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, 1997
OR
[X] 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 11, 1998 of $17.5625 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
$180,331,891.
The number of shares outstanding of the Registrant's Common Stock was 10,513,932
at March 11, 1998.
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 1998 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-receptor technologies 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 selectively
acquire product candidates, thereby reducing the costs and risks associated with
basic research and drug discovery. 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 valid and enforceable. See "Patents
and Proprietary Rights" below. The Company then sponsors and directs any
additional preclinical studies and clinical testing needed for product
registration and marketing approval. These late-stage product development
activities are outsourced to independent clinical research organizations to
maximize efficiency and minimize internal overhead. Historically the Company has
licensed the manufacturing and marketing rights to the product to a corporate
partner in exchange for licensing fees and royalty payments on future product
sales. A portion of 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. See "Government Regulation of
Pharmaceuticals" below.
Using this royalty-based business model, which is relatively uncommon in the
pharmaceutical industry, the Company has had two out of four NDAs approved,
commercialized two drugs, and has other compounds 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.
Substantially all of the Company's royalty income in the three year period ended
December 31, 1997 resulted from sales of ADENOCARD and ADENOSCAN in the United
States by Fujisawa-USA, Inc. ("Fujisawa"), the Company's corporate partner.
Statements contained in Item 1 of this report 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 upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. Forward looking statements involve known and unknown risks that could
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cause the Company's actual results to differ materially from expected 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 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 SEC filings.
STRATEGIC PLAN
Whereas large pharmaceutical companies often diversify 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
focuses primarily on the role of adenosine and its receptors in cardiovascular
disease. The Company's expertise in adenosine drug development is
well-recognized in the medical community.
To further concentrate its portfolio of products and development programs, the
Company is engaged in efforts to divest products unrelated to adenosine. In 1997
the Company returned the rights to Tc99m GLUCARATE and Adenosine Triphosphate
(ATP) to their respective licensors. NDAs for VIASCINT(TM) and BIDIL(R) were
filed on April 25, 1996 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. On July
31, 1997 the FDA issued a letter stating that the NDA for VIASCINT was not
approvable. Accordingly, in 1998 the Company may relinquish its rights to
VIASCINT and BIDIL depending on the results of its outlicensing efforts.
PORTFOLIO
ADENOCARD(R) - a sterile formulation of adenosine for injection - indicated for
the treatment of abnormally rapid heartbeats originating in the upper
chambers of the heart, referred to as 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"), a multinational pharmaceutical company
headquartered in France, 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, referred to as
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. During 1997 Sanofi received approval for the drug in 14 additional
member countries of the European Community through the mutual recognition
procedure.
ADENOSINE FOR CARDIOPROTECTION (formerly designated 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. At the 1997
70th Scientific Sessions of the American Heart Association, positive
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clinical results of a Phase II multicenter trial were reported, supporting
the Company's belief, although no assurance can be given, that the drug may
prove to be an effective cardioprotective agent during acute myocardial
infarction. Fujisawa is the Company's partner for this product.
ADENOSINE ANALOGS - chemical derivatives of adenosine, or adenosine analogs,
have been developed by chemists to selectively effect a particular
adenosine receptor subtype. These compounds are referred to as
second-generation technology. By means of options agreements and a research
agreement, the Company has rights to a number of adenosine analogs,
including A2a-, and A3- agonists as well as A1-, and A3- antagonists. The
lead A2a-agonist, designated MRE-0470, is under development as a potential
follow-on to the Company's currently marketed product ADENOSCAN. No
assurance can be given that any of the Company's analogs will result in the
filing or approval of any NDA. See "Government Regulation of
Pharmaceuticals" below.
ADENOSINE ALLOSTERIC MODULATORS - a new series of adenosine-based compounds,
designated ADENOSINE ALLOSTERIC MODULATORS, with a novel mechanism of
action were discovered and synthesized in 1997. The compounds are referred
to as third-generation technology. No assurance can be given that any of
these compounds will result in the filing or approval of any NDA. As of the
end of 1997, the Company had filed patent applications on more than 20
ADENOSINE ALLOSTERIC MODULATORS. No assurance can be given that any patents
will be issued or, if issued, that they will provide any competitive
protection to the Company. See "Patents and Proprietary Rights" below.
PRODUCT AND COMPOUND 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.
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 Austria, Australia, Belgium,
Bulgaria, Chile, the Czech Republic, Denmark, the Dominican Republic, Egypt,
Finland, France, French Polynesia, Germany, Greece, Guatemala, Hungary, India,
Indonesia, Ireland, Italy, Jordan, Kuwait, Latvia, Libya, Luxembourg, Malaysia,
the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Qatar,
Saudi Arabia, Singapore, Slovakia, South Africa, South Korea, Spain,
Switzerland, Taiwan, Thailand, Ukraine, the United Arab Emirates and Uruguay.
Product License: In March 1985, the University of Virginia Alumni Patents
Foundation ("UVAPF") granted to the Company an exclusive license to exploit in
the United States and Canada the use of adenosine for the treatment of
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supraventricular tachycardia that is caused by re-entry in the A-V node or an
accessory pathway of the human heart. (In November 1986, UVAPF 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.
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. The Company granted 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. The Company granted Sanofi 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
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 additional 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 is currently being sought from the health
authorities in each of the member countries. ADENOSCAN is currently marketed in
the United States, Canada, the United Kingdom, Australia, Ireland, and Germany.
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
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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.
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. Intravenous
dipyridamole is generically manufactured and marketed by Lederle. 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. 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
for the first five years after the commencement of commercial sales in each
territory, i.e., until July 2000 for U.S. sales, and thereafter royalties of 25%
of net sales until June 10, 2007, at which time Fujisawa would have a paid-up
license.
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, Fujisawa's Melrose Park, Illinois plant was
qualified by the FDA as an alternate manufacturing facility for ADENOSCAN in
30ml. vials.
Agreement with Sanofi. 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 registered
ADENOSCAN in 14 additional 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
is being 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. The Company signed a development and marketing agreement
with Suntory Limited for cardiovascular uses of adenosine in Japan. During 1997
Suntory initiated a Phase III trial to pursue 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
upon signing, a $300,000 fee in 1995 when the FDA granted marketing clearance in
the U.S. for ADENOSCAN and a payment of $400,000 following Suntory's initiation
of a Phase III trial in Japan in 1997.
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ADENOSINE FOR CARDIOPROTECTION
The Product: The Company's development program with 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 now is referred
to as "ADENOSINE FOR CARDIOPROTECTION" (formerly designated MEDR-640). 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 are
not uncommon. In addition, over 300,000 patients a year undergo coronary artery
bypass graft (CABG) surgery and, despite standard cardioprotective measures,
significant cardiac support is often required during the early postoperative
period.
