<PAGE>
PROSPECTUS
SCIOS NOVA INC.
842,120 SHARES
COMMON STOCK
------------
This Prospectus relates to 842,120 shares of Common Stock, par value $.001
(the "Common Stock"), of Scios Nova Inc. ("Scios Nova" or the "Company") which
are being offered and sold by a certain stockholder of the Company (the "Selling
Stockholder"). The Selling Stockholder, directly or through agents, broker-
dealers or underwriters, may sell the Common Stock offered hereby from time to
time on terms to be determined at the time of sale, in transactions on the
Nasdaq National Market or in privately negotiated transactions. The Selling
Stockholder and any agents, broker-dealers or underwriters that participate in
the distribution of the Common Stock may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Act"), and any
commission received by them and any profit on the resale of the Common Stock
purchased by them may be deemed to be underwriting discounts or commissions
under the Act. See "Selling Stockholder" and "Plan of Distribution." The
Company will not receive any proceeds from the sale of shares by the Selling
Stockholder.
The Common Stock of the Company is quoted on the Nasdaq National Market
under the symbol "SCIO." The last reported sales price of the Company's Common
Stock on the Nasdaq National Market on March 29, 1995 was $7.75 per share.
-------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $22,400, $22,105 of which are expected to be
reimbursed by the Selling Stockholder. See "Plan of Distribution." The
aggregate proceeds to the Selling Stockholder from the Common Stock will be the
purchase price of the Common Stock sold less the aggregate agents' commissions
and underwriters' discounts, if any.
The Company has agreed to indemnify the Selling Stockholder and certain
other persons against certain liabilities, including liabilities under the Act.
March 30, 1995
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information may be inspected and copied
at the Commission's Public Reference Section, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, as well as at the Commission's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock
of the Company is quoted on the Nasdaq National Market. Reports and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. at 1735 K Street, N.W. Washington, D.C. 20006.
ADDITIONAL INFORMATION
A registration statement on Form S-3 with respect to the Common Stock
offered hereby (the "Registration Statement") has been filed with the Commission
under the Act. This Prospectus does not contain all of the information
contained in such Registration Statement and the exhibits and schedules thereto,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus regarding the contents of any contract or any other
documents are not necessarily complete and, in each instance, reference is
hereby made to the copy of such contract or document filed as an exhibit to the
Registration Statement. The Registration Statement, including exhibits thereto,
may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section, Securities and Exchange Commission, Washington, D.C.,
20549, upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed or to be filed with the Commission under the
Exchange Act are hereby incorporated by reference into this Prospectus:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, including all material incorporated by reference therein;
(ii) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1994;
(iii) The Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1994;
(iv) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1994;
(v) The Company's Current Report on Form 8-K as filed on January 23, 1995;
and
(vi) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A as filed on June 19, 1990.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently-filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents that have been
incorporated by reference herein (not including exhibits to such documents
unless such exhibits are specifically incorporated by reference herein or into
such documents). Such request may be directed to Scios Nova Inc., Attention:
Corporate Secretary, 2450 Bayshore Parkway, Mountain View, California 94043-
1173, telephone (415) 966-1550.
2.
<PAGE>
THE COMPANY
Scios Nova is a biopharmaceutical company engaged in the discovery,
development and commercialization of novel human therapeutics. The Company
focuses its proprietary research and development efforts on products to treat
acute illnesses, primarily in the areas of cardio-renal disease and
inflammation, and seeks to collaborate with corporate partners in the
development of products to treat chronic diseases. In addition to having
capabilities in both protein-based and small-molecule drug discovery and
development, the Company has a marketing and sales organization selling third-
party products that generate cash to help fund continued development of the
Company's proprietary products, none of which to date has been developed to the
commercialization stage.
The Company directs its resources towards the development of proprietary
products that address acute illnesses, primarily in the areas of cardio-renal
disease and inflammation, where it has significant product candidates, a strong
competitive advantage and extensive technical expertise. The Company's lead
products for acute conditions are AURICULIN[REGISTERED TRADEMARK] anaritide for
the treatment of acute renal failure and NATRECOR[REGISTERED TRADEMARK] BNP for
the treatment of acute congestive heart failure. In January 1995 the Company
completed enrollment in a 500 patient Phase III clinical trial of AURICULIN
anaritide for the treatment of acute renal failure. Following analysis of the
results of this study the Company, together with Genentech, Inc., which recently
entered into a collaboration with Scios Nova for AURICULIN anaritide, will
determine the next appropriate development steps for the product. NATRECOR is
currently in Phase II clinical studies for the treatment of acute congestive
heart failure. The Company is also continuing preclinical studies of its anti-
inflammatory compounds.
Therapies for chronic conditions, such as basic fibroblast growth factor
for wound healing, insulinotropin for Type II diabetes and a treatment for
Alzheimer's disease, are being developed by corporate partners or by Scios Nova
with funding from corporate partners. Under its arrangements with corporate
partners, Scios Nova typically receives research and development funding,
payments for clinical supplies and/or milestone payments for achieving
scientific and clinical benchmarks. The Company also is entitled to royalties
on commercial sales of products and, in some cases, may receive additional
revenues from the manufacture of products.
Scios Nova's financial strategy involves careful management of its cash
through targeted investment in its acute-care pipeline, while supporting these
efforts with cash flow from its commercial operations and from corporate partner
funded projects.
Scios Nova was formed through the September 1992 merger (the "Merger") of
Scios Inc., a Delaware corporation ("Scios"), and Nova Pharmaceutical
Corporation, a Delaware corporation ("Nova"). The Merger brought together
Scios' expertise in producing recombinant proteins with Nova's expertise in
synthesizing small molecules. As a result, Scios Nova has capabilities in
molecular and cell biology, protein and medicinal chemistry, molecular modeling,
pharmacology and the bioprocessing sciences and has the tools to undertake the
rational design of small molecules based on knowledge of the associated design
targets. The Company also acquired Nova's sales force and a line of marketed
psychiatric products in the Merger.
The Company was incorporated in California in 1981 under the name
California Biotechnology, Inc. and reincorporated in Delaware in 1988. The
Company changed its name to Scios Inc. in February 1992 and to Scios Nova Inc.
in September 1992 following the Merger. The principal executive offices of the
Company are located at 2450 Bayshore Parkway, Mountain View, California 94043.
The telephone number at that location is (415) 966-1550.
RISK FACTORS
The following are the significant risk factors that should be considered
carefully in evaluating the Common Stock of Scios Nova.
NO ASSURANCE OF SUCCESSFUL AND TIMELY PRODUCT DEVELOPMENT AND APPROVAL OF
PRODUCTS UNDER DEVELOPMENT
Scios Nova focuses its product development efforts on proprietary
therapeutics for acute illnesses, principally in the areas of cardio-renal
disease and inflammation. The Company's success will depend on its ability to
achieve scientific and technological advances and to translate such advances
into reliable, commercially competitive products on a timely basis. Scios
Nova's products are at various stages of research and development and further
development and testing will be required to determine their technical
feasibility and commercial viability. Most of these products are not likely to
become commercially available, if at all, for several more years at the
earliest. The proposed development schedules for the Company's products may be
affected by a variety of factors, including technological difficulties,
proprietary technology of others, reliance on third parties for support and
changes in governmental regulation, many of which factors will not be within
3.
<PAGE>
the control of Scios Nova. Of all the Company's potential products,
AURICULIN anaritide, which is the subject of the Company's recent
collaboration with Genentech, Inc., is at the most advanced stage of
development. See "Risk Factors-Relationship with Genentech." Any delay
in the development, introduction or marketing of the Company's potential
products could result either in such products being marketed at a time when
their cost and performance characteristics would not be competitive in the
marketplace or in a shortening of their commercial lives.
DEPENDENCE ON THIRD PARTIES
The Company plans to continue the development of therapies for the
treatment of chronic conditions primarily under the sponsorship of corporate
partners. Continued funding and participation by the Company's corporate
partners under joint development and licensing agreements will depend not only
on the timely achievement of research and development objectives by the Company,
which cannot be assured, but also on each corporate partner's own financial,
competitive, marketing and strategic considerations. Scios Nova also may from
time to time enter into collaborative arrangements involving the licensing of
certain rights to its acute care therapeutics. See "Risk Factors-Relationship
with Genentech." Under several of its joint development and license agreements,
Scios Nova relies on its corporate partners to conduct preclinical and clinical
trials, to obtain regulatory approvals and to manufacture and market products.
Although the Company believes that its corporate partners will have an economic
incentive to meet their contractual responsibilities, the amount and timing of
resources devoted to these activities generally will be controlled by the
corporate partners. Suspension or termination of its joint development
agreements with certain of Scios Nova's corporate partners or the failure of
those partners to meet their contractual responsibilities could have a material
adverse effect on the Company.
It is expected that, for at least the next several years, a portion of
Scios Nova's total revenues will continue to be derived from collaborative
research agreements. Future collaborative research agreements entered into by
Scios Nova, if any, may be subject to similar risks to those described in the
preceding paragraph. The inability of Scios Nova to obtain new collaborative
research agreements or to retain those currently in effect might have a material
adverse effect on its future operations.
RELATIONSHIP WITH GENENTECH
In December 1994 the Company entered into a Collaboration Agreement (the
"Collaboration Agreement") with Genentech Inc. relating to the joint development
and commercialization of AURICULIN anaritide for use in the treatment of acute
renal failure (the "Field"). The Collaboration Agreement provides for co-
promotion of AURICULIN anaritide in the United States and Canada and gives
Genentech exclusive marketing rights in countries other than the United States
and Canada (the "Licensed Territory"). In addition to royalties on sales in the
Licensed Territory, Scios Nova is to receive a $30 million milestone payment
upon receipt of U.S. regulatory approval, and additional payments of up to $20
million upon obtaining regulatory approvals and achieving certain sales levels
in other designated markets.
