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, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 Commission file number 1-9771
MEDCO RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3318451
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(State or other Jurisdiction of (I.R.S. Identification No.)
Employer incorporation or
organization)
85 T W Alexander Drive,
-----------------------
Research Triangle Park, North Carolina 27709
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(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 10,586,857 as of July 28, 1998.
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.
<PAGE>
Medco Research, Inc.
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<CAPTION>
<S> <C>
June 30, December 31,
1998 1997*
-------------------------------------------------
(in thousands, except share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 7,866 $ 2,726
Investments held to maturity 11,962 14,273
Accounts and notes receivable:
Royalties 6,384 6,004
Other 124 245
Accrued interest income 473 563
Prepaid expenses and other 358 504
-------------------------------------------------
Total current assets 27,167 24,315
Investments held to maturity 28,557 23,530
Property and equipment, at cost, net of accumulated
depreciation and amortization 196 244
Patent, trademark and distribution rights, at cost, net of
accumulated amortization 1,939 1,524
=================================================
Total assets $57,859 $49,613
=================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 1,938 $ 2,379
Accrued royalties 1,713 1,301
Accrued compensation 274 476
-------------------------------------------------
Total current liabilities 3,925 4,156
Deferred royalty payments - 451
Other long-term liabilities 250 350
-------------------------------------------------
Total liabilities 4,175 4,957
Stockholders' equity:
Common stock, no par value, authorized 40,000,000
shares; shares issued of 11,245,757 and 11,182,832 at
June 30, 1998 and December 31, 1997, respectively;
shares outstanding of 10,576,857 and 10,513,932 at
June 30, 1998 and December 31, 1997, respectively. 53,148 52,513
Accumulated earnings (deficit) 7,212 (1,181)
Cost of stock held in treasury, 668,900 shares at June 30,
1998 and December 31, 1997 (6,676) (6,676)
-------------------------------------------------
Total stockholders' equity 53,684 44,656
-------------------------------------------------
Commitments and contingencies
=================================================
Total liabilities and stockholders' equity $57,859 $49,613
=================================================
See accompanying notes to consolidated financial statements.
*Abstracted from audited year-end financial statements.
2
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Medco Research, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------------------------
June 30, June 30, June 30, June 30,
(in thousands, except per share data) 1998 1997 1998 1997
-----------------------------------------------------------------------
Royalty revenue $6,387 $4,862 $12,766 $9,167
Royalty expense 919 618 2,183 1,585
-----------------------------------------------------------------------
Gross margin 5,468 4,244 10,583 7,582
-----------------------------------------------------------------------
Operating expenses:
Research & development costs 3,836 1,969 5,564 3,672
General and administrative expenses 572 679 1,197 1,378
-----------------------------------------------------------------------
4,408 2,648 6,761 5,050
-----------------------------------------------------------------------
Operating income 1,060 1,596 3,822 2,532
Other income:
Interest income 659 508 1,273 998
Other income 4,000 300 4,000 300
-----------------------------------------------------------------------
Income before taxes 5,719 2,404 9,095 3,830
Provision for income taxes 497 90 702 126
-----------------------------------------------------------------------
Net income $ 5,222 $ 2,314 $ 8,393 $ 3,704
=======================================================================
Basic earnings per share $ 0.49 $ 0.22 $ 0.80 $ 0.35
=======================================================================
Diluted earnings per share $ 0.48 $ 0.22 $ 0.77 $ 0.35
=======================================================================
Weighted average shares outstanding 10,558 10,509 10,538 10,595
=======================================================================
Weighted average shares outstanding
assuming dilution 10,965 10,509 10,862 10,612
=======================================================================
See accompanying notes to consolidated financial statements.
