second quarter (1) the
settlement of the litigation among Medco Research, Fujisawa USA, and Abbott
Laboratories related to the manufacturing and marketing rights to Adenoscan(R),
(2) resignation of the former President of the Company, and (3) the expenses
incurred preceding the termination of a proposed merger with Repligen
Corporation.
FINANCIAL CONDITION
As of June 30, 1995, the Company had total cash and investments of $39,110,000
comprised of $5,284,000 of cash and cash equivalents and $33,826,000 of
investments, primarily in U.S. Treasury Notes and debt securities of various
federal governmental agencies. The Company's working capital as of June 30,
1995 was $28,652,000 an increase of $3,769,000 as compared to December 31, 1994,
due to a shift from non- current investments to current investments in first
quarter 1995.
In connection with the accounting for these settlements, the Company has
recorded the $5.35 million due to Abbott as an obligation and the $5.35 million
of royalties to be earned and paid by Fujisawa as a deferred asset. The Company
has recorded the $2 million received from Fujisawa as a reduction of the asset
and the $2 million paid to Abbott as a reduction of the liability, during the
three months ended June 30, 1995. Included in liabilities at June 30, 1995 is
an accrued liability (current and non-current portion) of $3.35 million relating
to the balance of the Company's guaranteed royalty obligation to Abbott.
Included in the assets at June 30, 1995 is a deferred asset (current and
non-current portion) of $3.35 million relating to royalties to be received by
the Company from Fujisawa and paid by the Company to Abbott. Four percent of
the royalties of 29% of Adenoscan(R) net sales received by the Company will be
applied to the deferred asset of $3.35 million and 25% will be recognized as
royalty revenue. At such time, if any, during the first five years that the
deferred asset is fully recovered, the Company thereafter will recognize royalty
revenue of 29% through the end of the five year period. The Company will
write-off any portion of this deferred asset at such time, if any, in which it
becomes probable that the incremental 4% royalty revenue will be insufficient to
recover the remaining balance of this deferred asset.
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, two of which
are currently being commercially produced and marketed, the Company does not
anticipate that inflation will materially impact its costs of operation or the
profitability of its products when marketed.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by reference are paragraphs 3 through 7,
inclusive, of the Notes to the Financial Statements set forth in Item 1 of Part
I of this Report, set forth on pages 7 & 8 hereof. As discussed in such
paragraphs on May 16, 1995 an Appellate Court reversed the dismissal of the
class action litigations pending against the Company, and on May 22, 1995 the
Company, Fujisawa and Abbott settled the litigations over Adenoscan(R)
manufacturing and marketing rights in the United States and Canada.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
11. Computation of Net Loss per Common Share
10.01 Medco Research and Fujisawa, U.S.A. Mutual
Release and Settlement Agreement, dated
May 22, 1995
b. Reports on Form 8-K:
None
<PAGE>
Medco Research, Inc.
SIGNATURES
Pursuant to 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.
Date: August 11,1995 /s/ Roger D. Blevins
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: August 11, 1995 /s/ John E. Barnhardt
John E. Barnhardt
Chief Financial Officer
<TABLE>
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30 June 30 June 30
1995 1994 1995 1994
(in thousands except per share data)
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 11,007 11,175 11,008 11,179
Net effect of dilutive stock options
based on the treasury stock method
using average market price * * * *
11,007 11,175 11,008 11,179
Net loss $(2,023) $(1,114) $(2,335) $(1,840)
Per share $(0.18) $(0.10) $(0.21) $(0.16)
FULLY DILUTED
Weighted average shares outstanding 11,007 11,175 11,008 11,179
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price * * * *
11,007 11,175 11,008 11,179
Net loss $(2,023) $(1,114) $(2,335) $(1,840)
Per share $(0.18) $(0.10) $(0.21) $(0.16)
</TABLE>
*Antidilutive
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 5,284
<SECURITIES> 23,114
<RECEIVABLES> 4,499
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,591
<PP&E> 611
<DEPRECIATION> 306
<TOTAL-ASSETS> 46,443
<CURRENT-LIABILITIES> 4,939
<BONDS> 0
<COMMON> 51,262
0
0
<OTHER-SE> (14,478)
<TOTAL-LIABILITY-AND-EQUITY> 46,443
<SALES> 0
<TOTAL-REVENUES> 6,457
<CGS> 0
<TOTAL-COSTS> 8,792
<OTHER-EXPENSES> 8,792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,335)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,335)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,335)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
