Medco Research, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
Commission file number 0-13948
MEDCO RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3318451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 (d) 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Based on the closing price on March 7, 1997 of $9.375 for the Registrant's
Common Stock as reported on the American Stock Exchange, the aggregate market
value of Common Stock held by nonaffiliates of Registrant was approximately
$97,325,700.
The number of shares outstanding of the Registrant's Common Stock was 10,638,332
at March 7, 1997.
Documents incorporated by reference:
Part III: Sections entitled "Election of Directors", "Board of Directors and
Executive Officers", "Executive Compensation", "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Transactions" from the
Registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders.
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Medco Research, Inc.
PART I
ITEM 1. BUSINESS
COMPANY PROFILE
Medco Research, Inc. (the "Company") is a pharmaceutical company dedicated to
being a leader in the global commercialization of cardiovascular medicines and
adenosine-based products leading to superior growth in shareholder value.
The Company was incorporated in California in September 1978 and originally
founded as a contract research organization offering clinical and regulatory
support to the pharmaceutical industry. In 1984, the Company secured its own
product rights, went public, raised approximately $4 million in the initial
offering, and began its transition to a pharmaceutical company. In January 1992,
it raised approximately $48 million in a secondary public offering. In May 1993,
the Company relocated to Research Triangle Park, North Carolina, and in 1995 it
completed its reincorporation in Delaware.
The Company's business approach has been to carefully evaluate and acquire
product candidates which have already undergone some preclinical (animal) and
clinical (human) testing, thereby reducing the costs and risks associated with
drug discovery and basic research. These product opportunities and the related
intellectual property rights are typically obtained under license from academic
or corporate sources who have received United States patents which, in the
opinion of the Company's patent counsel, are enforceable. The Company then
sponsors and directs the clinical testing and any additional preclinical studies
needed for product registration and marketing approval. These late-stage
activities are often outsourced to independent clinical research organizations
to maximize efficiency and minimize internal overhead. The Company generally
will license the manufacturing and marketing rights to the product to a
corporate partner in exchange for licensing fees and royalty payments on future
product sales. Formulation development, as well as microbiology, chemistry,
manufacturing and controls information, are typically provided by the Company's
licensed corporate partner, and the Company then submits to the United States
Food and Drug Administration (the "FDA") a New Drug Application ("NDA") to
obtain the FDA's clearance to market the drug.
Using this royalty-based business model, which is relatively uncommon in the
pharmaceutical industry, the Company has commercialized two drugs, has filed
NDAs for two others and has others proceeding through various stages of
development, all with a relatively modest depletion of its cash. The Company's
first product, ADENOCARD(R), was approved by the FDA in October 1989. Its second
product, ADENOSCAN(R), was approved by the FDA in May 1995. The NDAs for
VIASCINT(TM) and BIDIL(R) were filed on April 25, and July 3, 1996,
respectively. On February 27, 1997 the Cardio-Renal Advisory Committee
("Committee") of the FDA voted 9 to 3 not to recommend approval of BIDIL for
treatment of congestive heart failure. The Company currently has not received a
written response from the Committee and the FDA regarding their specific
concerns for BIDIL. The Company's plans for BIDIL will depend upon such response
and whether a reasonable investment by the Company will enable the Company to
address and satisfy such concerns.
Substantially all of the Company's royalty income in the three year period ended
December 31, 1996 resulted from sales in the United States by Fujisawa-USA, Inc.
("Fujisawa"), the Company's corporate partner, of ADENOCARD and ADENOSCAN.
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Medco Research, Inc.
STRATEGIC PLAN
Whereas large pharmaceutical companies typically seek diversification into
multiple diagnostic and therapeutic areas, small companies with more limited
resources must concentrate their efforts to be competitive and successful. As
such, the Company continues to focus primarily on cardiovascular disease. Its
expertise in adenosine drug development, and more recently nuclear cardiology,
is well-recognized in the medical community. The Company believes that medical
market trends, in particular managed care, present unique opportunities well
suited to these core competencies. Therefore, to further concentrate its efforts
and corporate partner interests, the Company at this time intends to divest
unrelated products and focus on the continued acquisition and development of
cardiovascular medicines and adenosine-based products.
ADENOSINE PORTFOLIO
ADENOCARD(R) - a sterile formulation of adenosine for injection - indicated as
the drug of choice for the treatment of abnormally rapid heartbeats
originating in the upper chambers of the heart, so-called paroxysmal
supraventricular tachycardia. Commercially available from Fujisawa in the
U.S. and Canada since 1989 as ADENOCARD, the drug also is sold by the
Company's corporate partner Sanofi Pharma ("Sanofi") in the United Kingdom
and other countries of the world as ADENOCOR(R) and in Switzerland as
KRENOSIN(R).
ADENOSCAN(R) - a sterile formulation of adenosine for infusion - indicated as an
adjunct to thallium cardiac imaging for the evaluation of coronary artery
disease in patients unable to exercise adequately, so-called
pharmacological stress. Commercially available from Fujisawa in the United
States and Canada since 1995, the drug also is sold by Sanofi in the United
Kingdom and pending registration and approval in other countries of the
world.
ADENOSINE FOR CARDIOPROTECTION (MEDR-640) - sterile formulations of adenosine
for infusion - under development as a cardioprotective adjunct to early
thrombolytic therapy or emergency angioplasty in the treatment of acute
myocardial infarction and as an additive to standard cardioplegia during
open-heart surgery. Positive clinical results were reported at the 1995
Annual Meeting of the American Heart Association and the 1996 Annual
Meeting of American College of Cardiology supporting the Company's belief
that the drug holds significant promise as an effective cardioprotective
agent. Fujisawa is the Company's partner for this product, which is in
Phase II clinical testing.
NUCLEAR CARDIOLOGY PORTFOLIO
VIASCINT(TM) - a sterile radiopharmaceutical formulation of
iodine123-iodophenylpentadecanoic acid for injection - subject to FDA
approval, as to which no assurance can be given, proposed to be used to
determine the presence of "hibernating", or reversibly injured heart muscle
and thereby predict which patients are most likely to experience
improvement in cardiac function following, and thus benefit from, coronary
artery bypass graft (CABG) surgery, and to assist physicians in the
selection of patients for such surgery. The Company completed Phase III
clinical testing, and the results indicated that the product provides the
means to predict, with high accuracy, which patients will have improvement
in cardiac functioning following revascularization. The Company filed an
NDA in 1996. Nordion International Inc. currently has U.S. manufacturing
rights, and the Company has marketing rights. The Company is in the process
of seeking a corporate partner to market this product.
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Tc99m-GLUCARATE - a radiopharmaceutical kit for the preparation of
technetium99m-GLUCARATE for injection - under development for the early and
rapid diagnosis of acute myocardial infarction, particularly in patients
with nondiagnostic electrocardiograms (ECGs) and negative cardiac enzyme
tests. The Company acquired this product in January 1996 and currently
retains worldwide manufacturing and marketing rights to issued patents.
ADDITIONAL PORTFOLIO
BIDIL(R) - an oral dosage formulation containing the combination of hydralazine
hydrochloride and isosorbide dinitrate (two generically available
vasodilators) - subject to FDA approval, as to which no assurance can be
given, proposed to be used to improve symptoms and survival in patients
with congestive heart failure (CHF) who are inappropriate for treatment
with angiotensin-converting enzyme (ACE) inhibitors. The Company
transferred the manufacturing process for BIDIL from its formulator to its
commercial manufacturer. The Company filed an NDA in July 1996. On February
27, 1997 the Cardio-Renal Advisory Committee ("Committee") of the FDA voted
9 to 3 not to recommend approval of BIDIL for treatment of congestive heart
failure. The Company currently has not received a written response from the
Committee and the FDA regarding their specific concerns for BIDIL. The
Company's plans for BIDIL will depend upon such response and whether a
reasonable investment by the Company will enable the Company to address and
satisfy such concerns. In 1996 the Company reacquired all marketing and
manufacturing rights from Boehringer Mannheim Pharmaceutical Company. See
"Product-By-Product Summaries - BIDIL" below.
ATP - a sterile formulation of adenosine triphosphate - under development for
the treatment of solid tumors or cancer-related cachexia. The product has
completed one single-center Phase I and one multicenter Phase II clinical
trial, and the Company believes the results support the continued
investigation of the drug as an adjunctive therapy that may improve the
quality of life in patients suffering from non-small cell lung cancer. The
Company currently retains the United States manufacturing and marketing
rights. However, the Company's licensor is seeking an arbitration ruling
that the license agreement has terminated because of the Company's material
breach. The Company believes the allegations are without merit. Until the
initiation of such arbitration the Company had been seeking to sublicense a
corporate partner to continue the development of this product, including
the right to manufacture and market it. See Item 3 below, Legal
Proceedings.
PRODUCT-BY-PRODUCT SUMMARIES
ADENOCARD(R)
The Product: ADENOCARD is a sterile formulation of adenosine (3mg/ml) available
in 2ml vials and 2-4ml prefilled syringes for intravenous injection to restore
normal heart rhythm in patients with abnormally rapid heartbeats originating in
the upper chambers of the heart, so-called paroxysmal supraventricular
tachycardia (PSVT). Because of its very short half-life (less than 10 seconds),
ADENOCARD works quickly and typically without prolonged side effects. It has
been adopted by numerous medical organizations as the "drug-of-choice" for the
treatment of PSVT.
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Regulatory Status: In October 1988, the Company received FDA approval to market
ADENOCARD in the United States, and the drug is commercially available from
Fujisawa in the United States and Canada. In September 1991, Sanofi received
marketing approval (under the trade name ADENOCOR) in the United Kingdom and, in
May 1992, received marketing approval (under the trade name KRENOSIN) in
Switzerland. Sanofi also sells the drug in France, The Netherlands, Luxembourg,
Spain, Denmark, Italy, Ireland, Australia, Austria, Greece, Quatar, Jordan,
Saudi Arabia, Cyprus, Kuwait, Belgium and Germany.
Product License: In March 1985, the University of Virginia Alumni Patents
Foundation granted to the Company an exclusive license to exploit in the United
States and Canada the use of adenosine for the treatment of supraventricular
tachycardia that is caused by re-entry in the A-V node or an accessory pathway
of the human heart. In November 1986, licensor received a United States Patent
on such use. For these rights, the Company paid a one-time, nonrefundable
license fee and agreed to pay 10% of all net sales of ADENOCARD made directly by
the Company and 50% of all royalties received by the Company from its
sublicensees until the expiration of the term of the patent rights or until the
license is terminated as provided in the agreement. The Licensor, as it has done
in the past, is conducting an audit of the Company's royalty obligations under
the license agreement. In connection with this audit licensor is also
questioning whether the introduction and sale of the Company's ADENOSCAN drug
and the related decline in ADENOCARD sales, without compensation to licensor,
violates the license. The Company believes it is in full compliance with the
terms of the license, and it has been so advised by counsel.
Competition: Intravenous calcium channel blockers and beta-blockers (generically
available from numerous sources) are principal competitors. In addition,
catheter-based ablation therapy is becoming more common and may compete for
certain patient types.
Manufacturing and Marketing:
1. Agreement with Fujisawa. In November 1985, the Company granted LyphoMed,
Inc., a manufacturer and marketer of critical care injectable pharmaceuticals
and other products which subsequently was merged into Fujisawa and herein is
referenced as Fujisawa, an exclusive license to manufacture and market
ADENOCARD in the United States and Canada. Fujisawa agreed to pay the Company a
royalty equal to 25% of its net sales of ADENOCARD in each country for the
duration of patent protection or any other exclusive marketing rights that may
be granted to the Company by governmental agencies, whichever is longer.
Fujisawa also agreed to pay the Company a royalty equal to 7% of Fujisawa's net
sales of ADENOCARD during any subsequent term of the agreement, which will
continue after the initial term until either party terminates the agreement by
giving the other party 90 days written notice.
2. Agreement with Sanofi Pharma. In December 1987, the Company granted Sanofi
Pharma ("Sanofi"), a multinational pharmaceutical company headquartered in
France, the rights to exclusively manufacture and market ADENOCARD in Europe and
countries other than the United States and Canada. Sanofi agreed to use its best
efforts to commercialize ADENOCARD in such territories subsequent to receiving
governmental marketing approvals and to pay the Company royalties equal to 5% of
its net sales of ADENOCARD. Royalties will be paid on a country by country basis
for the longer of six years or the period of any marketing exclusivity.
ADENOSCAN(R)
The Product: ADENOSCAN is a sterile formulation of adenosine (3mg/ml) available
in 30ml or 20ml vials for infusion indicated as an adjunct to thallium cardiac
imaging in the evaluation of coronary artery disease in patients unable to
exercise adequately. The procedure is called pharmacological stress, since in
many ways the effects of adenosine simulate those of exercise. ADENOSCAN is
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administered by brief intravenous infusion, and thallium (a radioactive agent)
is injected during the procedure. Cardiac images are subsequently acquired (with
gamma cameras) which visually display the presence and severity of underlying
coronary artery disease. Because of its very short half-life, side effects are
generally very brief.
Regulatory Status: In October 1992, the Company received approval to market
ADENOSCAN in Canada; and in May 1995, the Company received from the FDA
marketing clearance for ADENOSCAN in the United States. In June 1995, Sanofi
received marketing approval for ADENOSCAN in the United Kingdom and in February
1997, Sanofi registered ADENOSCAN in 14 member countries of the European
Community through the mutual recognition procedure. The final administrative
procedure involving the granting of a National Marketing License authorizing the
sale of the product will be sought from the health authorities in each of the
member countries.
Product License: The Company owns the product as it is the exclusive assignee of
patents issued in the U.S. and Canada, with counterpart applications pending
approval in other countries of the world, covering the use of adenosine as a
pharmacological stressor in cardiac imaging. In addition, in the U.S. the
product received three years of exclusivity from the date of NDA approval under
the Hatch-Waxman Act. See "ADENOCARD - Product License" above.
Competition: Intravenous dipyridamole, manufactured and marketed by DuPont
Radiopharmaceuticals under the brand name IV Persantine(R) is the principal
competitor and has been available in the U.S. since 1990. IV Persantine(R) is
generically manufactured and marketed by Wyeth Ayerst. In addition, other drugs
and procedures currently available or under development may be useful in
determining the presence or severity of coronary artery disease and may compete
directly with ADENOSCAN.
Manufacturing and Marketing:
Agreement with Fujisawa. In December 1988, the Company granted Fujisawa an
exclusive license in the United States and Canada to manufacture and market
ADENOSCAN. As amended in May 1995 by an agreement settling a litigation among
the parties and Abbott Laboratories, Inc. related to the manufacturing and
marketing rights to this drug, Fujisawa agreed to pay the Company royalties of
29% of ADENOSCAN net sales in the United States and Canada for the first five
years after the commencement of commercial sales in each territory and
thereafter royalties of 25% of net sales until June 10, 2007, at which time
Fujisawa would have a paid-up license within such territories. (The Company is
obligated to pay to Abbott royalties of 2% of the net sales of ADENOSCAN for
five years following FDA marketing clearance, up to a maximum of $5.35 million.
