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 March 31, 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 10,943,532 as of April 30, 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 11.
1
Medco Research, Inc.
Consolidated Financial Statements
<TABLE>
<CAPTION>
March 31 December 31
1996 1995*
----------------------------------------------------
(in thousands except per share data) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,308 $ 4,305
Investments
Securities available for sale - 5,665
Securities held to maturity 11,210 17,571
Accounts and notes receivable:
Royalties 2,973 2,204
Other 1,631 1,531
Accrued interest income 145 252
Prepaid expenses 413 327
----------------------------------------------------
Total current assets 30,680 31,855
Investments held to maturity 9,004 9,005
Deferred asset 1,624 1,852
Property and equipment, at cost, net of accumulated depreciation
and amortization 326 330
Patent, trademark and distribution rights, at cost, net of
accumulated amortization 255 80
====================================================
Total assets $41,889 $43,122
====================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,647 $ 2,812
Accrued royalties 662 1,309
----------------------------------------------------
Total current liabilities 3,309 4,121
Deferred revenue 1,300 1,300
Deferred royalty payments 2,487 2,601
----------------------------------------------------
Total Liabilities 7,096 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 March 31, 1996, and December 31, 1995
respectively; shares outstanding of 10,943,532 and 11,013,732 at March 31,
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, 212,300 shares at March 31,1996
and 142,100 shares at December 31, 1995 (2,266) (1,535)
Accumulated deficit (15,157) (15,715)
----------------------------------------------------
Total stockholders' equity 34,793 35,100
====================================================
Commitments and contingencies
====================================================
Total liabilities and stockholders' equity $41,889 $43,122
====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
2
Medco Research, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
March 31 March 31
(in thousands except per share data) 1996 1995
-----------------------------------
<S> <C> <C>
Net Revenues:
Royalty revenue $2,746 $2,468
Royalty expense 661 1,234
-----------------------------------
Gross Margin 2,085 1,234
Operating Expenses:
Research & development costs 1,378 1,520
General and administrative expenses 679 613
-----------------------------------
2,057 2,133
-----------------------------------
Interest income 537 587
Net income (loss) before income taxes 565 (312)
Provisions for income taxes 7 -
Net income (loss) $ 558 $ (312)
===================================
Net income (loss) per share $ 0.05 $(0.03)
===================================
Weighted average number of common shares and common share
equivalents outstanding 10,967 11,008
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
(in thousands, except
share data)
Common Stock
---------------------------------
Unrealized
gain (loss)
on
investment
securities Cost of Stock
Number of available Accumulated held in
shares Amount for sale deficit Treasury Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 11,013,732 $52,216 $134 $(15,715) $(1,535) $35,100
December
31, 1995
Stock held (70,200) - - - (731) (731)
in
treasury
Unrealized
gain on
- - (134) - - (134)
investment
securities
available
for sale
Net Income - - - 558 - 558
==================================================================================================================
Balance at
March 10,943,532 $52,216 $ - $(15,157) $(2,266) $34,793
31, 1996
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
4
Medco Research, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
March 31 March 31
1996 1995
--------------------------------------------
(in thousands except per share data)
<S> <C> <C>
Operating activities
Net income (loss) $ 558 $ (312)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation of property and equipment
34 25
Amortization of patent, trademark and
distribution rights 27 3
Gain on investments available for sale
(49) (37)
Net amortization of investment discount
(137) (150)
Investment commissions - 30
Changes in operating assets and liabilities:
Accounts receivable (869) (49)
Prepaid expenses (86) 87
Accounts payable and accrued expenses (165) (234)
Accrued royalty expense (647) (1,012)
Accrued interest income 107 336
Deferred asset 228 -
Deferred royalty payment (114) -
--------------------------------------------
Net cash used in operating activities $(1,113) $(1,313)
--------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
Medco Research, Inc.
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
March 31 March 31
1996 1995
------------------------------------------------------
(in thousands except per share data)
<S> <C> <C>
Investing activities
Purchase of securities held to maturity $(30,432) $(14,407)
Purchase of securities available for sale (76) -
Sale of securities available for sale 5,656 3,227
Maturity of securities held to maturity 36,931 16,000
Principal repayments on securities held to
maturity - 390
Purchases of property and equipment (30) (25)
Purchases of patents & licenses (202) -
------------------------------------------------------
Net cash provided by investing activities 11,847 5,185
------------------------------------------------------
Financing activities
Purchase of stock for retirement - (158)
Purchase of stock held in treasury (731) -
------------------------------------------------------
Net cash used in financing activities (731) (158)
------------------------------------------------------
Increase in cash and cash equivalents 10,003 3,714
Cash and cash equivalents at beginning of period
4,305 1,053
------------------------------------------------------
Cash and cash equivalents at end of period
$14,308 $4,767
======================================================
</TABLE>
See accompanying notes to consolidated financial statements
6
Medco Research, Inc.