3
<PAGE>
Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
SIX MONTHS ENDED JUNE 30, 1998
(in thousands, except share data)
<CAPTION>
Common Stock
-----------------------------------
Accumulated Cost of Stock
Number of earnings held in
shares Amount (deficit) Treasury Total
----------------------------------------------------------------------------------------------
Balance at
December 31, 1997 10,514 $52,513 $(1,181) $ (6,676) $44,656
Stock options
exercised 63 635 - - 635
Net income - - 8,393 - 8,393
==============================================================================================
Balance at
June 30, 1998 10,577 $53,148 $ 7,212 $ (6,676) $53,684
==============================================================================================
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,
1998 1997
--------------------------------------------
(in thousands)
Operating activities:
Net income $ 8,393 $ 3,704
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 48 65
Amortization of patent, trademark and
distribution rights 298 14
Gain on investments available for sale - -
Net amortization of investment discount (199) (22)
Changes in operating assets and liabilities:
Accounts receivable (259) (461)
Prepaid expenses (175) (83)
Accounts payable and accrued expenses (464) 309
Accrued royalty expense 412 390
Accrued interest income 90 38
Deferred asset 321 124
Deferred revenue - (448)
Deferred royalty payments (730) (470)
--------------------------------------------
Net cash provided by operating activities $7,735 $3,160
--------------------------------------------
(Continued)
5
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------
June 30, June 30,
1998 1997
-----------------------------------------------------
(in thousands)
Investing activities:
Purchase of securities held to maturity (15,939) -
Maturity of securities held to maturity 13,422 3,500
Purchases of property and equipment - (35)
Purchases of patent and license (713) -
-----------------------------------------------------
Net cash provided by (used in) investing
activities (3,230) 3,465
-----------------------------------------------------
Financing activities:
Proceeds from exercise of options 635 -
Purchase of stock held in treasury - (2,299)
-----------------------------------------------------
Net cash provided by (used in) financing
activities 635 (2,299)
-----------------------------------------------------
Increase in cash and cash equivalents 5,140 4,326
Cash and cash equivalents at beginning of period
2,726 9,107
-----------------------------------------------------
Cash and cash equivalents at end of period
$7,866 $13,433
=====================================================
</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, 1997.
Cash and Cash Equivalents
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 adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS No. 130") for its fiscal year ending
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. The Company has no items of other comprehensive income in any period
presented and therefore is not required to report comprehensive income.
Earnings per Share
The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"), "Earnings Per Share," on December 31, 1997. Under SFAS No. 128, the
Company is required to report both basic and diluted earnings per share. Basic
earnings per share is computed using the weighted average number of common
shares outstanding during a period. Diluted earnings per share is computed using
the weighted average number of common shares and dilutive common share
equivalents, primarily stock options, outstanding during a period. All prior
period data has been restated to conform to the provisions of SFAS No. 128.
The net income used for both basic and dilutive earnings per share for each of
the periods ended June 30, 1998 and 1997 was the same. The following is a
reconciliation of the weighted average number of common shares and common share
equivalents used to determine diluted earnings per share for each of the periods
ended June 30, 1998 and 1997:
7
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Medco Research, Inc.
<TABLE>
<CAPTION>
<S> <C>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------- -------------- ----------------
1998 1997 1998 1997
-------------- --------------- -------------- ----------------
Basic-weighted average shares outstanding 10,558 10,509 10,538 10,595
Net effect of dilutive stock options
based on treasury stock method 407 - 324 17
============== =============== ============== ================
Weighted average shares assuming dilution 10,965 10,509 10,862 10,612
============== =============== ============== ================
</TABLE>
Equity
The Company adopted a Shareholder Rights Plan on April 2, 1998. The plan
provides for a dividend distribution of rights to purchase shares of the common
stock of the Company, exercisable upon the occurrence of certain events.
Patents
On March 30, 1998, Fujisawa USA, Inc. secured additional intellectual property
rights for intravenous adenosine in cardiac imaging and its potential new use as
a cardioprotectant in various acute ischemic settings. The Company paid and
capitalized its 50% share of a one-time up-front fee and will amortize this fee
over the life of the patents. The Company is also obligated to pay its 50% share
of an Adenoscan royalty to this third party.
Contingency
There are no material legal proceedings pending against the Company. However, on
October 3, 1997, Richard A. Wilson, Debra A. Angello, and Paul S. Angello
("Plaintiffs") filed a complaint against Fujisawa, USA, Inc. in the United
States District Court, District of Oregon, alleging that Fujisawa's sale of
Adenoscan in the United States induces, or contributes to, the infringement of
plaintiffs' U.S. Patent No. 4,824,660 ("the `660 patent"), entitled "Method of
Determining the Viability of Tissue in an Organism" which the Patent Office
issued on April 25, 1989. According to plaintiffs, the `660 patent claims a
specific technique for more reliably locating viable or nonviable regions of
heart tissue, namely using an adenosine triphosphate repleting agent such as
ribose or adenosine as an adjunct to radioactive isotope (e.g., thallium-201)
myocardial perfusion scintigraphy, where regions of heart tissue in which the
scan images show no radioactivity indicate the presence of nonviable heart
tissue. In its Answer and Counterclaim, Fujisawa denied that it infringed any of
the claims of the `660 patent and alleged that the `660 patent was invalid.
