Medco Research, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 Commission file number 1-9771
MEDCO RESEARCH, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3318451
-------- ----------
(State or other Jurisdiction of (I.R.S. Identification No.)
Employer incorporation or
organization)
85 T W Alexander Drive,
-----------------------
Research Triangle Park, North Carolina 27709
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(919) 549-8117
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock American Stock Exchange
------------ -----------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of common stock, as of the
latest practical date 10,491,932 as of July 28, 1997.
Pursuant to the Securities Exchange Act of 1934 Release 15502 and Rule
240.03 (b), the pages of this document have been numbered sequentially. The
total pages contained herein are 14.
1
<PAGE>
Medco Research, Inc.
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<CAPTION>
<S> <C>
June 30 December 31
1997 1996*
-------------------------------------------------
(in thousands except share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $13,433 $ 9,107
Investments held to maturity 9,003 6,439
Accounts and notes receivable:
Royalties 5,270 3,794
Other 1,212 2,227
Accrued interest income 339 377
Prepaid expenses 376 293
-------------------------------------------------
Total current assets 29,633 22,237
Investments held to maturity 13,537 19,579
Deferred asset - 124
Property and equipment, at cost, net of accumulated
depreciation and amortization 278 308
Patent, trademark and distribution rights, at cost,
net of accumulated amortization 366 380
=================================================
Total assets $43,814 $42,628
=================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,994 $ 2,685
Accrued royalties 1,569 1,179
-------------------------------------------------
Total current liabilities 4,563 3,864
Deferred revenue 100 548
Deferred royalty payments 1,247 1,717
-------------------------------------------------
Total liabilities 5,910 6,129
-------------------------------------------------
Stockholders' equity
Common stock, no par value, authorized 40,000,000
shares; shares issued of 11,155,832 at June 30,
1997 and December 31, 1996; shares outstanding
of 10,491,932 and 10,740,032 at June 30, 1997
and December 31, 1996, respectively. 52,216 52,216
Accumulated deficit (7,690) (11,394)
Cost of stock held in treasury, 663,900 shares at June 30, 1997 and
415,800 shares at December 31, 1996 (6,622) (4,323)
-------------------------------------------------
Total stockholders' equity 37,904 36,499
-------------------------------------------------
Commitments and contingencies
=================================================
Total liabilities and stockholders' equity $43,814 $42,628
=================================================
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
2
<PAGE>
Medco Research, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------------------------
June 30 June 30 June 30 June 30
(in thousands except per share data) 1997 1996 1997 1996
-----------------------------------------------------------------------
Net Revenues:
Royalty revenue $4,862 $3,293 $9,167 $6,040
Royalty expense 618 729 1,585 1,390
-----------------------------------------------------------------------
Gross Margin 4,244 2,564 7,582 4,650
-----------------------------------------------------------------------
Operating Expenses:
Research & development costs 1,969 1,380 3,672 2,758
General and administrative expenses 679 1,013 1,378 1,692
-----------------------------------------------------------------------
2,648 2,393 5,050 4,450
-----------------------------------------------------------------------
Operating Income 1,596 171 2,532 200
Other Income:
Interest income 508 487 998 1,024
Licensing income 300 350 300 350
-----------------------------------------------------------------------
Income before taxes 2,404 1,008 3,830 1,574
Provision for income taxes 90 7 126 14
-----------------------------------------------------------------------
Net income $ 2,314 $ 1,001 $ 3,704 $ 1,560
=======================================================================
Net income per share $0.22 $0.09 $ 0.35 $ 0.14
=======================================================================
Weighted average number of common shares and
common share equivalents outstanding 10,509 10,943 10,595 10,955
=======================================================================
See accompanying notes to consolidated financial statements.
3
<PAGE>
Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1997
(in thousands except share data)
<CAPTION>
Common Stock
-----------------------------------
Cost of Stock
Number of Accumulated held in
shares Amount deficit Treasury Total
----------------------------------------------------------------------------------------------
Balance at
December 31, 1996 10,740,032 $52,216 $(11,394) $(4,323) $36,499
Purchase of stock held
in treasury (248,100) - - (2,299) (2,299)
Net income - - 3,704 - 3,704
----------------------------------------------------------------------------------------------
Balance at
June 30, 1997 10,491,932 $52,216 $(7,690) $(6,622) $37,904
==============================================================================================
See accompanying notes to consolidated financial statements.
