Medco Research, Inc.
1 of 12
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 September 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. 11,097,247 as of October 19, 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>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1995 1994*
-------------------------------------------
(Unaudited)
<S> <C> <C>
(in thousands except per share data)
Assets
Current assets:
Cash and cash equivalents $ 5,486 $ 1,053
Investments
Securities available for sale 5,492 8,178
Securities held to maturity 17,904 15,960
Accounts and notes receivable:
Royalties 2,533 2,416
Joint development partner - 254
Other 1,706 106
Accrued interest income 186 405
Prepaid expenses 352 340
-------------------------------------------
Total current assets 33,659 28,712
Investments held to maturity 9,113 15,563
Deferred asset 1,582 -
Property and equipment, at cost, net of accumulated depreciation
and amortization 307 315
Patent, trademark and distribution rights, at cost, net of
accumulated amortization 83 90
===========================================
Total assets $44,744 $44,680
===========================================
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses $ 2,527 $ 1,585
Accrued royalties 658 2,244
-------------------------------------------
Total current liabilities 3,185 3,829
Deferred revenue 2,170 1,950
Deferred royalty payments 2,466 -
Stockholders' equity
Common stock, no par value, authorized 40,000,000 shares, issued and
outstanding 11,097,247 shares at September 30, 1995 and 11,020,947 at
December 31, 1994
51,875 51,376
Unrealized gain (loss) on investment securities available for
sale 56 (292)
Accumulated deficit (15,008) (12,183)
-------------------------------------------
Total stockholders' equity 36,923 38,901
===========================================
Commitments and contingencies
===========================================
===========================================
Total liabilities and stockholders' equity $44,744 $44,680
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------------------
September 30 September 30 September 30 September 30
1995 1994 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands except per share data)
Revenues:
Royalty revenue $2,365 $2,079 $7,657 $6,066
Interest income 552 598 1,717 1,627
Other income (loss) - - - (7)
----------------------------------------------------------------------------------------
2,917 2,677 9,374 7,686
Costs and expenses:
Royalty expense 658 1,039 3,304 3,033
Research and development costs 1,973 1,310 5,599 4,108
General and administrative expenses 777 941 3,296 2,999
----------------------------------------------------------------------------------------
3,408 3,290 12,199 10,140
----------------------------------------------------------------------------------------
Loss before income taxes (491) (613) (2,825) (2,454)
Provisions for income taxes - - - -
========================================================================================
Net loss (491) (613) (2,825) (2,454)
========================================================================================
Net loss per share $(0.04) $(0.06) $(0.26) $(0.22)
========================================================================================
Weighted average number of common shares
and common share equivalents outstanding
11,032 11,141 11,016 11,168
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Unrealized gain
(loss) on
investment
Number of securities
shares available for Accumulated
issued Amount sale deficit Total
----------------------------------------------------------------------------------------------
<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
Stock options exercised 90,000 613 613
Unrealized gain (loss) on
investment securities
available 348 348
for sale
Net Loss (2,825) (2,825)
==================================================================================================
Balance at September 30, 1995 11,097,247 $51,875 $56 $(15,008) $36,923
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
September 30 September 30
1995 1994
---------------------------------------
(in thousands except per share data)
<S> <C> <C>
Operating activities
Net loss $(2,825) $(2,454)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment
90 71
Amortization of patent, trademark and
distribution rights 7 7
Loss (gain) on sale of equipment - 6
Loss (gain) on investments available for
sale (6) -
Net amortization of investment discount
(516) (267)
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 (1,463) 17
Prepaid expenses (12) (276)
Accounts payable and accrued expenses
942 415
Accrued royalty expense (1,587) (867)
Accrued interest income 219 310
Deferred asset (1,582) -
Deferred royalty payment 2,466 -
Deferred royalty income 220 950
---------------------------------------
Net cash used in operating activities $(4,003) $(2,088)
---------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------------------
September 30 September 30
1995 1994
------------------------------------------------------
(in thousands except per share data)
<S> <C> <C>
Investing activities
Purchase of securities held to maturity $(73,308) $(34,942)
Purchase of securities available for sale (271) -
Sale of securities available for sale 3,312 8,034
Maturity of securities held to maturity 76,905 28,000
Principal repayments on securities held to
maturity 1,425 881
Purchases of property and equipment (82) (98)
Proceeds from sale of equipment - 1
------------------------------------------------------
Net cash provided by investing activities 7,981 1,876
------------------------------------------------------
Financing activities
Net proceeds from exercise of stock options
613 -
Purchase of stock for retirement (158) (928)
------------------------------------------------------
Net cash provided by (used in) financing
activities 455 (928)
------------------------------------------------------
Increase (decrease) in cash and cash equivalents
4,433 (1,140)
Cash and cash equivalents at beginning of period
1,053 12,656
------------------------------------------------------
Cash and cash equivalents at end of period
$5,486 $11,516
======================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
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.