The Company will bear the development costs of AURICULIN anaritide until
the receipt of regulatory approval in North America. Thereafter, all costs of
development and promotion within North America will be shared equally among the
two parties. Genentech will bear all costs for development and promotion within
the Licensed Territory.
For the reasons set forth in "Risk Factors-Government Regulation: Need for
Regulatory Approval" there can be no assurance that the Company will ever
receive the requisite regulatory approvals to market the product and to receive
the milestone payments called for by the Collaboration Agreement. In addition,
for the reasons set forth in "Risk Factors-No Assurance of Successful and Timely
Development and Approval of Products Under Development" there can be no
assurance that any product developed under the Collaboration Agreement will
generate sufficient, if any, revenue (through milestone payments, sales,
royalties, or otherwise) to offset the development and promotion costs incurred.
Genentech has the right to terminate the Collaboration Agreement within
30 days following receipt of the Phase III clinical results of AURICULIN
anaritide. In addition, if the Company does not file a New Drug Application
("NDA") for AURICULIN anaritide by December 31, 1997, or if, within 60 days of
such filing, the FDA has not accepted for review an NDA which was filed by
December 31, 1997, Genentech has the option of (i) electing to bring
NATRECOR[REGISTERED TRADEMARK] BNP or another natriuretic peptide product under
development by Scios Nova into the Collaboration Agreement for use in the Field
or (ii) terminating the Collaboration Agreement. This option could limit the
Company's ability to enter into other collaborative arrangements on NATRECOR BNP
or any other natriuretic peptide product until the earlier of the FDA's
acceptance for review of an NDA for AURICULIN anaritide or the expiration of the
above deadlines. If Genentech were to exercise its right to bring another
product into the Collaboration Agreement in place of AURICULIN anaritide, the
milestone payments due upon regulatory approval and other events would be
reduced significantly.
4.
<PAGE>
RELIANCE ON CERTAIN PRODUCTS
The Company currently markets in the United States four psychiatric
products under license from SmithKline Beecham Corporation (the "SB Products")
and co-promotes a fifth product, HALDOL[REGISTERED TRADEMARK] Decanoate
distributed by McNeil Pharmaceutical ("McNeil"). The SB Products have a well-
established reputation, but unit volume for certain products has been eroding
and can be expected to continue to erode due to competition from generic
products sold at substantially lower prices. In the past, the decrease in unit
sales has been partially offset by price increases; however, there can be no
assurance that the market will accept any additional price increases. Under its
agreement with McNeil, the Company receives quarterly payments based on total
sales of this product reaching specified levels. Although the Company believes
that SmithKline Beecham ("SB") and McNeil will have an economic incentive to
meet their respective contractual responsibilities, the amount and timing of
resources devoted to these activities generally will be controlled by such
parties. Suspension or termination of the Company's agreements with either
party or the failure of SB or McNeil to meet their contractual responsibilities
could have a material adverse effect on the Company.
CONTINUING OPERATING LOSSES
Scios Nova has had net operating losses since its inception and expects
such losses for at least several more years. As of September 30, 1994, Scios
Nova had an accumulated deficit of $257.5 million.
The ability of the Company to achieve profitability depends principally
upon the success of its product development efforts and the timing and scope of
regulatory approvals, particularly with respect to the Company's lead products,
AURICULIN anaritide and NATRECOR BNP. Other key factors include the amount of
profits generated from the Company's sale of the SB Products, HALDOL Decanoate
and any additional products co-promoted or licensed by the Company and the
development of new sources of third-party funding and other revenues to support
continuing research and development programs.
NEED FOR ADDITIONAL FUNDING
Substantial expenditures will be required to enable Scios Nova to continue
research and development activities, to conduct existing and planned clinical
trials and to manufacture and market products currently under development.
While Scios Nova believes that its net assets, together with funding from
corporate partners and interest income, will be sufficient to meet capital
requirements for at least the next 24 months, over the long term the Company
will need to arrange additional financing for the operation of its business,
including the commercialization of its products currently under development, and
will consider collaborative arrangements and additional public or private
financings, including additional equity financings. There can be no assurances
that such additional collaborative arrangements or financings can be obtained on
reasonable terms.
DEPENDENCE ON PROPRIETARY RIGHTS OF OTHERS
The manufacture and sale of any products developed by Scios Nova will
involve the use of processes, products or information the rights to certain of
which are owned by others. Although Scios Nova has obtained licenses for the
use of certain of such processes, products and information, there can be no
assurance that such licenses will not be terminated or expire during critical
periods, that Scios Nova will be able to obtain licenses or other rights which
may be important to it or, if obtained, that such licenses will be obtained on
commercially reasonable terms. If Scios Nova is unable to obtain such licenses,
it may have to develop alternatives to avoid infringing patents of others,
potentially causing increased costs and delays in product development and
introduction or precluding Scios Nova from developing, manufacturing or selling
its planned products. Some of Scios Nova's licenses provide for limited periods
of exclusivity that may be extended only with the consent of the licensor.
There can be no assurance that extensions will be granted on any or all such
licenses. This same restriction may be contained in licenses obtained in the
future. Additionally, there can be no assurance that the patents underlying any
licenses will be valid and enforceable. To the extent any products developed by
Scios Nova are based on licensed technology, royalty payments on licenses will
reduce Scios Nova's gross profit from such product sales and may render the
sales of such products uneconomical.
Scios Nova supports and collaborates in research conducted in universities
and in governmental research organizations. There can be no assurance that
Scios Nova will have or be able to acquire exclusive rights to inventions or
technical information derived from such collaborations or that disputes will not
arise as to rights in derivative or related research programs conducted by them.
5.
<PAGE>
Scios Nova receives grants and other public funding and collaborates with
governmental research organizations in connection with certain research
programs. Inventions resulting from such public funding or collaboration may be
subject to regulatory and contractual restrictions on the manner in which any
resulting inventions may be commercialized, and the government research
organization typically retains certain rights to use such inventions itself or,
under certain circumstances, to grant rights to others.
In the event of contractual breach or bankruptcy of Scios Nova, certain of
the Company's collaborative research contracts provide for transfer of
technology (including rights to practice under any patents or patent
applications) to the contract sponsors.
LIMITED MANUFACTURING EXPERIENCE
Scios Nova has concentrated its resources on product discovery and
development prior to investing substantially in manufacturing capability. To
date the Company has produced only its proprietary basic fibroblast growth
factor ("bFGF") in limited quantities sufficient for clinical trials then being
conducted on bFGF and currently relies on third parties for the manufacture of
other products including AURICULIN anaritide. Scios Nova has a production
facility which the Company believes will enable it to produce bFGF for a third
party, and potentially other products, under requirements for current Good
Manufacturing Practices ("cGMP"). However, the Company does not currently
possess the staff or facilities necessary to manufacture any product in the
commercial quantity expected to be required in the long term. Scios Nova's
strategy of building or acquiring commercial-scale manufacturing facilities or
utilizing third-party facilities only as the need arises carries with it certain
risks, as there can be no assurance that such facilities can be built, acquired
or used on commercially acceptable terms or at all or that Scios Nova will be
able to meet manufacturing quantity and quality requirements through the use of
such arrangements.
Scios Nova currently intends to obtain AURICULIN anaritide from third-party
manufacturers. In March 1994, the Company entered into a long-term agreement
for the supply of AURICULIN anaritide in bulk form, and will have fill and
finish services performed by another third party. The Company believes that it
would not be cost-effective to qualify alternate suppliers at this time.
However, an inability of either the Company's bulk or its fill and finish
manufacturer to provide material to Scios Nova on a timely basis would cause
delays in supply which could be expected to have a material adverse effect on
the Company's business.
SB manufactures the SB Products. If SB elects to discontinue manufacturing
the SB Products, the Company will either have to develop additional facilities
to manufacture independently on a large scale, procure a contract manufacturer,
or enter into another arrangement with a third party to manufacture such
products. McNeil manufactures HALDOL Decanoate.
If Scios Nova were to develop additional products with commercial
potential, it would be required to design and construct larger facilities to
manufacture such products or be dependent upon securing a third party contract
manufacturer to manufacture such products. There can be no assurance that the
Company would be able to develop such a manufacturing capability on its own or
enter into such a partnership on favorable terms or at all. In addition,
partnering arrangements could result in a lower level of income to Scios Nova
than if the Company manufactured the products entirely on its own.
LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
Scios Nova has limited experience in managing or operating a marketing
organization. Scios Nova currently has a sales force of approximately 85
representatives experienced in marketing products to the psychiatric profession.
These sales representatives work on a part-time basis marketing the SB Products
and co-promoting the McNeil product HALDOL Decanoate. To date, Scios Nova's
marketing experience has been limited to these psychiatric products. The
Company has had no experience marketing the acute care products which are the
focus of its research and development efforts.
Scios Nova's business strategy includes acquiring or licensing additional
products developed by third parties that could be sold by the Company's sales
force while the Company seeks to complete clinical trials and commercialization
of its proprietary products. There can be no assurances that such third-party
product rights will be available on terms favorable to the Company or at all, or
that the Company will be successful in commercializing its own proprietary
products.
If Scios Nova is successful in its efforts to develop additional products
for commercial sale, the commercialization of such products will require
significant financial resources as well as worldwide sales, marketing and
distribution capabilities. The Company will consider entering into additional
corporate partnerships with major pharmaceutical companies in order to provide
funds and expertise to meet these requirements. See "Risk Factors-Relationship
with Genentech." There
6.