4
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
June 30 June 30
1997 1996
--------------------------------------------
(in thousands)
Operating activities
Net income $ 3,704 $ 1,560
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 65 68
Amortization of patent, trademark and
distribution rights 14 36
Gain on investments available for sale - ( 49)
Net amortization of investment discount (22) (261)
Changes in operating assets and liabilities:
Accounts receivable (461) (2,231)
Prepaid expenses (83) (145)
Accounts payable and accrued expenses 309 (696)
Accrued royalty expense 390 81
Accrued interest income 38 23
Deferred asset 124 522
Deferred revenue (448) (1,000)
Deferred royalty payments (470) (261)
--------------------------------------------
Net cash provided by (used in) operating
activities $3,160 $(2,353)
--------------------------------------------
(Continued)
5
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------
June 30 June 30
1997 1996
-----------------------------------------------------
(in thousands)
Investing activities
Purchase of securities available for sale - (16,340)
Purchase of securities held to maturity - (76)
Sale of securities available for sale - 5,656
Maturity of securities held to maturity 3,500 16,500
Purchases of property and equipment (35) (47)
Purchases of patent and license - (351)
-----------------------------------------------------
Net cash provided by investing activities 3,465 5,342
-----------------------------------------------------
Financing activities
Purchase of stock held in treasury (2,299) (778)
-----------------------------------------------------
Net cash used in financing activities (2,299) (778)
-----------------------------------------------------
Increase in cash and cash equivalents 4,326 2,211
Cash and cash equivalents at beginning of period 9,107 4,305
-----------------------------------------------------
Cash and cash equivalents at end of period $13,433 $6,516
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Medco Research, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
General
- -------
The accompanying interim financial statements have been prepared by Medco
Research, Inc. (the "Company") in accordance with generally accepted accounting
principles. Certain disclosures and information normally included in financial
statements have been condensed or omitted. In the opinion of the management of
the Company, these financial statements contain all adjustments (all of a
recurring nature) necessary for a fair presentation for the interim periods.
These statements should be read in conjunction with the financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Adoption of New Accounting Pronouncements
- -----------------------------------------
The Company will adopt Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share," on December 31, 1997. SFAS No. 128
requires the Company to change its method of computing, presenting and
disclosing earnings per share information. Upon adoption, all prior period data
presented will be restated to conform to the provisions of SFAS No. 128.
If the Company had adopted SFAS No. 128 for the periods ended June 30, 1997 and
1996, the following computation would have been used to arrive at basic income
per common share and diluted income per common share and would have been
presented on the consolidated statements of operations:
<TABLE>
<CAPTION>
<S> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
(in thousands except per share data)
Basic:
Net income per common share $ 0.22 $ 0.09 $ 0.35 $ 0.14
---- ---- ---- ----
Weighted average shares 10,509 10,943 10,595 10,955
====== ====== ====== ======
Diluted:
Net income per common share $ 0.22 $ 0.09 $ 0.35 $ 0.14
---- ---- ---- ----
Weighted average shares 10,509 10,946 10,612 10,959
====== ====== ====== ======
</TABLE>
The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131") for its fiscal year ended December 31 1998. SFAS No. 131 requires the
Company to report selected information about operating segements in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company has yet to determine the impact, if any, of adoption of
the new pronouncement.
7
<PAGE>
Medco Research, Inc.
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130") for its fiscal year ended December
31, 1998. SFAS No. 130 requires the Company to display an amount representing
the total comprehensive income for the period in a financial statement which is
displayed with the same prominence as other financial statements. Upon adoption,
all prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The Company has yet to determine the impact, if any, of adoption
of the new pronouncement.
Class Action Litigation
- -----------------------
Pending dismissal of class action litigation was unanimously affirmed by the
United States Court of Appeals for the 7th Circuit in May 1997.
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 arbitration commenced in May 1997 and has continued in several sessions. It
is currently scheduled to be completed in August 1997.
