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, 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 10,935,032 as of August 5, 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 13.
<PAGE>
Consolidated Financial Statements
<TABLE>
<CAPTION>
June 30 December 31
1996 1995*
-------------------------------------------------------
(in thousands except per share data) (Unaudited)
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,861 $ 4,305
Investments
Securities available for sale - 5,665
Securities held to maturity 11,356 17,571
Accounts and notes receivable:
Royalties 3,652 2,204
Other 2,314 1,531
Accrued interest income 229 252
Prepaid expenses 472 327
-------------------------------------------------------
Total current assets 25,884 31,855
Investments held to maturity 13,976 9,005
Deferred asset 1,330 1,852
Property and equipment, at cost, net of accumulated
depreciation and amortization 309 330
Patent, trademark and distribution rights, at cost, net of
accumulated amortization 395 80
=======================================================
Total assets $41,894 $43,122
=======================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,116 $ 2,812
Accrued royalties 1,390 1,309
------------------------------------------------------
Total current liabilities 3,506 4,121
Deferred revenue 300 1,300
Deferred royalty payments 2,340 2,601
------------------------------------------------------
Total liabilities 6,146 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
June 30, 1996, and December 31, 1995 respectively;
shares outstanding of 10,938,532 and 11,013,732 at
June 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, 217,300 shares at June 30,
1996 and 142,100 shares at December 31, 1995 (2,313) (1,535)
Accumulated deficit (14,155) (15,715)
-------------------------------------------------------
Total stockholders' equity 35,748 35,100
-------------------------------------------------------
Commitments and contingencies
=======================================================
Total liabilities and stockholders' equity $41,894 $ 43,122
=======================================================
</TABLE>
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------------------------------------
June 30 June 30 June 30 June 30
(in thousands except per share data) 1996 1995 1996 1995
------------------------------------------------------------------------
<S> <C>
Net Revenues:
Royalty revenue $3,293 $2,824 $6,040 $5,292
Royalty expense 729 1,412 1,390 2,646
------------------------------------------------------------------------
Gross Margin 2,564 1,412 4,650 2,646
Operating Expenses:
Research & development costs 1,380 2,107 2,758 3,627
General and administrative expenses 1,013 1,906 1,692 2,519
----------------------------------------------------------------------------
2,393 4,013 4,450 6,146
Other Income:
Interest income 487 578 1,024 1,165
Other income 350 - 350 -
------------------------------------------------------------------------
837 578 1,374 1,165
------------------------------------------------------------------------
Net income (loss) before income taxes 1,008 (2,023) 1,574 (2,335)
Provisions for income taxes 7 - 14 -
Net income (loss) 1,001 (2,023) 1,560 (2,335)
========================================================================
Net income (loss) per share $ 0.09 $(0.18) $0.14 $(0.21)
========================================================================
Weighted average number of common shares and common
share equivalents outstanding 10,943 11,007 10,955 11,008
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Unrealized
gain (loss)
on
investment Cost of
securities Stock held
Number of available Accumulated in
shares Amount for sale deficit Treasury Total
----------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at
December 31,
1995 11,013,732 $52,216 $134 $(15,715) $(1,535) $35,100
Stock held
in treasury (75,200) - - - (778) (778)
Unrealized
gain on
investment
securities
available
for sale - - (134) - - (134)
Net Income - - - 1,560 - 1,560
================================================================================================================
Balance at
June 30,
1996 10,938,532 $52,216 $ - $(14,155) $(2,313) $35,748
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
June 30 June 30
1996 1995
--------------------------------------------
(in thousands except per share data)
<S> <C>
Operating activities
Net income (loss) $ 1,560 $ (2,335)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment 68 58
Amortization of patent, trademark and
distribution rights 36 5
Gain on investments available for sale (49) (6)
Net amortization of investment discount (261) (339)
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 (2,231) (1,723)
Prepaid expenses (145) (92)