See Note 6 to the Financial Statements included in Item 8 below.)
Fujisawa also agreed to pay royalties to the Company in respect of periods of
more than thirty days in which it is unable to fulfill ADENOSCAN orders for
reasons other than force majeure and other specified events, such royalties to
be at the then prevailing rate based on the average daily sales of ADENOSCAN
during the preceding 12 months. Fujisawa also agreed generally to maintain an
inventory of at least six months of ADENOSCAN finished product and
work-in-process, to be stored at multiple locations and to use its best efforts
to identify and provide data to the Company to qualify with the FDA an alternate
supplier of the adenosine raw material necessary for the manufacture of
ADENOSCAN. In October 1996, based on data provided by Fujisawa to the Company,
Fujisawa's Melrose Park, Illinois plant was qualified by the FDA as an alternate
ADENOSCAN manufacturing facility.
Agreement with Sanofi. In June 1992, the Company granted Sanofi the exclusive
rights to manufacture and market ADENOSCAN worldwide except in the United
States, Canada, Japan, Korea and Taiwan. In June 1995, Sanofi received marketing
approval for ADENOSCAN in the United Kingdom and in February 1997, Sanofi
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registered ADENOSCAN in 14 member countries of the European Community through
the mutual recognition procedure. The final administrative procedure involving
the granting of a National Marketing License authorizing the sale of the product
will be sought from the health authorities in each of the member countries.
Sanofi pays the Company a royalty of 6 to 8 percent, based on the level of
annual sales, for the longer of ten years or the period of any marketing
exclusivity for ADENOSCAN in each country of the territory.
Agreement with Suntory. In February 1994, the Company signed a development and
marketing agreement with Suntory Limited for cardiovascular uses of adenosine.
Suntory currently is pursuing the use of adenosine for pharmacologic stress for
use with thallium perfusion imaging to detect coronary artery disease. The
Japanese equivalent of an NDA has not been filed for any product covered by the
agreement. The Company received a $1 million license fee plus a $300,000 fee
when the FDA granted marketing clearance for ADENOSCAN.
ADENOSINE FOR CARDIOPROTECTION (MEDR-640)
The Product. Each year in the U.S. over one million patients suffer acute
myocardial infarction and, despite the benefits of early reperfusion, permanent
injury and disability is not uncommon. In addition, over 300,000 patients a year
undergo CABG surgery and, despite standard cardioprotective measures,
significant cardiac support is often required during the early postoperative
period. MEDR-640 is the internal denomination of a development program for a
sterile formulation of adenosine (3mg/ml) as an adjunct to early reperfusion
with thrombolytic therapy or emergency angioplasty in the treatment of acute
myocardial infarction and as an additive to standard cardioplegia during
open-heart surgery.
Development Background: Substantial preclinical data, and limited human testing,
suggest that adenosine may be further beneficial in these acute ischemic
settings. The results of a single-center pilot investigation suggest that
adenosine, as an adjunct to emergency angioplasty, may further limit the damage
associated with acute myocardial infarction. This was suggested by significantly
reduced injury measured six weeks after the procedure compared to measurements
made at the time of hospital discharge. The preliminary results from another
single-center pilot study suggest that adenosine, as an additive to standard
cold-blood cardioplegia, may also limit the amount of cardiac support required
during the early postoperative period following CABG surgery. This was suggested
by statistically significant reductions in the cumulative amount of inotropes
(i.e., dopamine and dobutamine) and vasodilators (i.e., nitroglycerin) required
in the 24-hour period following surgery. These preliminary findings support the
ongoing Phase II multicenter trials, including a placebo-controlled trial in
CABG surgery (so-called AB-02 trial), two related placebo-controlled trials
using thrombolytic therapy in acute myocardial infarction (so-called AMISTAD
trial), and a placebo-controlled trial using emergency (primary) angioplasty in
acute myocardial infarction (so-called ALIVE trial).
Regulatory Status: The original IND for Phase I studies was filed in November
1988. The Company is now conducting multicenter Phase II clinical trials in the
U.S., Canada and Argentina under this IND submitted to the FDA in November 1988.
Product License: The Company has a patent application pending in the U.S. and
abroad for the use of adenosine to prevent further injury during acute
myocardial infarction, and the Company is the sublicensee of Fujisawa, which is
the exclusive licensee, of a U.S. patent issued in 1989. See "Manufacturing and
Marketing" below.
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Competition: A wide variety of agents currently available or under investigation
may be useful in these acute ischemic settings, including antiplatelet and
anticoagulant agents, cardiosuppressants, perfluorochemicals, anti-free radical
scavengers, and adenosine analogs or modulators which may compete directly with
MEDR-640.
Manufacturing and Marketing: MEDR-640 was included in the Company's 1988
exclusive license agreement with Fujisawa relating to ADENOSCAN. Pursuant to the
May 1995 agreement with Fujisawa settling the litigation over the manufacturing
and marketing of ADENOSCAN, all references to MEDR-640 in such license agreement
were eliminated, and in May 1996, the parties entered into an agreement to
jointly develop adenosine-based products having indications as cardioprotective
agents, such as MEDR-640. Under that agreement Fujisawa granted to the Company
an exclusive sublicense under a U.S. patent under which Fujisawa is the
exclusive licensee. Fujisawa has exclusive manufacturing and marketing rights in
the U.S., Canada, Mexico and other territories, and it agreed to pay the Company
25% of net sales within the territories. The companies share equally all costs
of development and any royalties due to third parties.
VIASCINT(TM)
The Product: VIASCINT is a radiopharmaceutical formulation of
I123-iodophenylpentadecanoic acid under development to determine the presence of
"hibernating", or reversibly injured, heart muscle and thereby predict
improvement in cardiac function following coronary artery bypass graft (CABG)
surgery, and to assist physicians in the selection of patients most likely to
benefit from such procedure.
Development Background: Although numerous procedures and various factors are
considered in the evaluation of patients for CABG surgery, the only FDA approved
product for cardiac metabolic imaging and tissue viability assessment is
F18-fluorodeoxyglucose (FDG) for use in conjunction with positron emission
tomography (PET). However, this procedure is very expensive and not widely
available. Like FDG, VIASCINT is a radioactive metabolite and may provide
similar information with gamma cameras, which are generally available at most
large hospitals. The results of the Company's Phase III clinical trials support
its belief that VIASCINT provides the means to predict, with high accuracy,
which patients will have improvement in cardiac function following
revascularization.
Regulatory Status: The Company completed Phase III clinical trials in the U.S.
under an IND submitted to the FDA in June 1992. The Company filed an NDA in
April 1996. The Company currently has no rights or registration plans outside
the U.S.
Competition: A wide variety of agents and procedures currently available or
under investigation may be useful in assisting physicians in the selection of
patients for CABG surgery and may compete directly with VIASCINT. However, only
PET FDG is currently FDA approved for use in detecting reversibly injured heart
muscle that may improve subsequent to CABG surgery.
Product License; Manufacturing and Marketing: In April 1992, the Company
obtained from Nordion International Inc. ("Nordion"), a Canadian manufacturer of
radiopharmaceuticals, the right to develop and market VIASCINT in the United
States. Under the agreement Nordion will supply the Company with VIASCINT for
United States clinical trials and will share a portion of the Company's initial
development expenses. Should the results of these initial studies be favorable,
the Company will continue the development program in pursuit of FDA marketing
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clearance. The Company paid Nordion an annual fee of $25,000 (begun in April
1993) through April 1996, when it filed the VIASCINT NDA. Upon FDA approval, if
obtained, Nordion will retain exclusive manufacturing rights in the United
States. The Company and Nordion will share equally in the profits of VIASCINT
sold in the United States by the Company, and the Company will receive a royalty
equal to 25% of net sales of VIASCINT sold in the United States by another party
to which it may sublicense the marketing rights. The Company is seeking a
corporate partner to market this product.
VIASCINT is not protected by a U.S. patent. However, the manufacturing
(radiolabeling) technologies are trade secrets under license to Nordion
International. In addition, the Company has applied to the FDA for Orphan Drug
designation and anticipates five years of exclusivity under the Hatch-Waxman
Act.
Tc99m-GLUCARATE
The Product: It is estimated that, among the five million annual visits for
chest pain of possible cardiac origin, nearly two million patients have ECGs and
cardiac enzymes which indicate no acute myocardial injury, yet provide no clear
alternative diagnosis. These patients are variably managed with the tentative
diagnosis of "rule-out" myocardial infarction, yet they are not clearly
candidates for early reperfusion therapy or early discharge. Tc99m-GLUCARATE, a
radiopharmaceutical kit containing lyophilized glucaric acid (a carbohydrate
derivative) for reconstitution and radiolabeling with technetium99m for
injection, is under development for the early and rapid diagnosis of acute
myocardial infarction, and it may provide useful diagnostic information in these
patients with nondiagnostic electrocardiograms (ECGs) and negative cardiac
enzyme tests.
Development Background: Tc99m-GLUCARATE in animal studies has been shown not to
cross intact cellular membranes, and it is rapidly cleared from the blood
through the kidney. However, in the presence of irreversibly damaged (infarcted)
cells, Tc99m-GLUCARATE crosses the cellular membrane and binds tightly to
nuclear residues. This type of uptake produces images of the infarcted areas
that appear as "hot-spots" by standard nuclear imaging techniques.
Regulatory Status: The product has undergone limited preclinical and clinical
testing overseas and some formulation development work. An IND to commence human
testing in the U.S. is targeted for filing in mid 1997.
Competition: Tc99m -pyrophosphate (FDA approved) and In111-antimyosin antibody
(FDA approved) are nuclear imaging agents used to detect infarcted myocardium
and both would compete directly with Tc99m-GLUCARATE. In addition, other in vivo
or in vitro tests are available and would compete directly with Tc99m-GLUCARATE.
Product License; Manufacturing and Marketing: On January 5, 1996, the Company
received from Molecular Targeting Technology, Inc. an exclusive sublicense under
a U.S. patent issued in August 1990 covering the use of technetium-labeled
GLUCARATE for organ infarct imaging (the Molecular Targeting Technology
principals are the inventors, and the patent is jointly owned, through
assignment, by Centocor, Inc. and The Massachusetts General Hospital; similar
patents for the same technology were approved in Europe in May 1995). The
Company obtained the exclusive right to develop, manufacture and market
Tc99m-GLUCARATE in the United States, Japan and other countries of the world,
except in Asia. The Company agreed to pay opportunity fees totaling $1.9
million, including an initial payment of $200,000 upon execution of the
agreement and staged payments according to specific development milestones. The
Company will also pay a royalty of either 6% of net sales of the product if sold
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by the Company or 25% of the Company's revenues from product sales made by a
commercial partner. The sublicensor has provided all preclinical and clinical
data conducted in the U.S. and abroad and transferred all manufacturing
technology, including clinical trial material for Phase I and Phase II clinical
trials. The Company will be responsible for all aspects of development and
commercialization of the final product, with rights to sublicense.
BIDIL(R)
The Product: Among the estimated 3.5 million patients suffering from congestive
heart failure (CHF) in the U.S., a substantial portion are not candidates for
first-line therapy with angiotensin-converting enzyme (ACE) inhibitors and, for
such patients, the Agency for Health Care Policy and Research (AHCPR) and other
medical organizations recommend combination oral treatment with hydralazine
hydrochloride and isosorbide dinitrate, two generically available vasodilators.
BIDIL is a fixed-dose, combination tablet for oral administration containing
these two vasodilators, under development by the Company to improve survival in
patients with CHF who are inappropriate for treatment with ACE inhibitors. BIDIL
would offer a convenient formulation that may reduce noncompliance with
prescribed treatment - the leading cause of hospital readmissions in patients
with CHF.
Development Background: Two previous landmark studies, the so-called V-HeFT
trials, established the safety and efficacy of hydralazine and isosorbide
dinitrate in the treatment of CHF. In particular, survival was significantly
improved compared to placebo, although the ACE inhibitor enalapril was more
effective in this regard than the vasodilator combination. Although the Company
believes that data from these trials provide the clinical and statistical basis
to pursue a survival claim in the intended population the FDA Advisory Committee
found that the treatment group in the first V-HeFT did not show statistically
significant improvement over placebo in the primary endpoints, mortality, at two
years and mortality for the overall study period, and it voted not to recommend
approval.
Regulatory Status: In March 1993, the Company submitted to the FDA an IND to
commence human bioequivalency studies in the U.S. Phase III clinical testing has
been completed. At Company expense, a commercial source of raw bulk hydralazine
and isosorbide dinitrate has been found and used in the preparation of the BIDIL
combination product. The Company filed an NDA in July 1996. On February 27, 1997
the Cardio-Renal Advisory Committee ("Committee") of the FDA voted 9 to 3 not to
recommend approval of BIDIL for treatment of congestive heart failure. The
Company currently has not received a written response from the Committee and the
FDA regarding their specific concerns for BIDIL. The Company's plans for BIDIL
will depend upon such response and whether a reasonable investment by the
Company will enable the Company to address and satisfy such concerns. BIDIL will
qualify for three years of market exclusivity under the Hatch-Waxman Act.
Product License: In November 1991, the Company acquired exclusive rights from
Jay N. Cohn, M.D., to a United States patent issued to Dr. Cohn in September
1989, covering a method of reducing mortality associated with chronic CHF in
patients with impaired cardiac function by administering a combination of
specified amounts of hydralazine and isosorbide dinitrate. Dr. Cohn, who was the
principal investigator of the V-HeFT trials and became a director of the Company
in 1996, granted the Company an exclusive license to worldwide rights to the
combination therapy for research, development, manufacture and sale of this drug
under the issued United States patent that he holds and any future patents he
obtains.
The Company has agreed to pay Dr. Cohn a total nonrefundable license fee (which
will be credited against any future royalties) of $200,000, of which $125,000 is
payable upon FDA approval of the Company's NDA for BIDIL. In the event the drug
is commercialized, the Company will pay Dr. Cohn royalties equal to (i) 7.5% of
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the Company's direct net sales or (ii) 30% of any royalties received by the
Company from sublicensees. In the event that annualized net sales surpass
$100,000,000, the royalty amounts will increase to 9% and 40%, respectively, on
sales over $100,000,000. However, upon expiration of Dr. Cohn's United States
patent for BIDIL, each of the foregoing royalty rates will be reduced by 50%.
Competition: Hydralazine hydrochloride and isosorbide dinitrate are generically
available and would compete directly with BIDIL. In addition, other agents
approved or under development, such as calcium-channel blockers, beta-blockers,
angiotensin-II receptor blockers, and other vasodilators, may compete directly
with BIDIL.