Development Background: Substantial preclinical data and limited human testing
suggest, although no assurance can be given, that adenosine may be beneficial in
these acute ischemic settings. The results of a single-center pilot
investigation (i.e., significantly reduced injury measured six weeks after the
procedure compared to measurements made at the time of hospital discharge),
suggest that adenosine, as an adjunct to emergency angioplasty, may further
limit the damage associated with acute myocardial infarction. The preliminary
results from another single-center pilot study (i.e., statistically significant
reductions in the cumulative amount of inotropes such as dopamine and
dobutamine, and vasodilators such as nitroglycerin, required in the 24-hour
period following surgery), 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. These preliminary
findings supported the initiation of three Phase II multicenter trials,
including a placebo-controlled trial in CABG surgery (so-called AB-02 trial), a
placebo-controlled trial using emergency (primary) angioplasty in acute
myocardial infarction (so-called ALIVE trial), and a placebo-controlled trial
using thrombolytic therapy in acute myocardial infarction (so-called AMISTAD
trial). Patient enrollment for the AB-02 trial was completed during 1997 and the
results of the study should be available by mid 1998. Due to difficulty in
recruiting patients in a timely manner, the ALIVE trial has been terminated.
Patient enrollment for the AMISTAD trial was completed in July and results of
the study were presented by Dr. Kenneth Mahaffey, Duke Clinical Research
Institute, at the 70th Scientific Sessions of the American Heart Association on
November 10, 1997.
The AMISTAD trial revealed that patients with anterior MI who were treated with
adenosine plus thrombolysis experienced median final infarct size of 15.0%
(n=39) as compared to 45.5% (n=38) for patients treated with thrombolysis alone.
For patients with non-anterior MI, infarct size was similar (11.5% (n=72) vs.
11.5% (n=72)) regardless of the addition of adenosine. Statistical analysis of
the primary endpoint was carried out for the intent-to-treat population using
protocol-specified methods and predetermined variables. As expected, MI location
was the most significant variable related to the final infarct size, since
anterior MI is typically much larger than non-anterior MI. But more importantly,
for those patients with anterior MI, i.e., those at greatest risk, the use of
adenosine resulted in significantly smaller final infarct size (p=0.014).
In a subset of patients, cardiac images were obtained at the time of hospital
admission as well as at time of discharge in order to measure the amount of
heart muscle at risk of irreversible injury prior to treatment. For patients
with anterior MI, the amount of myocardium at risk was similar in the adenosine
and non-adenosine groups, 49.5% (n=12) vs. 51.0% (n=9), respectively. However,
the amount of heart muscle "saved", as a percentage of myocardium at risk, was
greater with adenosine plus thrombolysis (62.3%) vs. thrombolysis alone (15.0%).
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Overall, at any time during hospitalization, cardiogenic shock (5.0% vs. 3.4%),
congestive heart failure (10.1% vs. 6.8%), death (8.4% vs. 5.1%), and
reinfarction (5.0% vs. 2.6%) were more common in the adenosine group compared to
placebo. These differences were less apparent in the anterior MI subgroup and,
overall, these event rates were far too low to draw any conclusions about
clinical risk or benefit.
The study results (i.e., myocardial infarct size, as measured by nuclear
imaging, is reduced by treatment with adenosine), are consistent with the basic
literature describing the cardioprotective effects of adenosine in multiple
animal models from various laboratories around the world. Subsequent clinical
trials are necessary in order to establish the clinical benefit and overall
safety profile of adenosine in this setting. The Company is currently in
discussions with the FDA; its commercial partner, Fujisawa; and other third
parties to determine the next development steps, including the possibility of a
Phase III clinical program.
Regulatory Status: The original IND for Phase I studies was filed in November
1988. The Company has conducted three multicenter Phase II clinical trials in
the U.S., Canada and Argentina under this IND.
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. (No assurance can be
given that any pending application will result in any issued patent, or that any
issued patent will provide any competitive protection to the Company or
Fujisawa.) See "Patent and Proprietary Rights" below. See "Manufacturing and
Marketing" below.
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, free radical
scavengers, and adenosine analogs or modulators, which may compete directly with
ADENOSINE FOR CARDIOPROTECTION.
Manufacturing and Marketing: ADENOSINE FOR CARDIOPROTECTION 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 ADENOSINE FOR
CARDIOPROTECTION in such license agreement were eliminated, and in May 1996, the
parties entered into an agreement to jointly develop ADENOSINE FOR
CARDIOPROTECTION. 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. Either the Company or
Fujisawa may terminate the agreement and proceed alone providing it pays the
other party, in twenty-four equal monthly installments, 100% of the money
invested by the other party in the cardioprotective product, treated as an
advance royalty, and an 8% royalty. If both parties decide to terminate the
agreement then the parties shall share equally in the expenses and proceeds
derived from the sale of the rights to such cardioprotective product to a
third party.
ADENOSINE ANALOGS
The Compounds: Chemical derivatives, or analogs, of adenosine have been
developed in an effort to improve the therapeutic utility of adenosine. The
actions of adenosine are controlled or mediated through receptors, or specific
recognition sites, on the surface of cells. Four adenosine receptor subtypes are
known to exist (A1-, A2a-, A2b-, and A3-) and each is responsible for a
different function. Intravenous adenosine, or first-generation technology
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(commercially available as ADENOCARD or ADENOSCAN), is a non-selective agonist,
i.e., it stimulates all receptor subtypes. Adenosine analogs, or
second-generation technology, theoretically may be selective, i.e., may act
through a specific receptor subtype. In addition, certain analogs may exhibit
activity by oral administration.
Development Background: Theoretical rationale and preclinical data support the
investigation of several A2a-agonists for a variety of applications including:
diagnosis of coronary artery disease, promotion of wound healing, treatment of
coronary artery disease, prevention of restenosis, and treatment of congestive
heart failure. The Company's lead A2a-receptor agonist, MRE-0470, should
theoretically produce coronary vasodilation (via stimulation of the
A2a-receptor) while not producing transient heart block and arrhythmias (the
effects of A1-receptor stimulation). Hence, the compound may hold potential as a
second-generation pharmacologic stressor. With respect to MRE-0470, necessary
animal toxicology and pharmacoloy studies are underway. In addition to these
A2a-agonists, a lead A1-antagonist has been selected for pre clinical
development (refer to Biomedica Foscama in "Product License" below), and an
A3-agonist has been identified (refer to University of Ferrara in "Product
License" below).
Regulatory Status: Work is in progress to file an IND.