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
judgement motion of the company and other defendants. The Court concluded that
the plaintiffs' federal securities fraud claims were barred by the statute of
limitations.
7
Medco Research, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter of 1996 Compared to First Quarter of 1995
Net Revenues. Royalty revenues for first quarter 1996 were $2.746 million
compared to $2.468 million for the comparable period of 1995, an increase of
11%. 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 for first quater 1996 were
$2.085 million compared to $1.234 million for the comparable period of 1995, an
increase of 69%. 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 for first
quarter 1996 was $.661 million compared to $1.234 million for the comparable
period of 1995, a decrease of 46%.
Operating Expenses. Total operating expenses for the first quarter 1996 were
$2.057 million compared to $2.132 million for the comparable period of 1995, a
decrease of 4%.
Research and development expenditures for the first quarter 1996 were $1.378
million compared to $1.520 million for the comparable period of 1995, a decrease
of 9%. First quarter 1996 research and development expenditures returned to
historical spending levels. As the Company previously reported, third and
especially fourth quarter 1995 expenditures were unusually high due to its
BiDil(R) and ViaScint(TM) drugs both being in pivotal trials at that time.
General and administrative expenses for the first quarter of 1996 were $.679
million compared to $.613 million for the comparable period of 1995, an increase
of 11% mainly related to the expenses incurred in the Company's class action
litigation.
Interest Income. Interest income decreased 9% 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 rates.
Income (Loss) Per Share. In the first quarter 1996 the Company had net income of
$.558 million or $0.05 per share compared to a loss of $.312 million or $(0.03)
per share for the year earlier period, on weighted average common shares and
common share equivalents outstanding of 10.967 and 11.008 million, respectively.
FINANCIAL CONDITION
As of March 31, 1996, the Company had total cash and investments of $34,522,205
comprised of $14,307,708 of cash and cash equivalents and $20,214,497 of
investments in U.S. Treasury Notes and debt securities of various federal
governmental agencies. The Company's working capital as of March 31, 1996 was
$27.371 million, compared to $27.734 million as of December 31, 1995.
8
Medco Research, Inc.
Included in liabilities at March 31, 1996 is an accrued liability (current and
non-current portion) of $3.1 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 March 31, 1996 is a
deferred asset (current and non-current portion) of $2.8 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 are Class Action Litigation, paragraphs 3 and
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 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
9
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.
Medco Research, Inc.
Date: May 13, 1996 By: /s/ Roger D. Blevins
----------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: May 13, 1996 By: /s/ Adam C. Derbyshire
----------------------
Adam C. Derbyshire
Corporate Controller
10
EXHIBIT 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31 March 31
1996 1995
------------------------ -----------------------
(in thousands except per share data)
<S> <C> <C>
PRIMARY
Weighted average shares outstanding 10,967 11,008
Net effect of dilutive stock options
based on the treasury stock method
using average market price * *
======================== =======================
10,967 11,008
======================== =======================
Net income (loss) $558 $(312)
======================== =======================
Per share $0.05 $(0.03)
======================== =======================
FULLY DILUTED
Weighted average shares outstanding 10,967 11,008
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price * *
------------------------ -----------------------
10,967 11,008
======================== =======================
Net income (loss) $558 $(312)
======================== =======================
Per share $0.05 $(0.03)
======================== =======================
*Antidilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 14,308
<SECURITIES> 11,210
<RECEIVABLES> 5,162
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,680
<PP&E> 693
<DEPRECIATION> 367
<TOTAL-ASSETS> 41,889
<CURRENT-LIABILITIES> 3,309
<BONDS> 0
52,216
0
<COMMON> 0
<OTHER-SE> (17,423)
<TOTAL-LIABILITY-AND-EQUITY> 41,889
<SALES> 0
<TOTAL-REVENUES> 3,283
<CGS> 0
<TOTAL-COSTS> 2,718
<OTHER-EXPENSES> 2,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 565
<INCOME-TAX> 7
<INCOME-CONTINUING> 558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