Manufacturing and Marketing: In November 1993, the Company signed a licensing
agreement with Boehringer Mannheim Pharmaceutical Company ("BMPC") giving BMPC
rights to market BIDIL in the U.S., Canada and Mexico with a right of first
refusal for licenses outside these territories. BMPC agreed to pay the Company
royalties as follows: (i)on net sales of up to $30,000,000, a royalty of
twenty-five percent (25%) of such net sales; (ii)on net sales of over
$30,000,000 and below $60,000,000, a royalty of twenty-two percent (22%) of such
net sales; and (iii)on net sales of over $60,000,000, a royalty of twenty
percent (20%) of such net sales.
BMPC paid the Company a licensing fee of $1,000,000 following the execution of
the agreement and agreed to make the following additional payments to the
Company: $500,000 within 30 days of successful completion of the bioequivalence
study; $250,000 within 30 days of the submission to the FDA of an NDA; and
$1,000,000 within 30 days of the approval of the NDA by the FDA. In the event
that within the time parameters established in the Development Plan a viable
formulation of BIDIL cannot be attained or bioequivalence of BIDIL is not
achieved, the Company is obligated to refund the $1,000,000 fee paid upon the
execution of the Agreement or $500,000 of such fee, as the case may be, and in
either case the agreement shall terminate.
The Company and 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. As a result of BMPC's strategic marketing plans
for certain of its other products, it was no longer interested in BIDIL. The
Company retained $350,000 of BMPC's $1 million license fee, which the Company
accounted for as income in the second quarter of 1996.
ADENOSINE TRIPHOSPHATE ("ATP")
The Product: There is a need for more effective treatment of solid tumors such
as non-small cell lung cancer, which is extremely aggressive, and leads rapidly
to death. ATP has demonstrated some ability to inhibit tumor growth in animal
studies, and it may reduce cachexia, the weight-loss and wasting syndrome
associated with cancer.
Development Background: Adenosine triphosphate is the primary energy-releasing
molecule in the human body and is composed of adenosine and phosphate. The
anti-cancer effects of ATP previously have been reported in several experimental
animal tumors. A small number of patients with late stage colorectal cancer have
received ATP in conjunction with a currently marketed anti-cancer drug,
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5-fluorouracil. In the two trials completed under the IND, ATP has shown a
favorable safety profile, and some preliminary indications of efficacy based on
quality of life and performance indices, but it has not produced any
statistically significant tumor regression.
Regulatory Status: A Phase I dose-ranging safety study and a Phase I/II
multicenter study in patients with non-small cell lung cancer have been
completed under an IND approved by the FDA in May 1992. ATP will qualify for
five years of market exclusivity under the Hatch-Waxman Act.
Product License: In May 1991, the Company acquired from Eliezer Rapaport, Ph.D.,
the exclusive rights to two issued United States patents and one patent
application pending in the United States covering (i) the use of adenosine
5-diphosphate ("ADP") and adenosine 5-triphosphate ("ATP") to arrest and kill
tumor cells (United States patent issued November 1989); (ii) the arrest of
growth of tumor cells due to an increase in blood and plasma levels of ATP in a
host resulting from the administration to the host of adenosine monophosphate
("AMP") or ATP and a reduction in weight loss caused by cancer cachexia by
administration of AMP or ATP (United States patent issued September 1991); and
(iii) the utilization of adenosine nucleotides and/or adenosine and inorganic
phosphates for elevation of liver, blood and blood plasma ATP concentrations
(United States patent pending). A patent covering claims in (i) above has issued
in April 1988 in Europe and in February 1988 in Japan. Patent applications
covering claims in (ii) and (iii) above are pending in Europe and Japan.
In consideration for entering into this agreement, the Company granted Dr.
Rapaport and another scientist in May 1991 options to purchase a total of 21,200
shares of the Company's stock at $14.625 per share (the market price of the
stock at the time of the grant), and agreed generally to pay Dr. Rapaport an 8%
royalty based on net sales of ATP by the Company or its affiliates and 40% of
the net monetary proceeds paid to the Company from any sublicensee based on net
sales, but in no event will Dr. Rapaport receive an amount less than 4% of the
sublicensee's net sales during the period in which the Company is receiving
royalties from the sublicensee. Unless sooner terminated under the terms of the
agreement, the license will continue until the later of the expiration of Dr.
Rapaport's patents or of any exclusive marketing period provided by law.
However, the Company may continue to market ATP in any country without making
royalty payments to Dr. Rapaport after the expiration of the patents in that
country or after five years following the commencement of sales in any country
not covered by Dr. Rapaport's patents.
Dr. Rapaport has alleged the Company materially breached the license agreement
and claims it therefore has terminated. The Company believes it has complied
with the terms of the license and is vigorously defending itself. See Item 3
below, Legal Proceedings.
Competition. There are numerous anti-cancer agents on the market and other drugs
are in development, which may be used to treat NSCL cancer.
Manufacturing and Marketing: ATP is the Company's only adenosine-based product
with a non-cardiac indication, and until the initiation of Dr. Rapaport's
arbitration the Company had been seeking to sublicense a corporate partner to
continue the development of this product, including the right to manufacture and
market it.
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GOVERNMENT REGULATION OF PHARMACEUTICALS
The Company is engaged in a business in which strict federal regulation through
the FDA is a significant factor. Such regulations relate primarily to the safety
and efficacy, but also govern manufacturing, labeling, advertising and
marketing, of pharmaceutical products.
In order to test clinically and later market pharmaceutical products, a company
must obtain marketing clearance from the FDA in the United States and comparable
governmental agencies in other countries. The FDA requires substantial evidence
of the safety and efficacy of new drugs and the approval process involves
several steps. Each of these steps can be time consuming and expensive.
The first step includes the period from the discovery of the compound, including
laboratory and animal experimentation, to the filing of an IND. The IND
submission must contain data from the preclinical drug research, including
biochemistry, animal toxicological and pharmacological studies, and any other
available information on the drug and must also outline a plan of clinical
investigation. INDs must be sought for particular formulations of a drug, such
as oral, injectable and topical, and these formulations must be tested in the
treatment of human disease only in accordance with protocols (specific treatment
regimens) submitted in connection with the IND.
Once an IND has been allowed to become effective by the FDA, clinical trials on
humans may be undertaken in accordance with the approved protocols. During
clinical investigation, the sponsor is required to monitor all studies, to
submit progress reports to the FDA at intervals not exceeding one year, and to
report promptly serious adverse reactions pertinent to the safety of the drug.
There are usually three phases in the clinical development of a new drug. Phase
I concerns the testing of the drug in a small number of healthy subjects to
determine primarily a number of safety parameters and to obtain other basic
experience with the drug in humans. Phase II concerns the testing of the drug
under well-controlled conditions in a larger population to obtain information on
the drug's safety and efficacy in patients for the claim or claims being made by
the sponsor. Phase III concerns the testing of the drug in a still larger
patient population and for a longer period of time under well-controlled
conditions to confirm the safety and efficacy results obtained in Phase II.
Phase III is usually considered the last phase in the clinical testing of the
drug.
If the sponsor elects to proceed beyond clinical development to
commercialization of the drug, it submits to the FDA an NDA which contains a
written summary of all data reflecting the total research experience with the
drug and a section regarding its manufacture. When the FDA has reviewed the NDA
and all additional information which it may have required to be submitted during
the review process, it decides whether, and under what labeling conditions, it
will permit the product to be marketed. The FDA may require post-marketing
testing and surveillance of adverse reactions as a condition of its approval to
monitor the drug's effect during marketing.
Although health registration requirements are generally more rigidly applied in
the United States than elsewhere, the regulatory pattern in the United States is
now being followed by most industrialized countries.
ORPHAN DRUG ACT
As the sponsor of an orphan drug for a particular indication, the Company would
be entitled to receive seven years exclusive marketing rights for this
indication, but only if it proceeds to sponsor the first NDA approved for the
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drug for this indication. Thus, unlike patent protection, the designation of a
drug for a particular indication as an orphan drug would not, by itself, prevent
other manufacturers or sponsors from obtaining orphan drug status for the same
drug for the same indication if they obtained a prior NDA, or from obtaining FDA
approval prior to approval of the Company's NDA.
The Company also is entitled to certain federal income tax credits with respect
to certain clinical expenses related to its orphan drugs.
As is the case with FDA approval generally, the grant of orphan drug status for
one or more of the Company's drugs would not prevent the FDA from approving the
same drug or drugs for a different indication, and medical practitioners may
prescribe an approved drug for non-indicated (i.e., off-label) uses. The
marketing potential of the Company's orphan drugs could be adversely affected by
FDA approval of another company's NDA for the same drug for different uses.
The Company intends, where applicable, to obtain orphan drug designation for any
drugs licensed or acquired by it in the future. There can be no assurance,
therefore, that the scope of protection currently afforded by orphan drug status
or the federal income tax credits currently available to sponsors of orphan
drugs will continue to be available in the future.
HATCH-WAXMAN ACT
The Hatch-Waxman Act provides for limited marketing exclusivity for
pharmaceutical products which receive NDA approval from the FDA, independent of
any issued patents which may apply. If a pharmaceutical product receives NDA
approval, and the FDA has not previously approved any other product containing
the same active ingredient, including any salt or ester of the active
ingredient, then the Hatch-Waxman Act does not permit any abbreviated generic
NDA ("ANDA") to be submitted by another company for that drug product for five
years from the date of NDA approval. If an NDA approval is received for a
pharmaceutical product containing an active ingredient or salt or ester of an
active ingredient that has been previously approved by the FDA, and if that NDA
approval was secured in part through the submission to the FDA of new clinical
investigations other than bioavailability studies, then the Hatch-Waxman Act
prohibits the FDA from making effective the approval of an ANDA for that product
by another company for a period of three years from the date of NDA approval.
This limited exclusivity provision is automatically granted upon NDA approval as
applicable and does not require special consideration. Within the Company's
current portfolio of products, VIASCINT and ATP qualify for five years of
exclusivity, and ADENOSCAN, MEDR-640, and BIDIL qualify for three years of
exclusivity, under this provision.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are extremely important to the Company's
business. However, the patent positions of biopharmaceutical firms, including
the Company, are uncertain and involve complex legal and factual questions which
can be difficult to resolve.
The Company's general policy is to license the right to manufacture and sell
pharmaceutical products the use of which for the particular indication is
covered by an issued United States patent which the Company's patent counsel
believes is valid and enforceable. The Company believes that licensing issued
patents represents the best step the Company can take to protect the technology,
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inventions, and improvements that it considers important to the development of
its business, and the Company's financial investment therein. However, on
occasion the Company may acquire product opportunities without issued patents or
without patent applications pending, such as, for example, when in Management's
opinion, the invention would expand the Company's adenosine portfolio. The
Company also relies upon trade secrets, know-how, continuing technological
innovations and subsequent licensing opportunities to develop and maintain its
competitive position.
The patent application and issuance process may take several years and involves
considerable expense, and there is no assurance that any patent sought by the
Company or its licensors will issue. The coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, neither the applicant nor the licensee knows whether any claim
contained in a patent application will be allowed and result in the issuance of
a patent or, if any patent is issued, whether it will provide meaningful
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy, until foreign
counterparts, if any, are published, and because publication of discoveries in
the scientific or patent literature often lags behind actual discoveries, the
Company cannot be absolutely certain that it or any licensor was the first
inventor of the subject matter covered by the patent application or that it or
such licensor was the first to file a patent application therefor or that it
would obtain the freedom to practice the claimed inventions. Moreover, priority
in filing a patent application for an invention can be overcome by a different
party who first practiced the invention. Accordingly, the Company might have to
participate in extensive proceedings in U.S. and/or foreign patent offices or
courts, including interference proceedings declared by the U.S. Patent and
Trademark Office ("Patent Office"), to determine priority and/or patent
validity. Any such proceeding would be costly and consuming of Management's
time. There can be no assurance either that the Company's owned or licensed
patents would be held valid or that the Company's products would not be found to
infringe patents owned by others. In the event of a determination that the
Company is infringing a third party's patent, the Company likely would be
required to pay royalties, which could be substantial, to such third party. It
is even possible that the third party could refuse a license to the Company in
order to keep the Company's product off the market.
There can be no assurance that any patent rights held by the Company will
provide any actual competitive advantage to the Company. Competitors might be
able to develop similar and competitive products outside the scope of the
Company's patents. For example, should third parties patent or otherwise develop
and receive governmental clearance to commercialize an adenosine product for a
use not covered by the Company's patents, physicians could use those third party
products in place of the Company's adenosine products even though such third
party products were not approved by the FDA for the same indications as the
Company's products. Any such off-label use of third party products could have a
material adverse effect on sales of the Company's products and the amount of
royalty revenues received by the Company.
From time to time, third parties may claim or the Company may identify,
intellectual property rights not owned or licensed by the Company which may be
infringed by the Company. To the extent that such properties are in the public
domain, in the first instance the Company would seek the opinion of its patent
counsel to avoid claims of willful infringement. In addition, whether or not
such properties are in the public domain, based on its evaluation (after
consultation with patent counsel) of applicable considerations, including
without limitation the potential duration, expense and outcome of an
infringement proceeding, the validity or enforceability of such potential claims
and other business consideration, the Company might seek to license such
intellectual properties in consideration of its payment of royalties. Although
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the Company believes that it should be able to obtain a license on commercially
reasonable terms to any such patent, there can be no assurance that it will be
able to obtain from third parties patent licenses on commercially reasonable
terms, if at all.
In the case of ADENOSCAN, one such third party with potential claims has been
identified. In 1987 such third party filed broad patent applications relating to
uses of adenosine. The third party has told the Company that its applications
make certain claims which may be relevant to the development and
commercialization of the Company's adenosine products, including ADENOSCAN.
Although the Company has requested, but not been given, a copy of such
application and all of the related correspondence with the Patent Office and is
seeking from such third party specific information concerning these claims,
based on the information it has received from such third party the Company
believes its ADENOSCAN patent would have priority over any patent that might
issue to such third party. Nonetheless, based on such information as the Company
may receive in the future from such third party, the Company will consider with
its patent counsel whether to seek a license from such third party of the
pending claims or those claims for which the Patent Office may grant a patent.
The third party already has told the Company that it would like to enter into a
license agreement with the Company covering its pending claims. This third party
also has an issued Canadian patent which appears to have priority over the
Company's Canadian patent for ADENOSCAN. Although the royalty revenues from the
product's sales in Canada are not material to the Company, the Company may seek
to obtain a Canadian patent license. However, there can be no assurance either
that any license can be negotiated with this third party on mutually acceptable,
or commercially reasonable, terms or that the owner of this patent application
will not seek to enforce against the Company's products, or against its
development activities, any patent that may issue.