Class Action Litigation
In September 1993, the Company, and certain of its past and then directors and
officers 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.
On November 7, 1995, the Company served its answers to the complaints in the two
consolidated class action lawsuits. The answers denied the material allegations
of the complaints and asserted affirmative defenses, including among others that
the Company did not commit securities fraud, that the Company did not make any
untrue representations, that the Company made adequate disclosure about the
Adenoscan(R) NDA and that the complaints were not filed timely by reason of the
applicable statute of limitations.
During the fiscal quarter ending March 31, 1996, the Company expects to serve a
summary judgment motion seeking the dismissal of these lawsuits on the merits.
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.
Fujisawa/Abbott Settlement
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(R) 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 MEDR640, 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.
Included in liabilities at September 30, 1995 is an accrued liability (current
and non-current portion) of $3.27 million relating to the balance of the
Company's guaranteed royalty obligation to Abbott. Included in assets at
September 30, 1995 is a deferred asset (current and non-current portion) of
$3.18 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 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
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
Third Quarter and Nine Months of 1995 Compared To Third Quarter and Nine Months
of 1994
Operating Results. The third quarter resulted in a loss of $0.5 million or
$(0.04) per share, and a nine month loss of $2.8 million or $(0.26) per share,
compared to losses of $0.6 million or $(0.06) per share, and $2.5 million or
$(0.22) per share, for the year earlier periods.
Revenue. The Company's royalty revenue for the third quarter 1995 increased 14%
and 26% for the first nine months over the comparable periods of 1994,
reflecting increased sales of adenosine (Adenocard(R) and Adenoscan(R)) from the
July 31st launch of Adenoscan(R) in the U.S. by Fujisawa USA, the Company's
North American licensee. Fujisawa is responsible for substantially all of the
royalty revenue to the Company.
Total royalty revenue decreased 16% for the third quarter 1995 compared to the
second quarter 1995. The decrease in total royalty revenue reflects the expected
reduction in Adenocard(R) sales which occurred with the introduction of
Adenoscan(R). However, net royalty revenue (royalty revenue less royalty
expense) increased by 21% since there is no royalty expense associated with
Adenoscan(R) (see discussion of royalty expense below).
Fujisawa's launch of Adenoscan(R) is still in progress. Short-term goals are to
sell Adenoscan(R) to purchasers of Adenocard(R) and to open accounts with and
supply wholesalers, distributors and radiopharmacies. Intermediate objectives
include placing Adenoscan(R) on the formularies of managed care organizations
and on the lists of insurance-reimbursable products, implementing an
Adenoscan(R) advertisement campaign in medical journals, disseminating recently
available pharmacoeconomic data demonstrating cost savings obtained from the use
of Adenoscan(R) compared to dipyridamole, the market leader, and converting
users of dipyridamole.
Fujisawa has made substantial progress in achieving its immediate objective of
establishing a distribution infrastructure for Adenoscan(R), and it also has
begun to realize some of the above-referenced intermediate objectives. However,
Fujisawa's Adenoscan(R) sales through September 30, 1995 appear to represent
principally the initial inventory buildup necessary to fulfill potential product
orders (and not sales to end-users). Accordingly, reported Adenoscan(R) sales do
not indicate the level of actual Adenoscan(R) use. The Company therefore
believes that no inferences can be drawn at this time about Adenoscan(R)'s
market penetration or sales trends, or the level at which Adenocard(R) sales
will stabilize.
Costs and Expenses. Total costs and expenses for the third quarter 1995
increased 4% and 20% for the first nine 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), decreased 37% during the third quarter and increased 9% during the
nine months, reflecting the expected reduction in Adenocard(R) sales that
occurred with the introduction of Adenoscan(R). There is no royalty expense
associated with the royalty income received from Adenoscan(R) sales.