Competition: ADENOCARD, ADENOSCAN, generic dipyridamole
Product License: The Company has an exclusive worldwide license to multiple U.S.
patents and foreign counterparts held by Discovery Therapeutics, Inc. (DTI)
related to A2a-agonists. The Company has an exclusive option through January
1999 to acquire New York University's worldwide rights for the use of adenosine
A2a-receptor agonists for the promotion of wound healing. The Company has an
option agreement with the University of Massachusetts to acquire exclusive
rights to its patents issued and pending worldwide for the use of adenosine
A2a-receptor agonists for the promotion of positive inotrophic effects in
compromised myocardium. The Company also has an option agreement with Biomedica
Foscama to acquire exclusive rights to its library of adenosine A1-antagonists
patents issued and pending worldwide. The Company has expanded its research
agreement with the University of Ferrara to include agonists and antagonists
which exert their actions at the adenosine A1- and A3- receptor subtypes. A
Provisional Patent Application has been filed with the United States Patent and
Trademark office on a lead A3-agonist. (No assurance can be given that any
pending application will result in any issued patent, or that any issued patent
will provide any competitive protection to the Company or Fujisawa.)
ADENOSINE ALLOSTERIC MODULATORS
The Compounds: ADENOSINE ALLOSTERIC MODULATORS affect the action of endogenous
adenosine in the form of enhancement or inhibition by binding at sites distinct
from, but functionally linked to, the primary recognition site of a receptor.
Binding site studies and functional assays have shown that the enhancers
"amplify" the effects of adenosine. Research is underway to establish the exact
molecular mechanisms of this class of compounds. Allosteric enhancers may
increase the actual number of adenosine receptors in the "active" or
high-affinity state. Accordingly, although no assurance can be given, allosteric
enhancers may be therapeutically useful when internal adenosine signals are
weak.
Development Background: This new series of compounds was discovered and
synthesized in the laboratories of Professor Giovanni Baraldi at the University
of Ferrara, Italy as part of a basic research collaboration agreement between
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the Company and the University of Ferrara. The agreement grants the Company
exclusive ownership of all intellectual properties relating to allosteric
modulators derived from the collaboration.
Product License: The Company has filed patent applications with the U.S. Patent
and Trademark Office and intends to file companion applications overseas for the
first series of compounds synthesized and tested by Dr. Baraldi and colleagues.
(No assurance can be given that any pending application will result in any
issued patent, or that any issued patent will provide any competitive protection
to the Company or Fujisawa.)
Regulatory Status: The subject compounds are in the research/discovery stage,
and the Company therefore has no need to commence regulatory work.
Competition: The Company has no knowledge of the existence of any additional
adenosine allosteric inhibitors.
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, and
regulatory approval can never be predicted nor assured.
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
10
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Medco Research, Inc.
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
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
11
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Medco Research, Inc.
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, ADENOSCAN and ADENOSINE FOR CARDIOPROTECTION
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,
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.
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Medco Research, Inc.
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.
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 and
ADENOSINE FOR CARDIOPROTECTION. This third party also has an issued Canadian
patent which appears to have priority over the Company's Canadian patent for
ADENOSCAN. The third party already has told the Company and Fujisawa that it
would like to enter into a license agreement covering its pending claims, and
negotiations are on-going. 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.
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.
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 $6,902,092, $5,839,278, and
$8,535,187 during the years ended December 31, 1997, 1996 and 1995,
respectively.
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Medco Research, Inc.
EMPLOYEES
As of March 11, 1998 the Company employed twenty-three 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 extended this lease through November 30, 1998
with the Company's sole discretion to extend for an additional 30 days until
December 31, 1998. The Company has entered into a letter of intent to lease a
facility no later than December 31, 1998 which will be adequate for the
Company's present and future operations.
ITEM 3. LEGAL PROCEEDINGS
The Company prevailed in the liability claims pending against it as reported in
its 1996 Form 10-K: In November 1997, the American Arbitration Association
denied, in its entirety, the damage claims of Dr. Eliezer Rapaport; and in May
1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed
the dismissal of the class action litigation alleging the Company had violated
federal securities laws. Both decisions are final and binding on the parties.
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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Medco Research, Inc.
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.
Quarter Ended High Low
------------- ---- ---
Calendar 1997:
March 31, 1997 $13 3/8 $7 3/4
June 30, 1997 9 13/16 7 3/4
September 30, 1997 14 9 5/8
December 31, 1997 17 1/8 12 3/4
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
The Company had 237 owners of record and in excess of 4,911 beneficial owners of
its Common Stock as of March 11, 1998, 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 ended
December 31, 1997, 1996, 1995, 1994 and 1993 has been derived from the audited
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and the notes thereto, and other financial
information included elsewhere in this report.
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Medco Research, Inc.
Summary Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS Years Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Revenue $22,782,306 $15,824,073 $13,007,734 $10,688,619 $9,345,256
Costs and Expenses 12,569,177 11,502,428 16,540,176 15,103,087 12,903,575
Net Income (Loss) 10,213,128 4,321,645 (3,532,442) (4,414,468) (3,558,319)
Basic Earnings (Loss) per
Common Share $0.97 $0.40 $(0.32) $(0.40) $(0.32)
Diluted Earnings (Loss) per
Common Share $0.96 $0.40 $(0.32) $(0.40) $(0.32)
Weighted Average Shares
Outstanding 10,545,533 10,917,920 11,023,921 11,144,938 11,182,376
Weighted Average Shares
Outstanding Assuming
Dilution 10,620,785 10,938,357 11,023,921 11,144,938 11,182,376
Cash Dividends Declared
per Common Share - - - - -
Summary Consolidated Balance Sheet Data:
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Working Capital $20,158,833 $18,372,970 $27,734,612 $24,883,199 $13,089,253
Total Assets 49,612,714 42,628,404 43,121,656 44,680,299 49,298,432
Stockholders' Equity 44,656,284 36,499,005 35,099,683 38,901,572 45,577,377
Accumulated (Deficit) (1,180,819) (11,393,947) (15,715,592) (12,183,150) (7,768,682)
Net Book Value
Per Share 4.25 3.40 3.19 3.53 4.07
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
For calendar 1997, adenosine royalties (ADENOCARD and ADENOSCAN) increased 49%
and operating expenses increased 5% which resulted in a net income of
$10,213,128 for 1997, or $0.97 basic earnings per share, compared to $4,321,645,
or $0.40 basic earnings per share, for 1996. Earnings per share on a diluted
basis for 1997 and 1996 were $0.96 and $0.40, respectively. Two-thirds of all
royalty income in the two-year period ended December 31, 1997 resulted from
Fujisawa sales of ADENOSCAN in the United States.
In February 1997, Sanofi successfully registered ADENOSCAN in 14 member
countries of the European Community through the mutual recognition procedure. In
March 1997, the Company formed a basic research collaboration with Professor
Giovanni Baraldi, Department of Pharmaceutical Chemistry, University of Ferrara,
Italy, to discover novel adenosine-receptor compounds. In June 1997, the
Company's development and commercial partner for adenosine in Japan, Suntory
Limited, announced plans to initiate Phase III clinical trials of ADENOSCAN for
use with thallium perfusion imaging to detect coronary artery disease in
patients unable to exercise adequately. Also in June, the Company obtained an
option from NYU to exclusively license worldwide rights for the development,
manufacturing, use and sale of adenosine A2a-receptor agonists in the field of
wound healing. In August 1997, the Company and Discovery Therapeutics, Inc.