8
<PAGE>
Medco Research, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Second Quarter and Six Months of 1997 Compared to Second Quarter and Six Months
of 1996
Net Revenues. Royalty revenues were $4.862 million and $9.167 million for the
second quarter and first six months of 1997, an increase of 48% and 52%,
respectively, over the comparable periods of 1996. This increase reflects the
continued growth of Adenoscan in its original 30 ml vial formulation and the May
1997 launch of the 20 ml vial. Fujisawa USA, Inc. is responsible for
substantially all of the royalty revenue of the Company.
Gross Margin. Gross margin from adenosine revenues was $4.244 million and $7.582
million for the second quarter and first six months of 1997, an increase of 66%
and 63%, respectively, over the comparable periods of 1996. This significant
increase reflects the growth in the product sales of 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 was $.618 million and $1.585 million for the second quarter and first six
months of 1996, a decrease of 15% and an increase of 14%, respectively.
Operating Expenses. Total operating expenses were $2.648 million and $5.050
million for the second quarter and first six months of 1997, an increase of 11%
and 14%, respectively, principally as a result of research and development
expenditures increasing 43% and 33% due to increased activity associated with
the adenosine for cardioprotection (MEDR640) trials, the pre-IND submission
requirements for Tc99m-Glucarate and legal expenditures for arbitration of the
ATP license agreement. General and administrative expenses were $.679 million
and $1.378 million for the second quarter and first six months of 1997, a
decrease of 33% and 19%, respectively. This decrease is attributed to the
absence of recruiting fees and other expenditures related to changes in
management that occurred during the second quarter of 1996.
Other Income . Interest income was $.508 million and $.998 million for the
second quarter and first six months of 1997, an increase of 4% and decrease of
3%, respectively. The Company recognized as income a $300,000 milestone payment
by Suntory Limited, the Company's development and marketing partner for
adenosine in Japan, following Suntory's announcement of the initiation of Phase
III clinical trials of Adenoscan in Japan .
Income Per Share. In the second quarter 1997 the Company had net income of
$2.314 million or $0.22 per share and a six month net income of $3.704 million
or $0.35 per share, compared to net income of $1.001 million or $0.09 per share
and $1.560 million or $0.14 per share for the year earlier periods.
FINANCIAL CONDITION
- -------------------
As of June 30, 1997, the Company had total cash and investments of $35.973
million comprised of $13.433 million of cash and cash equivalents and $22.540
million of investments in U.S. Treasury Notes and high quality corporate debt
securities. The Company's working capital as of June 30, 1997 was $25.070
million, compared to $18.373 million as of December 31, 1996.
9
<PAGE>
Medco Research, Inc.
Included in liabilities at June 30, 1997 is an accrued liability (current and
non-current portion) of $2.0 million relating to the balance of the Company's
guaranteed royalty obligation to Abbott Laboratories pursuant to the terms of
the Company's settlement of litigation relating to the manufacturing and
marketing rights to Adenoscan. Included in current assets at June 30, 1997 is a
deferred asset of $.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 five year period. The Company will
write off any portion of this deferred asset at such time, if any, in which it
becomes probable that the incremental 4% royalty revenue will be insufficient to
recover the remaining balance of this deferred asset.
Adenoscan and Adenocard are the Company's two commercial products, and they are
marketed by the Company's exclusive licensees principally in the United States,
Canada and the United Kingdom. Substantially all of the Company's royalty
revenue is obtained by Fujisawa USA from sales of these drugs in the U.S.
The Company will not generate revenues from its other products unless and until
it or its licensees receive marketing clearance from the FDA and appropriate
governmental agencies in other countries. The Company cannot predict the timing
of any potential marketing clearance nor can assurances be given that the FDA or
such agencies will approve any of the Company's products. For the near term the
Company expects to receive substantially all of its royalty revenues from sales
of its products in the U.S. by Fujisawa USA.
IMPACT OF INFLATION
- -------------------
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products when marketed.
CAUTIONARY STATEMENT
- --------------------
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. The following
statement highlights some of these risks.