<PAGE>
can be no assurance that the Company would be able to develop such a marketing
capability on its own or enter into such a partnership on favorable terms or at
all. In addition, partnering arrangements could result in a lower level of
income to Scios Nova than if the Company marketed the products entirely on its
own.
TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE; SUBSTANTIAL COMPETITION
Competition is intense in the development of biopharmaceutical products,
particularly in the development of products through the application of
biotechnology. There are numerous companies and academic research groups
throughout the world engaged in similar research and development. Some of the
Company's competitors, including some of its licensees, are working on products
similar to those being developed by Scios Nova, including products in some of
the Company's major therapeutic focus areas. Many of these companies have
substantially greater financial, marketing and human resources than Scios Nova.
With respect to AURICULIN anaritide, Scios Nova believes other companies may be
attempting to develop other forms of natriuretic peptides for indications
similar to those being pursued by the Company.
There can be no assurance that technological developments or superior
marketing capabilities possessed by competitors will not materially adversely
affect the commercial potential of the Company's products. In addition, if the
Company commences significant commercial sales of products, manufacturing
efficiency and marketing capability are likely to be significant competitive
factors. With respect to products no longer covered by patents, such as the SB
Products, Scios Nova faces competition from companies offering generic products.
The Company believes that the competitive success of the Company will be
based primarily on scientific and technological superiority, managerial
competence in identifying and pursuing opportunities, operational competence in
developing, protecting, producing and marketing products and obtaining timely
regulatory agency approvals and adequate funds. Achieving success in these areas
will depend on the Company's ability to attract and retain skilled and
experienced personnel, to develop and secure the rights to advanced proprietary
technology and to exploit commercially its technology prior to the development
of competitive products by others. Scios Nova expects that there will be
continued competition for highly qualified scientific, technical and managerial
personnel.
UNCERTAINTY OF LEGAL PROTECTION AFFORDED BY PATENTS AND PROPRIETARY RIGHTS;
POSSIBLE INFRINGEMENT OF RIGHTS OF OTHERS
Scios Nova's success will depend in large part upon its ability to protect
its proprietary products and technology under U.S. and foreign patent laws and
other intellectual property laws. Scios Nova has incurred and expects to
continue to incur, substantial costs in connection with the protection of its
intellectual property rights. The patent position of biotechnology and
pharmaceutical firms generally is highly uncertain and involves complex legal
and factual questions. Although Scios Nova believes it has strong patent
positions on certain of its products, there can be no assurance that any patent
will issue on pending applications of the Company, or that any patent issued
will afford the Company significant commercial protection against competitors
for the technology or product covered by it, or that patents will not be
infringed upon or designed around. Third parties have filed applications for,
or have been issued patents relating to, products or processes which are similar
to or competitive with certain of the Company's products or processes. Scios
Nova is incurring and expects to continue to incur substantial costs in
interference proceedings and in defending the validity or scope of its patents
or in challenging the validity or scope of competing patents. The Company is
unable to predict how the courts will resolve issues relating to the validity
and scope of such patents, and if any such patent were to be interpreted to
cover any of the Company's products and could not be licensed, circumvented or
shown to be invalid, the results of Scios Nova's future operations could be
materially and adversely affected.
Companies which have or obtain patents relating to Scios Nova's products or
processes could bring legal actions against Scios Nova and its corporate partner
claiming damages and seeking to enjoin them from manufacturing or marketing such
products. Because of such proceedings, Scios Nova could encounter delays in
product market introductions while it attempts to design around such patents or
could find that the development, manufacture or sale of Scios Nova's products
could be foreclosed. If any such action were successful, in addition to any
potential liability for damages, Scios Nova or its corporate partners could be
required to obtain a license in order to continue to manufacture or market such
products. Even if licenses were to be available, their cost might not be
commercially acceptable. If a patent were to be issued to a third party
covering products competitive with Scios Nova's products and such patent could
not be licensed, circumvented or shown to be invalid, the results of Scios
Nova's future operations could be materially adversely affected.
Scios Nova also may have to participate in interference proceedings
declared by the United States Patent and Trademark Office (the "PTO") to
determine the priority of inventions, which could result in substantial cost to
Scios Nova or in the determination that patents should be issued to a
competitor. Unfavorable outcomes in interference proceedings could result in
the need for cross-licensing agreements with competitors that could hinder or
prevent Scios Nova from
7.
<PAGE>
making, using or selling the products which are the subjects of such patents or
adversely affect Scios Nova's operating results.
Other companies engaged in research and development of new health care
products based on biotechnology also are actively pursuing patents for their
technologies, which they consider to be novel and patentable. Scios Nova also
relies and will continue to rely upon trade secrets and know-how to develop and
maintain its competitive position. There can be no assurance, however, that
others will not develop similar technology so that confidentiality agreements on
which the Company relies to protect trade secrets will be honored. To the
extent corporate partners or consultants apply technological information
independently developed by them or by others to Scios Nova projects, disputes
may arise as to the proprietary rights to such information.
GOVERNMENT REGULATION: NEED FOR REGULATORY APPROVAL
The production and marketing of the Company's proposed products and its
ongoing research and development activities are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Prior to marketing in the United States, a drug must undergo rigorous
preclinical and clinical testing and an extensive regulatory approval process
implemented by the U.S. Food and Drug Administration ("FDA") under federal law,
including the Food, Drug and Cosmetic Act, as amended. Satisfaction of such
regulatory requirements includes satisfying the FDA that the product is both
safe and efficacious. Typically, this takes several years or more depending upon
the type, complexity and novelty of the product and the nature of the disease or
other indication to be treated and requires the expenditure of substantial
resources. Preclinical studies must be conducted in conformance with the FDA's
Good Laboratory Practice regulations. Clinical testing must meet requirements
for Institutional Review Board ("IRB") oversight and informed consent by
clinical trial subjects, as well as FDA prior review, oversight and the FDA's
Good Clinical Practice requirements. Clinical trials may require large numbers
of test subjects. Scios Nova has limited experience in conducting clinical
testing and in pursuing applications necessary to gain regulatory approvals.
Furthermore, the Company or the FDA may suspend clinical trials at any time if
either believes that the subjects participating in such trials are being exposed
to unacceptable health risks, including undesirable or unintended side effects.
Before receiving FDA approval to market a product, Scios Nova may have to
demonstrate that the product represents an improved form of treatment compared
to existing therapies. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations, which could delay, limit or prevent
regulatory approvals. In addition, delays or rejections may be encountered based
upon additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Delays in obtaining such approvals
could adversely affect marketing of Scios Nova's products. Delays in regulatory
approvals that may be encountered by Scios Nova's joint development partners and
licensees could adversely affect Scios Nova's ability to receive royalties or
other sales revenues. There can be no assurance that, after such time and
expenditures, regulatory approval will be obtained for any products developed by
the Company. Even after initial FDA approval has been obtained, further studies
may be required to provide additional data on safety or to gain approval for the
use of a product as a treatment for clinical indications other than those
initially targeted. Moreover, the FDA may reconsider its approval of any
product at any time and may withdraw such approval. In addition, before the
Company's products can be marketed in foreign countries, they are subject to
regulatory approval in such countries similar to that required in the United
States. Furthermore, approval may entail ongoing requirements for post-
marketing studies.
The Orphan Drug Act currently provides incentives to manufacturers to
develop and market drugs for rare diseases or conditions affecting fewer than
200,000 persons in the United States at the time of application for orphan drug
designation. A drug that receives orphan drug designation and is the first
product to receive FDA marketing approval for its product claim is entitled to a
seven-year exclusive marketing period in the United States for that product
claim. However, a drug that is considered by the FDA to be different from a
particular orphan drug is not barred from sale in the United States during the
seven-year exclusive marketing period. The Company has received from the FDA
orphan drug designation of AURICULIN anaritide in acute kidney failure. Various
amendments of the Orphan Drug Act are currently being considered by Congress,
some of which could reduce the benefits of orphan drug status to Scios Nova, if
passed.
The FDA's regulations require that any drug or formulation to be tested in
humans must be manufactured according to cGMP regulations. This has been
extended to include any drugs which will be tested for safety in animals, in
support of human testing. The cGMPs set certain minimum requirements for
procedures, record-keeping and the physical characteristics of the laboratories
used in the production of these drugs. In addition, various federal and state
laws, regulations and recommendations relating to safe working conditions,
laboratory practices, the experimental use of animals and the purchase, storage,
movement, import and export, use, and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research work are
8.
<PAGE>
or may be applicable to their activities. They include, among others, the
United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the
Occupational Safety and Health Act, the National Environmental Policy Act, the
Toxic Substances Control Act, and the Resource Conservation and Recovery Act,
national restrictions on technology transfer, import, export and customs
regulations, and other present and possible future federal, state or local
regulations. Scios Nova is unable to estimate the extent and impact of
regulation in the biotechnology field resulting from such future federal, state
or local legislation or administrative action.
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorization from the appropriate foreign
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. This foreign regulatory approval process includes all of the
risks associated with FDA approval set forth above.
RISK OF PRODUCT LIABILITY; USE OF HAZARDOUS MATERIALS
The testing, marketing and sale of human therapeutic products entails
significant risks. If the Company succeeds in developing products in these
areas, use of such products in trials and the sale of such products following
regulatory approval may expose the Company to liability claims allegedly
resulting from use of such products. These claims might be made directly by
consumers or others. Scios Nova currently has only limited insurance for its
clinical trials. However, there can be no assurance that Scios Nova will be
able to obtain and maintain such insurance for all of its clinical trials or
that coverage will be in sufficient amounts to protect against damages for
liability that could have a material adverse effect on Scios Nova. There can
also be no assurance that Scios Nova will be able to obtain or maintain product
liability insurance in the future on acceptable terms or in sufficient amounts
to protect the Company against damages for liability that could have a material
adverse effect on the Company. The Company's agreements with SB and McNeil
provide for certain indemnification, but there can be no assurance that any
claim arising from products manufactured by SB or McNeil would not also include
claims directly against Scios Nova.
