Medco Research, Inc.
UNITED STATES
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, 1997
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
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(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 10,496,932 as of October 21, 1997.
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.
1
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<TABLE>
Medco Research, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<CAPTION>
<S> <C>
September 30 December 31
1997 1996*
------------------------------------
(in thousands, except share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $1,289 $ 9,107
Investments held to maturity 6,690 6,439
Accounts and notes receivable:
Royalties 5,318 3,794
Other 649 2,227
Accrued interest income 385 377
Prepaid expenses 280 293
------------------------------------
Total current assets 14,611 22,237
Investments held to maturity 29,039 19,579
Deferred asset - 124
Property and equipment, at cost, net of accumulated
depreciation and amortization 237 308
Patent, trademark and distribution rights, at cost,
net of accumulated amortization 1,693 380
====================================
Total assets $45,580 $42,628
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 3,022 $ 2,685
Accrued royalties 582 1,179
------------------------------------
Total current liabilities 3,604 3,864
Deferred revenue - 548
Deferred royalty payments 961 1,717
------------------------------------
Total liabilities 4,565 6,129
------------------------------------
Stockholders' equity
Common stock, no par value, authorized 40,000,000
shares; shares issued of 11,155,832 at
September 30, 1997 and December 31, 1996;
shares outstanding of 10,486,932 and 10,740,032
at September 30, 1997 and December 31, 1996,
respectively. 52,216 52,216
Accumulated deficit (4,525) (11,394)
Cost of stock held in treasury, 668,900 shares at
September 30, 1997 and 415,800 shares at
December 31, 1996 (6,676) (4,323)
------------------------------------
Total stockholders' equity 41,015 36,499
------------------------------------
Commitments and contingencies
====================================
Total liabilities and stockholders' equity $45,580 $42,628
====================================
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
2
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Medco Research, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------------------------------------------------
September 30 September 30 September 30 September 30
(in thousands, except per share data) 1997 1996 1997 1996
--------------------------------------------------------------------------------
Net Revenues:
Royalty revenue $5,050 $3,938 $14,217 $9,978
Royalty expense 679 526 2,264 1,917
--------------------------------------------------------------------------------
Gross Margin 4,371 3,412 11,953 8,061
--------------------------------------------------------------------------------
Operating Expenses:
Research & development costs 1,533 1,490 5,204 4,248
General and administrative expenses 464 602 1,842 2,294
--------------------------------------------------------------------------------
1,997 2,092 7,046 6,542
--------------------------------------------------------------------------------
Operating Income 2,374 1,320 4,907 1,519
Other Income:
Interest and other income, net 523 477 1,521 1,501
Licensing income 400 - 700 350
--------------------------------------------------------------------------------
Income before taxes 3,297 1,797 7,128 3,370
Provision for income taxes 133 42 259 56
--------------------------------------------------------------------------------
Net income $ 3,164 $ 1,755 $ 6,869 $ 3,314
================================================================================
Net income per share $0.30 $0.16 $ 0.65 $ 0.30
================================================================================
Weighted average number of common
shares and common share equivalents 10,489 10,930 10,560 10,947
outstanding
================================================================================
See accompanying notes to consolidated financial statements.
3
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Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<CAPTION>
(in thousands, except share data)
Common Stock
----------------------------------
Cost of Stock
Number of Accumulated held in
shares Amount deficit Treasury Total
-------------------------------------------------------------------------------------------
Balance at
December 31, 1996 10,740,032 $52,216 $(11,394) $(4,323) $36,499
Purchase of stock held in - -
treasury (253,100) (2,353) (2,353)
Net income - - 6,869 - 6,869
===========================================================================================
Balance at
September 30, 1997 10,486,932 $52,216 $(4,525) $(6,676) $41,015
===========================================================================================
See accompanying notes to consolidated financial statements.