It is the Company's policy to require its employees, consultants and parties to
collaborative agreements to execute confidentiality agreements upon the
commencement of employment or consulting relationships or the exchange of
information prior to a collaboration with the Company. These agreements provide
that all confidential information developed or made known during the course of
relationship with the Company is to be kept confidential and not disclosed to
third parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions resulting from work performed for the
Company, utilizing property of the Company or relating to the Company's business
and conceived or completed by the individual during employment, shall be the
exclusive property of the Company to the extent permitted by applicable law.
There can be no assurance, however, that these agreements will provide
meaningful protection of the Company's trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information. To the extent that
key employees, consultants or third parties apply technological information
independently developed by them or by others to any of the proposed projects of
the Company, disputes may arise as to the proprietary rights to such
information, and such disputes may not be resolved in favor of the Company.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary technology and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
The Company has registered various trademarks in the Patent Office and has other
trademarks which have acquired both national and international recognition. The
Company has trademark registrations or pending applications in a number of
foreign countries.
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Medco Research, Inc.
PRODUCT AND CLINICAL STUDIES LIABILITY
Administration of any drug to humans involves the risk of allergic or other
adverse reactions in certain individuals. Accordingly, it is possible that
claims might be successfully asserted against the Company for liability with
respect to injuries that may arise from the administration or use of its
products during clinical trials or following marketing. However, no claim
involving a material liability has ever been brought against the Company. The
Company presently carries, and contractually requires its marketing partners to
carry, what it believes to be adequate product and clinical studies liability
insurance coverage.
RESEARCH AND DEVELOPMENT
The Company expended for research and development $5,839,278, $8,535,187 and
$5,844,014 during the years ended December 31, 1996, 1995 and 1994,
respectively.
EMPLOYEES
As of March 7, 1997 the Company employed twenty-six persons on a full-time
basis. None of the Company's employees are represented by a labor union, and the
Company considers its employee relations to be good. The Company will need to
hire additional scientific and support personnel as it expands its operations.
ITEM 2. PROPERTIES
The Company leases approximately 11,900 square feet of office space, in Research
Triangle Park, North Carolina, for its corporate offices under a lease that
expires in July 1998. The Company believes that this facility is adequate for
its present operations.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company except as
discussed below:
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
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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
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 abitration is scheduled
to commence in May 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the
symbol MRE. The following table sets forth the high and low sales prices of the
Company's Common Stock on the American Stock Exchange during the applicable
periods.
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Quarter Ended High Low
------------- ---- ---
Calendar 1996:
March 31, 1996 $12 1/8 $ 9
June 30,1996 11 1/2 8 7/8
September 30, 1996 10 1/4 8
December 31, 1996 11 5/8 8 3/4
Calendar 1995:
March 31, 1995 $14 5/8 $11 1/8
June 30, 1995 15 5/8 11 7/8
September 30, 1995 15 1/8 11 3/4
December 31, 1995 12 3/4 9 1/2
The Company had 299 owners of record and in excess of 4,878 beneficial owners of
its Common Stock as of March 7, 1997, based upon information provided by the
Company's transfer agent.
DIVIDENDS
The Company has not paid any cash dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no cash dividends on its Common Stock will be
declared in the foreseeable future. Any future cash dividends will be subject to
the discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, the operating and financial condition of the
Company, its capital requirements and general business conditions.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five years has been
derived from the audited financial statements of the Company. The selected
consolidated financial data for the years ended December 31, 1996, 1995 and 1994
should be read in conjunction with the consolidated financial statements and the
notes thereto, and other financial information included elsewhere in this
report.
Summary Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
<S> <C>
Year Ended
OPERATIONS Years Ended December 31, August 31,
------------------------------------------------------------------ ---------------
1996 1995 1994 1993 1992
Revenue $15,824,073 $ 13,007,734 $10,688,619 $9,345,256 $6,078,711
Costs and Expenses 11,502,428 16,540,176 15,103,087 12,903,575 5,683,208
Net Income (Loss) 4,321,645 (3,532,442) (4,414,468) (3,558,319) 395,503
Net Income (Loss) per
Common Share .40 (.32) (.40) (.32) .04
Weighted Average Number
of Shares Outstanding 10,917,920 11,023,921 11,144,938 11,182,376 10,655,039
Cash Dividends Declared
per Common Share - - - - -
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Summary Consolidated Balance Sheet Data:
<CAPTION>
December 31, August 31,
------------------------------------------------------------------ -----------------
1996 1995 1994 1993 1992
Working Capital $18,372,970 $27,734,612 $24,883,199 $13,089,253 $21,791,436
Total Assets 42,628,404 43,121,656 44,680,299 49,298,432 49,663,388
Stockholders' Equity 36,499,005 35,099,683 38,901,572 45,577,377 48,643,948
Accumulated (Deficit) (11,393,947) (15,715,592) (12,183,150) (7,768,682) (4,231,126)
Net Tangible Book Value
Per Share 3.40 3.19 3.53 4.07 4.37
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
For calendar 1996, adenosine royalties (ADENOCARD and ADENOSCAN) increased 38%
and operating expenses decreased 29% which resulted in a net income of
$4,321,645 for 1996, or $0.40 per share, compared to a net loss of $3,532,442,
or $0.32 per share, for 1995.
In January 1996, the Company acquired Tc99m-GLUCARATE, a nuclear "hot spot"
imaging agent for the early and rapid diagnosis of acute myocardial infarction.
In April 1996, the Company filed a New Drug Application for its novel imaging
agent VIASCINT (I123-iodophenylpentadecanoic acid) with the U.S. Food and Drug
Administration. In May 1996, the Company signed a Joint Development Agreement
with Fujisawa to continue the development of adenosine as a cardioprotectant in
the settings of coronary artery bypass graft surgery and acute myocardial
infarction. In July 1996, the Company filed a New Drug Application for BIDIL, an
oral combination formulation of hydralazine hydrochloride and isosorbide
dinitrate, with the U.S. Food and Drug Administration. The Company announced the
hiring of two senior executives, Glenn C. Andrews, as Vice President, Finance
and Administration, and Chief Financial Officer, and Don Kirksey, Ph.D., Vice
President of Licensing and Business Development, who combined have over 25 years
of experience in the pharmaceutical industry. On February 27, 1997 the
Cardio-Renal Advisory Committee ("Committee") of the FDA voted 9 to 3 not to
recommend approval of BIDIL for treatment of congestive heart failure. The
Company currently has not received a written response from the Committee and the
FDA regarding their specific concerns for BIDIL. The Company's plans for BIDIL
will depend upon the response from the Committee and the FDA and whether it's
surmountable at a reasonable investment by the Company.
RESULTS OF OPERATIONS
The accompanying consolidated financial statements and certain selected
financial data have been presented for the calendar years ended December 31,
1996, 1995 and 1994. The Company changed its presentation of the Consolidated
Statements of Operations to reflect gross margin related to royalty revenues
followed by operating expenses and other income (expense).
Calendar Year 1996 Compared to Calendar Year 1995
Net Revenues. The Company's 1996 royalty revenue increased from $9,770,124 to
$13,453,958, an increase of 38%, due to quarter-to-quarter increases since its
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Medco Research, Inc.
July 31, 1995 launch in unit sales of ADENOSCAN by Fujisawa, the Company's North
American licensee. Fujisawa is responsible for substantially all of the royalty
revenue to the Company.
Gross Margin. The Company's 1996 gross margin from adenosine revenues increased
from $5,814,573 to $10,880,081, an increase of 87% due to the continued 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, decreased from
$3,955,551 to $2,573,877, a decrease of 35%.
Operating Expenses. Total operating expenses decreased from $12,484,625 to
$8,841,551, a decrease of 29% due to a substantial decrease in research and
development expenditures for VIASCINT and BIDIL and a significant decrease in
general and administrative expenditures for legal services.
Research and development costs decreased from $8,535,187 to $5,839,278, a
decrease of 32%, and returned to historical levels. Research and development
expenditures were higher during 1995 principally due to the Company's pivotal
trial work associated with VIASCINT and BIDIL, for which NDAs were filed in
1996. 1996 expenditures reflect activities associated with a product portfolio
in earlier stages of development, including joint development with Fujisawa of
adenosine for cardioprotection.
General and administrative expenses decreased from $3,949,438 to $3,002,273, a
decrease of 24%. This improvement in general and administrative expenses is
mainly attributed to lower legal expenses during 1996 related to the pending
class action litigation.
Other Income (Expense). Interest income decreased from $2,237,610 to $2,020,115,
a decrease of 10%. Investment income was lower in 1996 mainly due to slightly
higher yields and higher investment balances in 1995. Other income decreased
from $1,000,000 to $350,000, a decrease of 65%. This decrease is related to
non-royalty receipts under licensing agreements, such as license fees or
milestone payments, and the timing in which these receipts can be recognized as
revenues. Such receipts are not recognized as revenues prior to the completion
of the related milestones and must be refunded in part or completely if the
related milestones are not met.
Net Income (Loss) Per Share. Income/loss per share improved from a loss of $0.32
per share in 1995 to income of $0.40 per share in 1996 on weighted average
common shares and common share equivalents outstanding of 11,023,921 and
10,917,920, respectively. The income/loss per share reflects a net operating
loss of $3,532,442 and income of $4,321,645 in 1995 and 1996, respectively.
Calendar Year 1995 Compared to Calendar Year 1994
Net Revenues. The Company's 1995 royalty revenue increased from $8,460,180 to
$9,770,124, an increase of 16%, primarily due to a 34% increase, for the first
six month period compared to the year earlier period, in unit sales of ADENOCARD
related to increased demand for the vial formulation and the July 31, 1995
launch of ADENOSCAN, which more than offset the decrease in ADENOCARD sales.
Although the Company had increased royalty revenue from Sanofi's foreign sales
of ADENOCOR and ADENOSCAN, Fujisawa is responsible for substantially all of the
royalty revenue to the Company.
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Medco Research, Inc.
Gross Margin. The Company's 1995 gross margin from adenosine revenues increased
from $4,230,092 to $5,814,573, an increase of 37% due to a decline in ADENOCARD
sales, a change in the product sales mix, and a corresponding reduction in the
associated royalty expense. 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. It decreased from $4,230,088 to $3,955,551, a
decrease of 7%.
Operating Expenses. Total operating expenses increased from $10,872,999 to
$12,484,625, an increase of 15%, due to a substantial increase in research and
development costs.
Research and development costs increased from $5,844,014 to $8,535,187, an
increase of 46%. This increase largely reflected the completion of a pivotal
bioequivalence study and manufacturing scale-up for BIDIL, the completion of two
pivotal Phase III clinical trials and data analysis for VIASCINT, and the entry
into three multicenter Phase II clinical trials for MEDR-640.
General and administrative expenses decreased from $4,064,707 to $3,949,438
primarily due to a substantial decrease in legal expenses offset somewhat by
increases in investor relations and accounting services expenses.
Other Income (Expense). The Company substantially satisfied preclinical and
toxicology accomplishments related to adenosine and accordingly recognized
$1,000,000 in revenue from the licensee. Interest income increased from
$2,235,127 to $2,237,610.
Net Loss Per Share. Loss per share decreased from $0.40 per share in 1994 to
$0.32 per share in 1995 on weighted average common shares and common share
equivalents outstanding of 11,144,938 and 11,023,921, respectively. The loss per
share reflects a net operating loss of $4,414,468 and $3,532,442 in 1994 and
1995, respectively.
FINANCIAL CONDITION
As of December 31, 1996, the Company had total cash and investments of
$35,124,848 comprised of $9,106,695 of cash and cash equivalents and $26,018,153
of investments in U.S. Treasury Notes and debt securities of various federal
governmental agencies. The Company's working capital as of December 31, 1996 was
$18,372,970, compared to $27,734,612 as of December 31, 1995. The decrease in
working capital was primarily due to a shift from current investments held to
maturity to non-current investments held to maturity in 1996.
Included in liabilities at December 31, 1996 is an accrued liability (current
and non-current portion) of $2.5 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. See Note 6 to the Company's Financial
Statements included in Item 8 below. Included in assets at December 31, 1996 is
a deferred asset (current and non-current portion) of $1.7 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
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Medco Research, Inc.
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 is currently marketed in the United States, Canada and the United
Kingdom. ADENOCARD is currently marketed in the United States and Canada, the
United Kingdom plus Ireland, Switzerland, Quatar, Australia, Greece, Austria,
Kuwait, Belgium, Saudi Arabia and Germany. The Company will not generate
royalties from the sale of its products until 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 short term the Company expects to receive
substantially all of its royalty revenues from sales of its products, in the
U.S. by Fujisawa.
The FASB has issued Statement of Financial Accounting Standard No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," which applies to all
transactions in which an entity acquires goods and services by issuing equity
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans
(ESOPs). The Statement covers transactions with employees and nonemployees and
is applicable to both public and nonpublic entities. A new method of accounting
for stock-based compensation arrangements is established by the Statement. The
new method is a fair value based method rather than the intrinsic value based
method that is contained in APB Opinion No. 25 (Opinion 25). However, the
Statement does not require an entity to adopt the new fair value based method
for purposes of preparing its basic financial statements for stock-based
compensation arrangements with employees. The Company has reviewed the
provisions of SFAS 123 and will not adopt the new fair value based method;
rather, it will continue to use the Opinion 25 method. However, the Company has
provided disclosure of pro forma effects on net income regarding the new fair
value based method. See Note 8 of the Financial Statements included in Item 8
below.
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 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
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Medco Research, Inc.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Medco Research, Inc. are
included in this report:
<TABLE>
<S> <C>
Page 25 Independent Auditors' Report
Page 26 Consolidated Balance Sheets--December 31, 1996 and 1995
Page 27 Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994
Page 28 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995
and 1994
Page 29 Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994
Page 31 Notes to Consolidated Financial Statements
</TABLE>
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<PAGE>
Medco Research, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Medco Research, Inc.:
We have audited the accompanying consolidated balance sheets of Medco Research,
Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medco Research, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the consolidated financial statements, the Company is
party to certain claims and litigation. The ultimate outcome of these matters
cannot presently be determined. Accordingly, no provisions for liability, if
any, that may result from the resolution of such matters have been recognized in
the accompanying consolidated financial statements.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standard No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", on January 1, 1994.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
January 28, 1997
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Medco Research, Inc.