16
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Medco Research, Inc.
entered into an alliance dedicated to the discovery, development and
commercialization of compounds that stimulate the A2a subfamily of adenosine
receptors ("A2a-agonists"). In October 1997, the Company announced the discovery
of ADENOSINE ALLOSTERIC MODULATORS. In November 1997, the Company's results from
the AMISTAD multi-center trial (Acute Myocardial Infarction Study of Adenosine)
and the use of adenosine combined with heparin in the treatment of chronic
stable angina were reported at the 70th Scientific Sessions of the American
Heart Association in Orlando, Florida. In December 1997, the Company obtained an
option from Biomedica Foscama to exclusively license its library of adenosine
A1-antagonists.
RESULTS OF OPERATIONS
The accompanying consolidated financial statements and certain selected
financial data have been presented for the calendar years ended December 31,
1997, 1996 and 1995. The Company's presentation of the Consolidated Statements
of Operations reflect gross margin related to royalty revenues followed by
operating expenses and other income (expense).
Calendar Year 1997 Compared to Calendar Year 1996
Royalty Revenues. The Company's 1997 royalty revenue increased from $13,453,958
to $20,000,366, an increase of 49%, primarily due to continued
quarter-to-quarter increases in unit sales of ADENOSCAN by Fujisawa, the
Company's North American licensee. Fujisawa is responsible for substantially all
of the royalty revenue of the Company.
Gross Margin. The Company's 1997 gross margin from adenosine revenues increased
from $10,880,081 to $17,015,292, an increase of 56% due to the continued shift
in the product sales mix to ADENOSCAN and continued quarter-to-quarter increases
in unit 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, increased from
$2,573,877 to $2,985,074, an increase of 16%.
Operating Expenses. Total operating expenses increased from $8,841,551 to
$9,295,693, an increase of 5% due to an increase in research and development
expenditures for ADENOSINE FOR CARDIOPROTECTION and ADENOSINE ANALOGS.
Research and development costs increased from $5,839,278 to $6,902,092, an
increase of 18%. Research and development expenditures were higher during 1997
primarily due to nearing the completion of the Company's three multi-center
Phase II trials associated with ADENOSINE FOR CARDIOPROTECTION and pursuing the
filing of an IND for MRE-0470, an adenosine A2a-receptor agonist for the
diagnosis of coronary artery disease.
General and administrative expenses decreased from $3,002,273 to $2,393,601, a
decrease of 20%. This reduction is primarily the result of lower overall
spending in 1997 and one-time employee related charges incurred in 1996.
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Medco Research, Inc.
Other Income. Interest income increased from $2,020,115 to $2,099,550, an
increase of 4%. Investment income was higher in 1997 mainly due to higher
investment balances. Other income increased from $350,000 to $682,389, an
increase of 95%. This increase 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.
Basic Earnings Per Share. Basic earnings per share increased from $0.40 per
share in 1996 to $0.97 per share in 1997 on weighted average common shares
outstanding of 10,917,920 and 10,545,533, respectively. The basic earnings per
share reflects net income of $4,321,645 and $10,213,128 in 1996 and 1997,
respectively.
Calendar Year 1996 Compared to Calendar Year 1995
Royalty 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 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 of 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. Expenditures in 1996 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. 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
18
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Medco Research, Inc.
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.
Basic Earnings (Loss) Per Share. Basic earnings/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 outstanding of 11,023,921 and 10,917,920, respectively.
The basic earnings/loss per share reflects a net loss of $3,532,442 and income
of $4,321,645 in 1995 and 1996, respectively.
FINANCIAL CONDITION
As of December 31, 1997, the Company had total cash and investments of
$40,529,469 comprised of $2,726,486 of cash and cash equivalents and $37,802,983
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 December 31, 1997 was $20,158,833 compared to $18,372,970
as of December 31, 1996.
Included in liabilities at December 31, 1997 is an accrued liability (current
and non-current portion) of $1.5 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.
The Company recognized a full valuation allowance for its deferred tax asset 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. See Note 9 to the Company's
Financial Statements included in Item 8 below.
ADENOSCAN is currently marketed in the United States, Canada, the United
Kingdom, Australia, Ireland, and Germany. ADENOCARD is currently marketed in the
United States and Canada, the United Kingdom plus Austria, Australia, Belgium,
Bulgaria, Chile, the Czech Republic, Denmark, the Dominican Republic, Egypt,
Finland, France, French Polynesia, Germany, Greece, Guatemala, Hungary, India,
Indonesia, Ireland, Italy, Jordan, Kuwait, Latvia, Libya, Luxembourg, Malaysia,
the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Qatar,
Saudi Arabia, Singapore, Slovakia, South Africa, South Korea, Spain,
Switzerland, Taiwan, Thailand, Ukraine, the United Arab Emirates and Uruguay.
The Company will not generate royalties from the sale of its products until its
licensees receive marketing clearance from the FDA or 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 Standards No. 128 ("SFAS
No. 128"), "Earnings per Share," which applies to all entities with publicly
held common stock or potential common stock. SFAS No. 128 requires the Company
to change its method of computing, presenting, and disclosing earnings per share
information. This Statement replaces the presentation of primary earnings per
share (EPS) with a presentation of basic EPS. SFAS No. 128 also requires dual
19
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Medco Research, Inc.
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The Company has adopted the
Statement and accordingly, restated all prior-period data presented to conform
with the provisions of SFAS No. 128. See Note 1, under the caption "Earnings Per
Share", to the Company's 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.
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.
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.
20
<PAGE>
Medco Research, Inc.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Medco Research, Inc. are
included in this report:
Page 22 Report of Independent Accountants
Page 23 Independent Auditors' Report
Page 24 Consolidated Balance Sheets--December 31, 1997 and 1996
Page 25 Consolidated Statements of Operations--Years Ended December
31, 1997, 1996 and 1995
Page 26 Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 1997, 1996 and 1995
Page 27 Consolidated Statements of Cash Flows--Years Ended December
31, 1997, 1996 and 1995
Page 29 Notes to Consolidated Financial Statements
21
<PAGE>
Medco Research, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Medco Research, Inc.:
We have audited the accompanying consolidated balance sheet of Medco Research,
Inc. and subsidiary as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medco Research,
Inc. and subsidiary as of December 31, 1997 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
January 22, 1998
22
<PAGE>
Medco Research, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Medco Research, Inc.:
We have audited the accompanying consolidated balance sheet of Medco Research,
Inc. and subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two-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 the results of their operations and
their cash flows for each of the years in the two-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.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
January 28, 1997
23
<PAGE>
Medco Research, Inc.