In addition, the Company's research and development involves the controlled
use of hazardous materials, radioactive compounds and other chemicals.
Accordingly, the Company is subject to various federal, state and local
environmental laws and regulations. Failure to comply with present or future
regulations could result in substantial liability to the Company, suspension or
cessation of the Company's operations, restrictions on the Company's ability to
expand at its present location or the incurrence of other significant expense.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by federal,
state and local regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. The Company may also
incur substantial costs to comply with environmental regulations if the Company
develops additional manufacturing capacity or otherwise changes its operations.
For example, in connection with the closure of its Baltimore research and
development facility in 1994 to consolidate such activities at its Mountain View
headquarters, the Company incurred costs of approximately $370,000 for chemical
disposal, storage and related costs.
HEALTHCARE REIMBURSEMENT
Scios Nova's ability to successfully commercialize human therapeutic
products may depend in part on the extent to which reimbursement for the cost of
such products and related treatment will be available from government health
administration authorities, private health coverage insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved healthcare products, and there can be no assurance that adequate
third-party coverage will be available for Scios Nova to maintain price levels
sufficient for realization of an appropriate return on its investment in product
development. Government and other third party payers are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products approved for marketing by the FDA
and by refusing, in some cases, to provide any coverage for uses of approved
products for disease indications for which the FDA has not granted marketing
approval. If adequate coverage and reimbursement levels are not provided by
government and third-party payers for uses of Scios Nova's healthcare products,
the market acceptance of these products would be adversely affected.
NO ASSURANCE OF ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL; ABSENCE OF KEY-MAN
LIFE INSURANCE
Scios Nova's ability to maintain its competitive technological position
will depend, in part, upon its ability to attract and retain highly qualified
scientific, managerial and manufacturing personnel. Competition for such
personnel is intense. Scios Nova must recruit and organize expanded marketing
and sales organizations for those products it will commercialize
9.
<PAGE>
directly. The loss of a significant group of key personnel would adversely
affect Scios Nova's product development effort. Scios Nova does not currently
maintain key-man life insurance on any of its employees.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS
The market prices for securities of biotechnology and pharmaceutical
companies, including the securities of Scios Nova, have been volatile.
Announcements of technological innovations or new commercial products by Scios
Nova or its competitors, a change in status of a corporate partner, developments
concerning proprietary rights, including patents and litigation matters,
publicity regarding actual or potential medical results with products under
development by Scios Nova, regulatory developments in both the United States and
foreign countries and public concern as to the safety of biotechnology or of
pharmaceutical products, as well as period-to-period fluctuations in revenues
and financial results, may have a significant impact on the market price of its
Common Stock. Scios Nova has not paid any cash dividends since its inception,
and it does not anticipate paying cash dividends in the foreseeable future.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of Scios Nova's Certificate of Incorporation, as
amended, Bylaws and Share Purchase Rights Plan may have the effect of delaying,
deferring or preventing attempts to acquire control of Scios Nova. The delay,
deferral or prevention of a change in control may result in denying to
stockholders of Scios Nova the receipt of a premium for their stock in the
transaction which would have resulted in the change of control and may also
result in a depressive effect on the market price of the Scios Nova Common
Stock.
10.
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholder in the offering.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data set forth below for the years ended
December 31, 1992, 1993 and 1994 and as of December 31, 1993 and 1994 are
derived from and are qualified by reference to, the audited consolidated
financial statements included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992* 1991 1990
- -------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues $ 53,667 $ 47,568 $ 25,085 $ 7,357 $12,425
Loss from operations (31,719) (43,237) (138,703) (21,189) (8,398)
Other income 4,045 6,298 7,338 5,536 3,281
Net loss (27,961) (36,579) (131,946) (17,251)** (5,131)
Net loss per common share (0.79) (1.05) (5.76) (1.18) (0.44)
Cash and securities 104,439 108,271 134,660 126,680 32,448
Working capital 38,942 96,334 42,842 93,417 15,620
Total assets 146,096 151,278 182,398 160,972 62,911
Long-term obligations 1,739 2,323 401 -- --
Stockholders' equity 126,438 135,299 169,144 156,092 60,078
Employees at year end 283 337 382 167 153
<FN>
*Includes Nova Pharmaceutical Corporation and Nova Technology Limited
Partnership from the dates of their acquisition, September 3, 1992 and
December 31, 1992, respectively, as well as related charges for in-process
technologies totaling $108.0 million.
**Includes a $6.2 million charge related to the purchase of minority interests
in a subsidiary, Metabolic Biosystems Inc.
</TABLE>
11.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On September 3, 1992, Nova was merged into Scios and the combined company was
renamed Scios Nova Inc. The results of operations of Nova are included with
Scios with effect from the date of the merger and the Company's balance sheets
at December 31, 1992 reflect the inclusion of Nova's assets and liabilities
adjusted to fair value at the merger date. The acquisition was accounted for
under the purchase method of accounting. The excess of the purchase price over
the fair value of the acquired assets was allocated to in-process technology
and was written off, resulting in a one-time non-cash charge to operations of
$87.5 million.
In December 1992, the Company exercised an option to purchase all limited
partnership interests in the Nova Technology Limited Partnership ("NTLP"). The
acquisition of the partnership interests, paid in shares of Scios Nova common
stock, resulted in a one-time $20.5 million non-cash charge to operations.
OPERATING RESULTS (1994, 1993 AND 1992)
Total revenues were $53.7 million in 1994, $47.6 million in 1993 and $25.1
million in 1992. The increase in 1994 over 1993 was principally due to higher
contract revenues and an increase in co-promotion commissions earned under the
Company's agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of
Johnson & Johnson, for the co-promotion of McNeil's psychiatric product
HALDOL[REGISTERED TRADEMARK] Decanoate. Co-promotion commissions were earned
over a twelve-month period in 1994 versus a five-month period in 1993. The 1993
revenue increase over 1992 was principally due to sales of certain psychiatric
products (the "SB Products") under license from SmithKline Beecham Corporation
("SB"), which are included for twelve months in 1993 and four months in 1992.
Revenue from product sales (SB Products) was $42.8 million, $43.6 million and
$17.3 million in 1994, 1993 and 1992, respectively. Product sales declined 2%
from 1993 to 1994. The decrease was due to a drop in unit sales as a result of
generic competition, partially offset by a 1994 price increase. The 1993 product
sales increase over 1992 resulted from inclusion of twelve months of sales in
1993 versus only four months in 1992.
Revenue from research and development contracts was $7.1 million, $3.5 million
and $7.7 million in 1994, 1993 and 1992, respectively. The increase in contract
revenue from 1993 to 1994 was principally due to payments from Pfizer Inc
associated with the renegotiation of the contract for
12.
<PAGE>
the development of insulinotropin and from Kaken Pharmaceutical Co., Ltd.
("Kaken") for the licensing of the Company's FIBLAST[REGISTERED TRADEMARK] bFGF
manufacturing technology and initiation of Phase III clinical trials in Japan.
The decrease in contract revenue from 1992 to 1993 was principally due to the
cessation of funding under the Company's agreements with Pfizer, NTLP and E.
Merck and receipt in 1992 of milestone payments under the collaboration with
Marion Merrell Dow Inc. to study Alzheimer's disease. Revenues under the
collaboration with Marion Merrell Dow comprised approximately 26% and 49% of
contract revenue in 1994 and 1993, respectively, while revenues under the
collaboration with Kaken were 31% and 19% of contract revenue in 1994 and 1993,
respectively.
Cost of goods sold for the SB Products was $26.5 million, $28.8 million and
$11.7 million in 1994, 1993 and 1992, respectively. The decline from 1993 to
1994 was principally the result of lower unit sales. Gross margins improved from
34% in 1993 to 38% in 1994 due to a sales mix shift towards higher margin
products and a price increase imposed in early 1994. The increase in cost of
goods sold from 1992 to 1993 was the result of twelve months of 1993 sales
versus four months of post-merger sales in 1992.
Research and development expenses were $34.5 million in 1994 compared to $39.5
million and $29.9 million in 1993 and 1992, respectively. The 1994 decrease from
1993 reflects the late 1993 staffing reduction associated with the elimination
of certain projects as a result of the strategic refocusing of the Company and
the 1994 consolidation of Baltimore, Maryland research and development
operations with those in Mountain View, California. The 1993 increase over 1992
is due to the inclusion of a greater share of the cost of Nova operations from
the date of the merger and expanded product development activities for the
Company's lead products.
Marketing, general and administrative expenses were $15.7 million in 1994
compared to $18.2 million and $12.2 million in 1993 and 1992, respectively.
Although higher sales and marketing spending occurred in 1994 to support the
increased sales activities, the increase was more than offset in 1994 by expense
reductions in general and administrative areas associated with the strategic
refocusing and the consolidation of research and development operations. The
cost increase from 1992 to 1993 reflects twelve months of costs for the Nova
administrative and marketing operations in 1993 versus four months in 1992.
13.
<PAGE>
The profit distribution to third parties of $5.2 million in 1994 and $4.3
million in 1993 represents SB's share of the net profits from sales of the SB
Products. The 1994 increase over 1993 is due to higher gross margins and a lower
allocation of sales and marketing expenses for SB Product sales. The increase in
profit distribution to third parties from $1.5 million in 1992 to $4.3 million
in 1993 was due to 1993's twelve months of SB Product sales versus only four
months in 1992.