<TABLE>
Consolidated Balance Sheets
<CAPTION>
<S> <C>
December 31,
---------------------------------------------
1996 1995
---------------------------------------------
Assets
Current assets:
Cash and cash equivalents $9,106,695 $4,304,774
Investments (Note 2)
Securities available for sale - 5,664,669
Securities held to maturity 6,439,219 17,571,488
Accounts and notes receivable:
Royalties 3,794,264 2,203,663
Other 2,227,361 1,531,227
Accrued interest income 376,864 252,220
Prepaid expenses 292,892 327,319
---------------------------------------------
Total current assets 22,237,295 31,855,360
Investments held to maturity (Note 2) 19,578,934 9,004,270
Deferred asset (Note 6) 124,212 1,851,915
Property and equipment, at cost, net of accumulated
depreciation (Note 3) 307,521 329,669
Patent, trademark and distribution rights, at cost,
net of accumulated amortization of $62,268 (1996)
and $60,865 (1995) (Note 5) 380,442 80,442
---------------------------------------------
Total assets $42,628,404 $43,121,656
=============================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses 2,684,768 $2,811,427
Accrued royalties (Note 5) 1,179,557 1,309,321
---------------------------------------------
Total current liabilities 3,864,325 4,120,748
Deferred revenue (Note 7) 548,202 1,300,000
Deferred royalty payment (Note 6) 1,716,872 2,601,225
Stockholders' equity (Note 8):
Common stock, no par value, authorized 40,000,000 shares;
shares issued of 11,155,832 at December 31, 1996, and 1995;
shares outstanding of 10,740,032 and 11,013,732 at
December 31, 1996 and 1995, respectively 52,216,010 52,216,010
Unrealized gain (loss) on investment securities available
for sale (Note 2) - 133,972
Accumulated deficit (11,393,947) (15,715,592)
Cost of stock held in treasury, 415,800 and 142,100
shares at December 31, 1996 and 1995, respectively (4,323,058) (1,534,707)
---------------------------------------------
Total stockholders' equity 36,499,005 35,099,683
---------------------------------------------
Commitments and contingencies (Notes 5, 6 and 11)
---------------------------------------------
Total liabilities and stockholders' equity $42,628,404 $43,121,656
=============================================
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Operations
<CAPTION>
<S> <C>
Years Ended December 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
Net Revenues:
Royalty revenue (Note 5) $13,453,958 $9,770,124 $8,460,180
Royalty expense (Note 5) 2,573,877 3,955,551 4,230,088
------------------------------------------------------
Gross Margin 10,880,081 5,814,573 4,230,092
------------------------------------------------------
Operating Expenses:
Research and development costs 5,839,278 8,535,187 5,844,014
General and administrative expenses 3,002,273 3,949,438 4,064,707
Write down of investment security (Note 2) - - 964,278
------------------------------------------------------
8,841,551 12,484,625 10,872,999
------------------------------------------------------
Other Income (Expense)
Interest income 2,020,115 2,237,610 2,235,127
Other income (expense) (Note 7) 350,000 1,000,000 (6,688)
------------------------------------------------------
2,370,115 3,237,610 2,228,439
------------------------------------------------------
Income (loss) before income taxes 4,408,645 (3,432,442) (4,414,468)
Provision for income taxes (Note 9) 87,000 100,000 -
------------------------------------------------------
Net income (loss) 4,321,645 (3,532,442) (4,414,468)
======================================================
Net income (loss) per share $0.40 $(0.32) $(0.40)
======================================================
Weighted average number of common shares and common
share equivalents outstanding 10,917,920 11,023,921 11,144,938
======================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Medco Research, Inc.
<TABLE>
<S> <C>
Consolidated Statements of Stockholders' Equity
<CAPTION>
Common stock
---------------------------
Unrealized
gain (loss) on
investment
securities
Number of available for Accumulated Cost of stock held
shares Amount sale deficit in treasury Total
----------------------------------------------------------------------------------------------------
Balance at 11,184,672 $53,346,059 $ - $(7,768,682) $ - $45,577,377
December 31,
1993
Stock options
exercised 85,000 486,563 - - - 486,563
Stock
repurchased
and retired in
connection
with exercise
of stock
options (29,931) (356,563) - - - (356,563)
Compensation
expense
related to
stock options - 390,512 - - - 390,512
Stock
repurchased
and retired (218,794) (2,490,537) - - - (2,490,537)
Unrealized
(loss) on
investment
securities
available for
sale - - (291,312) - - (291,312)
Net loss - - (4,414,468) - (4,414,468)
----------------------------------------------------------------------------------------------------
Balance at December
31, 1994 11,020,947 $51,376,034 $(291,312) $(12,183,150) - $38,901,572
Stock options
exercised 148,585 953,757 - - - 953,757
Stock held in
treasury (142,100) - - - (1,534,707) (1,534,707)
Compensation
expense
related to
stock options - 44,568 - - - 44,568
Stock
repurchased
and retired (13,700) (158,349) - - - (158,349)
Change in the
value of
available for
sale
investment
securities - - 425,284 - - 425,284
Net loss - - - (3,532,442) - (3,532,442)
-----------------------------------------------------------------------------------------------------
Balance at
December 31,
1995 11,013,732 $52,216,010 $133,972 $(15,715,592) $(1,534,707) $35,099,683
Stock held in
treasury (273,700) - - - (2,788,351) (2,788,351)
Change in the
value of
available for
sale
investment
securities - - (133,972) - - (133,972)
Net income - - - 4,321,645 - 4,321,645
=====================================================================================================
Balance at
December 31,
1996 10,740,032 $52,216,010 $ - $(11,393,947) $(4,323,058) $36,499,005
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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Medco Research, Inc.
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
<S> <C>
Years Ended December 31,
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
Operating activities
Net income (loss) $4,321,645 $(3,532,442) $(4,414,468)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 143,934 127,213 94,935
Amortization of patent, trademark and distribution
rights 51,403 9,085 9,636
Loss (gain) on investments held to maturity - (45) 60,095
Gain on investments available for sale (49,258) (7,302) -
Write down of investment security - - 964,278
Net amortization of investment discount (260,912) (686,023) (182,603)
Loss on property and equipment - - 19,672
Settlement payment from Fujisawa - 2,000,000 -
Settlement payment to Abbott - (2,000,000) -
Compensation expense related to stock options - 44,568 390,512
Changes in operating assets and liabilities:
Accounts receivable (2,286,735) 241,480 (290,587)
Accrued interest income (124,644) 152,893 36,270
Prepaid expenses 34,427 12,558 (112,728)
Deferred asset 1,727,703 298,085 -
Accounts payable and accrued expenses (126,659) 626,806 777,528
Accrued royalty expense (129,764) (934,784) 330,144
Deferred revenue (751,798) (650,000) 950,000
Deferred royalty payment (884,353) (148,775) -
-----------------------------------------------------------
Net cash provided by (used in) operating activities 1,664,989 (4,446,683) (1,367,316)
-----------------------------------------------------------
</TABLE>
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<PAGE>
Medco Research, Inc.
<TABLE>
Consolidated Statements of Cash Flows (continued)
<CAPTION>
<S> <C>
Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------
Investing activities
Purchase of securities held to maturity $(45,631,850) $(99,932,331) $(39,738,961)
Purchase of securities available for sale (76,012) (366,275) (5,306,031)
Maturity of securities held to maturity 46,450,367 104,140,647 36,000,000
Principal repayments on securities held to maturity - 1,424,924 1,292,547
Proceeds from sale of securities available for sale 5,655,967 3,312,378 -
Purchases of property and equipment (121,786) (141,423) (123,619)
Proceeds from sale of property and equipment - - 760
Purchases of patent, trademark and distribution rights (351,403) - -
---------------------------------------------------------------
Net cash provided by (used in) investing activities 5,925,283 8,437,920 (7,875,304)
---------------------------------------------------------------
Financing activities
Purchase of stock for retirement $ - $ (158,349) $(2,490,537)
Net proceeds from exercise of stock options - 953,757 130,000
Purchase of stock held in treasury (2,788,351) (1,534,707) -
---------------------------------------------------------------
Net cash used in financing activities (2,788,351) (739,299) (2,360,537)
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,801,921 3,251,938 (11,603,157)
Cash and cash equivalents at beginning of year 4,304,774 1,052,836 12,655,993
--------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,106,695 $ 4,304,774 $ 1,052,836
===============================================================
</TABLE>
Supplemental schedule of Non-cash Financing Activities
See Note 8 for a discussion of stock option exercises involving non-cash
transactions.
See accompanying notes to consolidated financial statements.
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Medco Research, Inc.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
Company Operations
Medco Research, Inc. is an emerging pharmaceutical company engaged in the global
commercialization of cardiovascular medicines and adenosine-based products.
The Company in-licenses late stage compounds from researchers or other
pharmaceutical companies and takes these products through clinical development.
The process includes the design and implementation of clinical trials as well as
data submission and coordination with regulatory agencies to obtain marketing
approval. The Company then out-licenses these compounds to companies with
appropriate facilities and sales teams to manufacture and market the licensed
products.
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about the Fair
Value of Financial Instruments" (SFAS 107) requires the disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate the value. In cases where
quoted market prices are not readily available, fair values are based on quoted
market prices of comparable instruments. SFAS 107 excludes certain financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts are not intended to represent the underlying value of the Company.
The carrying amount of cash and equivalents, accounts receivable and payable,
and accrued royalties approximates fair value because of the short maturity of
those instruments. The net aggregate fair value based on a net present value
calculation of the deferred asset and deferred royalty payment is approximately
$100,000 which the Company considers to be immaterial. The fair value of
investments was based primarily on quoted market prices. If quoted market prices
are not readily available, fair values are based on quoted market prices of
comparable instruments.
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<PAGE>
Medco Research, Inc.
1. Summary of Significant Accounting Policies (continued)
Investments
The Company's investments include primarily investments in marketable debt
securities which are recorded at cost, net of amortization of premiums and
discounts. All premiums and/or discounts are amortized over the remaining term
of the related security using the straight-line method which does not differ
significantly from the level-yield method. The Company adopted SFAS No.115,
"Accounting for Certain Investments in Debt and Equity Securities" at January 1,
1994. This statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. These investments are classified in three
categories and are accounted for as follows: (1) debt securities that the
Company has the positive intent and the ability to hold to maturity are
classified as held-to-maturity and reported at cost; (2) debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings; (3) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of equity. The Company has no securities
classified as trading securities. Unrealized gains or losses on investments
available-for-sale are reported as a separate component of stockholders' equity.
The classification of investments is determined on the date of acquisition. The
Company reviews its investment portfolio as deemed necessary and, where
appropriate, adjusts individual investments for other-than-temporary
impairments.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over five years.
Trademark and Distribution Rights
The cost of acquiring trademark and distribution rights is amortized over 15
years using the straight-line method. Periodically, these costs are reviewed and
adjusted based on the estimated future financial benefits of the underlying
drug.
Patent Costs
The Company capitalizes certain costs, principally acquisition costs, incurred
in connection with the application for and procurement of patents. Costs are
capitalized on a case by case basis relating to those territories where the
Company anticipates receiving significant future benefits from the patent, and
are amortized over the life of the patent beginning at the date of grant.
Periodically, these costs are reviewed and the amortization adjusted based on
the estimated future benefits remaining.
Concentration of Credit Risk
Statement of Financial Accounting Standard No. 105 requires disclosure of
information about financial instruments with off-balance-sheet risk and
financial instruments with concentrations of credit risk. Financial instruments
which subject the Company to concentrations of credit risk consist principally
of accounts receivable and investments.
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Medco Research, Inc.
The Company invests its excess cash primarily in U.S. Government and high
quality corporate debt securities (included in investments) and commercial paper
(cash equivalents). The commercial paper securities are highly liquid and the
governmental securities typically mature within one to three years (although
there is an established secondary market for sales at any given time). The
majority of the accounts receivable balance relates to one customer (See Note
5). Based on the nature of the financial instruments and/or historical
realization of these financial instruments, management believes they bear
minimal risk.
Deferred Revenue
Revenues derived from license agreements are recorded as earned based on the
performance requirements of the related contract.
Research and Development
All research and development costs are expensed in the year incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Earnings Per Share
Earnings per share is computed using the weighted average number of common
shares and dilutive common share equivalents (stock options) outstanding during
the period.
33 of 48
<PAGE>
Medco Research, Inc.
2. Investments
The aggregate values of investment securities at December 31, 1996 and 1995
along with unrealized gains and losses determined on an individual security
basis are as follows:
<TABLE>
<CAPTION>
<S> <C>
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------- ---------------------- ---------------------- -------------------
1996 Held to maturity
U.S. Government $18,505,359 - $(58,309) $18,447,050
Corporate Obligations 7,512,794 - (24,900) 7,487,894
================= ====================== ====================== ===================
Total securities held to maturity $26,018,153 - $(83,209) $25,934,944
================= ====================== ====================== ===================
1995 Held to maturity
U.S. Government $26,575,758 $31,977 - $26,607,735
================= ====================== ====================== ===================
1995 Available for sale
PIMCO 5,530,697 133,972 - 5,664,669
================= ====================== ====================== ===================
</TABLE>
Net realized gains in 1996 were $49,258 as a result of the sale of the Pimco
Fund. Net realized gains in 1995 were $7,302 as a result of the sale of the
Preferred Dividend Fund. Realized losses in 1994 were $60,095 due to the early
call of a held-to-maturity investment by the issuer and $964,278 due to an
other-than-temporary impairment on a non-derivative investment.
The following represents the contractual maturities of investments held as of
December 31, 1996.
Less than 1 year $ 6,439,219
1 to 5 years $ 19,578,934
============
Total $ 26,018,153
============
3. Property and Equipment
1996 1995
-----------------------------------
Property and equipment $785,269 $663,482
Accumulated depreciation (477,748) (333,813)
-----------------------------------
$307,521 $329,669
===================================
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<PAGE>
Medco Research, Inc.
4. Leases
The Company leases office space under an operating lease which expires in July
1998. Lease expense approximated $206,100, $203,700 and $203,700, in 1996, 1995
and 1994.
Future minimum lease payments under this lease agreement are:
Year ending December 31,
1997 $210,817
1998 122,976
-------
$333,793
========
5. Patent, Trademark and Distribution Rights
The Company is engaged in the development of new prescription drugs in pursuit
of obtaining governmental marketing approvals in the United States and other
countries. The Company acquires from third parties exclusive rights to develop
and market various drugs, including related patents and trademarks (where
applicable), and develops drugs and seeks patents and trademarks for its
products on a proprietary basis. The costs of acquiring rights from third
parties and major costs associated with the perfection and protection of patents
and trademarks are capitalized by the Company. Agreements under which the
Company acquires such rights from third parties generally require the Company to
finance the costs of clinical trials and the filing of New Drug Applications
("NDAs") with the United States Food and Drug Administration ("FDA") and, in
some instances, comparable applications with appropriate regulatory agencies in
other countries. The Company is also typically required to pay royalties to such
third parties based on sales of the applicable approved drugs. The Company also
may be obligated to pay to third parties advance royalties or license fees, some
of which may be based on the attainment of specified milestones.
Under present agreements with third parties, the Company has obligations to pay
a maximum of $375,000 in nonrefundable advances and $1,550,000 in nonrefundable
payments generally upon the completion of development milestones and the FDA's
approvals of the applicable NDAs.