Statements contained in Management's Discussion and Analysis of Financial
Conditions and Results of Operations which are not historical facts are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Factors that could cause actual
results to differ materially include, among others, the high cost and
uncertainty of the research, clinical trials and other development of
pharmaceutical products; the unpredictability of the duration and results of the
U.S. Food and Drug Administration's review of New Drug Applications and/or the
review of other regulatory agencies worldwide; the possible impairment of, or
inability to obtain, intellectual property rights; intense competition; the
uncertainty of obtaining, and the Company's dependence on, third parties to
manufacture and sell its products; results of pending or future litigation and
other risk factors detailed in the Company's Securities and Exchange Commission
filings.
10
<PAGE>
Medco Research, Inc.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Incorporated herein by reference are Class Action Litigation and Arbitration of
ATP License Agreement, inclusive, set forth in the Notes to the Financial
Statements set forth in Item 1 of Part I of this Report, set forth on page 8
herof.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
a) June 18, 1997 Annual Meeting
b) Directors Elected - Albert D. Angel
William M. Bartlett
Jay N. Cohn, M.D.
Marvin S. Hausman, M.D.
Mark B. Hirsch
Eugene L. Step
Richard C. Williams
c) Proposals voted upon:
(i) Election of Directors:
Albert D. Angel
For: 9,184,354
Abstain: 1,205,601
William M. Bartlett
For: 9,190,108
Abstain: 1,199,847
Jay N. Cohn, M.D.
For: 9,204,728
Abstain: 1,185,227
Marvin S. Hausman, M.D.
For: 9,206,328
Abstain: 1,183,627
Mark B. Hirsch
For: 9,206,328
Abstain: 1,183,627
Eugene L. Step
For: 9,206,328
Abstain: 1,183,627
11
<PAGE>
Medco Research, Inc.
Richard C. Williams
For: 9,203,328
Abstain: 1,186,627
(ii) Ratification of Coopers & Lybrand LLP as independent accountants:
For: 10,068,066
Against: 275,849
Abstain: 46,040
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits:
11. Computation of Net Income per Common Share
b. Reports on Form 8-K:
A Form 8-K/A dated March 24, 1997, reporting in Item
4 thereof a change in the Company's certifying
accountants, was filed April 14, 1997.
12
<PAGE>
Medco Research, Inc.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Medco Research, Inc.
Date: August 8, 1997 By: /s/ Roger D. Blevins
- -------------------- --------------------
Roger D. Blevins, Pharm.D.
President and
Chief Operating Officer
Date: August 8, 1997 By: /s/ Glenn C. Andrews
- -------------------- --------------------
Glenn C. Andrews
Chief Financial Officer
Date: August 8, 1997 By: /s/ Adam C. Derbyshire
- -------------------- ----------------------
Adam C. Derbyshire
Corporate Controller
13
<TABLE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<CAPTION>
<S> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30 June 30 June 30
1997 1996 1997 1996
----------------------------------------------------------------------
(in thousands except per share data)
PRIMARY
Weighted average shares outstanding 10,509 10,943 10,595 10,955
Net effect of dilutive stock options
based on the treasury stock method
using average market price 0 3 17 4
----------------------------------------------------------------------
10,509 10,946 10,612 10,959
----------------------------------------------------------------------
Net income $2,314 $1,001 $3,704 $1,560
======================================================================
Per share $0.22 $0.09 $0.35 $0.14
======================================================================
FULLY DILUTED
Weighted average shares outstanding 10,509 10,943 10,595 10,955
Net effect of dilutive stock options
based on the treasury stock method
using ending market price, if
higher than average market price 17 3 17 4
----------------------------------------------------------------------
10,526 10,946 10,612 10,959
======================================================================
Net income $2,314 $1,001 $3,704 $1,560
======================================================================
Per share $0.22 $0.09 $0.35 $0.14
======================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,433
<SECURITIES> 9,003
<RECEIVABLES> 7,197
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,633
<PP&E> 820
<DEPRECIATION> 542
<TOTAL-ASSETS> 43,814
<CURRENT-LIABILITIES> 4,563
<BONDS> 0
0
0
<COMMON> 52,216
<OTHER-SE> (14,312)
<TOTAL-LIABILITY-AND-EQUITY> 43,814
<SALES> 0
<TOTAL-REVENUES> 10,465
<CGS> 0
<TOTAL-COSTS> 6,635
<OTHER-EXPENSES> 6,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,830
<INCOME-TAX> 126
<INCOME-CONTINUING> 3,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,704
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