In September 1994, the Company recorded a charge of $3.5 million associated with
the closure of its research and development facility in Baltimore, Maryland and
the transfer of certain research and development operations to Mountain View,
California. The consolidation was undertaken to eliminate redundancies, reduce
future expenses and increase productivity by concentrating research and
development activities in one location. As a result of the consolidation,
forty-one positions were eliminated in 1994 and ten additional positions are
expected to be eliminated in the first quarter of 1995. Twelve employees were
relocated to Mountain View, California. The Company's Commercial Operations
staff, which was formerly located at the site being closed, moved to a smaller
office space in Baltimore in the first quarter of 1995.
Other income decreased to $4.0 million in 1994 from $6.3 million in 1993 and
$7.3 million in 1992. The decrease year to year resulted primarily from lower
income generated by the Company's investment portfolio. The 1994 decrease from
1993 was also due to lower rental income from sublease tenants and higher
royalty expense associated with the increased contract revenue.
In June 1994, the Company's subsidiary, Guilford Pharmaceuticals Inc.,
("Guilford") completed an initial public stock offering which reduced the
Company's ownership in Guilford from 62% to 29%. Upon the reduction in ownership
percentage, the Company began using the equity method of accounting for its
investment in Guilford. Prior to the date of the public stock offering, the
financial results of Guilford were consolidated with those of the Company. The
minority interest of $0.6 million and $0.4 million in 1994 and 1993,
respectively, reflects the minority shareholders portion of Guilford losses when
the Company was fully consolidating Guilford operations.
The equity in net loss of affiliates of $0.9 million in 1994 represents the
Company's share of the losses of Guilford. Recognition of these losses reduced
the Company's investment in Guilford to zero by December 31, 1994. The equity
loss of $0.6 million in 1992 represents the Company's share of the losses of
NTLP from the merger date. The Company's investment in NTLP was reduced to zero
by year-end 1992.
14.
<PAGE>
OUTLOOK
The Company expects to continue to incur losses for several more years. The
ability of the Company to achieve profitability depends principally upon the
success of: (i) product development efforts and the timing and scope of
regulatory approvals, particularly with respect to the Company's lead products,
AURICULIN[REGISTERED TRADEMARK] anaritide and NATRECOR[REGISTERED TRADEMARK]
BNP; (ii) the Company's strategy of generating operating profits from marketing
and selling the SB Products, HALDOL[REGISTERED TRADEMARK] Decanoate and
additional third-party products, which it is actively seeking to acquire; and
(iii) the development of new third-party funding sources and other revenues to
support continuing research and development programs. Profitability will also be
affected by the Company's ability to undertake complex manufacturing processes
in a cost-effective manner.
In early 1995, the Company completed patient enrollment in its Phase III
clinical study of AURICULIN for the treatment of acute renal (kidney) failure.
Upon completion of the statistical analysis of the study, the Company, along
with its partner, Genentech, will determine the next appropriate steps based
on results of the study. If the Company and Genentech determine that the
results of the Phase III study provide sufficiently compelling evidence of
AURICULIN's safety and efficacy, the Company will proceed as rapidly as
possible to prepare
and submit a New Drug Application to the Food and Drug Administration. If the
Company determines that a confirmatory study or studies are required, the
Company plans to initiate the additional study(s) as soon as is practical. It is
also possible that the results of the study will not warrant any further
development of AURICULIN. Hence, the outcome of the trial, and resulting steps
taken by the Company, will have a significant effect on the Company's future
profitability.
Further development of the Company's products will require substantial
additional investment to cover, among other things, the costs of clinical
trials, the securing of commercial scale manufacturing capability and the
marketing and sales expenses associated with product introductions. While market
introduction of new products will require considerable expenditures by the
Company, revenues generated from such products, assuming they are successfully
developed, may not be realized for several years. In the case of AURICULIN, the
Company alone is responsible for continued development costs, but marketing and
related costs will be shared by Genentech in the United States and Canada.
Genentech will also share in any marketing profits from AURICULIN sales in the
United States and Canada.
15.
<PAGE>
Sales of the SB Products are likely to decrease during the next few years
because of increased competition from generic products. The Company hopes to
more than offset any such decrease with revenues from its co-promotion of
HALDOL[REGISTERED TRADEMARK] Decanoate and the promotion of any additional
third-party products. There can be no assurance that such additional products
will be available on terms favorable to the Company or at all.
A portion of the Company's revenues will continue to be derived from
collaborative research agreements. Future collaborative funding will depend, in
part, upon priorities set by the sponsors in relation to the sponsor's other
product opportunities and its assessment of the continued benefit of sponsoring
a particular program at the Company. Other licenses, as well as agreements to
manufacture and supply bulk materials, are also subject to termination by the
licensee or contract sponsor under certain circumstances. For the reasons stated
above, the operating results of the Company are expected to fluctuate from
period to period. Inflation is not expected to have a significant effect upon
the business of the Company. In addition, because the Company participates in a
highly dynamic industry, the Company's common stock price is subject to
significant volatility as a result of developments in the biopharmaceutical
industry.
PRO FORMA OPERATING RESULTS
Operating results of the Company reflect the effects of the merger of Scios and
Nova from the merger date, September 3, 1992. The following pro forma financial
information for 1992 assumes that the merger of Scios and Nova had occurred on
the first day of 1992 adjusted to exclude certain non-recurring merger-related
expenses.
On a pro forma basis, total revenues for 1992 would have been approximately
$56.2 million with SB Product sales of $43.7 million and contract revenues of
$12.5 million. Gross margins from product sales, as a percentage of such sales,
would have been 32% in 1992. Pro forma research and development expenses would
have been $46.8 million and marketing, general and administration expenses $16.6
million in 1992.
Pro forma total costs and expenses for 1992, including cost of goods sold and
profit distribution to third parties would have been $97 million with other
income of $8.5 million.
16.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Combined cash, cash equivalents and securities (both current and non-current)
totaled $104.4 million at December 31, 1994, a decrease of $3.8 million from
December 31, 1993. The decrease is mainly attributable to the $19.7 million used
to fund operations and $3.2 million of spending on property, plant and equipment
partially offset by proceeds from the sale of preferred stock to Genentech ($20
million). Working capital decreased from $96.3 million at December 31, 1993 to
$38.9 million at December 31, 1994. The decrease resulted principally from a
decrease in current available-for-sale securities and a corresponding increase
in non-current available-for-sale securities.
To date, the Company's operations and capital requirements have been financed
primarily from the proceeds of public and private sales of common stock,
research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. The tax effect of the
Company's net operating losses and tax credit carryforwards will provide an
additional source of liquidity only to the extent that profitable operations are
achieved prior to the expiration of carryforward periods. The utilization of
losses generated through the date of the merger will be subject to annual
limitations.
OUTLOOK
The Company's cash, cash equivalents and marketable securities of approximately
$104.4 million at December 31, 1994, together with revenues from product sales,
collaborative agreements and interest income, will be used to fund new and
continuing research and development programs, expanded clinical trials for its
products under development and other general purposes. The Company believes its
cash resources will be sufficient to meet its capital requirements for at least
the next two years.
Over the long term, the Company will need to arrange additional financing for
the future operation of its business, including the commercialization of its
products currently under development, and will consider collaborative
arrangements and additional public or private financings, including additional
equity financings. There can be no assurances that such additional funding can
be obtained on reasonable terms.
17.
<PAGE>
SELLING STOCKHOLDER
The following table sets forth the name of the Selling Stockholder, the
number of shares of Common Stock owned beneficially by the Selling Stockholder
as of December 31, 1994 and the number of shares which may be offered pursuant
to this Prospectus. This information is based upon information provided by the
Selling Stockholder. Because the Selling Stockholder may offer all, some or
none of its Common Stock, no definitive estimate as to the number of shares
thereof that will be held by the Selling Stockholder after such offering can be
provided.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING SHARES OFFERING(1)
------------------- BEING -------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
---- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Genentech, Inc....................2,205,300 5.9% 842,120 1,363,180 3.6%
<FN>
- -----------------
(1) Assumes the sale of all shares offered hereby.
(2) Applicable percentage of ownership is based on 35,283,200 shares of Common
Stock outstanding on December 31, 1994 and assumes the issuance of 2,105,300
shares of Common Stock issuable upon conversion of 21,053 shares of the
Company's nonvoting Series A Preferred Stock.
</TABLE>
In December 1994 the Selling Stockholder entered into the Collaboration
Agreement with the Company. See "Risk Factors -- Relationship with Genentech."
At that time the Selling Stockholder also (i) purchased $20 million of nonvoting
Series A Preferred Stock of the Company convertible into 2,105,300 shares of
Common Stock and (ii) agreed to loan the Company an additional $30 million,
which the Company can draw down at its discretion through December 2002. Amounts
drawn under this loan facility will bear interest at the prime rate and be
repayable in cash or Scios Nova Common Stock, at the Company's option, in
December 2002.
18.
<PAGE>
PLAN OF DISTRIBUTION
The Company is registering the shares of Common Stock offered by the
Selling Stockholder hereunder pursuant to contractual registration rights
contained in a Preferred Stock Purchase Agreement entered into in December 1994
(the "Purchase Agreement"), pursuant to which the Selling Stockholder purchased
21,053 shares of nonvoting Series A Preferred Stock for approximately $20
million. Each share of such Preferred Stock is convertible, at the request of
the Selling Stockholder or upon transfer to a third party, into 100 shares of
the Company's Common Stock for a total of 2,105,300 shares of Common Stock. The
Selling Stockholder may not transfer ownership of any of such shares without
first offering the Company the opportunity to purchase such shares at the
average closing trading price for a period preceding the sale. If the Company
does not purchase the shares offered to it, the Selling Stockholder may sell
such shares to any third party without reoffering them to the Company.