In October 1989, the Company received FDA approval to market ADENOCARD in the
United States. The Company entered into agreements with Fujisawa USA, Inc.
(Fujisawa) for the manufacture and marketing of ADENOCARD in the United States
and Canada and is receiving and will receive royalties from Fujisawa based on a
percentage of ADENOCARD net sales. The Company has also entered into an
agreement with Sanofi Pharma (France) (Sanofi) for the manufacture and marketing
of ADENOCARD in all countries other than the United States and Canada. In
September 1991, Sanofi received marketing approval (under the trade name
ADENOCOR) in the United Kingdom and, in May 1992, received marketing approval
(under the trade name KRENOSIN) in Switzerland. The Company is receiving and
will receive royalties from Sanofi based on a percentage of ADENOCOR and
KRENOSIN sales. One half of all royalties received from ADENOCARD, ADENOCOR and
KRENOSIN sales are payable by the Company to the University of Virginia Alumni
Patents Foundation from whom the Company acquired rights to ADENOCARD.
Substantially all royalty income and expenses in the two-year period ended
December 31, 1995 resulted from Fujisawa sales of ADENOCARD in the United
States.
35 of 48
<PAGE>
Medco Research, Inc.
In 1988, the Company entered into a Development and License Agreement (the
"Agreement") with Fujisawa that provides for Fujisawa to fund one-half of the
development costs (as incurred) of ADENOSCAN, and other products. Under the
agreement, Fujisawa will have manufacturing and marketing rights to these drugs
in the United States and Canada upon the Company's receipt of the required
regulatory approvals, and will pay the Company royalties based on sales of these
drugs. Royalties received by the Company from sales of these drugs outside of
the United States and Canada will be shared equally with Fujisawa. In May 1995,
the FDA granted marketing clearance for ADENOSCAN in the United States. Pursuant
to the May 1995 agreement with Fujisawa settling the litigation over the
manufacturing and marketing of ADENOSCAN, all references to MEDR-640 in such
license agreement were eliminated, and in May 1996 the parties entered into an
agreement to jointly develop adenosine-based products having indications as
cardioprotective agents, such as MEDR-640. Under that agreement Fujisawa granted
to the Company an exclusive sublicense under a U.S. patent under which Fujisawa
is the exclusive licensee. Fujisawa has exclusive manufacturing and marketing
rights in the U.S., Canada, Mexico and other territories, and it agreed to pay
the Company 25% of net sales within the territories. The companies share equally
all costs of development and any royalties due to third parties. In June 1995,
Sanofi received marketing approval for ADENOSCAN in the United Kingdom and in
February 1997, Sanofi registered ADENOSCAN in 14 member countries of the
European Community through the mutual recognition procedure. The final
administrative procedure involving the granting of a National Marketing License
authorizing the sale of the product will be sought from the health authorities
in each of the member countries.
6. Deferred Asset and Royalty Payment
In May 1995, the litigation pending between Fujisawa USA, Inc. (Fujisawa) and
the Company, regarding the rights to manufacture and market ADENOSCAN in the
United States and Canada, was settled and the Company and Abbott Laboratories,
Inc. (Abbott) terminated their manufacturing and marketing agreements regarding
the ADENOSCAN drug and settled Medco's outstanding obligations thereunder.
Pursuant to the settlement agreement with Fujisawa, the December 21, 1988 Joint
Development and License Agreement between the parties remains in full force and
effect except as expressly amended and Fujisawa remains the Company's exclusive
licensee to manufacture and market ADENOSCAN in the United States and Canada.
Fujisawa agreed to pay the Company within fifteen days after FDA marketing
clearance of ADENOSCAN the sum of $2 million, representing certain research and
development expenses incurred by the Company, and to pay the Company royalties
of 29 percent of ADENOSCAN net sales in the United States and Canada for the
first five years after the commencement of commercial sales in each territory.
Thereafter Fujisawa would pay the Company royalties of 25% of sales until June
10, 2007 at which time Fujisawa would have a paid-up license within such
territories.
Fujisawa also agreed to pay royalties to the Company in respect of periods of
more than thirty days in which it is unable to fulfill ADENOSCAN orders for
reasons other than force majeure and other specified events, such royalties to
be at the then prevailing rate based on the average daily sales of ADENOSCAN
during the preceding twelve months. Fujisawa also agreed generally to maintain
an inventory of at least six months of ADENOSCAN finished product and
work-in-process, to be stored at multiple locations, to provide the Company
within one year with data necessary to qualify Fujisawa's Melrose Park, Illinois
plant as an alternate ADENOSCAN manufacturing facility and to use its best
efforts to identify and provide data to the Company to qualify with the FDA an
alternate supplier of the adenosine raw material necessary for the manufacture
of ADENOSCAN. The parties also agreed as soon as practicable to enter into an
agreement to jointly develop adenosine-based products having indications as
cardioprotective agents, such as MEDR-640, and for that purpose Fujisawa would
grant to the Company an exclusive sublicense under U.S. patent 4,880,783 under
which Fujisawa is the exclusive licensee. Fujisawa would have exclusive
36 of 48
<PAGE>
Medco Research, Inc.
manufacturing and marketing rights in the U.S., Canada, Mexico and other
territories to be agreed upon and it would pay the Company 25% of net sales
within the territories. The companies would share equally all costs of
development and any royalties due to third parties.
The Company agreed to pay Abbott a royalty of two percent of net sales of
ADENOSCAN for the first five years of commercial sales, up to a maximum of $5.35
million, of which $2 million was payable within fifteen days after FDA marketing
clearance of ADENOSCAN as an advance royalty payment and the remainder payable
based upon actual sales of ADENOSCAN. The Company also agreed that if at the
conclusion of the five-year period Abbott had not received an aggregate of $5.35
million, including the $2 million advance, Medco would pay Abbott any
deficiency. Abbott relinquished all claims to royalty payments in excess of that
amount. Finally, the Company agreed to pay Abbott $330,560 for the reimbursement
of research and development and other expenses incurred in connection with
ADENOSCAN. The Company expensed $330,560 in the first quarter of 1995.
Included in liabilities at December 31, 1996 is an accrued liability (current
and non-current portion) of $2.5 million relating to the balance of the
Company's guaranteed royalty obligation to Abbott. Included in assets at
December 31, 1996 is a deferred asset (current and non-current portion) of $1.7
million relating to royalties to be received by the Company from Fujisawa and
paid by the Company to Abbott. The Company receives a 29% royalty from ADENOSCAN
net sales of which 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
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.
7. Deferred Revenue
Receipts related to various licensing agreements are not recognized as revenues
prior to the completion of the related milestones and must be refunded in part
or completely if the related milestones are not met. In 1994, the Company
entered into a Development and License Agreement related to one of the drugs in
development which provided a gross licensing fee of $1,000,000 ($900,000 net of
foreign taxes paid) based upon the satisfactory preclinical and toxicology
accomplishments. During 1995, the Company substantially satisfied preclinical
and toxicology accomplishments related to adenosine and accordingly recognized
$1,000,000 in revenue from the licensee and received from the licensee an
additional $300,000 licensing fee upon the NDA approval of ADENOSCAN.
During 1993, the Company received $1,000,000 from Boehringer Mannheim
Pharmaceutical Company ("BMPC") upon the execution of a marketing and back-up
manufacturing licensing agreement related to BIDIL. The Company and 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. The Company retained $350,000 of BMPC's $1 million license fee, which
the Company accounted for as income in the second quarter of 1996.
8. Employee Benefits Plans
The Company sponsors an IRS-approved 401(K) retirement plan. Employees become
eligible to participate in the plan beginning on the enrollment date coinciding
with or following 90 days of employment. Enrollment periods are limited to
37 of 48
<PAGE>
Medco Research, Inc.
January 1, April 1, July 1 and October 1 of each year. The 401(K) plan allows
employees to contribute a portion of their pre-tax earnings into their own
retirement account. Eligible employees may contribute between 2% and 15% of
their annual income up to the annual limits established by the IRS yearly. The
Board of Directors authorized the Company, for those years in which it achieves
the performance goals established in advance by the Compensation Committee, to
match 50% of each employee's annual plan contribution up to a maximum of 2% of
the salary of such employee, such Company contributions to vest over four years
at the end of each year. In 1996 the Company approximately accrued $22,000 for
the match of 50% of each employee's 1996 annual plan contribution up to a
maximum of 2% of the salary of such employee based on achievement of Company
performance goals to be paid in 1997 and vest over four years, at the end of
each year.
The Company currently has two stock option plans in operation, the 1983 Stock
Option plan and the 1989 Stock Option and Stock Appreciation Rights Plan.
Options to purchase up to 1,200,000 shares and up to 1,500,000 shares,
respectively, of the Company's common stock may be granted to officers,
directors, employees of the Company and to other persons who provide important
services to the Company. Under the Plans, both incentive and non-qualified stock
options, as well as stock appreciation rights under the 1989 Plan, can be
granted. No incentive stock options are currently outstanding and no stock
appreciation rights have been granted. Non-qualified stock options generally can
be exercised one year after the date of grant. The exercise price may not be
less than 100% of the fair market value of the common stock on the date of grant
(110% with respect to incentive stock options granted to optionees who are 10%
or more stockholders of the Company). Option holders may, with the consent of
the Compensation Committee of the Board of Directors, pay for the exercise of
the options in whole or in part by tendering shares of common stock of the
Company, in lieu of cash.
During the years ended December 31, 1995 and 1994, options covering 25,000 and
75,000 shares with an aggregate market value of $259,375 and $893,750 were
exercised by the tendering of 16,415 and 29,931 shares with a market value of
$170,306 and $356,563, respectively, and minimal cash payments. During the year
ended December 31, 1996, there were no options exercised.
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1996 Price 1995 Price 1994 Price
---------------------------------------------------------------------------------------------
Outstanding at beginning of year 610,732 $15 781,870 $15 975,200 $14
Granted 461,000 10 241,000 13 104,920 14
Exercised - - (165,000) 7 (85,000) 5
Expired or canceled (289,750) 17 (247,138) 17 (213,250) 14
=============================================================================================
Outstanding at end of year 781,982 11 610,732 15 781,870 15
=============================================================================================
Available for grant at end of year 285,531 N/A 456,781 N/A 434,228 N/A
Exercisable at end of year 281,257 N/A 341,170 N/A 530,160 N/A
Weighted average fair value of
options granted 3.92 N/A 5.32 N/A 5.71 N/A
Price range of options $8.63-$17.13 N/A $10.63-$26.69 N/A $6.81-$26.69 N/A
Price range of options exercised N/A N/A $6.81 N/A $5.69-$6.00 N/A
</TABLE>
38 of 48
<PAGE>
Medco Research, Inc.
Options outstanding and exercisable as of December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------------
Weighted Weighted
Average Weighted Average
Range of Exercise Number Remaining Average Number Exercisable
Prices Outstanding Contractual Life Exercise Price Exercisable Price
- --------------------- ----------------- ----------------- ----------------- ---------------- -------------------
$8 to 14 695,655 8.8 years $11 194,930 $13
$15 to 18 86,327 4.8 16 86,327 16
----------------- ----------------
$8 to 18 781,982 8.4 11 281,257 14
================= ================
</TABLE>
The Company reviewed the provisions of SFAS No.123 and did not adopt the new
fair value based method for the options granted to employees; rather, it
continued to use the Opinion 25 method. However the Company is required to
disclose the pro forma effects on net income regarding the new fair value based
method. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 1996 and 1995, respectively: dividend yield zero; expected
volatility of 35%; risk-free interest rate of 5%; and expected life of 5 years.
Had compensation cost for the Company's stock-based compensation plans, as
described above, been determined consistent with SFAS No.123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The compensation costs disclosed here may not be representative
of the effects of pro forma net income in future years.
<TABLE>
<CAPTION>
<S> <C>
1996 1995
---------------------- ---------------------
Net income (loss) As reported $4,321,645 $(3,532,442)
Pro forma 2,806,507 (4,472,574)
Primary earnings As reported $0.40 $(0.32)
per share Pro forma $0.26 $(0.40)
Fully diluted earnings As reported $0.40 $(0.32)
per share Pro forma $0.26 $(0.40)
</TABLE>
9. Income Taxes
The components of income tax expense consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
Current expense:
Federal $ 87,000 $ - $ -
State - - -
Foreign taxes - 100,000
------------------ ------------------- ------------------
$ 87,000 $100,000 $ -
------------------ ------------------- ------------------
Deferred expense (benefit):
Federal - - -
State - - -
------------------ ------------------- ------------------
- - -
------------------ ------------------- ------------------
Total $ 87,000 $100,000 $ -
================== =================== ==================
</TABLE>
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<PAGE>
Medco Research, Inc.
The components of net deferred tax assets and the net deferred tax liabilities
as of December 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
------------------- ------------------
1996 1995
------------------- ------------------
Deferred tax assets:
Tax loss carryforwards $ 6,813,000 $ 8,484,000
Capital losses 456,000 456,000
Tax credit carryforwards 1,305,000 1,297,000
Compensation accruals 49,000 96,000
Reserves and accruals - 1,000
Deferred revenue 524,000 567,000
------------------- ------------------
Total gross deferred tax assets 9,147,000 10,901,000
Valuation allowance (9,131,000) (10,856,000)
------------------- ------------------
Net deferred tax assets $ 16,000 $ 45,000
------------------- ------------------
Deferred tax liabilities:
Depreciation and amortization 4,000 14,000
Prepaid expenses 12,000 31,000
------------------- ------------------
Total gross deferred tax liabilities 16,000 45,000
Net deferred tax asset $ - $
-
=================== ==================
</TABLE>
The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the earnings before income taxes and cumulative effect of a change in
accounting principle) as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------------------- ----------------------------- -------------------------------
Amount % Amount % Amount %
------------------ ------------- ----------------- ----------- ----------------- -------------
Computed "expected" tax expense
(benefit) $1,498,940 34.0% $(1,167,030) (34.0)% $(1,501,000) (34.0)%
Change in valuation allowance (1,725,000) (39.1) 2,706,000 78.8 2,823,000 63.9
Tax credits 8,000 0.2 (488,664) (14.2) (280,000) (6.4)
State tax (benefit) 325,934 7.4 (430,245) (12.5) (122,000) (2.8)
Write down of marketable
securities (29,469) (0.7) (315,111) (9.2) (965,000) (21.9)
Stock options - - (278,779) (8.1) - -
Foreign taxes - - 66,000 1.9 - -
Other 8,595 0.2 7,829 0.2 45,000 1.2
================== ============= ================= =========== ================= =============
Current provision $ 87,000 2.0% $ 100,000 2.9% $ - -%
================== ============= ================= =========== ================= =============
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $18,300,000. The net operating loss carryforwards expire in
various amounts from 2004 through 2010. Additionally, the Company has net
operating loss carryforwards of approximately $11,300,000 for state income tax
purposes which expire between 1997 and 2000.
