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 September 30, 1996
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 10,860,532 as of November 4, 1996.
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.
1
<PAGE>
Medco Research, Inc.
Part I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C>
September 30 December 31
1996 1995*
--------------------------------------
(in thousands except per share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,336 $ 4,305
Investments
Securities available for sale - 5,665
Securities held to maturity 19,435 17,571
Accounts and notes receivable:
Royalties 4,668 2,204
Other 1,381 1,531
Accrued interest income 155 252
Prepaid expenses 445 327
--------------------------------------
Total current assets 34,420 31,855
Investments held to maturity 6,971 9,005
Deferred asset 870 1,852
Property and equipment, at cost, net of accumulated depreciation and amortization 295 330
Patent, trademark and distribution rights, at cost, net of accumulated amortization 388 80
--------------------------------------
Total assets $42,944 $43,122
======================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,499 $ 2,812
Accrued royalties 524 1,309
--------------------------------------
Total current liabilities 3,023 4,121
Deferred revenue 548 1,300
Deferred royalty payments 2,090 2,601
--------------------------------------
Total liabilities 5,661 8,022
Stockholders' equity
Common stock, no par value, authorized 40,000,000 shares; shares issued of
11,155,832 and 11,155,832 at September 30, 1996, and December 31, 1995
respectively; shares outstanding of 10,913,132 and 11,013,732 at September
30,1996 and December 31, 1995 respectively. 52,216 52,216
Unrealized gain on investment securities available for sale - 134
Cost of stock held in treasury, 242,700 shares at September 30, 1996 and 142,100
shares at December 31, 1995 (2,532) (1,535)
Accumulated deficit (12,401) (15,715)
--------------------------------------
Total stockholders' equity 37,283 35,100
--------------------------------------
Commitments and contingencies
======================================
Total liabilities and stockholders' equity $42,944 $ 43,122
======================================
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
</TABLE>
2
<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
<S> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------------------
September 30 September 30 September 30 September 30
(in thousands except per share data) 1996 1995 1996 1995
----------------------------------------------------------------------------------------
Net Revenues:
Royalty revenue $3,938 $2,365 $9,978 $7,657
Royalty expense 526 658 1,917 3,304
----------------------------------------------------------------------------------------
Gross Margin 3,412 1,707 8,061 4,353
Operating Expenses:
Research & development costs 1,490 1,973 4,248 5,599
General and administrative expenses 602 777 2,294 3,296
----------------------------------------------------------------------------------------
2,092 2,750 6,542 8,895
Other Income:
Interest income 477 552 1,501 1,717
Other income - - 350 -
----------------------------------------------------------------------------------------
477 552 1,851 1,717
----------------------------------------------------------------------------------------
Net income (loss) before income taxes 1,797 (491) 3,370 (2,825)
Provisions for income taxes 42 - 56 -
Net income (loss) 1,755 (491) 3,314 (2,825)
========================================================================================
Net income (loss) per share $ 0.16 $(0.04) $0.30 $(0.26)
========================================================================================
Weighted average number of common shares
and common share equivalents outstanding 10,930 11,032 10,947 11,016
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Stockholders' Equity
(Unaudited)
<CAPTION>
<S> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996
(in thousands, except share data)
Common Stock
-----------------------------------
Unrealized
gain
(loss) on
investment Cost of
securities Stock
Number of available Accumulated held in
shares Amount for sale deficit Treasury Total
-----------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 11,013,732 $52,216 $134 $(15,715) $(1,535) $35,100
Stock held in (100,600) - - - (997) (997)
treasury
Unrealized gain on
investment
securities
available for sale - - (134) - - (134)
Net Income - - - 3,314 - 3,314
===========================================================================================================
Balance at
September 30, 1996 10,913,132 $52,216 $ - $(12,401) $(2,532) $37,283
===========================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
<S> <C>
NINE MONTHS ENDED
--------------------------------------------
September 30 September 30
1996 1995
--------------------------------------------
(in thousands except per share data)
Operating activities
Net income (loss) $ 3,314 $ (2,825)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment 104 90
Amortization of patent, trademark and
distribution rights 44 7
Gain on investments available for sale (49) (6)
Net amortization of investment discount (261) (516)
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 (2,314) (1,463)
Prepaid expenses (118) (12)
Accounts payable and accrued expenses (313) 942
Accrued royalty expense (785) (1,587)
Accrued interest income 97 219
Deferred asset 982 (1,582)
Deferred royalty payment (511) 2,466
Deferred royalty income (752) 220
--------------------------------------------
Net cash used in operating activities $ (562) $(4,003)
--------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Cash Flows
(continued)
<CAPTION>
<S> <C>
NINE MONTHS ENDED
----------------------------------------------------
September 30 September 30
1996 1995
----------------------------------------------------
(in thousands except per share data)
Investing activities
Purchase of securities held to maturity $(112,112) $(73,308)
Purchase of securities available for sale (76) (271)
Sale of securities available for sale 5,656 3,312
Maturity of securities held to maturity 112,542 76,905
Principal repayments on securities held to maturity - 1,425
Purchases of property and equipment (69) (82)
Purchase of patent & license (351) -
----------------------------------------------------
Net cash provided by investing activities 5,590 7,981
----------------------------------------------------
Financing activities
Net proceeds from exercise of stock options - 613
Purchase of stock for retirement - (158)
Purchase of stock held in treasury (997) -
----------------------------------------------------
Net cash provided by (used in) financing activities (997 455
----------------------------------------------------
Increase in cash and cash equivalents 4,031 4,433
Cash and cash equivalents at beginning of period 4,305 1,053
----------------------------------------------------
Cash and cash equivalents at end of period $8,336 $5,486
====================================================
See accompanying notes to consolidated financial statements
</TABLE>
6
<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, 1995.