4
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Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------
September 30 September 30
1997 1996
--------------------------------------------
(in thousands)
Operating activities
Net income $ 6,869 $ 3,314
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 109 104
Amortization of patent, trademark and
distribution rights 419 44
Loss on sale of equipment 11 -
Gain on investments available for sale - ( 49)
Net amortization of investment discount 211 (261)
Changes in operating assets and liabilities:
Accounts receivable 54 (2,314)
Prepaid expenses 13 (118)
Accounts payable and accrued expenses 337 (313)
Accrued royalty expense (597) (785)
Accrued interest income (8) 97
Deferred asset 124 982
Deferred revenue (548) (752)
Deferred royalty payments (756) (511)
--------------------------------------------
Net cash provided by (used in) operating
activities $6,238 $(562)
--------------------------------------------
(Continued)
5
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Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------
September 30 September 30
1997 1996
----------------------------------------------
(in thousands)
Investing activities
Purchase of securities available for sale - (76)
Purchase of securities held to maturity (17,422) (19,341)
Sale of securities available for sale - 5,656
Maturity of securities held to maturity 7,500 19,500
Purchases of property and equipment (51) (69)
Proceeds from sale of equipment 2 -
Purchases of patent and license (1,732) (351)
----------------------------------------------
Net cash provided by (used in) investing activities (11,703) 5,319
----------------------------------------------
Financing activities
Purchase of stock held in treasury (2,353) (997)
----------------------------------------------
Net cash used in financing activities (2,353) (997)
----------------------------------------------
Increase/(decrease) in cash and cash equivalents (7,818) 3,760
Cash and cash equivalents at beginning of period 9,107 4,305
----------------------------------------------
Cash and cash equivalents at end of period $1,289 $8,065
==============================================
See accompanying notes to consolidated financial statements.
</TABLE>
6
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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, 1996.
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Adoption of New Accounting Pronouncements
The Company will adopt Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share," on December 31, 1997. SFAS No. 128
requires the Company to change its method of computing, presenting and
disclosing earnings per share information. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS No. 128.
If the Company had adopted SFAS No. 128 for the periods ended September 30, 1997
and 1996, the following computation would have been used to arrive at basic
income per common share and diluted income per common share and would have been
presented on the consolidated statements of operations:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30 1997 September 30 1996 September 30 1997 September 30 1996
----------------- ----------------- ----------------- -----------------
<S> <C>
(in thousands except per share data)
Basic:
Net income per common share $ 0.30 $ 0.16 $ 0.65 $ 0.30
---- ---- ---- ----
Weighted average shares 10,489 10,930 10,560 10,947
====== ====== ====== ======
Diluted:
Net income per common share $ 0.30 $ 0.16 $ 0.65 $ 0.30
---- ---- ---- ----
Weighted average shares 10,566 10,936 10,591 10,962
====== ====== ====== ======
</TABLE>
The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131") for its fiscal year ended December 31 1998. SFAS No. 131 requires the
Company to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Preliminary analysis of this pronouncement by the Company indicates
that the pronouncement will not have a material impact on the Company.
7
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Medco Research, Inc.
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130") for its fiscal year ended December
31, 1998. SFAS No. 130 requires the Company to display an amount representing
the total comprehensive income for the period in a financial statement which is
displayed with the same prominence as other financial statements. Upon adoption,
all prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The Company has yet to determine the impact, if any, of adoption
of the new pronouncement.
Arbitration of ATP License Agreement
In November 1996, Dr. Eliezer Rapaport, the licensor of the Company's potential
adenosine triphosphate ("ATP") drug, commenced an arbitration before the
American Arbitration Association of his claim that the Company had 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
for the Company's alleged breach of contract and failure to return such rights.
He also is seeking an unspecified amount of punitive damages and $44 million in
compensatory damages. He has computed such compensatory damages on the basis of
"total worldwide billings of an approved ATP medication for treatment of
cancer...".
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 indicate ATP
demonstrated no 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.)