<TABLE>
Medco Research, Inc.
Consolidated Balance Sheets
<CAPTION>
<S> <C>
December 31,
----------------------------------------
1997 1996
----------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,726,486 $ 9,106,695
Investments held to maturity (Note 2) 14,272,791 6,439,219
Accounts and notes receivable:
Royalties 6,003,629 3,794,264
Other 244,486 2,227,361
Accrued interest income 563,294 376,864
Prepaid expenses and other 503,568 292,892
----------------------------------------
Total current assets 24,314,254 22,237,295
Investments held to maturity (Note 2) 23,530,192 19,578,934
Deferred asset (Note 6) - 124,212
Property and equipment, at cost, net of accumulated depreciation (Note 3) 243,996 307,521
Patent, trademark and distribution rights, at cost, net of accumulated amortization
of $277,406 (1997) and $62,268 (1996) (Note 5) 1,524,272 380,442
----------------------------------------
Total assets $49,612,714 $42,628,404
========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,378,933 $ 2,308,857
Accrued royalties (Note 5) 1,300,650 1,179,557
Accrued compensation 475,838 375,911
----------------------------------------
Total current liabilities 4,155,421 3,864,325
Deferred revenue (Note 7) - 548,202
Deferred royalty payment (Note 6) 451,009 1,716,872
Other long-term liabilities 350,000 -
Stockholders' equity (Note 8):
Common stock, no par value, authorized 40,000,000 shares; shares issued of
11,182,832 and 11,155,832 at December 31, 1997, and 1996, respectively;
shares
outstanding of 10,513,932 and 10,740,032 at December 31, 1997 and 1996, 52,513,135 52,216,010
respectively
Accumulated deficit (1,180,819) (11,393,947)
Cost of stock held in treasury, 668,900 and 415,800 shares at December 31, 1997
and 1996, respectively (6,676,032) (4,323,058)
----------------------------------------
Total stockholders' equity 44,656,284 36,499,005
----------------------------------------
Commitments and contingencies (Notes 5, 6 and 11)
----------------------------------------
Total liabilities and stockholders' equity $49,612,714 $42,628,404
========================================
See accompanying notes to consolidated financial statements.
24
<PAGE>
Medco Research, Inc.
Consolidated Statements of Operations
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
Royalty revenue (Note 5) $20,000,366 $13,453,958 $9,770,124
Royalty expense (Note 5) 2,985,074 2,573,877 3,955,551
------------------------------------------------------
Gross margin 17,015,292 10,880,081 5,814,573
------------------------------------------------------
Operating expenses:
Research and development costs 6,902,092 5,839,278 8,535,187
General and administrative expenses 2,393,601 3,002,273 3,949,438
------------------------------------------------------
9,295,693 8,841,551 12,484,625
------------------------------------------------------
Operating income (loss) 7,719,599 2,038,530 (6,670,052)
------------------------------------------------------
Other income:
Interest income 2,099,550 2,020,115 2,237,610
Other income (Note 7) 682,389 350,000 1,000,000
------------------------------------------------------
2,781,939 2,370,115 3,237,610
------------------------------------------------------
Income (loss) before income taxes 10,501,538 4,408,645 (3,432,442)
Provision for income taxes (Note 9) 288,410 87,000 100,000
------------------------------------------------------
Net income (loss) $10,213,128 $ 4,321,645 $(3,532,442)
======================================================
Basic earnings (loss) per share $0.97 $0.40 $(0.32)
======================================================
Diluted earnings (loss) per share $0.96 $0.40 $(0.32)
======================================================
Weighted average shares outstanding 10,545,533 10,917,920 11,023,921
======================================================
Weighted average shares outstanding
assuming dilution 10,620,785 10,938,357 11,023,921
======================================================
See accompanying notes to consolidated financial statements.
25
<PAGE>
Medco Research, Inc.
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 December
31, 1994 11,020,947 $51,376,034 $(291,312) $(12,183,150) $ - $38,901,572
Stock options 148,585 953,757 - - - 953,757
exercised
Stock held in (142,100) - - - (1,534,707) (1,534,707)
treasury
Compensation
expense
related to - 44,568 - - - 44,568
stock options
Stock
repurchased (13,700) (158,349) - - - (158,349)
and retired
Change in the
value of
available for - - 425,284 - - 425,284
sale
investment
securities
Net loss - - - (3,532,442) - (3,532,442)
---------------------------------------------------------------------------------------------------
Balance at
December 31, 11,013,732 52,216,010 133,972 (15,715,592) (1,534,707) 35,099,683
1995
Stock held in (273,700) - - - (2,788,351) (2,788,351)
treasury
Change in the
value of
available for - - (133,972) - - (133,972)
sale
investment
securities
Net income - - - 4,321,645 - 4,321,645
---------------------------------------------------------------------------------------------------
Balance at
December 31, 10,740,032 52,216,010 - (11,393,947) (4,323,058) 36,499,005
1996
Stock options 27,000 297,125 - - - 297,125
exercised
Purchase of
stock held in (253,100) - - - (2,352,974) (2,352,974)
treasury
Net income - - - 10,213,128 - 10,213,128
===================================================================================================
Balance at
December 31, 10,513,932 $52,513,135 $ - $(1,180,819) $(6,676,032) $44,656,284
1997
===================================================================================================
See accompanying notes to consolidated financial statements.
26
<PAGE>
Medco Research, Inc.
