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 March 31, 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.
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(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,
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Research Triangle Park, North Carolina 27709
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(Address of principal executive offices) (Zip Code)
(919) 549-8117
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock American Stock Exchange
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(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
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Indicate the number of shares outstanding of common stock, as of the
latest practical date 10,543,307 as of May 4, 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 12.
1
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<TABLE>
Medco Research, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
<CAPTION>
<S> <C>
March 31, December 31,
1998 1997*
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(in thousands except share data) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,982 $ 2,726
Investments held to maturity 12,276 14,273
Accounts and notes receivable:
Royalties 5,845 6,004
Other 637 245
Accrued interest income 443 563
Prepaid expenses and other 221 504
-------------------------------------------------
Total current assets 23,404 24,315
Investments held to maturity 26,559 23,530
Property and equipment, at cost, net of accumulated
depreciation and amortization 220 244
Patent, trademark and distribution rights, at cost,
net of accumulated amortization 2,091 1,524
-------------------------------------------------
Total assets $52,274 $49,613
=================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,756 $ 2,379
Accrued royalties 804 1,301
Accrued compensation 230 476
-------------------------------------------------
Total current liabilities 3,790 4,156
Deferred royalty payments 117 451
Other long-term liabilities 300 350
-------------------------------------------------
Total liabilities 4,207 4,957
Stockholders' equity
Common stock, no par value, authorized 40,000,000
shares; shares issued of 11,206,207 and 11,182,832
at March 31, 1998 and December 31, 1997, respectively;
shares outstanding of 10,537,307 and 10,513,932 at
March 31, 1998 and December 31, 1997, respectively. 52,753 52,513
Accumulated earnings (deficit) 1,990 (1,181)
Cost of stock held in treasury, 668,900 shares at March 31, 1998
and December 31, 1997 (6,676) (6,676)
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Total stockholders' equity 48,067 44,656
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Commitments and contingencies
=================================================
Total liabilities and stockholders' equity $52,274 $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
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March 31, March 31,
(in thousands except per share data) 1998 1997
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Royalty revenue $6,379 $4,304
Royalty expense 1,264 966
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Gross margin 5,115 3,338
Operating expenses:
Research & development costs 1,728 1,703
General and administrative expenses 625 699
2,353 2,402
Operating income 2,762 936
--------------------------------------
Other income:
Interest income 614 490
Income before taxes 3,376 1,426
Provision for income taxes 205 36
Net income $3,171 $1,390
======================================
Basic earnings per share $ 0.30 $ 0.13
======================================
Diluted earnings per share $ 0.30 $ 0.13
======================================
Weighted average shares outstanding 10,518 10,681
======================================
Weighted average shares outstanding
assuming dilution 10,743 10,730
======================================
See accompanying notes to consolidated financial statements.
3
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Medco Research, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
THREE MONTHS ENDED MARCH 31, 1998
(in thousands except share data)
<CAPTION>
Common Stock
-----------------------------------
Accumulated Cost of
Number of earnings Stock Held
shares Amount (deficit) in Treasury Total
----------------------------------------------------------------------------------------------
Balance at
December 31, 1997 10,514 $52,513 $(1,181) $(6,676) $44,656
Stock options
exercised 23 240 240
Net income - - 3,171 - 3,171
----------------------------------------------------------------------------------------------
Balance at
March 31, 1998 10,537 $52,753 $1,990 $(6,676) $48,067
==============================================================================================
See accompanying notes to consolidated financial statements.
4
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Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
THREE MONTHS ENDED
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March 31, March 31,
1998 1997
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(in thousands)
Operating activities
Net income $3,171 $1,390
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 24 32
Amortization of patent, trademark and
distribution rights 146 7
Net amortization of investment discount (93) (22)
Changes in operating assets and liabilities:
Accounts receivable (233) (208)
Prepaid expenses 283 162
Accounts payable and accrued expenses 81 259
Accrued royalty expense (497) (221)
Accrued interest income 120 87
Deferred asset - 124
Deferred royalty payment (334) (190)
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Net cash provided by operating activities
$2,668 $1,420
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(Continued)
5
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Medco Research, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
THREE MONTHS ENDED
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March 31, March 31,
1998 1997
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(in thousands)
Investing activities
Purchase of securities held to maturity (8,439) -
Maturity of securities held to maturity 7,500 3,500
Purchases of property and equipment - (35)
Purchases of patent and license (713) -
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Net cash provided by (used in) investing
activities (1,652) 3,465
--------------------------------------------
Financing activities
Net proceeds from exercise of stock options 240 -
Purchase of stock held in treasury - (1,743)
--------------------------------------------
Net cash provided by (used in) financing
activities 240 (1,743)
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Increase in cash and cash equivalents 1,256 3,142
Cash and cash equivalents at beginning of period 2,726 9,107
--------------------------------------------
Cash and cash equivalents at end of period $3,982 $12,249
============================================
See accompanying notes to consolidated financial statements.