Therefore, the Company believes such damage claim, which is based on ATP as a
cancer treatment is unfounded. The Company believes Dr. Rapaport has incurred no
damages from the Company's drug development activities. The Company is
vigorously defending itself against the allegations of Dr. Rapaport, which the
Company believes are without any merit. The arbitration commenced in May 1997
and final briefs were filed in September 1997. The Company has been notified by
the American Arbitration Association that in November 1997 the arbitration panel
will decide whether the Company has any liability to Dr. Rapaport.
8
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Medco Research, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter and Nine Months of 1997 Compared to Third Quarter and Nine Months
of 1996
Net Revenues. Royalty revenues were $5.050 million and $14.217 million for the
third quarter and first nine months of 1997, an increase of 28% and 43%,
respectively, over the comparable periods of 1996. However, it should be noted
that royalty revenues in third quarter 1996 included approximately $.875 million
attributable to the purchase of a multi-month supply of Adenoscan, instead of
normal monthly purchases, by a major radiopharmacy. Royalty revenues, less
royalty revenue unrelated to the third quarter of 1996, for the third quarter
and first nine months of 1997 increased 65% and 56%, respectively. This increase
reflects the continued growth of Adenoscan. Fujisawa USA, Inc. is responsible
for substantially all of the royalty revenue of the Company.
Gross Margin. Gross margin from adenosine revenues was $4.371 million and
$11.953 million for the third quarter and first nine months of 1997, an increase
of 28% and 48%, respectively, over the comparable periods of 1996. This
significant increase reflects the growth in net revenues. Royalty expense, which
is payable to the University of Virginia Alumni Patents Foundation from whom the
Company acquired exclusive rights to Adenocard, and represents one-half of
royalty revenue earned by the Company from Adenocard sales, was $.679 million
and $2.264 million for the third quarter and first nine months of 1996, an
increase of 29% and 18%, respectively. Third quarter royalty expense increased
29% principally as a result of a one time payment to satisfy Adenocard
outstanding royalties owed by Sanofi Pharma, the Company's manufacturing and
marketing partner for Adenoscan and Adenocard in Europe and countries other than
the United States and Canada.
Operating Expenses. Total operating expenses were $1.997 million and $7.046
million for the third quarter and first nine months of 1997, a decrease of 5%
and an increase 8%, respectively. Research and development expenditures were
$1.533 million and $5.204 million for the third quarter and first nine months of
1997, an increase of 3% and 23%, respectively, reflecting increased expenditures
associated with the completion of the adenosine for cardioprotection trials and
expenditures for arbitration of the ATP license agreement. General and
administrative expenditures were $.464 million and $1.842 million for the third
quarter and first nine months of 1997, a decrease of 23% and 20%, respectively.
This decrease is the result of lower overall spending in third quarter 1997 and
one-time employee related charges incurred in the first half of 1996.
Other Income . Interest income was $.533 million and $1.531 million for the
third quarter and first nine months of 1997, an increase of 12% and 2%,
respectively. Milestone payments recognized by the Company in the third quarter
and first nine months of 1997 as income of $.400 million and $.700 million,
respectively, paid by Suntory Limited, the Company's development and marketing
partner for adenosine in Japan, following Suntory's initiation of Phase III
clinical trials of Adenoscan in Japan .
Income Per Share. In the third quarter 1997 the Company had net income of $3.164
million or $0.30 per share and a nine month net income of $6.869 million or
$0.65 per share, compared to net income of $1.755 million or $0.16 per share and
$3.314 million or $0.30 per share for the year earlier periods, an increase of
88% and 115%, respectively. However, income per share in the third quarter 1996
9
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Medco Research, Inc.
included approximately $0.08 per share attributable to the purchase of a
multi-month supply of Adenoscan, instead of normal monthly purchases, by a major
radiopharmacy which when adjusted reflects growth for the third quarter and
first nine months of 1997 of 275% and 192%, respectively, over the comparable
periods of 1996.
FINANCIAL CONDITION
As of September 30, 1997, the Company had total cash and investments of $37.018
million comprised of $1.289 million of cash and cash equivalents and $35.729
million of investments in U.S. Treasury Notes and high quality corporate debt
securities.