Medco Research, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
Operating activities
Net income (loss) $10,213,128 $4,321,645 $(3,532,442)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 101,965 143,934 127,213
Amortization of patent, trademark and distribution
rights 573,817 51,403 9,085
Gain on investments held to maturity - - (45)
Gain on investments available for sale - (49,258) (7,302)
Net amortization of investment discount (101,869) (260,912) (686,023)
Loss on property and equipment 10,852 - -
Loss on disposal of patents 14,759 - -
Settlement payment from Fujisawa - - 2,000,000
Settlement payment to Abbott - - (2,000,000)
Compensation expense related to stock options - - 44,568
Changes in operating assets and liabilities:
Accounts receivable (226,490) (2,286,735) 241,480
Accrued interest income (186,430) (124,644) 152,893
Prepaid expenses and other 109,876 34,427 12,558
Deferred asset 124,212 1,727,703 298,085
Accounts payable and accrued expenses 199,451 (126,659) 626,806
Accrued royalties 121,093 (129,764) (934,784)
Deferred revenue (548,202) (751,798) (650,000)
Deferred royalty payment (1,265,863) (884,353) (148,775)
-----------------------------------------------------------
Net cash provided by (used in) operating activities 9,140,299 1,664,989 (4,446,683)
-----------------------------------------------------------
(Continued)
27
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows (continued)
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
Investing activities
Purchase of securities held to maturity (20,161,540) (45,631,850) (23,963,079)
Purchase of securities available for sale - (76,012) (366,275)
Maturity of securities held to maturity 8,478,579 46,450,367 28,171,395
Principal repayments on securities held to maturity - - 1,424,924
Proceeds from sale of securities available for sale - 5,655,967 3,312,378
Purchases of property and equipment (51,298) (121,786) (141,423)
Proceeds from sale of property and equipment 2,006 - -
Purchases of patent, trademark and distribution rights (1,732,406) (351,403) -
---------------------------------------------------------------
Net cash provided by (used in) investing activities (13,464,659) 5,925,283 8,437,920
---------------------------------------------------------------
Financing activities
Purchase of stock for retirement - - (158,349)
Net proceeds from exercise of stock options 297,125 - 953,757
Purchase of stock held in treasury (2,352,974) (2,788,351) (1,534,707)
---------------------------------------------------------------
Net cash used in financing activities (2,055,849) (2,788,351) (739,299)
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (6,380,209) 4,801,921 3,251,938
Cash and cash equivalents at beginning of year 9,106,695 4,304,774 1,052,836
---------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,726,486 $ 9,106,695 $ 4,304,774
===============================================================
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.
</TABLE>
28
<PAGE>
Medco Research, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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's business approach has been to carefully evaluate and selectively
acquire product candidates, thereby reducing the costs and risks associated with
basic research and drug discovery. 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 any additional pre clinical studies and clinical testing
needed for product registration and marketing approval. These late-stage product
development activities are outsourced to independent clinical research
organizations to maximize efficiency and minimize internal overhead.
Historically the Company has licensed the manufacturing and marketing rights to
the product to a corporate partner in exchange for licensing fees and royalty
payments on future product sales. A portion of 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.
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 No. 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
29
<PAGE>
Medco Research, Inc.
market prices of comparable instruments. SFAS No. 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 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.
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's investments are
accounted for in accordance with SFAS No.115, "Accounting for Certain
Investments in Debt and Equity Securities". 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's
investments are accounted for as held-to-maturity securities as of December 31,
1997 and 1996. 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
product.
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.
30
<PAGE>
Medco Research, Inc.
1. Summary of Significant Accounting Policies (continued)
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.
The Company invests its excess cash primarily in U.S. Government and
high-quality corporate debt securities and commercial paper. 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 as 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
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), 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, "Accounting for Stock Issued to Employees",
and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants 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.
31
<PAGE>
Medco Research, Inc.
1. Summary of Significant Accounting Policies (continued)
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 (loss) used for both basic and dilutive earnings per share for
each of the years ended December 31, 1997, 1996, and 1995 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 (loss) per share
for each of the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
---------------- --------------- ---------------
<S> <C>
Basic-weighted average shares outstanding 10,545,533 10,917,920 11,023,921
Net effect of dilutive stock options
based on treasury stock method
using average market price 75,252 20,437 -
-------------- --------------- -----------------
Weighted average shares assuming
dilution 10,620,785 10,938,357 11,023,921
============== =============== =================
</TABLE>
Adoption of New Accounting Pronouncements
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 ending December 31, 1998. SFAS No. 131 requires the
Company to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Preliminary analysis of this pronouncement by the Company indicates
that the pronouncement will not have a material impact on the Company.
The Company will adopt 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
32
<PAGE>
Medco Research, Inc.
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. Preliminary analysis of this
pronouncement by the Company indicates that the pronouncement will not have a
material impact on the Company.
2. Investments
The aggregate values of investment securities at December 31, 1997 and 1996
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
----------------- ---------------------- ---------------------- -------------------
1997 Held to maturity
U.S. Government $26,003,402 $40,248 $ - $26,043,650
Corporate Obligations 11,799,581 - (84,645) 11,714,936
================= ====================== ====================== ===================
Total securities held to maturity $37,802,983 $40,248 $(84,645) $37,758,586
================= ====================== ====================== ===================
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
================= ====================== ====================== ===================
</TABLE>
There were no realized gains or losses in 1997. 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.
The following represents the contractual maturities of investments held as of
December 31, 1997.
Less than 1 year $14,272,791
1 to 5 years 23,530,192
===========
Total $37,802,983
===========
3. Property and Equipment
December 31,
1997 1996
-----------------------------------
Property and equipment $717,675 $785,269
Accumulated depreciation (473,679) (477,748)
===================================
$243,996 $307,521
===================================
33
<PAGE>
Medco Research, Inc.
4. Leases
The Company leases office space under an operating lease which expires in July
1998. Lease expense approximated $210,800, $206,100, and $203,700 in 1997, 1996
and 1995, respectively. The Company extended this lease through November 30,
1998 with the Company's sole discretion to extend for an additional 30 days
until December 31, 1998. Future minimum lease payments under this lease
agreement and its extension through December 31, 1998 are approximately
$220,000.
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 as of
December 31, 1997 to pay $550,000 in nonrefundable payments which are payable in
quarterly installments of $50,000 through July 1, 2000. The Company may also be
required to pay a maximum of $6,500,000 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
34
<PAGE>
Medco Research, Inc.
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 period ended December 31,
1995 resulted from Fujisawa sales of ADENOCARD in the United States.
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. In May
1996, the parties entered into an agreement to jointly develop adenosine-based
products having indications as cardioprotective agents. 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 29% of net sales for the first
five years and 25% thereafter within the territories. The companies share
equally all costs of development and any royalties due to third parties.
Two-thirds of all royalty income in the two-year period ended December 31, 1997
resulted from Fujisawa sales of 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.
In 1997 the Company entered into a Development and Commercialization Agreement
(the "Agreement") with Discovery Therapeutics, Inc. ("DTI") dedicated to the
discovery, development and commercialization of compounds that stimulate the A2a
subfamily of adenosine receptors ("A2a-agonists"). Under the terms of the
Agreement, DTI granted to the Company an exclusive worldwide license to DTI's
current intellectual property related to A2a-agonists. The Company has exclusive
worldwide rights to market and sell developed compounds, either directly or
through sublicense. In exchange for these rights, the Company agreed to pay DTI
certain licensing fees, development milestones and royalties on future sales of
A2a-agonists.
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
35
<PAGE>
Medco Research, Inc.
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
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 for years ended December 31, 1997 and 1996 was an
accrued liability (current and non-current portion) of approximately $1.5
million and $2.5 million, respectively, relating to the balance of the Company's
guaranteed royalty obligation to Abbott. Included in assets at December 31, 1996
was 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 received a 29% royalty from ADENOSCAN net sales of which
4% was applied to the deferred asset and 25% was recognized as royalty revenue.