Furthermore, the Purchase Agreement provides that the Selling Stockholder may
not, without the consent of Scios Nova, sell to a single third party investor in
any 12 month period more than 500,000 shares of Common Stock purchased under the
Purchase Agreement prior to December 31, 1996 or more than 1,000,000 shares of
Common Stock during any 12 month period thereafter (except that the foregoing
volume limitation is inapplicable to sales of the Common Stock to brokers or
dealers who agree to abide by such volume limitation). The foregoing transfer
restrictions terminate upon the earliest to occur of (i) December 30, 2002,
(ii) the date on which the Selling Stockholder and its affiliates no longer own
3% of the Company's outstanding voting securities or (iii) the closing of a
merger or similar transaction in which greater than 50% of the Company's voting
stock is transferred to a stockholder or group of stockholders, or a sale of all
or substantially all of the Company's assets.
Subject to the restrictions set forth in the Purchase Agreement, the shares
of Common Stock offered hereunder may be sold from time to time by the Selling
Stockholder, or by pledgees, donees, transferees or other successors in
interest. Such sales may be made on the Nasdaq National Market or in the over-
the-counter market or otherwise, at prices and on terms then prevailing or
related to the then-current market price, or in negotiated transactions. The
shares of Common Stock may be sold to or through one or more broker-dealers,
acting as agent or principal, in underwritten offerings, block trades, agency
placements, exchange distributions, brokerage transactions or otherwise, or in
any combination of transactions.
In connection with distributions of the Common Stock, the Selling
Stockholder may enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of the Common Stock in the course of
hedging the positions they assume with the Selling Stockholder. The Selling
Stockholder also may sell the Common Stock short and deliver the Common Stock to
close out such short positions. The Selling Stockholder also may enter into
option or other transactions with broker-dealers that involve the delivery of
the Common Stock to the broker-dealers, which may then resell or otherwise
transfer such Common Stock. The Selling Stockholder also may loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or upon a default may sell or otherwise transfer the pledged Common
Stock.
In connection with any transaction involving the Common Stock, broker-
dealers or others may receive from the Selling Stockholder, and may in turn pay
to other broker-dealers or others, compensation in the form of commissions,
discounts or concessions in amounts to be negotiated at the time. Broker-
dealers and any other persons participating in a distribution of the Common
Stock may be deemed to be "underwriters" within the meaning of the Act in
connection with such distribution, and any such commissions, discounts or
concessions may be deemed to be underwriting discounts or commissions under the
Act.
Any or all of the sales or other transactions involving the Common Stock
described above, whether effected by the Selling Stockholder, any broker-dealer
or others, may be made pursuant to this prospectus. In addition, any shares of
Common Stock that qualify for sale pursuant to Rule 144 under the Act may be
sold under Rule 144 rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is available and
is complied with.
The registration fee and fees in connection with listing the Common Stock
on the Nasdaq National Market will be reimbursed by the Selling Stockholder.
The Selling Stockholder will also reimburse the Company for all
19.
<PAGE>
other costs, expenses and fees in connection with the registration of the Common
Stock with the Commission up to $20,000. The Company and the Selling
Stockholder have agreed, and hereafter may further agree, to indemnify certain
persons, including broker-dealers or others, against certain liabilities in
connection with any offering of the Common Stock, including liabilities arising
under the Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward Castro Huddleson & Tatum, Palo Alto, California.
EXPERTS
The financial statements of the Company and subsidiaries as of December 31,
1994 and 1993 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years for the period
ended December 31, 1994, included in this Prospectus have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report included herein and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer or solicitation by anyone in any state
in which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
----
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain
Documents by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selling Stockholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-1
-------------------
20.
<PAGE>
SCIOS NOVA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of Scios Nova Inc.:
We have audited the accompanying consolidated balance sheets of Scios Nova Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scios Nova Inc.
and subsidiaries as of December 31, 1994 and 1993, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
San Jose, California
February 1, 1995
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,674 $ 13,587
Available-for-sale securities 22,441 90,312
Accounts receivable 3,529 2,614
Other receivables 70 1,681
Prepaid expenses 1,147 1,200
- --------------------------------------------------------------------------------
Total current assets 56,861 109,394
Available-for-sale securities, non-current 52,324 4,372
Property and equipment, net 35,118 36,879
Other assets 1,793 633
- --------------------------------------------------------------------------------
Total Assets $ 146,096 $ 151,278
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,301 $ 2,168
Other accrued liabilities 11,557 9,637
Deferred contract revenue 2,444 617
Current portion of long-term debt 617 638
- --------------------------------------------------------------------------------
Total current liabilities 17,919 13,060
Minority interests -- 596
Long-term debt 1,739 2,323
Commitments (Notes 9 and 10)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares
authorized; 21,053 issued and outstanding -- --
Common stock; $.001 par value; 150,000,000 shares
authorized; issued and outstanding: 35,283,200 and
35,109,937, respectively 35 35
Additional paid-in capital 391,745 370,468
Notes receivable (27) (159)
Unrealized losses on securities (2,309) --
Accumulated deficit (263,006) (235,045)
- --------------------------------------------------------------------------------
Total stockholders' equity 126,438 135,299
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 146,096 151,278
- --------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1993 1992
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales $ 42,792 $ 43,585 $ 17,344
Co-promotion commissions 3,770 500 --
Research & development contracts 7,105 3,483 7,741
- --------------------------------------------------------------------------------
53,667 47,568 25,085
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 26,541 28,782 11,713
Research and development 34,491 39,490 29,945
Marketing, general and administration 15,681 18,190 12,191
Profit distribution to third parties 5,173 4,343 1,495
Restructuring charges 3,500 -- --
Write-off of purchased technology -- -- 108,444
- --------------------------------------------------------------------------------
85,386 90,805 163,788
- --------------------------------------------------------------------------------
Loss from operations (31,719) (43,237) (138,703)
Other income:
Investment income 4,386 6,592 6,846
Other income (expense), net (341) (294) 492
- --------------------------------------------------------------------------------
4,045 6,298 7,338
Equity in net loss of affiliates (883) (15) (581)
Minority interests 596 375 --
- --------------------------------------------------------------------------------
Net loss $(27,961) $(36,579) $(131,946)
- --------------------------------------------------------------------------------
Net loss per common share $ (0.79) $ (1.05) $ (5.76)
- --------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 35,219,442 34,768,195 22,915,336
- --------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Common Stock Additional Preferred Receivable Unrealized
----------------------- Paid-In Stock from Losses on Accumulated
Shares Par Value Capital Par Value Stockholders Securities Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1991 18,322,847 $183 $222,429 $-- $ -- $ -- $ (66,520) $ 156,092
Issued in acquisitions 14,863,238 149 135,380 135,529
Warrants exercised 1,232,188 12 7,939 7,951
Options exercised 125,158 1 869 (85) 785
Other 74,681 1 732 733
Change in par value (311) 311 --
Net loss (131,946) (131,946)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1992 34,618,112 $ 35 $367,660 $-- $ (85) $ -- $(198,466) $(169,144)
Options exercised 409,255 2,106 (74) 2,032
Incentive plan awards 61,357 449 449
Other 21,213 253 253
Net loss (36,579) (36,579)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1993 35,109,937 $ 35 $370,468 $-- $(159) $ -- $(235,045) $ 135,299
Issued to
Genentech, Inc. 20,000 20,000
Options exercised 71,702 375 132 507
Incentive plan awards 65,349 578 578
Other 36,212 324 324
Unrealized losses on
available-for-sale
securities (2,309) (2,309)
Net loss (27,961) (27,961)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 35,283,200 $ 35 $391,745 $-- $ (27) $(2,309) $(263,006) $ 126,438
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1993 1992
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (27,961) $ (36,579) $(131,946)
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 4,693 4,588 3,440
Write-off of purchased technology -- -- 108,444
Other 1,898 1,219 1,301
Change in assets and liabilities,
net of
Nova acquisition:
Accounts receivable (915) 2,211 (2,226)
Accounts payable 1,133 321 (2,577)
Other accrued liabilities 2,498 (513) (1,236)
Other (997) 149 1,552
- --------------------------------------------------------------------------------
Net cash used by operating (19,651) (28,604) (23,248)
activities
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment, net (3,179) (2,269) (4,773)
Acquisition of Nova Pharmaceutical
Corporation and Nova Technology
Limited
Partnership, net of cash received -- -- (3,435)
Sales of marketable securities 454,147 266,226 95,798
Purchases of marketable securities (435,036) (229,325) (90,056)
- --------------------------------------------------------------------------------
Net cash provided (used) by
investment activities 15,932 34,632 (2,466)
Cash flows from financing activities:
Proceeds from issuance of preferred 20,000 -- --
stock
Proceeds from exercise of common stock -- -- 7,950
warrants
Issuance of common stock and collection
of notes receivable from stockholders,
net 411 2,032 785
Issuance of common stock for technology -- -- 712
acquisition
Issuance of long-term debt -- 2,801 --
Payments of long-term debt (605) (349) (10,483)
- --------------------------------------------------------------------------------
Net cash provided (used) by financing 19,806 4,484 (1,036)
activities
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and 16,087 10,512 (26,750)
cash equivalents
Cash and cash equivalents at beginning 13,587 3,075 29,825
of period
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of $ 29,674 $ 13,587 $ 3,075
period
- --------------------------------------------------------------------------------
Supplemental cash flow data:
Net unrealized securities losses $ (2,309) -- --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Scios Nova Inc. ("the Company") and its wholly-owned and
majority-owned subsidiaries. Other affiliates, more than 20% but less than 50%
owned, are accounted for on the equity basis. Intercompany transactions and
balances are eliminated on consolidation.