</TABLE>
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Medco Research, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
The accompanying interim financial statements have been prepared by Medco
Research, Inc. (the "Company") in accordance with generally accepted accounting
principles. Certain disclosures and information normally included in financial
statements have been condensed or omitted. In the opinion of the management of
the Company, these financial statements contain all adjustments (all of a
recurring nature) necessary for a fair presentation for the interim periods.
These statements should be read in conjunction with the financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 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. SFAS No. 128 requires the
Company to change its method of computing, presenting and disclosing earnings
per share information. The Company is now 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. Upon adoption, 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 March 31, 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 March 31, 1998 and 1997:
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Medco Research, Inc.
Period Ended March 31,
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1998 1997
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Basic-weighted average shares outstanding 10,518 10,681
Net effect of dilutive stock options
based on treasury stock method 225 49
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Weighted average shares assuming dilution 10,743 10,730
=======================
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, the Company announced that it had 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 share of a one-time up-front fee and will
amortize this fee over the life of the patent. The Company is also obligated to
pay its 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.
8
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Medco Research, Inc.
This action is in the pre-discovery motion 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.
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
First Quarter of 1998 Compared to First Quarter of 1997
Net Revenues. The Company's first quarter 1998 royalty revenues increased from
$4.304 million to $6.379 million, an increase of 48%, 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 USA, Inc. from its sales of Adenoscan and
Adenocard in the United States and Canada.
Gross Margin. The Company's first quarter 1998 gross margin from adenosine
revenues increased from $3.338 million to $5.115 million, an increase of 53%,
due to the shift in the product sales mix to Adenoscan. Royalty expense from
adenosine sales increased from $.966 to $1.264 million, an increase of 31%, 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 first quarter 1998 total operating expenses
decreased from $2.402 million to $2.353 million, a decrease of 2%, principally
as a result of general and administrative expenditures decreasing from $.699
million to $.625 million , a decrease of 11%, due to lower overall spending in
first quarter 1998. The Company's first quarter 1998 research and development
expenditures were essentially unchanged, from $1.703 million to $1.728 million
for the comparable period in 1997.
Interest Income . Interest income increased 25% mainly due to higher investment
balances.
Earnings Per Share. In the first quarter 1998, the Company had net income of
$3.171 million or $0.30 diluted earnings per share compared to $1.390 million or
$0.13 diluted earnings per share for the year earlier period, on weighted
average common shares and common share equivalents outstanding of 10.743 and
10.730 million, respectively.
9
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Medco Research, Inc.
FINANCIAL CONDITION
As of March 31, 1998, the Company had total cash and investments of $42.817
million comprised of $3.982 million of cash and cash equivalents and $38.835
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 March 31, 1998 was $19.614 million, compared to
$20.159 million as of December 31, 1997.
Included in liabilities at March 31, 1998 is an accrued liability (current and
non-current portion) of $1.1 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 first 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 March 31, 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.
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 operations and
does not anticipate that the Year 2000 will materially impact the Company's
information systems, business and ability to operate in a well-controlled
environment.
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.
10
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Medco Research, Inc.
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.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated herein by reference is a contingency, inclusive, set forth in the
Notes to the Financial Statements set forth in Item 1 of Part I of this Report,
set forth on pages 8 and 9 hereof.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
A form 8-K dated April 2, 1998, reporting in Item 5
thereof the adoption of a Shareholder Rights Plan,
was filed April 15, 1998.
11
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Medco Research, Inc.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Medco Research, Inc.
Date: May 14, 1998 By: /s/ Roger D. Blevins
-----------------------------
Roger D. Blevins, Pharm.D.
President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ Glenn C. Andrews
-----------------------------
Glenn C. Andrews
Chief Financial Officer
Date: May 14, 1998 By: /s/ Adam C. Derbyshire
-----------------------------
Adam C. Derbyshire
Corporate Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,982
<SECURITIES> 12,276
<RECEIVABLES> 7,146
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,404
<PP&E> 718
<DEPRECIATION> 498
<TOTAL-ASSETS> 52,274
<CURRENT-LIABILITIES> 3,790
<BONDS> 0
<COMMON> 52,753
0
0
<OTHER-SE> (4,686)
<TOTAL-LIABILITY-AND-EQUITY> 52,274
<SALES> 0
<TOTAL-REVENUES> 6,993
<CGS> 0
<TOTAL-COSTS> 3,617
<OTHER-EXPENSES> 3,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,376
<INCOME-TAX> 205
<INCOME-CONTINUING> 3,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,171
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