At such time 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. As of December 31, 1997 the deferred asset was
fully recovered and the Company will recognize royalty revenue of 29% through
July 2000.
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
received from Suntory Limited ("Suntory"), the Company's development and
marketing partner for adenosine in Japan, a $1,000,000 licensing fee which
became non-refundable upon satisfactory pre clinical and toxicology
accomplishments. During 1995, the Company substantially satisfied pre clinical
and toxicology accomplishments and accordingly recognized $1,000,000 as other
income and received an additional $300,000 licensing fee upon the NDA approval
of ADENOSCAN which became non-refundable upon Suntory's initiation of Phase III
clinical trials. During 1997, the Company recognized the $300,000 licensing fee
as income and also received and recognized a $400,000 payment as other income
following Suntory's announcement of the initiation of Phase III clinical trials
of ADENOSCAN in Japan.
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
36
<PAGE>
Medco Research, Inc.
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.
During third quarter 1996, the Company deferred $248,202 of royalty revenue
associated with the purchase of a multi-month supply of ADENOSCAN by a major
radiopharmacy as a result of back-end loaded incentives. During 1997, the
Company recognized the $248,202 of deferred revenue as royalty revenue for
back-end loaded incentives which were recognized during 1997.
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
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, and such Company contributions to vest equally over
the first four years of service. Following the fourth year of service, all
matching contributions are fully vested. In 1997 and 1996, the Company accrued
approximately $28,000 and $22,000, respectively, for the match of 50% of each
employee's annual plan contribution up to a maximum of 2% of the salary of such
employee based on achievement of Company performance goals. The Company did not
have a 401(K) match plan for fiscal year 1995; therefore, no match was made in
1995.
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 year ended December 31, 1995, options covering 25,000 shares with an
aggregate market value of $259,375 were exercised by the tendering of 16,415
shares with a market value of $170,306 and minimal cash payments. During the
year ended December 31, 1997, 27,000 shares were exercised. During the year
ended December 31, 1996 there were no options exercised.
37
<PAGE>
Medco Research, Inc.
Changes in the status of options are summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
---------------------------------------------------------------------------------------------
<S> <C>
Outstanding at beginning of year 781,982 $11 610,732 $15 781,870 $15
Granted 400,080 14 461,000 10 241,000 13
Exercised (27,000) 11 - - (165,000) 7
Expired or canceled (171,132) 14 (289,750) 17 (247,138) 17
=============================================================================================
Outstanding at end of year 983,930 $12 781,982 $11 610,732 $15
=============================================================================================
Available for grant at end of year 56,583 N/A 285,531 N/A 456,781 N/A
Exercisable at end of year 394,275 N/A 281,257 N/A 341,170 N/A
Weighted average fair value of
options granted $6.05 N/A $3.92 N/A $5.32 N/A
Price range of options $8.63-$15.88 N/A $8.63-$17.13 N/A $10.63-$26.69 N/A
Price range of options exercised $10.13-$13.25 N/A N/A N/A $6.81 N/A
Options outstanding and exercisable as of December 31, 1997 are summarized as
follows:
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------------
Weighted
Average Weighted
Range of Exercise Number Remaining Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ----------------- ----------------- ----------------- ---------------- -------------------
$8 - $11 434,500 8.5 years $10 232,125 $10
$12 - $16 549,430 8.7 $14 162,150 $13
----------------- ----------------
$8 - $16 983,930 8.6 $12 394,275 $11
================= ================
</TABLE>
As of December 31, 1997, the Company had a warrant outstanding allowing the
holder to purchase 40,000 shares of the Company's common stock on or before
November 16, 2000 at an exercise price of $13.50 per share. The Company has
reserved 1,080,513 shares of common stock for future exercise of stock options
and warrants.
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 APB Opinion No. 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 1997, 1996 and 1995: dividend yield zero (all
years); expected volatility of 37% (1997) and 35% (1996 and 1995); risk-free
38
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Medco Research, Inc.
interest rate of 6% (all years); and expected life of 5 years for all options.
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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1997 1996 1995
------------------- -------------------- --------------------
Net income (loss): As reported $10,213,128 $4,321,645 $(3,532,442)
Pro forma 8,674,702 2,806,507 (4,472,574)
Basic earnings (loss) per share: As reported $0.97 $0.40 $(0.32)
Pro forma 0.82 0.26 (0.40)
Diluted earnings (loss) per share: As reported $0.96 $0.40 $(0.32)
Pro forma 0.82 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,
---------------------------------------------------------
1997 1996 1995
------------------ ------------------- ------------------
Current expense:
Federal $208,410 $ 87,000 $ -
State - - -
Foreign taxes 80,000 - 100,000
------------------ ------------------- ------------------
288,410 87,000 100,000
------------------ ------------------- ------------------
Deferred expense:
Federal - - -
State - - -
------------------ ------------------- ------------------
- - -
------------------ ------------------- ------------------
Total $288,410 $ 87,000 $100,000
================== =================== ==================
39
<PAGE>
Medco Research, Inc.
The components of deferred tax assets and the deferred tax liabilities as of
December 31, 1997 and December 31, 1996 are as follows:
<CAPTION>
Years Ended December 31,
------------------- ------------------
1997 1996
------------------- ------------------
Deferred tax assets:
Tax loss carryforwards $ 3,214,000 $ 6,813,000
Capital losses 381,000 456,000
Tax credit carryforwards 1,625,000 1,305,000
Compensation accruals 33,000 49,000
Charitable Contributions 25,000 -
Deferred revenue 567,000 524,000
Depreciation and Amortization 24,000
------------------- ------------------
Total gross deferred tax assets 5,869,000 9,147,000
Valuation allowance (5,869,000) (9,131,000)
------------------- ------------------
Net deferred tax assets 16,000
-
------------------- ------------------
Deferred tax liabilities:
Depreciation and amortization - 4,000
Prepaid expenses - 12,000
------------------- ------------------
Total gross deferred tax liabilities - 16,000
------------------- ------------------
Net deferred tax asset $ - $ -
=================== ==================
</TABLE>
The Company will recognize a full valuation allowance for its deferred tax asset
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 actual income tax expense for 1997, 1996 and 1995 differs from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the earnings before income taxes) as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997 December 31, 1996 December 31, 1995
-------------------------------- ----------------------------- -------------------------------
Amount % Amount % Amount %
------------------ ------------- ----------------- ----------- ----------------- -------------
Computed "expected" tax expense
(benefit) $3,570,523 34.0% $1,498,940 34.0% $(1,167,030) (34.0)%
Change in valuation allowance (3,262,000) (31.1) (1,725,000) (39.1) 2,706,000 78.8
Tax credits - - 8,000 0.2 (488,664) (14.2)
State tax expense (benefit) 12,366 0.1 325,934 7.4 (430,245) (12.5)
Write down of marketable
securities - - (29,469) (0.7) (315,111) (9.2)
Stock options (101,023) (1.0) - - (278,779) (8.1)
Foreign taxes 52,940 0.5 - - 66,000 1.9
Other 15,605 0.2 8,595 0.2 7,829 0.2
================== ============= ================= =========== ================= =============
Current provision $ 288,410 2.7% $ 87,000 2.0% $ 100,000 2.9%
================== ============= ================= =========== ================= =============
</TABLE>
At December 31, 1997, the Company had Federal net operating loss carryforwards
of approximately $8,500,000 and $9,000,000 for regular tax and alternative
40
<PAGE>
Medco Research, Inc.
minimum tax purposes, respectively. The net operating loss carryforwards expire
in various amounts from 2008 to 2010. Additionally, the Company has net
operating loss carryforwards of approximately $6,000,000 for state income tax
purposes which expire between 1998 and 2000.