CASH EQUIVALENTS The Company considers all highly liquid investments with
original maturities of less than ninety days to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
AVAILABLE-FOR-SALE SECURITIES Beginning January 1, 1994, the Company adopted
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities at December 31, 1994 were deemed by management to be
available for sale and are stated at fair value with net unrealized gains or
losses reported in stockholders' equity. Adoption of Statement No. 115 did not
have a material effect on the Company's Consolidated Financial Statements.
Available-for-sale securities consist of short- and medium-term interest-bearing
corporate securities and U.S. Treasury Notes.
At December 31, 1993, the Company followed Financial Accounting Standards No.
12, "Accounting for Certain Marketable Securities." At December 31, 1993, all
marketable securities were stated at cost, which approximated market value.
Premiums and discounts were amortized over the period from acquisition to
maturity.
CONCENTRATION OF CREDIT RISK The Company's excess cash is invested in a
diversified portfolio of securities consisting of U.S. Treasury Notes, deposits
with major banks and financial institutions, and in investment-grade
interest-bearing corporate securities issued by companies in a variety of
industries.
DEPRECIATION AND AMORTIZATION Buildings and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets (3 to 7 years for equipment and 5 to 40 years for buildings).
Leasehold improvements are amortized on a straight-line basis over the shorter
of the asset life or fixed lease term.
PRODUCT SALES Revenue from sales of certain psychiatric products (the "SB
Products") under license from SmithKline Beecham Corporation (see Note 3) is
recognized in the period in which the products are shipped. Provision is made
for estimated returns and allowances, cash discounts and rebates attributable
to Medicaid programs.
F-7
<PAGE>
CO-PROMOTION COMMISSIONS Revenue from co-promotion commissions (see Note 3) is
recognized based on estimated sales levels of McNeil Pharmaceutical's
psychiatric product HALDOL [REGISTERED TRADEMARK] Decanoate for the
contract year.
CONTRACT REVENUES Research and development contract revenues from
cost-reimbursement agreements are recorded as the related expenses are incurred,
up to contractual limits. Payments received which are related to future
performance are deferred and recorded as revenues as they are earned over
specified future performance periods. Research and development payments for
which no services are required to be performed in the future and license
payments irrevocably received are recognized as revenues upon receipt. Research
and development expenses in 1994, 1993 and 1992 include approximately $2.9
million, $3.1 million and $5.5 million, respectively, incurred in connection
with programs subject to cost reimbursement, collaborative or other performance
agreements.
PER SHARE DATA Loss per share is based on the weighted average number of common
shares outstanding for all periods. Stock options, warrants and preferred stock
are antidilutive and therefore excluded from the calculation.
2. Merger with Nova Group
A. NOVA PHARMACEUTICAL CORPORATION On September 3, 1992 ("date of merger"), Nova
Pharmaceutical Corporation ("Nova") was merged into Scios Inc. ("Scios") and the
combined company was renamed Scios Nova Inc. The acquisition was accounted for
under the purchase method of accounting. The results of operations of Nova are
included with the Company's results of operations with effect from the date of
merger.
The Company issued common stock and stock options valued at $114.5 million,
assumed liabilities of $22.9 million and incurred $3.6 million in additional
costs related to the merger. Total consideration as allocated to the assets
acquired was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Current assets $ 3,995
Marketable securities 40,472
Property and equipment 8,026
Other assets 1,022
In-process technology 87,465
- --------------------------------------------------------------------------------
$140,980
- --------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
The portion of the purchase price allocated to in-process technology was charged
as an operating expense in 1992.
B. NOVA TECHNOLOGY LIMITED PARTNERSHIP In December 1992, the Company exercised
its option to acquire all limited partner interests in Nova Technology Limited
Partnership ("NTLP") for $20.4 million and transaction costs of approximately
$0.1 million. The Company also issued contingent payment rights to all limited
partners of the partnership, pursuant to which the Company is obligated until
January 15, 2008 to pay royalties on the sale or license of certain products
that were under development by the partnership.
The total expense of $20.5 million was allocated entirely to in-process
technologies and charged as an operating expense in 1992.
C. CASH FLOWS The merger of Scios and Nova and the acquisition of NTLP included
certain non-cash investing and financing activities as follows (in thousands of
dollars):
<TABLE>
<S> <C>
Common stock and stock options issued $ 134,817
Liabilities assumed 22,902
Assets acquired (53,192)
In-process technology (107,962)
Cash paid 3,435
</TABLE>
D. UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma condensed
statement of operations information has been prepared to give effect to the
merger as if such transaction had occurred at the beginning of the period
presented. The historical results of operations have been adjusted to reflect
the elimination of nonrecurring and merger-related expenses. The information
presented is not necessarily indicative of the results of future operations of
the merged companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (UNAUDITED) 1992
- --------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C>
Revenues $ 56.1
Net loss $(33.9)
Pro forma loss per share $(1.07)
</TABLE>
F-9
<PAGE>
3. Joint Business Arrangements
A. AGREEMENT WITH SMITHKLINE BEECHAM Under the terms of an agreement with
SmithKline Beecham Corporation ("SB"), the Company has the exclusive U.S. rights
to market the SB Products. SB is fully responsible for ancillary matters
relating to sales of the SB Products (including various administrative tasks),
for the maintenance in good standing of all New Drug Applications with respect
to the SB Products and for the maintenance of product liability insurance. The
Company pays SB 40% of net profits, as defined in the agreement, from U.S. sales
of the SB Products.
B. AGREEMENT WITH MCNEIL PHARMACEUTICAL In July 1993, the Company entered into a
five-year agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of
Johnson & Johnson, to jointly promote the injectable antipsychotic HALDOL
[REGISTERED TRADEMARK] Decanoate. Under the agreement, the Company receives
payments based on achieving specified levels of sales. McNeil manufactures and
distributes the product. The agreement may be extended up to an additional three
years upon the attainment of revenue goals.
C. AGREEMENT WITH GENENTECH, INC. In December 1994, the Company entered into a
collaboration agreement with Genentech, Inc. ("Genentech") for the development
and commercialization of AURICULIN [REGISTERED TRADEMARK] anaritide for the
treatment of acute renal failure. The two companies will co-promote AURICULIN
for this indication in the United States and Canada, and share equally profits
from its commercialization. Genentech received exclusive marketing rights to
markets outside North America in return for a royalty on sales. Concurrent with
the collaboration agreement, Genentech purchased $20 million of Scios Nova
preferred stock, convertible into approximately 2.1 million shares of common
stock and provided a $30 million loan to the Company in the form of a letter of
credit (see Note 9). The loan can be drawn down through the year 2002. Genentech
has also agreed to pay the Company up to $50 million in milestone payments upon
the achievement of key development events and commercial targets.
D. AGREEMENT WITH KAKEN PHARMACEUTICAL CO., LTD. In September 1994, the Company
entered into a series of agreements with Kaken Pharmaceutical Co., Ltd.
("Kaken") to expand a previous agreement signed in 1988 for FIBLAST [REGISTERED]
TRADEMARK] bFGF ("FIBLAST"). Under the new agreements, the Company will
collaborate with Kaken to further develop the FIBLAST manufacturing process,
supply
F-10
<PAGE>
FIBLAST product to Kaken and provide Kaken a license to the Company's FIBLAST
manufacturing technology. In return, Kaken will make milestone payments to the
Company which are contingent on Kaken's continuing development of the
product.
4. Affiliates
In June 1994, Guilford Pharmaceuticals Inc. ("Guilford"), a fully consolidated
subsidiary of the Company, completed an initial public offering which resulted
in the Company's ownership declining from 62% to 29%. As a result, the equity
method of accounting was adopted by the Company. Prior to the date of the public
offering, the financial results of Guilford were fully consolidated with those
of the Company.
5. Available-For-Sale Securities
Unrealized gains and losses on available-for-sale securities at December 31,
1994 by classification were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
Fair Value Cost Basis Gains Losses Net
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government &
Government Agency
Securities $37,872 $39,732 $-- $(1,860) $(1,860)
Corporate Bonds 36,893 37,342 7 (456) (449)
- --------------------------------------------------------------------------------
Total $74,765 $77,074 $ 7 $(2,316) $(2,309)
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, scheduled maturities for available-for-sale securities
were less than one year for $22,441,000 and between one and five years for
$52,324,000.
The Company realized gains of $43,879 and losses of $225,717 on the disposal of
available-for-sale securities during 1994.
F-11
<PAGE>
6. Property and Equipment
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Laboratory equipment $ 12,012 $ 12,409
Computer and related equipment 4,138 4,170
Furniture and other 2,782 2,811
Buildings and building improvements 41,371 39,401
- --------------------------------------------------------------------------------
60,303 58,791
Accumulated depreciation and
amortization (26,532) (23,007)
33,771 35,784
Construction in progress 1,347 1,095
- --------------------------------------------------------------------------------
$ 35,118 $ 36,879
- --------------------------------------------------------------------------------
</TABLE>
7. Other Assets
<TABLE>
<CAPTION>
DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deposits $ 127 $ 23
Other assets 268 9
Employee notes receivable 1,360 563
Acquired technology 38 38
- --------------------------------------------------------------------------------
$1,793 $633
- --------------------------------------------------------------------------------
</TABLE>
8. Other Accrued Liabilities
Other accrued liabilities at December 31, 1994 and 1993 comprised the
following:
<TABLE>
<CAPTION>
1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accrued Medicaid rebates $ 2,387 $2,428
Accrued payroll 2,640 2,708
Profit distribution to third parties 1,645 1,361
Costs related to Nova acquisition 207 940
Restructure reserve 2,290 --
Other 2,388 2,200
- --------------------------------------------------------------------------------
$11,557 $9,637
- --------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
In September 1994, the Company recorded a charge of $3.5 million associated with
the closure of its research and development facility in Baltimore, Maryland and
the transfer of certain research and development operations to the Company's
Mountain View, California headquarters. Of the total restructuring charge,
severance and related costs accounted for 34%, asset write-downs 49%, facility
carrying costs 7% and chemical disposal and other expenses 10%.