40 of 48
<PAGE>
Medco Research, Inc.
The Tax Reform Act of 1986 contains provisions which limit the ability to
utilize net operating loss, capital loss, and various tax credit carryforwards
in the case of certain events including significant changes in ownership
interests. If the Company's tax carryforwards are limited, and the Company has
taxable income which exceeds the permissible yearly net operating loss
carryforward, the Company would incur a federal income tax liability even though
these loss carryforwards would be available in future years.
At December 31, 1996, the Company had available approximately $1,218,200,
$83,000 and $3,800 of research and development credit, alternative minimum tax
credit and investment credit, respectively. Except for the alternative minimum
tax credit, these credits expire in varying amounts from 1998 through 2010.
Capital loss carryforwards of $191,250 will expire during 1997, unless utilized.
Of the total remaining capital loss carryforward, $47,000 and $926,800 will also
expire during 1999 and 2000, respectively.
10. Related Party Transactions
Fees of approximately $750, $10,000 and $18,000 in 1996, 1995 and 1994 as well
as related travel expenses, were paid to an individual director for consulting
on a number of projects related to Company operations, business development and
strategic planning. Fees of $144,000, $144,000 and $56,000 in 1996, 1995 and
1994 as well as related travel expenses were paid to an individual director for
consulting with the Company on matters such as acquisitions, financial public
relations and pending litigation.
11. Contingencies
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
41 of 48
<PAGE>
Medco Research, Inc.
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 License Agreement
In November 1996, Dr. Eliezer Rapaport, the licensor of the Company's potential
adenosine triphosphate ("ATP") drug, commenced an arbitration by 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 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 intends to vigorously defend 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 May 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
All of the information required by this Item is contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
captions "Election of Directors," "Board of Directors" and "Executive Officers"
and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
All of the information required by this Item is contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Executive Compensation" and is incorporated herein by this reference.
42 of 48
<PAGE>
Medco Research, Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the information required by this Item is contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the information required by this Item is contained in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders under the
caption "Certain Transactions" and is incorporated herein by this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Medco Research, Inc. are
included in Item 8:
<TABLE>
<S> <C>
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
</TABLE>
All schedules for which provision is made in the applicable accounting
regulation of the Securities Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1996.
(c) Exhibits
<TABLE>
<S> <C>
3.1 Articles of Incorporation of the Registrant for the State of California, as
amended to date.(6)
3.2 Bylaws of the Registrant for the State of California, as amended to
date.(5)
3.3 Articles of Incorporation of the Registrant for the State of Delaware.(8)
3.4 Bylaws of the Registrant for the State of Delaware.(8)
10.1 1983 Stock Option Plan, as amended to date.(1)
43 of 48
<PAGE>
Medco Research, Inc.
10.2 Form of Indemnity Agreement by and between Registrant and Registrant's
directors and officers.(5)
10.3 Agreement dated March 16, 1988 by and among Registrant, Pharmatec, Inc. and
the University of Florida Research Foundation, Inc.(1)
10.4 Development and License Agreement dated December 21, 1988 by and between
Registrant and LyphoMed, Inc.(2)
10.5 Letter Agreement dated March 3, 1989 by and between Registrant and the
University of Virginia Alumni Patents Foundation.(3)
10.6 First Amendment dated March 17, 1989 to Development and License Agreement
dated November 7, 1985 by and between Registrant and LyphoMed, Inc.(3)
10.7 1989 Stock Option and Stock Appreciation Rights Plan, as amended to
date.(4)
10.8 Employment Agreement dated January 8, 1992 by and between Registrant and
Archie W. Prestayko. (6)
10.9 Second Amendment to Lease dated February 18, 1992 relative to Registrant's
facilities at 8455 Beverly Boulevard, Los Angeles, California. (6)
10.10 License Agreement dated April 21, 1992 by and between Registrant and
Nordion International Inc. (6)
10.11 Employment Agreement dated June 9, 1992 by and between Registrant and
Donald B. Siegel. (6)
10.12 Employment Agreement dated June 9, 1992 by and between Registrant and Sam
L. Teichman.(6)
10.13 Third Amendment to Lease dated August 10, 1992 relative to Registrant's
facilities located at 8455 Beverly Boulevard, Los Angeles, California.(6)
10.14 Consulting Agreement dated September 15, 1992 by and between Registrant
and William M. Bartlett.(6)
10.15 Employment Agreement dated October 16, 1992 by and between Registrant and
Roger D. Blevins.(7)
10.16 Employment Agreement dated January 8, 1993 by and between Registrant and
Archie W. Prestayko.(7)
10.17 Lease Agreement effective June 25, 1993 relative to Registrant's
facilities at 85 T.W. Alexander Drive, Research Triangle Park, North
Carolina.(7)
10.18 Consulting Agreement dated July 1, 1993 by and between Registrant and
Richard C. Williams.(7)
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<PAGE>
Medco Research, Inc.
10.19 Employment Agreement dated October 16, 1993 by and between Registrant and
Roger D. Blevins.(7)
10.20 Employment Agreement dated February 24, 1994 by and between Registrant and
Archie W. Prestayko.(7)
10.21 Consulting Agreement dated December 1, 1994 by and between Registrant and
Richard C. Williams. (8)
10.22 Medco Research and Fujisawa, USA Mutual Release and Settlement Agreement,
dated May 22, 1995. (9)
10.23 Amendment to Consulting Agreement dated December 1, 1994 by and between
Registrant and Richard C. Williams. (10)
10.24 Employment Agreement dated September 26, 1996 by and between Registrant
and Roger D. Blevins.
10.25 Amendment to Consulting Agreement dated December 1, 1994 by and between
Richard C. Williams.
11 Computation of Net Income (Loss) per Common Share.
</TABLE>
- -------------------------------------------------------------------------------
(1) The referenced exhibits are incorporated herein by reference to Exhibits
10.1 and 10.6 to the Registrant's Form 10-K for the fiscal year ended August 31,
1988 filed with the Securities and Exchange Commission on November 29, 1988.
(2) The referenced exhibit is incorporated herein by reference to Exhibit 10.02
to the Registrant's Form 8-K dated December 21, 1988 filed with the Securities
and Exchange Commission.
(3) The referenced exhibits are incorporated herein by reference to Exhibits
10.01 and 10.02 to the Registrant's Form 8-K dated March 3, 1989 filed with the
Securities and Exchange Commission.
(4) The referenced exhibit is incorporated herein by reference to Exhibit 10.20
to the Registrant's Form 10-K for this fiscal year ended August 31, 1989 filed
with the Securities and Exchange Commission on November 29, 1989.
(5) The referenced exhibits are incorporated herein by reference to Exhibits 3.2
and 10.4 to the Registrant's Form 10-K for the fiscal year ended August 31, 1990
filed with the Securities and Exchange Commission on December 14, 1990.
(6) The referenced exhibits are incorporated herein by reference to Exhibits
10.18, 10.19, 10.20, 10.21, 10.22, 10.23, and 10.24 to the Registrant's Form
10-K for the fiscal year ended August 31, 1992 filed with the Securities and
Exchange Commission on November 27, 1992.
45 of 48
<PAGE>
Medco Research, Inc.
(7) The referenced exhibits are incorporated herein by reference to Exhibits
10.23, 10.24 10.25, 10.26, 10.27, and 10.28 to the Registrant's Form 10-K for
the Transition period of September 1, 1992 through December 31, 1992 and
calendar year ended December 31, 1993 filed with the Securities and Exchange
Commission on March 28, 1994.
(8) The referenced exhibit is incorporated herein by reference to Exhibit 3.3,
3.4, and 10.21 to the Registrant's Form 10-K for the calendar year ended
December 31, 1994 filed with the Securities and Exchange Commission on March 29,
1996.
(9) The referenced exhibit is incorporated herein by reference to Exhibit 10.01
to the Registrant's Form 10Q for the period ended June 30, 1995 filed with the
Securities and Exchange Commission on August 11, 1995.
(10) The referenced exhibit is incorporated herein by reference to Exhibit 10.23
to the Registrant's Form 10-K for the calendar year ended December 31, 1995
filed with the Securities and Exchange Commission on March 29, 1996.
46 of 48
<PAGE>
Medco Research, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Roger D. Blevins
----------------------------------
Roger D. Blevins, Pharm. D.,
President and
Chief Operating Officer
Date: March 28, 1997
By: /s/ Glenn C. Andrews
----------------------------------
Glenn C. Andrews
Chief Financial Officer
Date: March 28, 1997
By: /s/ Adam C. Derbyshire
----------------------------------
Adam C. Derbyshire
Corporate Controller
Date: March 28, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Richard C. Williams Date: March 28, 1997
----------------------------------- --------------
Richard C. Williams,
Chairman of the Board
By: /s/ William M. Bartlett Date: March 28, 1997
----------------------------------- --------------
William M. Bartlett, Director
By: /s/ Eugene L. Step Date: March 28, 1997
----------------------------------- --------------
Eugene L. Step, Director
By: /s/ Albert D. Angel Date: March 28, 1997
----------------------------------- --------------
Albert D. Angel, Director
47 of 48
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Medco Research, Inc.
By: /s/ Jay N. Cohn, M.D. Date: March 28, 1997
----------------------------------- --------------
Jay N. Cohn, M.D., Director
By: /s/ Marvin S. Hausman, M.D. Date: March 28, 1997
----------------------------------- --------------
Marvin S. Hausman, M.D., Director
By: /s/ Mark B. Hirsch Date: March 28, 1997
----------------------------------- --------------
Mark B. Hirsch, Director
48 of 48
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, made as of September 26, 1996, by and
between MEDCO RESEARCH, INC. ("Medco"), a Delaware corporation with principal
offices at 85 T.W. Alexander Drive, Research Triangle Park, NC 27709, and ROGER
BLEVINS ("Blevins"), residing at 233 Markham Plantation, Apex, North Carolina
27502.
Blevins has been employed by Medco in various executive
capacities since July 18, 1988, and is currently its President and Chief
Operating Officer;
Blevins is presently an employee at will, and Medco and
Blevins desire to formalize their relationship as employer and employee pursuant
to a written employment agreement; and
From the date hereof through September 30, 1999, Blevins is
willing to serve as Medco's President and Chief Operating Officer, and Medco is
willing so to employ Blevins, upon the terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereby agree as follows:
1. Term. Subject to earlier termination of this Agreement as
hereinafter provided, Medco hereby agrees to employ Blevins, and Blevins hereby
agrees to serve Medco, as hereinafter set forth in Section 2, for the period
commencing effective September 26, 1996 and terminating on September 30, 1999
(such period being herein referred to as the "Term").
2. Employment. Medco hereby employs Blevins to render
exclusive and full-time services to Medco as its President and Chief Operating
Officer, subject to the direction of Medco's Board of Directors, and in
connection therewith to perform such duties as he shall be reasonably directed
by the Board of Directors. Blevins hereby accepts such employment and agrees to
devote his best efforts and his full and exclusive time, skill, labor and
attention to the diligent and faithful performance of such services.
3. Compensation.
3.1 As full compensation for all of the services to
be rendered by Blevins under this Agreement and subject to the provisions of
Section 5 below, Medco shall pay Blevins during the Term an annual base salary
in an amount equal to Two Hundred Thirty Thousand ($230,000.00) Dollars, which
shall be subject to annual merit adjustments as determined by the Compensation
Committee of Medco's Board of Directors pursuant to the then prevailing terms
and conditions of Medco's Management Bonus Objectives program, payable in
accordance with Medco's prevailing payroll practices.
3.2 Blevins shall be eligible to receive incentive
compensation of (a) no less than a rate of 35% of his annual base salary set
forth above in Section 3.1 and (b) annual awards of stock options (in addition
to the options awarded to Blevins pursuant to Section 3.3 below), in each case
as determined by the Compensation Committee of Medco's Board of Directors
pursuant to the then prevailing terms and conditions of Medco's Management Bonus
Objectives program.
3.3 As an inducement to Blevins to enter into this
Agreement Medco agrees to grant to Blevins as of the date of the commencement of
the Term (the "Date of Grant") nonqualified stock options to purchase 120,000
shares of Medco's Common Stock at a price per share equal to the "fair market
value", as such term is defined in Medco's 1989 Stock Option Plan, as amended
(the "Plan"), of Medco's Common Stock on the Date of Grant, which shall vest and
become exercisable on the third anniversary of the Date of Grant provided
Blevins is employed as an executive officer of Medco on such Date; provided,
however, that the vesting of 50% of said 120,000 options shall accelerate to the
day immediately following the twentieth consecutive trading day on which the
closing price of Medco's Common Stock as reported in The Wall Street Journal
shall have exceeded $20 per share, and the vesting of the remaining 50% thereof
shall accelerate to the day immediately following the twentieth consecutive
trading day on which such closing price shall have exceeded $25 per share. Said
options shall be subject to the terms and conditions of the Plan and the Stock
Option Agreement under which the options are granted, the terms of each of which
are incorporated herein by reference.
3.4 Blevins' salary, bonus and other incentive
compensation shall be subject to deductions and withholdings as shall be
required by applicable law and regulations.
4. Benefits. In addition to the compensation described in
Section 3 hereof, during the Term Blevins, to the extent he is eligible, shall
have the right to participate in any and all group life, hospital, medical and
disability insurance plans, and in any severance, retirement, pension or death
benefit plans (hereinafter such plans are collectively referred to as the
"Company Benefit Plans") now or hereafter during the Term maintained by Medco
and offered by Medco to its executive officers generally. Medco does not
guarantee the adoption or continuation of any particular Company Benefit Plan
during the Term, and Blevins' participation in any Company Benefit Plan shall be
subject to the rules and regulations applicable thereto.
5. Vacation. Blevins shall be entitled to vacation during each
full fiscal year of the Term, prorated for any partial fiscal year, pursuant to
Medco's existing policy.
6. Expenses. Medco shall reimburse Blevins for the reasonable
and necessary expenses actually incurred by him during the Term in the
performance of his services hereunder, upon presentation by Blevins of
appropriate documentation of such expenditures; provided, however, that the
maximum amount available for such expenses during any period may be fixed in
advance by Medco's Board of Directors.
7. Termination.
7.1 This Agreement shall terminate upon the death of
Blevins, in which event Medco shall pay Blevins' base salary through the last
day of the pay period in which occurred his death, plus any unpaid bonus awarded
to Blevins under Medco's MBO review program in respect of the fiscal year of
Medco immediately preceding the year of Blevins' death, to whomever Blevins has
previously designated or, in the event no such designation has been made, to his
estate.