Accounts payable and accrued expenses (696) 709
Accrued royalty expense 81 401
Accrued interest income 23 143
Deferred asset 522 (1,750)
Deferred royalty payment (261) 2,550
Deferred royalty income (1,000) 220
--------------------------------------------
Net cash used in operating activities $(2,353) $(2,115)
--------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------
June 30 June 30
1996 1995
------------------------------------------------------
(in thousands except per share data)
<S> <C>
Investing activities
Purchase of securities held to maturity $(90,890) $(36,892)
Purchase of securities available for sale (76) (178)
Sale of securities available for sale 5,656 3,312
Maturity of securities held to maturity 92,395 39,484
Principal repayments on securities held to
maturity - 826
Purchases of property and equipment (47) (48)
Purchase of patent & license (351) -
------------------------------------------------------
Net cash provided by investing activities 6,687 6,504
------------------------------------------------------
Financing activities
Purchase of stock for retirement - (158)
Purchase of stock held in treasury (778) -
------------------------------------------------------
Net cash used in financing activities (778) (158)
------------------------------------------------------
Increase in cash and cash equivalents 3,556 4,231
Cash and cash equivalents at beginning of period 4,305 1,053
------------------------------------------------------
Cash and cash equivalents at end of period $7,861 $5,284
======================================================
</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, 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.
A notice of appeal has been filed by the plaintiffs. The plaintiffs' briefs are
due by August 30, 1996.
<PAGE>
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
Second Quarter and Six Months of 1996 Compared to Second Quarter and Six Months
of 1995
Net Revenues. Royalty revenues were $3.293 million and $6.040 million for the
second quarter and first six months of 1996, an increase of 17% and 14%,
respectively, over the comparable periods of 1995. This increase reflects
continued growth of Adenoscan sales. Fujisawa USA, Inc. is responsible for
substantially all of the royalty revenue of the Company.
Gross Margin. Gross margin from adenosine revenues was $2.564 million and $4.650
million for the second quarter and first six months of 1996, an increase of 82%
and 76%, respectively, over the comparable periods of 1995. This significant
increase reflects a 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 $.729 million and $1.390 million for
the second quarter and first six months of 1996, a decrease of 48% over the
comparable periods of 1995.
Operating Expenses. Total operating expenses were $2.393 million and $4.450
million for the second quarter and first six months of 1996, a decrease of 40%
and 28%, respectively, over the comparable periods of 1995.
Research and development expenditures were $1.380 million and $2.758 million for
the second quarter and first six months of 1996, a decrease of 35% and 24%,
respectively. Second quarter research and development expenditures returned to
historical levels. Research and development expenditures were higher during the
comparable periods of 1995 due to the nature of the Company's development
portfolio, reflecting pivotal trial work of ViaScint and BiDil. Expenditures for
the second quarter and first six months of 1996 reflect activities associated
with a product portfolio in earlier stages of development. In addition, the
Company and Fujisawa USA, Inc. signed a joint development agreement to develop
adenosine line-extensions whereby both companies will share equally research and
development expenses, including third party royalty obligations for intellectual
property rights. The parties agreed that their combined responsibility for
research and development funding will not exceed $4 million in 1996 (therefore
Medco's share would not exceed $2 million in 1996).
General and administrative expenses were $1.013 million and $1.692 million for
second quarter and first six months of 1996, a decrease of 47% and 33%,
respectively. This decrease is attributed to the absence of three separate
events that occurred during the second quarter 1995: (1) the settlement of the
litigation among Medco Research, Fujisawa USA, and Abbott Laboratories related
to the manufacturing and marketing rights to Adenoscan, (2) resignation of the
former President of the Company, and (3) the expenses incurred preceding the
termination of a proposed merger.
Other Income . Interest income for the second quarter and first six months of
1996 decreased 15% and 12%, 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
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.
