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 March 31, 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
-------- ----------
(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 10,526,932 as of April 24, 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.
<PAGE>
Medco Research, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C>
March 31 December 31
1997 1996*
-------------------------------------------
(in thousands except share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 12,249 $ 9,107
Investments held to maturity 9,003 6,439
Accounts and notes receivable:
Royalties 4,632 3,794
Other 1,597 2,227
Accrued interest income 290 377
Prepaid expenses 131 293
-------------------------------------------
Total current assets 27,902 22,237
Investments held to maturity 13,537 19,579
Deferred asset - 124
Property and equipment, at cost, net of accumulated depreciation and
amortization 311 308
Patent, trademark and distribution rights, at cost, net of
accumulated amortization 373 380
===========================================
Total assets $42,123 $42,628
===========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,944 $ 2,685
Accrued royalties 958 1,179
-------------------------------------------
Total current liabilities 3,902 3,864
Deferred revenue 548 548
Deferred royalty payments 1,527 1,717
-------------------------------------------
Total liabilities 5,977 6,129
Stockholders' equity
Common stock, no par value, authorized 40,000,000 shares; shares issued of
11,155,832 at March 31, 1997 and December 31, 1996; shares outstanding of
10,563,232 and 10,740,032 at March 31, 1997 and December 31, 1996,
respectively. 52,216 52,216
Accumulated deficit (10,004) (11,394)
Cost of stock held in treasury, 592,600 shares at March 31, 1997
and 415,800 shares at December 31, 1996 (6,066) (4,323)
-------------------------------------------
Total stockholders' equity 36,146 36,499
===========================================
Commitments and contingencies
===========================================
===========================================
Total liabilities and stockholders' equity $42,123 $42,628
===========================================
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
</TABLE>
2
<PAGE>
Medco Research, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED
--------------------------------------
March 31 March 31
(in thousands except per share data) 1997 1996
--------------------------------------
Net Revenues:
Royalty revenue $4,304 $2,746
Royalty expense 966 661
--------------------------------------
Gross Margin 3,338 2,085
--------------------------------------
Operating Expenses:
Research & development costs 1,703 1,378
General and administrative expenses 699 679
--------------------------------------
2,402 2,057
--------------------------------------
Operating Income 936 28
Interest income 490 537
Income before taxes 1,426 565
Provision for income taxes 36 7
Net income $ 1,390 $ 558
======================================
Net income per share $0.13 $ 0.05
======================================
Weighted average number of common shares and common share
equivalents outstanding 10,682 10,967
======================================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Stockholders' Equity
(Unaudited)
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31, 1997
(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 (176,800) (1,743) (1,743)
Net Income - - 1,390 - 1,390
============================================================================================
Balance at
March 31, 1997 10,563,232 $52,216 $(10,004) $(6,066) $36,146
============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED
--------------------------------------------
March 31 March 31
1997 1996
--------------------------------------------
(in thousands)
Operating activities
Net income $ 1,390 $ 558
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 32 34
Amortization of patent, trademark and
distribution rights 7 27
Gain on investments available for sale - ( 49)
Net amortization of investment discount (22) (137)
Changes in operating assets and liabilities:
Accounts receivable (208) (869)
Prepaid expenses 162 ( 86)
Accounts payable and accrued expenses 259 (165)
Accrued royalty expense (221) (647)
Accrued interest income 87 107
Deferred asset 124 228
Deferred royalty payment (190) (114)
--------------------------------------------
Net cash provided by (used in) operating
activities $1,420 $(1,113)
--------------------------------------------
</TABLE>
(Continued)
5
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED
-----------------------------------------------------
March 31 March 31
1997 1996
-----------------------------------------------------
(in thousands)
Investing activities
Purchase of securities available for sale - (76)
Sale of securities available for sale - 5,656
Maturity of securities held to maturity 3,500 6,499
Purchases of property and equipment (35) (30)
Purchases of patent and license - (202)
-----------------------------------------------------
Net cash provided by investing activities 3,465 11,847
-----------------------------------------------------
Financing activities
Purchase of stock held in treasury (1,743) (731)
-----------------------------------------------------
Net cash used in financing activities (1,743) (731)
-----------------------------------------------------
Increase in cash and cash equivalents 3,142 10,003
Cash and cash equivalents at beginning of period 9,107 4,305
-----------------------------------------------------
Cash and cash equivalents at end of period $12,249 $14,308
=====================================================
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
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 Statement of Financial Accounting Standards No. 128
- ---------------------------------------------------------------
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 March 31, 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>
<S> <C>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------ ------------------
(in thousands except per share data)
Basic:
Net income per common share $ 0.13 $ 0.05
---- ----
Weighted average shares 10,682 10,967
====== ======
Diluted:
Net income per common share $ 0.13 $ 0.05
---- ----
Weighted average shares 10,731 10,971
====== ======
</TABLE>
7
<PAGE>
Medco Research, Inc.