7.2 Medco shall have the right, exercisable by
written notice to Blevins which shall be effective as of the giving of such
notice, to terminate this Agreement at any time for Cause. In the event of
termination of this Agreement for Cause, (a) Medco shall pay to Blevins his base
salary through the effective date of such termination and any unpaid bonus
awarded to Blevins under Medco's MBO review program in respect of the fiscal
year of Medco immediately preceding the year of such termination and (b) all
outstanding Medco stock options, whether or not vested, awarded to Blevins shall
terminate and be of no further force or effect and be forfeited by Blevins. The
term "Cause", as used herein, shall mean Blevins' (a) conviction of a felony,
(b) conviction of any lesser crime or offense involving the property of Medco or
any of its affiliates or subsidiaries, (c) continued failure to perform his
duties hereunder after written notice, (d) willful misconduct or gross
negligence in connection with the performance of his duties (e) breach of any of
the material terms of this Agreement, or (f) conduct which would make his
further employment by Medco prejudicial to its best interests which is continued
after written notice thereof, in the case of clauses (c), (d), (e) and (f) as
determined in good faith in the sole discretion of Medco's Board of Directors,
whose determination shall be final and binding on Blevins if made by the
affirmative vote of at least two-thirds of the number of directors then serving.
In the event of termination of this Agreement for Cause arising under clause (e)
above, Medco shall give Blevins at least 10 days after written notice of
termination to cure the specified breach, if the same is capable of being fully
cured.
7.3 Medco shall have the right, exercisable by
written notice to Blevins which shall be effective at the end of the pay period
in which such notice is given, to terminate this Agreement prior to the
expiration of the Term in the event of the incapacity of Blevins, in which event
Medco shall pay to Blevins his base salary through the effective date of such
termination plus any unpaid bonus awarded to Blevins under Medco's MBO review
program in respect of the fiscal year of Medco immediately preceding the year of
such termination. "Incapacity" shall mean Blevins' inability, regardless of the
medical or other reason therefor, to perform the duties and obligations of his
employment under this Agreement for any period of 90 consecutive days or for
shorter periods aggregating 90 days during any period of 12 consecutive months.
8. Covenants Not To Compete; Non-Solicitation;
Non-Disclosure.
8.1 Blevins hereby agrees that, during the Term, he
shall not participate or engage, directly or indirectly, and whether or not for
compensation, individually or as an officer, director, shareholder, trustee,
employee, consultant, advisor, partner, proprietor or otherwise, in any business
or enterprise, or have an interest in any other commercial duties or pursuits
whatsoever, except as Medco, acting through its Board of Directors, shall
permit. Provided Blevins's capacity and ability to fulfill his duties and
obligations to Medco under this Agreement are not prejudiced, interfered with,
restricted or limited, nothing contained in this Section 8.1 shall be construed
to prohibit Blevins during the Term from (a) making or maintaining personal
investments which do not require more than his minimal personal services and (b)
rendering to a reasonably limited extent personal services to civic or
charitable organizations.
8.2 Blevins hereby agrees that, for a period of 36
months after the termination or expiration of this Agreement, he shall not,
directly or indirectly, individually or as an officer, director, shareholder,
trustee, employee, consultant, advisor, partner, proprietor or otherwise, and
whether or not for compensation, participate or engage in or provide any
services to, or have any direct or indirect interest in, any business or
enterprise which competes directly or indirectly with the business of Medco or
its subsidiaries or affiliates as then conducted or as proposed to be conducted.
8.3 Blevins hereby agrees that, during the Term and
during a period of 36 months after the termination or expiration of this
Agreement, he will not either directly or indirectly for himself or any third
party, (a) solicit, induce or recruit, or cause the soliciting, inducement or
recruitment of, any person in the employ of Medco, its subsidiaries or
affiliates, or cause any person in such employ to terminate his employment, for
the purpose of joining, associating or becoming employed by or providing any
services to (1) any business or enterprises which competes directly or
indirectly with the business of Medco or its subsidiaries or affiliates as then
conducted or as proposed to be conducted or (2) any business or enterprise in
which Blevins is an officer, director, shareholder, trustee, employee,
consultant, advisor, partner, proprietor or otherwise, or directly or indirectly
has any interest or to which he provides any services or (b) interfere with or
harm the contractual or business relationships with any licensor, licensee or
independent contractor of Medco or its subsidiaries or affiliates.
8.4 Except in the course of performing his duties
hereunder during the Term, or thereafter with the express written consent of
Medco acting through its Board of Directors, Blevins will not, at any time
during the Term or after the expiration or termination of this Agreement,
publish, disclose or otherwise reveal any Confidential Information (as such term
is defined below) known by Blevins on the date hereof, or acquired by him
thereafter as a consequence of or through his employment by Medco under this
Agreement, all of which Information (a) he shall maintain in the strictest
confidence and keep secret using at least the same degree of care as he uses for
his personal confidential information, (b) retain in trust in a fiduciary
capacity for the sole and absolute benefit of Medco, its successors and assigns,
and (c) refrain from using or allowing to be used for his own benefit or for the
benefit of any third party. The term "Confidential Information" as used herein
shall mean all material information and knowledge of Medco not generally known
or available to the public, including, without limitation, its research
projects, data, protocols, designs and developments, processes, formulae,
financial and personnel data, strategic and operating plans, projections, "know
how," products, licenses and other contract rights, intellectual property and
other business affairs; provided, however, that in the event disclosure of
Confidential Information is requested (i) by governmental agencies under color
of law or applicable regulation, (ii) pursuant to subpoena or other compulsory
process, or (iii) otherwise as may be required by law, Blevins will to the
extent lawfully possible give Medco at least five (5) days prior written notice
before his disclosure and will provide Medco with copies of any responsive
materials.
8.5 Blevins hereby agrees that all keys to Medco's
offices, Medco's credit cards, memoranda, notes, reports, manuals, business
records, papers and documents (and all copies thereof) relating to the business
or affairs of Medco or any of its subsidiaries or affiliates are and shall
remain the property of Medco. Blevins agrees that he will deliver and surrender
to Medco promptly upon the termination of his employment by Medco, or at any
time Medco may so request, all of such items which then shall be in his
possession or under his control.
9. Remedies.
9.1 If Blevins commits a breach, or threatens to
commit a breach, of any of the provisions of Section 8 hereof, Medco shall have
the following rights and remedies:
(a) The right and remedy to have the provisions of
this Agreement specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to Medco and that money damages will not provide an
adequate remedy to Medco, and in connection therewith to obtain, without notice
to Blevins and without the need to post any bond, a temporary restraining order,
an injunction and any other equitable relief.
(b) The right and remedy to require Blevins to
account for any pay over to Medco all compensation, profits, monies, accruals,
increments or other benefits (collectively "Benefits") derived or received by
him as the result of any transactions constituting a breach of any of the
provisions of Section 8, and Blevins hereby agrees to account for and pay over
such Benefits to Medco. Each of the foregoing rights and remedies shall be
independent of the other and shall be severally enforceable, and all of such
rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to Medco under law or in equity.
9.2 If any one, or any part, of the covenants
contained in Section 8 is construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants, which shall be
given full effect without regard to the invalid portions.
9.3 If any one, or any part, of the covenants
contained Section 8 is held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that the court making
such determination shall have the power to reduce the duration and/or area of
such provision and, in its reduced form, said provision shall then be
enforceable.
9.4 The parties hereto intend to and hereby confer
jurisdiction to enforce the covenants contained in Section 8 upon the courts of
any state within the geographical scope of such covenants. In the event that the
courts of any one or more of such states shall hold such covenants wholly
unenforceable by reason of the breadth of such scope or otherwise, it is the
intention of the parties hereto that such determination not bar or in any way
affect in the courts of any other states within the geographical scope of such
covenants Medco's right to the relief provided in this Section 9 for breaches of
such covenants in such other states, the above covenants as they relate to each
state being, for this purpose, severable into diverse and independent covenants.
9.5 In the event that any action, suit or other
proceeding in law or in equity is brought to enforce any one, or any part, of
the covenants contained in Section 8 or to obtain money damages for the breach
thereof, and such action results in the award of a judgment for money damages or
in the granting of any injunction in favor of Medco, all expenses (including
reasonable attorneys' fees) of Medco in such action, suit or other proceeding
shall (on demand of Medco) be paid by Blevins.
10. Inventions and Patents.
10.1 Blevins hereby agrees that all processes, technologies
and inventions ("Inventions), including without limitation new contributions,
improvements, ideas and discoveries, whether patentable or not, conceived,
developed, invented or made by him while he was employed by Medco prior to the
Term or during the Term shall belong to Medco, provided that such Inventions
grew out of Blevins work with Medco or any of its subsidiaries or affiliates,
are related in any manner to the business (commercial or experimental) of Medco
or any of its subsidiaries or affiliates or are conceived or made on Medco's
time or with the use of Medco's facilities or materials. Blevins hereby agrees
to: (a) promptly disclose each such Invention to Medco, (b) assign to Medco,
without additional compensation, all patent and other rights to each such
Invention for the United States and foreign countries, (c) give testimony in
support of his inventorship and (d) sign all papers necessary to carry out the
foregoing.
10.2 If any Invention is described in a patent application or
is disclosed to third parties, directly or indirectly, by Blevins within two
years after the termination of his employment by Medco, Blevins hereby agrees
that the Invention shall be deemed conceived or made during the period Blevins
was employed by Medco and shall belong to Medco.
10.3 Blevins agrees that he will not claim any individual
right, title or interest in or to any Invention based on it having been made or
acquired by him prior to the date of this Agreement, except for Inventions, if
any, disclosed to Medco in writing prior to the date hereof.
11. Notices.
11.1 All notices and consents required or desired to
be given pursuant hereto shall be in writing and shall be deemed properly given
if delivered to the addressee, in person, or if mailed, by registered or
certified mail, return receipt requested, to Blevins at the address set forth at
the head of this Agreement and to Medco, to the attention of the Chairman of the
Board of Directors, at its address set forth at the head of this Agreement.
11.2 Any address specified above may be changed by
notice given, as herein provided, by the party hereto whose address is being
changed to the other party hereto.
11.3 Notices delivered in person shall be deemed
given on the date of delivery; and notices mailed shall be deemed given three
days after the date of mailing.
12. Amendment; Waiver. This Agreement may not be amended or
modified in any manner, except by an instrument in writing signed by both
parties hereto and approved by the Board of Directors of Medco acting by
majority vote. The failure of either party hereto to enforce at any time any of
the provisions of this Agreement shall in no way be construed to be a waiver of
any such provision or any other provision, or of the right of such party
thereafter to enforce each and every such provision or other provision in the
event of a subsequent breach.
13. Agreement Binding Upon Successors. This Agreement is an
agreement for the personal services of Blevins and it shall inure to the benefit
of, and shall be binding upon Medco, its successors and assigns, and upon
Blevins, his heirs, executors, administrators and legal representatives, and
therefore the obligations of Blevins hereunder may not be assigned.
14. Choice of Law. It is the intention of the parties that the
internal laws of North Carolina shall govern the validity of this Agreement, the
construction of its terms and the interpretation of the rights and duties for
the parties.
15. Section Headings. Section heading contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
16. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
17. Indemnification. Medco agrees to indemnify Blevins for his
actions on behalf of Medco in accordance with Medco's standard Indemnification
Agreement for officers and directors.
18. Entire Agreement. This Agreement (i) constitutes the
entire agreement and supersedes all other prior agreements and understandings,
both written and oral, between the parties with respect to the subject matter
hereof, and (ii) is not intended to and shall not confer upon any person other
than the parties hereto any rights or remedies hereunder or otherwise with
respect to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
MEDCO RESEARCH, INC. ACCEPTED AND AGREED TO:
By:
Richard C. Williams Roger D. Blevins, Pharm.D.
Chairman of the Board President and COO
AMENDMENT
TO
CONSULTING AGREEMENT
Amendment, dated November 20, 1996 to Consulting Agreement
(the "Consulting Agreement") dated December 1, 1994, as amended (the "Consulting
Agreement"), between MEDCO RESEARCH, INC. (the "Corporation") and RICHARD C.
WILLIAMS ("Williams").
WHEREAS, the Compensation Committee of the Board of Directors
of the Corporation has determined that inasmuch as the Corporation does not have
a Chief Executive Officer it is in the best interests of the Corporation to
continue to consult with Williams on matters not customarily involving a
non-employee Chairman of the Board, such as corporate acquisitions, financial
public relations and pending litigation, and further to extend the Consulting
Agreement for a period of one year on the terms set forth below; and
WHEREAS, Williams is willing so to continue to consult with
the Corporation;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereto agree as follows:
1. Section 1 of the Consulting Agreement is hereby amended by
deleting in the first sentence thereof (a) the phrase "fiscal 1996" and
substituting therefor the words "fiscal 1997" and (b) the proviso at the end of
such sentence.
2. Section 3.1 of the Consulting Agreement is hereby amended
by deleting in the first sentence thereof "1996" and substituting therefor
"1997".
3. Except as expressly amended hereby, the Consulting
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this
agreement as of the date first above written.
Richard C. Williams
MEDCO RESEARCH, INC.
By:
Roger D. Blevins, President
and Chief Operating Officer
<TABLE>
Computation of Net Income (Loss) Per Common Share
<CAPTION>
<S> <C>
Years Ended December 31,
-------------------- ------------------------- ----------------------
1996 1995 1994
-------------------- ------------------------- ----------------------
Primary:
Weighted average shares outstanding 10,917,920 11,023,921 11,144,938
Net effect of dilutive stock options used on
the treasury stock method using average
market price - * *
-------------------- ------------------------- ----------------------
10,917,920 11,023,921 11,144,938
==================== ========================= ======================
Net income (loss) $4,321,645 $(3,532,442) $(4,414,468)
==================== ========================= ======================
Per share $0.40 $(0.32) $(0.40)
==================== ========================= ======================
Fully diluted:
Weighted average shares outstanding 10,917,920 11,023,921 11,144,938
Net effect of dilutive stock options based on
the treasury stock method using ending
market price, if higher than average market
price - * *
==================== ========================= ======================
10,917,920 11,023,921 11,144,938
==================== ========================= ======================
Net income (loss) $4,321,645 $(3,532,442) $(4,414,468)
==================== ========================= ======================
Per Share $0.40 $(0.32) $(0.40)
==================== ========================= ======================
* Antidilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,106,695
<SECURITIES> 6,439,219
<RECEIVABLES> 6,691,381
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,237,295
<PP&E> 785,269
<DEPRECIATION> 477,748
<TOTAL-ASSETS> 42,628,404
<CURRENT-LIABILITIES> 3,864,325
<BONDS> 0
0
0
<COMMON> 52,216,010
<OTHER-SE> (15,717,005)
<TOTAL-LIABILITY-AND-EQUITY> 42,628,404
<SALES> 0
<TOTAL-REVENUES> 15,824,073
<CGS> 0
<TOTAL-COSTS> 11,415,428
<OTHER-EXPENSES> 11,415,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,408,645
<INCOME-TAX> 87,000
<INCOME-CONTINUING> 4,321,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,321,645
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