Income (Loss) Per Share. In the second quarter 1996 the Company had net income
of $1.001 million or $0.09 per share and a six month net income of $1.560
million or $0.14 per share, compared to losses of $2.023 million or $(0.18) per
share and $2.335 million or $(0.21) per share for the year earlier periods.
FINANCIAL CONDITION
As of June 30, 1996, the Company had total cash and investments of $33.193
million comprised of $7.861 million of cash and cash equivalents and $25.332
million of investments in U.S. Treasury Notes and debt securities of various
federal governmental agencies. The Company's working capital as of June 30, 1996
was $22.378 million, compared to $27.734 million as of December 31, 1995.
Included in liabilities at June 30, 1996 is an accrued liability (current and
non-current portion) of $2.9 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 June 30, 1996 is a deferred
asset (current and non-current portion) of $2.5 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. The 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 USA.
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.
Part II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) June 20, 1996 Annual Meeting
b) Directors Elected - Albert D. Angel
William M. Bartlett
Jay N. Cohn, M.D.
Marvin S. Hausman, M.D.
Mark B. Hirsch
Manfred Mosk, Ph.D.
Eugene L. Step
Richard C. Williams
c) Proposals voted upon:
(i) Election of Directors:
Albert D. Angel
For: 10,732,137
Abstain: 123,963
William M. Bartlett
For: 10,732,137
Abstain: 123,963
Jay N. Cohn, M.D.
For: 10,804,587
Abstain: 51,513
Marvin S, Hausman, M.D.
For: 10,804,587
Abstain: 51,513
Mark B. Hirsch
For: 10,732,137
Abstain: 123,963
Manfred Mosk, Ph.D.
For: 10,804,587
Abstain: 51,513
Eugene L. Step
For: 10,732,137
Abstain: 123,963
Richard C. Williams
For: 10,692,137
Abstain: 163,963
(ii) Ratification of KPMG Peat Marwick LLP as independent
accountants:
For: 10,515,386
Against: 22,372
Abstain: 15,892
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.
Medco Research, Inc.
Date: By: /s/ Roger D. Blevins
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: By: /s/ Glenn C. Andrews
Glenn C. Andrews
Chief Financial Officer
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30 June 30 June 30
1996 1995 1996 1995
------------------- ------------------ ----------------- ------------------
(in thousands except per share data)
<S> <C>
PRIMARY
Weighted average shares outstanding 10,943 11,007 10,955 11,008
Net effect of dilutive stock options
based on the treasury stock method
using average market price * * * *
=================== ================== ================= ==================
10,943 11,007 10,955 11,008
=================== ================== ================= ==================
Net income (loss) $1,001 $(2,023) $1,560 $(2,335)
=================== ================== ================= ==================
Per share $0.09 $(0.18) $ 0.14 $(0.21)
=================== ================== ================= ==================
FULLY DILUTED
Weighted average shares outstanding 10,943 11,007 10,955 11,008
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price * * *
------------------- ------------------ ----------------- ------------------
10,943 11,007 10,955 11,008
=================== ================== ================= ==================
Net income (loss) $1,001 $(2,023) $1,560 $(2,335)
=================== ================== ================= ==================
Per share $0.09 $(0.18) $0.14 $(0.21)
=================== ================== ================= ==================
</TABLE>
*Antidilutive
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,861
<SECURITIES> 11,356
<RECEIVABLES> 6,667
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,884
<PP&E> 711
<DEPRECIATION> 402
<TOTAL-ASSETS> 41,894
<CURRENT-LIABILITIES> 3,506
<BONDS> 0
<COMMON> 52,216
0
0
<OTHER-SE> (16,468)
<TOTAL-LIABILITY-AND-EQUITY> 41,894
<SALES> 0
<TOTAL-REVENUES> 4,130
<CGS> 0
<TOTAL-COSTS> 3,122
<OTHER-EXPENSES> 3,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,008
<INCOME-TAX> 7
<INCOME-CONTINUING> 1,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,001
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