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.
On February 20, 1996, defendants moved for summary judgment on the basis that
Plaintiffs' claims are barred by the statute of limitations and, in the
alternative, assuming plaintiffs' allegations are true, any misrepresentations
by defendants caused no losses to the plaintiffs. On May 9, 1996 the United
States District Court, Northern District of Illinois, granted the summary
judgment motion of the Company and the other defendants. The Court concluded
that the plaintiffs' federal securities fraud claims were barred by the statute
of limitations.
Plaintiffs have filed with the United States Court of Appeals for the 7th
Circuit a notice of appeal. All briefs have been filed and the parties are
awaiting the Court's determination of a date for oral argument of the appeal.
7
<PAGE>
ITEM 2. 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 1996 Compared to Third Quarter and Nine Months
of 1995
Net Revenues. Royalty revenues were $3.938 million and $9.978 million for the
third quarter and first nine months of 1996, an increase of 67% and 30%,
respectively, over the comparable periods of 1995. This increase reflects
continued growth of Adenoscan sales. Fujisawa USA, Inc. ("Fujisawa") is
responsible for substantially all of the royalty revenue of the Company.
Gross Margin. Gross margin from adenosine revenues was $3.412 million and $8.061
million for the third quarter and first nine months of 1996, an increase of 100%
and 85%, respectively, over the comparable periods of 1995. This significant
increase reflects a continuing shift in the product sales mix to Adenoscan
coupled by the fact that Medco owns the underlying patent on Adenoscan and
therefore pays no third party royalty. Royalty expense represents one-half of
royalty revenue earned by the Company from Adenocard sales and is payable to the
University of Virginia Alumni Patents Foundation from whom the Company acquired
exclusive rights to Adenocard. Royalty expense was $.526 million and $1.917
million for the third quarter and first nine months of 1996, a decrease of 20%
and 42%, respectively, over the comparable periods of 1995.
Operating Expenses. Total operating expenses were $2.092 million and $6.542
million for the third quarter and first nine months of 1996, a decrease of 24%
and 26%, respectively, over the comparable periods of 1995.
Research and development expenditures were $1.490 million and $4.248 million for
the third quarter and first nine months of 1996, a decrease of 24%. Third
quarter research and development expenditures returned to historical levels.
Research and development expenditures were higher during the comparable periods
of 1995 principally due to the Company's pivotal trial work on ViaScint and
BiDil, for which NDA's were filed in 1996. Expenditures for the third quarter
and first nine months of 1996 reflect activities associated with a product
portfolio in earlier stages of development, including joint development with
Fujisawa of adenosine line-extensions.
General and administrative expenses were $.602 million and $2.294 million for
the third quarter and the first nine months of 1996, a decrease of 23% and 30%,
respectively. This improvement in general and administrative expenses is mainly
attributed to lower legal expenses during the third quarter 1996 related to the
pending class action litigation.
Other Income . Interest income for the third quarter and first nine months of
1996 decreased 14% and 13%, respectively, mainly related to the utilization of
cash to purchase shares of the Company's Common Stock pursuant to a repurchase
program and a decrease in interest yield. The Company and Boehringer-Mannheim
8
<PAGE>
Pharmaceuticals Corporation ("BMPC") mutually agreed effective April 1, 1996 to
terminate the November 1993 license in which the Company granted to BMPC
marketing and back-up manufacturing rights to BiDil(R). The Company retained
$350,000 of BMPC's $1 million license fee, which the Company accounted for as
income in second quarter 1996. As a result, other income for the first nine
months of 1996 increased 8% over the comparable period of 1995.
Income (Loss) Per Share. In the third quarter 1996 the Company had net income of
$1.755 million or $0.16 per share and a nine month net income of $3.314 million
or $0.30 per share, compared to losses of $.491 million or $(0.04) per share and
$2.825 million or $(0.26) per share for the year earlier periods.
FINANCIAL CONDITION
As of September 30, 1996, the Company had total cash and investments of $34.742
million, comprised of $8.336 million of cash and cash equivalents and $26.406
million of investments in U.S. Treasury Notes and debt securities of various
federal governmental agencies. The Company's working capital as of September 30,
1996 was $31.397 million, compared to $27.734 million as of December 31, 1995.