Research and Development expenditures for the third quarter 1995 were $2.0
million and $5.6 million for the first nine months of 1995, compared to $1.3
million and $4.1 million for the comparable periods of 1994, an increase of 51%
and 36%, respectively. This increase largely reflects the additional costs
associated with a pivotal bioequivalence study and manufacturing scale-up of
BiDil(R). On October 18, 1995, the Company announced that its data analyses of
two pivotal Phase III clinical trials indicate that its novel imaging agent for
the assessment of myocardial viability, ViaScint(TM) (I-123 Iodophenyl
pentadecanoic acid), appears to provide the means to predict, with high
accuracy, which patients will have improvement in cardiac function following
revascularizaton. Based on the foregoing, the Company plans to pursue the filing
of New Drug Applications with the U.S. Food and Drug Administration (FDA) for
BiDil(R) and ViaScint(TM) targeted for no later than first quarter of 1996. The
Company accordingly expects to incur in its fourth quarter 1995 research and
development expenses at a level which could be significantly higher, and will
not be less than that incurred in the third quarter in order to complete these
FDA filings.
General and administrative expenses for the third quarter 1995 were $0.8 million
and $0.9 million for the comparable period of 1994, a decrease of 17%. General
and administrative expenses for the first nine months were $3.3 million and $3.0
million for the comparable period of 1994, an increase of 10%. The nine month
increase is 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 September 30, 1995, the Company had total cash and investments of
$37,995,000 comprised of $5,486,000 of cash and cash equivalents and $32,509,000
of investments, primarily in U.S. Treasury Notes and debt securities of various
federal governmental agencies. The Company's working capital as of September 30,
1995 was $30,474,000 an increase of $5,591,000 as compared to December 31, 1994,
due to a shift from non-current investments to current investments in first
quarter 1995.
Included in liabilities at September 30, 1995 is an accrued liability (current
and non-current portion) of $3.27 million relating to the balance of the
Company's guaranteed royalty obligation to Abbott. Included in the assets at
September 30, 1995 is a deferred asset (current and non-current portion) of
$3.18 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 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 Class Action Litigation, paragraphs 2 and
3, inclusive, set fourth in the Notes to the Financial Statements set forth in
Item 1 of Part I of this Report, set forth on pages 7 & 8 hereof.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
11. Computation of Net Loss per Common Share
b. Reports on Form 8-K:
None
<PAGE>
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: November 10,1995 /s/ Roger D. Blevins
---------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: November 10, 1995 /s/ John E. Barnhardt
---------------------
John E. Barnhardt
Chief Financial Officer
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30 September 30 September 30
1995 1994 1995 1994
--------------- ------------------- --------------------- -------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 11,032 11,141 11,016 11,168
Net effect of dilutive stock options
based on the treasury stock method
using average market price * * * *
=============== =================== ===================== ===================
11,032 11,141 11,016 11,168
=============== =================== ===================== ===================
Net loss $(491) $(613) $(2,825) $(2,454)
=============== =================== ===================== ===================
Per share $(0.04) $(0.06) $(0.26) $(0.22)
=============== =================== ===================== ===================
FULLY DILUTED
Weighted average shares outstanding 11,032 11,141 11,016 11,168
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price * * * *
--------------- ------------------- --------------------- -------------------
11,032 11,141 11,016 11,168
=============== =================== ===================== ===================
Net loss $(491) $(613) $(2,825) $(2,454)
=============== =================== ===================== ===================
Per share $(0.04) $(0.06) $(0.26) $(0.22)
=============== =================== ===================== ===================
</TABLE>
*Antidilutive
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,486
<SECURITIES> 23,396
<RECEIVABLES> 4,777
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,659
<PP&E> 645
<DEPRECIATION> 338
<TOTAL-ASSETS> 44,744
<CURRENT-LIABILITIES> 3,185
<BONDS> 0
<COMMON> 51,875
0
0
<OTHER-SE> (14,952)
<TOTAL-LIABILITY-AND-EQUITY> 44,744
<SALES> 0
<TOTAL-REVENUES> 9,374
<CGS> 0
<TOTAL-COSTS> 12,199
<OTHER-EXPENSES> 12,199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,825)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,825)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