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, 1997, the Company had available approximately $1,332,000,
$289,000 and $4,000 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 2011.
The Company has a capital loss carryover of $974,000 at December 31, 1997, of
which $47,000 will expire in 1999 and the
remainder will expire in 2000.
The Company made income tax payments of $528,750 and $87,000 for the years ended
December 31, 1997 and 1996, respectively. There were no income tax payments made
during the year ended December 31, 1995.
10. Related Party Transactions
Fees of $144,000 as well as related travel expenses were paid in 1997, 1996, and
1995 to an individual director for consulting with the Company on matters such
as acquisitions, financial public relations and pending litigation.
11. Contingencies
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 pre-discovery motion stage. Fujisawa has advised the
Company that Fujisawa intends to vigorously defend this action and believes it
41
<PAGE>
Medco Research, Inc.
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.
The Company prevailed in the liability claims pending against it as reported in
its 1996 Form 10-K: In November 1997, the American Arbitration Association
denied, in its entirety, the damage claims of Dr. Eliezer Rapaport; and in May
1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed
the dismissal of the class action litigation alleging the Company had violated
federal securities laws. Both decisions are final and binding on the parties.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No information is required by this Item; however, information pertaining to
this Item is required and contained in the Company's definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders under the caption "Ratification of
the Appointment of Independent Accountants".
42
<PAGE>
Medco Research, Inc.
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 1998 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 1998 Annual Meeting of Shareholders under the
caption "Executive Compensation" and is incorporated herein by this reference.
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 1998 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 1998 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:
Independent Accountants' Report
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Operations--Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1997, 1996 and 1995
43
<PAGE>
Medco Research, Inc.
Consolidated Statements of Cash Flows--Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
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, 1997.
(c) Exhibits
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)
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)
44
<PAGE>
Medco Research, Inc.
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)
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. (11)
10.25 Amendment to Consulting Agreement dated December 1, 1994 by and
between Richard C. Williams. (11)
10.26 Amendment to Consulting Agreement dated December 1, 1994 by and
between Richard C. Williams.
23.1 Consent of Independent Accountants.
23.2 Accountants' Consent.
45
<PAGE>
Medco Research, Inc.
- --------------------------------------------------------------------------------
(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.
(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 exhibits are incorporated herein by reference to Exhibits
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.
(11) The referenced exhibits are incorporated herein by reference to
Exhibits 10.24 and 10.25 to the Registrant's Form 10-K for the calendar
year ended December 31, 1996 filed with the Securities and Exchange
Commission on March 27, 1997.
46
<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 Executive
Officer
Date: March 24, 1998
By: /s/ Glenn C. Andrews
Glenn C. Andrews
Vice President, Finance and
Administration and Chief
Financial Officer
Date: March 24, 1998
By: /s/ Adam C. Derbyshire
Adam C. Derbyshire
Corporate Controller and
Secretary
Date: March 24, 1998
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 24, 1998
--------------------------------------------
Richard C. Williams,
Chairman of the Board
By: /s/ Albert D. Angel Date: March 24, 1998
-------------------------------------------
Albert D. Angel, Director
By: /s/ William M. Bartlett Date: March 24, 1998
-----------------------------------
William M. Bartlett, Director
47
<PAGE>
Medco Research, Inc.
By: /s/ Jay N. Cohn Date: March 24, 1998
-----------------------------------
Jay N. Cohn, M.D., Director
By: /s/ Marvin S. Hausman Date: March 24, 1998
-----------------------------------
Marvin S. Hausman, M.D., Director
By: /s/ Mark B. Hirsch Date: March 24, 1998
-----------------------------------
Mark B. Hirsch, Director
By: /s/ Eugene L. Step Date: March 24, 1998
-----------------------------------
Eugene L. Step, Director
48
EXHIBIT 10.26
AMENDMENT
TO
CONSULTING AGREEMENT
Amendment, dated November 13, 1997, 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 (the "Compensation Committee") has determined that it is in
the best interests of the Corporation for the Corporation to continue to consult
with Williams pursuant to the Consulting Agreement for up to one additional 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
(a) deleting in the first sentence thereof "1997" and substituting therefor
"1998" and (b) adding the following proviso at the end of such Section:
"provided, however, that based on its review of the needs of the Corporation
between July 1 and December 31, 1998, the Corporation's Executive Committee, in
its sole discretion, shall have the right to unilaterally terminate the
Agreement effective at any time on or after June 30, 1998 on 30 days prior
written notice to Williams, and Williams agrees that the decision of such
Committee shall be final, conclusive and binding upon him."
2. Section 3.1 of the Consulting Agreement is hereby amended
by deleting in the first sentence thereof "1997" and substituting therefor
"1998".
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.
/s/ Richard C. Williams
-----------------------
Richard C. Williams
MEDCO RESEARCH, INC.
By: /s/ Roger D. Blevins
------------------------
Roger D. Blevins, President
and Chief Executive Officer
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Medco Research, Inc. on Form S-8 (File No. 33-35675) of our report dated January
22, 1998, on our audit of the consolidated financial statements of Medco
Research, Inc. as of December 31, 1997 and for the year ended December 31, 1997
which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
March 20, 1998
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Medco Research, Inc.
We consent to the incorporation by reference in the registration statement (No.
33-35675) on Form S-8 of Medco Research, Inc. and subsidiary of our report dated
January 28, 1997, with respect to the consolidated balance sheet of Medco
Research, Inc. and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1996, which report
appears in the December 31, 1997 annual report on Form 10-K of Medco Research,
Inc.
Our report dated January 28, 1997, contains an explanatory paragraph that states
that the Company is party to certain claims and litigation, which outcome cannot
be presently be determined. No provisions for liability, if any, that may result
from the resolution of such matters have been recognized in the accompanying
consolidated financial statements.
KPMG Peat Marwick LLP
Raleigh, North Carolina
March 19, 1998
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<FISCAL-YEAR-END> DEC-31-1997
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