Fujisawa further alleged that plaintiffs' claims of patent infringement were
barred by the doctrines of laches and estoppel. In its Counterclaim, Fujisawa
requested a declaratory judgment that it did not infringe the claims of the `660
patent and that such patent is invalid.
This action is in the discovery stage. Fujisawa has advised the Company that
Fujisawa intends to vigorously defend this action and believes it has no merit.
Under the terms of its Adenoscan exclusive license agreement with Fujisawa, the
Company will reimburse Fujisawa for 50% of the cost of defending this action.
8
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Medco Research, Inc.
The Company also believes the action has no merit. The Company has long been
aware of the `660 patent, and as part of its normal operating procedures the
Company has received the written opinions of separate patent counsel that the
manufacture and sale of Adenoscan for use in myocardial imaging does not
infringe any valid claim of the `660 patent. The Company disclosed its receipt
of its patent counsel non-infringement opinion in its 1993 Form 10-K Report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Second Quarter and Six Months of 1998 Compared to Second Quarter and Six Months
of 1997
Net Revenues. The Company's second quarter and first six months of 1998 royalty
revenues increased from $4.862 million and $9.167 million to $6.387 million and
$12.766 million, an increase of 31% and 39%, respectively, due to continued
quarter-to-quarter increases in unit sales of Adenoscan by Fujisawa, the
Company's North American licensee. Substantially all of the royalty revenue of
the Company is generated by Fujisawa Healthcare, Inc. from its sales of
Adenoscan and Adenocard in the United States and Canada.
Gross Margin. The Company's second quarter and first six months of 1998 gross
margin from adenosine revenues increased from $4.244 million and $7.582 million
to $5.468 million and $10.583 million, an increase of 29% and 40%, respectively,
due to the shift in the product sales mix to Adenoscan. Royalty expense for the
second quarter and first six months from adenosine sales increased from $.618
million and $1.585 million to $.919 million and $2.183 million, an increase of
49% and 38%, respectively, due to the payment of an Adenoscan royalty to a third
party relating to the procurement of additional intellectual property rights for
intravenous adenosine.
Operating Expenses. The Company's second quarter and first six months of 1998
total operating expenses increased from $2.648 million and $5.050 million to
$4.408 million and $6.761 million, an increase of 67% and 34%, respectively,
principally as a result of a one-time research and development charge of $2.361
million for the purchase of Fujisawa's commercialization rights and related
intellectual properties for the cardioprotection application of intravenous
adenosine. Research and development expenditures increased from $1.969 million
and $3.672 million to $3.836 million and $5.564 million, an increase of 95% and
52%, respectively, as a result of the one-time charge pertaining to the
development and commercialization of adenosine for use in the treatment of acute
ischemic conditions of the heart, including acute myocardial infarction and
open-heart surgery. General and administrative expenditures for second quarter
and the first six months of 1998 decreased from $.679 million and $1.378 million
to $.572 million and $1.197 million, a decrease of 16% and 13%, respectively,
due to lower overall spending in 1998.
9
<PAGE>
Medco Research, Inc.
Other Income . Interest income for second quarter and the first six months of
1998 increased 30% and 28% over the comparable periods of 1997 primarily due to
higher investment balances. Other income for second quarter, as well as the
first six months of 1998 increased from $.3 million to $4 million as a result of
a one-time $4 million addition to income in consideration for the transfer of
NDA's and necessary manufacturing rights for Adenocard and Adenoscan to Fujisawa
Healthcare, Inc.
Earnings Per Share. In the second quarter and first six months of 1998, the
Company had net income of $5.222 million and $8.393 million or $0.48 and $0.77
diluted earnings per share compared to $2.314 million and $3.704 million or
$0.22 and $0.35 diluted earnings per share for the year earlier period. Weighted
average common shares and common share equivalents outstanding for second
quarter and the first six months of 1998 were 10.965 million and 10.862 million,
respectively, versus 10.509 million and 10.612 million for the comparable
periods of the prior year.
FINANCIAL CONDITION
As of June 30, 1998, the Company had total cash and investments of $48.385
million, made up of $7.866 million of cash and cash equivalents and $40.519
million of investments in U.S. Treasury Notes, debt securities of various
federal governmental agencies, and high quality corporate debt securities. The
Company's working capital as of June 30, 1998 was $23.242 million, compared to
$20.159 million as of December 31, 1997.
Included in liabilities at June 30, 1998 is a current accrued liability of $.721
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.
The actual income tax expense for the second quarter 1998 differs from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the earnings before income taxes) due to the utilization of net operating
loss carryforwards and research and development credit carryforwards for which a
full valuation allowance was previously recorded.