Included in liabilities at September 30, 1996 is an accrued liability (current
and non-current portion) of $2.7 million relating to the balance of the
Company's guaranteed royalty obligation to Abbott Laboratories pursuant to the
terms of the Company's settlement of a litigation relating to the manufacturing
and marketing rights to Adenoscan. Included in assets at September 30, 1996 is a
deferred asset (current and non-current portion) of $2.0 million relating to
royalties to be received by the Company from Fujisawa and paid by the Company to
Abbott. Of the 29% of Adenoscan net sales received as royalty revenue by the
Company, 4% 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 after the
approval of the Adenoscan NDA 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.
Adenoscan and Adenocard are the Company's two commercial products, and they are
marketed by the Company's exclusive licensees principally in the United States,
Canada, and the United Kingdom. Tthe Company will not generate revenues from its
other products unless and until it or its licensees receive marketing clearance
from the FDA and appropriate governmental agencies in other countries. The
Company cannot predict the timing of any potential marketing clearance nor can
assurances be given that the FDA or such agencies will approve any of the
Company's products. For the near term the Company expects to receive
substantially all of its royalty revenues from sales of its products in the U.S.
by Fujisawa.
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, the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products when marketed.
9
<PAGE>
Part II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Incorporated herein by reference is Class Action Litigation paragraph 4,
inclusive, set forth in the Notes to the Financial Statements set forth in Item
1 of Part I of this Report, set forth on page 7 hereof.
2. Dr. Eliezer Rapaport, the licensor of the Company's potential adenosine
triphosphate ("ATP") drug, has notified the Company that he has requested
arbitration by the American Arbitration Association of his claim that the
Company has breached its May 20, 1991 license agreement by failing to devote
reasonable efforts in preparing and filing within three years of FDA approval of
its Investigational New Drug application, that is, by May 8, 1995, a New Drug
Application ("NDA") for the use of ATP in the treatment of at least one type of
human cancer. (Arbitration is the binding dispute resolution method provided for
in the agreement). The licensor is seeking the return of all licensed ATP patent
rights and compensatory and punitive damages for breach of contract and the
failure to return such rights.
In discussions with Dr. Rapaport held as early as May 1995, the Company
continuously maintained, and it currently believes, that it has not breached the
agreement. Data from the Company's Phase II clinical trials for ATP did not show
any tumor response, as defined in the protocol, in patients with non-small
cell lung cancer, and the Company so advised its licensor. (The Company
believes that such responses are the benchmark accepted in the
pharmaceutical industry for filing an NDA for a cancer treatment drug.) However,
data from the Company's multicenter clinical trial completed in 1995 indicated
that the administration of ATP to such patients may have produced an
anti-cachexic effect, that is, it may have reduced the weight loss associated
with cancer, and it may have improved quality of life, in late stage cancer
patients.
With Dr. Rapaport's knowledge and consent, the Company has been attempting to
sublicense ATP to a partner interested in further developing its anti-cachexic
effect. The Company intends to continue this effort and vigorously defend
itself against the allegations of Dr. Rapaport, which the Company believes are
without any merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
11. Computation of Net Income (Loss) per Common Share
b. Reports on Form 8-K:
None
10
<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.
Medco Research, Inc.
Date: November 14, 1996 By: /s/ Roger D. Blevins
- ------------------------------------ --------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: November 14, 1996 By: /s/ Glenn C. Andrews
- ------------------------------------- --------------------
Glenn C. Andrews
Chief Financial Officer
11
EXHIBIT 11
<TABLE>
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Unaudited)
<CAPTION>
<S> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- --------------------------------------
September 30 September 30 September 30 September 30
1996 1995 1996 1995
------------------- ------------------- ------------------- ------------------
(in thousands except per share data)
PRIMARY
Weighted average shares outstanding 10,930 11,032 10,947 11,016
Net effect of dilutive stock options
based on the treasury stock method
using average market price * * * *
------------------- ------------------- ------------------- ------------------
10,930 11,032 10,947 11,016
=================== =================== =================== ==================
Net income (loss) $1,755 $ (491) $3,314 $(2,825)
=================== =================== =================== ==================
Per share $0.16 $ (0.04) $ 0.30 $ (0.26)
=================== =================== =================== ==================
FULLY DILUTED
Weighted average shares outstanding 10,930 11,032 10,947 11,016
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price * * * *
------------------- ------------------- ------------------- ------------------
10,930 11,032 10,947 11,016
=================== =================== =================== ==================
Net income (loss) $1,755 $ (491) $3,314 $(2,825)
=================== =================== =================== ==================
Per share $ 0.16 $ (0.04) $ 0.30 $ (0.26)
=================== =================== =================== ==================
*Antidilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,336
<SECURITIES> 19,435
<RECEIVABLES> 6,649
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,420
<PP&E> 733
<DEPRECIATION> 438
<TOTAL-ASSETS> 42,944
<CURRENT-LIABILITIES> 3,023
<BONDS> 0
0
0
<COMMON> 52,216
<OTHER-SE> (14,933)
<TOTAL-LIABILITY-AND-EQUITY> 42,944
<SALES> 0
<TOTAL-REVENUES> 4,415
<CGS> 0
<TOTAL-COSTS> 2,618
<OTHER-EXPENSES> 2,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,797
<INCOME-TAX> 42
<INCOME-CONTINUING> 1,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,755
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