Included in liabilities at September 30, 1997 is an accrued liability (current
and non-current portion) of $1.8 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 litigation relating to the manufacturing
and marketing rights to Adenoscan. Included in current assets at September 30,
1997 is a deferred asset of $.2 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.
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, United Kingdom, and Germany. Substantially all of the Company's royalty
revenue is obtained by Fujisawa USA from sales of these drugs in the U.S.
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.
CAUTIONARY STATEMENT
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. The following
statement highlights some of these risks.
Statements contained in Management's Discussion and Analysis of Financial
Conditions and Results of Operations which are not historical facts are
forward-looking statements under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Although the Company believes the
expectations reflected in such forward looking statements are based on
reasonable assumptions, it can give no assurance that its expectations will be
10
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Medco Research, Inc.
attained. Forward looking statements involve known and unknown risks that could
cause the Company's actual results to differ materially from expected results.
Factors that could cause actual results to differ materially from the Company's
expectations include, among others, the high cost and uncertainty of the
research, clinical trials and other development activities involving
pharmaceutical products; the unpredictability of the duration and results of the
U.S. Food and Drug Administration's review of New Drug Applications and/or the
review of other regulatory agencies worldwide; the possible impairment of, or
inability to obtain, intellectual property rights; intense competition; the
uncertainty of obtaining, and the Company's dependence on, third parties to
manufacture and sell its products; results of pending or future litigation and
other risk factors detailed from time to time in the Company's Securities and
Exchange Commission filings.
11
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Medco Research, Inc.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by reference is the Arbitration of ATP License Agreement,
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 8 hereof.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
11. Computation of Net Income per Common Share
b. Reports on Form 8-K:
None
12
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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: November 10, 1997 By: /s/ Roger D. Blevins
- ----------------------- --------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: November 10, 1997 By: /s/ Glenn C. Andrews
- ----------------------- --------------------
Glenn C. Andrews
Vice President, Finance and Administration
Chief Financial Officer
Date: November 10, 1997 By: /s/ Adam C. Derbyshire
- ----------------------- ----------------------
Adam C. Derbyshire
Corporate Controller & Secretary
13
<TABLE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<CAPTION>
<S> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ----------------------------------------
September 30 September 30 September 30 September 30
1997 1996 1997 1996
------------------- ------------------- ------------------- --------------------
(in thousands except per share data)
PRIMARY
Weighted average shares outstanding 10,489 10,930 10,560 10,947
Net effect of dilutive stock options
based on the treasury stock method
using average market price 77 6 31 15
=================== =================== =================== ====================
10,566 10,936 10,591 10,962
=================== =================== =================== ====================
Net income $3,164 $1,755 $6,869 $3,314
=================== =================== =================== ====================
Net income per share $0.30 $0.16 $0.65 $0.30
=================== =================== =================== ====================
FULLY DILUTED
Weighted average shares outstanding 10,489 10,930 10,560 10,947
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price 161 6 161 14
------------------- ------------------- ------------------- --------------------
10,650 10,936 10,721 10,961
=================== =================== =================== ====================
Net income $3,164 $1,755 $6,869 $3,314
=================== =================== =================== ====================
Net income per share $0.30 $0.16 $0.64 $0.30
=================== =================== =================== ====================
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,289
<SECURITIES> 6,690
<RECEIVABLES> 6,632
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,611
<PP&E> 717
<DEPRECIATION> 480
<TOTAL-ASSETS> 45,580
<CURRENT-LIABILITIES> 3,604
<BONDS> 0
<COMMON> 52,216
0
0
<OTHER-SE> (11,201)
<TOTAL-LIABILITY-AND-EQUITY> 45,580
<SALES> 0
<TOTAL-REVENUES> 16,438
<CGS> 0
<TOTAL-COSTS> 9,310
<OTHER-EXPENSES> 9,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,128
<INCOME-TAX> 259
<INCOME-CONTINUING> 6,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,869
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.64
</TABLE>