Class Action Litigation
- -----------------------
In September and October 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. These actions,
which were consolidated in February 1994, 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. They seek
unspecified compensatory, punitive and exemplary damages. In September 1994, the
District Court granted the Company's motion to dismiss on the ground that the
action was time barred. Plaintiffs appealed, and in 1995 the United States Court
of Appeals for the 7th Circuit held that the lower Court's dismissal was
premature and reversed the granting of the motion to dismiss.
In November 1995, the Company answered the complaints and denied the material
allegations thereof 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 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 appealed, and on February 20, 1997 the appeal
was argued before the United States Court of Appeals for the 7th Circuit. The
parties are awaiting the Court's decision.
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
8
<PAGE>
Medco Research, Inc.
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 not only extremely speculative but also 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 parties are engaged in document discovery, and the arbitration is scheduled
to commence in May 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
First Quarter of 1997 Compared to First Quarter of 1996
- -------------------------------------------------------
Net Revenues. The Company's first quarter 1997 royalty revenues increased from
$2.746 million to $4.304 million, an increase of 57%, due to continued growth of
Adenoscan sales and a stronger than expected quarterly increase in Adenocard
sales. Fujisawa USA, Inc. is responsible for substantially all of the royalty
revenue of the Company.
Gross Margin. The Company's first quarter 1997 gross margin from adenosine
revenues increased from $2.085 million to $3.338 million, an increase of 60%,
due to the shift in the product sales mix to Adenoscan, a drug for which the
Company owns the underlying patent and therefore pays no third party royalty.
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 increased from $.661 to $.966 million, an increase of 46%.
Operating Expenses. The Company's first quarter 1997 total operating expenses
increased from $2.057 million to $2.402 million, an increase of 17%, principally
as a result of research and development expenditures increasing from $1.378
million to $1.703 million, an increase of 24%, due to increased activity
associated with the adenosine for cardioprotection (MEDR-640) trials and the
pre-IND submission requirements for Tc99m-Glucarate. The Company's first quarter
1997 general and administrative expenses increased 3%, from $.679 million to
$.699 million for the comparable period of 1996.
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 the recognition of income in first quarter 1996 due to
the liquidation of an available-for-sale investment.
Income Per Share. In the first quarter 1997 the Company had net income of $1.390
million or $0.13 per share compared to $.558 million or $0.05 per share for the
year earlier period, on weighted average common shares and common share
equivalents outstanding of 10.682 and 10.967 million, respectively.
9
<PAGE>
Medco Research, Inc.
FINANCIAL CONDITION
- -------------------
As of March 31, 1997, the Company had total cash and investments of $34.788
million comprised of $12.249 million of cash and cash equivalents and $22.540
million of investments in U.S. Treasury Notes and high quality corporate debt
securities. The Company's working capital as of March 31, 1997 was $24.000
million, compared to $18.373 million as of December 31, 1996.
Included in liabilities at March 31, 1997 is an accrued liability (current and
non-current portion) of $2.3 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 March 31, 1997 is a
deferred asset of $1.3 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.
10
<PAGE>
Medco Research, Inc.
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 that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results to differ materially include, among others, the high cost and
uncertainty of the research, clinical trials and other development of
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 in the Company's Securities and Exchange Commission
filings.
Part II: OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
Incorporated herein by reference are Class Action Litigation and 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 pages 8
and 9 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:
A Form 8-K dated March 24, 1997, reporting in Item 4,
thereof a change in the Company's certifying
accountants, was filed March 25, 1997.
11
<PAGE>
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 14, 1997 By: /s/ Roger D. Blevins
- ------------------ --------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: May 14, 1997 By: /s/ Glenn C. Andrews
- ------------------ --------------------
Glenn C. Andrews
Chief Financial Officer
Date: May 14, 1997 By: /s/ Adam C. Derbyshire
- ------------------ ----------------------
Adam C. Derbyshire
Corporate Controller
12
Medco Research, Inc.
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED
March 31 March 31
1997 1996
---------------------- -----------------------
(in thousands except per share data)
PRIMARY
Weighted average shares outstanding 10,682 10,967
Net effect of dilutive stock options
based on the treasury stock method
using average market price 49 4
====================== =======================
10,731 10,971
====================== =======================
Net income $1,390 $558
====================== =======================
Per share $0.13 $0.05
====================== =======================
FULLY DILUTED
Weighted average shares outstanding 10,682 10,967
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price 49 6
---------------------- -----------------------
10,731 10,973
====================== =======================
Net income $1,390 $558
====================== =======================
Per share $0.13 $0.05
====================== =======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,249
<SECURITIES> 9,003
<RECEIVABLES> 6,650
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,902
<PP&E> 821
<DEPRECIATION> 510
<TOTAL-ASSETS> 42,123
<CURRENT-LIABILITIES> 3,902
<BONDS> 0
0
0
<COMMON> 52,216
<OTHER-SE> (16,070)
<TOTAL-LIABILITY-AND-EQUITY> 42,123
<SALES> 0
<TOTAL-REVENUES> 4,794
<CGS> 0
<TOTAL-COSTS> 3,368
<OTHER-EXPENSES> 3,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,426
<INCOME-TAX> 36
<INCOME-CONTINUING> 1,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,390
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