As of December 31, 1994, actual cash expenditures incurred as a result of the
restructuring plan were approximately $1.2 million. The remaining $2.3 million
provision consists of $0.5 million of additional cash expenses and $1.8
million of non-cash write-downs. It is anticipated that the remaining costs will
be incurred by year-end 1995. In early 1995, the Company terminated its lease on
the Baltimore research and development facility by exercising its option to
purchase the building for approximately $3 million. The Company has recorded a
charge of $1.25 million for the impairment of leasehold improvements in the
Baltimore facility.
<TABLE>
<CAPTION>
1994 1994
Provision Activity Balance
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Severance and relocation $1,178 $1,028 $ 150
Asset write-downs 1,701 (87) 1,788
Facility carrying costs 250 50 200
Chemical disposal and other 371 219 152
- --------------------------------------------------------------------------------
$3,500 $1,210 $2,290
- --------------------------------------------------------------------------------
</TABLE>
9. Lease and Debt Commitments
A. OPERATING LEASES The Company leases facilities under various operating leases
in California and the land on which the Company's California facilities are
located. The long-term ground lease expires in 2053. Beginning in July 2010, a
portion of the annual ground rent is subject to renegotiation.
Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>
Operating Leases
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
1995 $171
1996 181
1997 181
1998 178
1999 186
- --------------------------------------------------------------------------------
$897
- --------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
Rent expense for all operating leases was approximately $565,000, $601,000 and
$565,000 in 1994, 1993 and 1992, respectively.
B. CAPITAL LEASES and Long-term Debt At December 31, 1994, long-term debt and
capital lease commitments were:
<TABLE>
<CAPTION>
Capital Leases Debt
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
1995 $135 $ 680
1996 128 680
1997 9 778
1998 -- 375
1999 -- --
- --------------------------------------------------------------------------------
272 2,513
Less future interest (30) (399)
- --------------------------------------------------------------------------------
$242 $2,114
- --------------------------------------------------------------------------------
</TABLE>
Long-term debt consists of two five-year notes, secured by equipment, at
interest rates of 9.5% and 9.8%. Under the terms of the notes, the Company is
required to maintain a minimum cash and marketable securities balance of $35
million.
C. GENENTECH LOAN COMMITMENT As part of the AURICULIN agreement with Genentech,
Genentech has provided a $30 million loan to the Company in the form of a letter
of credit. The loan can be drawn down through the year 2002, bearing interest at
the prime rate. The loan is repayable in cash or Scios Nova common stock, at the
prevailing market price, at the Company's option at any time through December
31, 2002.
10. Research Commitments
The Company's commitments for research sponsorship payments to collaborators and
institutions during 1995, 1996 and 1997 aggregate approximately $259,000.
In 1988, the Company purchased the interests of Biotechnology Research Partners,
a limited partnership ("BRP") in a joint venture and made a down payment of
$575,000. The balance of the purchase price is to be paid in quarterly
installments in accordance with the following formula: (i) until the minority
partners have received payments of approximately $22.8 million, the Company will
pay approximately 37% of the royalty income from third-party licenses and
approximately 3.7% of the Company's gross sales of Partnership products; (ii)
thereafter, until the minority
F-14
<PAGE>
partners have received aggregate payments of approximately $34.1 million, the
Company will pay approximately 31% of the royalty income and approximately 3.1%
of the Company's gross sales of Partnership products; and (iii) thereafter,
until the earlier of 20 years from the date of exercise of the option or the
time all patents relating to the Partnership's technology expire and all
information relating to that technology becomes part of the public domain, the
Company will pay to the minority partners approximately 20.5% of the royalty
income and approximately 2% of the Company's gross sales of Partnership
products.
11. Stockholders' Equity
As part of the merger, the outstanding Nova warrants were converted into
warrants to purchase approximately 4,645,000 shares of Scios Nova common stock.
At December 31, 1994, warrants were outstanding to purchase approximately
2,662,000 shares at prices ranging from $8.84 to $55.13 per share and are
generally exercisable through June 1998.
The Company's preferred stock may be issued in series that have such rights as
may be designated by the Board of Directors from time to time. There were 21,053
shares of Series A preferred stock issued and outstanding at December
31, 1994. These non-voting shares, which are convertible at the option of the
holder into 2,105,300 shares of common stock, were issued to Genentech in
connection with the AURICULIN collaboration agreement. They have rights to
dividends if a dividend is paid on the common stock and preference upon a merger
or liquidation of the Company equal to the $950.00 per share purchase price.
There was no preferred stock issued and outstanding in the years ended 1993
and 1992.
The Company has a Common Share Purchase Rights Plan under which stockholders
have a right to purchase for each share held, one share of the Company's common
stock at a 50% discount and, in certain circumstances, a share of common stock
of an acquirer at a similar discount. The rights become exercisable, at $55.00
per right, in the event of an acquisition or tender offer which results in the
acquisition of 20% or more of the Company's common stock. The rights may be
redeemed, in certain circumstances, at $0.01 per right and expire on July
31, 2000.
12. Employee Benefits and Stock Option Plans
The Company has a qualified profit sharing plan and trust under Internal Revenue
Service Code sections 401(a) and 401(k). Employees are eligible to participate
in the plan at the beginning of each calendar quarter during the year and can
elect to contribute to the plan up to 15% of their
F-15
<PAGE>
salary subject to current statutory limits. In 1994, the Company matched
employee contributions at a rate of 100% to a maximum of $3,000 per employee for
the calendar year. The Company contribution vests over a three-year period.
Company contributions to the plan totaled approximately $794,000 in 1994,
$845,000 in 1993 and $234,000 in 1992.
Under the Company's stock option plans, the following shares of common stock are
authorized and available for grant as of December 31, 1994:
<TABLE>
<CAPTION>
Shares
Shares Options Available
Plan Title Authorized Outstanding For Grant Option Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1983/86 2,200,000 1,275,689 41,912 Not less than 85% FMV
1989 170,000 43,000 0 Fair Market Value
1992 3,500,000 2,364,406 817,357 Not less than 85% FMV
NQ 443,161 11,740 0 Not less than 85% FMV
</TABLE>
Additional information with respect to the activity of outstanding options is
summarized in the following table.
<TABLE>
<CAPTION>
Number of Aggregate
Common Stock Shares Option Price Price
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Balances at December 31, 1991 1,683,235 $5.00-$19.62 $ 16,896
Granted:
In connection with Nova merger 639,824 $0.64-$20.54 3,304
Other 2,794,908 $2.56-$21.62 24,915
Exercised (125,158) $5.12-$14.00 (870)
Canceled (816,665) $5.50-$21.62 (13,153)
- --------------------------------------------------------------------------------
Balances at December 31, 1992 4,176,144 $0.64-$21.13 31,092
Granted 317,269 $0.01-$ 6.88 2,035
Exercised (409,255) $0.01-$ 9.13 (2,106)
Canceled (163,727) $5.63-$21.13 (1,301)
- --------------------------------------------------------------------------------
Balances at December 31, 1993 3,920,431 $0.16-$21.13 29,720
Granted 303,149 $6.63-$ 9.00 2,597
Exercised (71,702) $2.56-$ 9.13 (408)
Canceled (457,043) $2.56-$18.46 (3,650)
- --------------------------------------------------------------------------------
Balances at December 31, 1994 3,694,835 $0.16-$21.13 $ 28,259
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, options to purchase 2,437,370 shares were fully vested.
F-16
<PAGE>
13. Significant Customers
In 1994, 1993 and 1992, no customers contributed more than 10% of total
revenues.
In 1994, of the $3.5 million in accounts receivable, $1.5 million was a
receivable from SB for prior period sales of the SB Products and $1.3 million
was a receivable from McNeil based on realizing specific sales levels.
14. Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. As of January 1, 1993, no cumulative effect adjustment was
required for the adoption of SFAS 109, as the resulting net deferred tax asset
was fully reserved by a valuation allowance.
The Company has federal and state income tax net operating loss ("NOL")
carryforwards at December 31, 1994 for tax purposes available as follows:
Federal $206,000,000
State 47,000,000
These federal and state carryforwards expire in the years 1997 through 2008, and
1997 through 1999, respectively.
Due to a change in the ownership of the Company, as defined, approximately
$120,000,000 of the federal NOL carryover is subject to an annual utilization
limitation of $15,700,000, and approximately $22,700,000 of the state NOL
carryover is subject to an annual utilization limitation of $9,300,000. Should
another change in ownership occur, future utilization of the Company's NOL
carryforwards may be subject to additional limitations.
F-17
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Depreciable and amortizable assets,
primarily technology $ 6,000 $ 5,900
Other accrued liabilities 3,100 2,500
State (net of federal benefit) 3,800 4,000
Net operating loss carryforward 70,000 57,800
Research credit 7,500 6,000
Valuation allowance (90,400) (76,200)
- --------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
- --------------------------------------------------------------------------------
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
F-18