The Company recognized a full valuation allowance for its estimated deferred tax
asset at June 30, 1998 due to the uncertainty surrounding timing of partnering
arrangements and the uncertainty surrounding the ultimate cost of the research,
clinical trials and other development of pharmaceutical products that
potentially could adversely affect future operations and profit levels.
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.
10
<PAGE>
Medco Research, Inc.
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.
IMPACT OF YEAR 2000
The Company has assessed the impact Year 2000 could have on its internal
operations and does not anticipate that the Year 2000 will materially impact the
Company's information systems, business or ability to operate in a
well-controlled environment. The Company will be requesting Year 2000 compliance
certification from each of its major customers and suppliers for their hardware
or software products and for their internal business applications and processes.
The Company currently does not expect that the cost of its Year 2000 compliance
will be material to its financial condition or results of operations or that its
business will be adversely affected by the Year 2000 issue in any material
respect. Nevertheless, achieving Year 2000 compliance is dependent on many
factors, some of which are not completely within the Company's control.
CAUTIONARY STATEMENT
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. The following
statement highlights some of these risks.
Statements contained in Management's Discussion and Analysis of Financial
Conditions and Results of Operations which are not historical facts are forward
looking statements under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Although the Company believes the expectations
reflected in such forward looking statements are based on reasonable
assumptions, it can give no assurance that its expectations will be attained.
Forward looking statements involve known and unknown risks that could cause the
Company's actual results to differ materially from expected results. Factors
that could cause actual results to differ materially from the Company's
expectations include, among others, the high cost and uncertainty of the
research, clinical trials and other development activities involving
pharmaceutical products; the unpredictability of the duration and results of
regulatory review of New Drug Applications; the possible impairment of, or
inability to obtain, intellectual property rights and the cost of obtaining such
rights from third parties; intense competition; the uncertainty of obtaining,
and the Company's dependence on, third parties to manufacture and sell its
products; results of pending or future litigation and other risk factors
detailed from time to time in the Company's Securities and Exchange Commission
filings.
11
<PAGE>
Medco Research, Inc.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by reference is the contingency described in the Notes to
the Financial Statements set forth in Item 1 of Part I of this Report, set forth
on pages 8 and 9 hereof.
Item 4. Submission of Matters to a Vote of Security Holders
a) July 29, 1998 Annual Meeting
b) Directors Elected - William M. Bartlett
Roger D. Blevins, Pharm.D.
Jay N. Cohn, M.D.
Mark B. Hirsch
Eugene L. Step
Richard C. Williams
c) Proposals voted upon:
(i) Election of Directors:
William M. Bartlett
For: 9,671,856
Abstain: 353,712
Roger D. Blevins, Pharm.D.
For: 9,671,856
Abstain: 353,712
Jay N. Cohn, M.D.
For: 9,671,856
Abstain: 353,712
Mark B. Hirsch
For: 9,671,856
Abstain: 353,712
Eugene L. Step
For: 9,671,856
Abstain: 353,712
Richard C. Williams
For: 9,671,856
Abstain: 353,712
(ii) Amendment of the Company's 1989 Stock Option and Stock
Appreciation Rights Plan:
For: 5,621,470
Against: 1,154,592
Abstain: 215,649
(iii) Ratification of Coopers & Lybrand LLP as independent
accountants:
For: 10,004,847
Against: 10,830
Abstain: 9,891
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
None.
13
<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 11, 1998 By: /s/ Roger D. Blevins
- --------------------- --------------------
Roger D. Blevins, Pharm.D.
President and
Chief Executive Officer
Date: August 11, 1998 By: /s/ Glenn C. Andrews
- --------------------- --------------------
Glenn C. Andrews
Chief Financial Officer
Date: August 11, 1998 By: /s/ Adam C. Derbyshire
- --------------------- ----------------------
Adam C. Derbyshire
Corporate Controller
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,866
<SECURITIES> 11,962
<RECEIVABLES> 7,339
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,167
<PP&E> 718
<DEPRECIATION> 522
<TOTAL-ASSETS> 57,859
<CURRENT-LIABILITIES> 3,925
<BONDS> 0
<COMMON> 53,148
0
0
<OTHER-SE> 536
<TOTAL-LIABILITY-AND-EQUITY> 57,859
<SALES> 0
<TOTAL-REVENUES> 11,046
<CGS> 0
<TOTAL-COSTS> 5,327
<OTHER-EXPENSES> 5,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,719
<INCOME-TAX> 497
<INCOME-CONTINUING> 5,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,222
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
</TABLE>
