SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11749
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SCIOS NOVA INC.
(Doing business as SCIOS INC.)
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(Exact name of registrant as specified in its charter)
DELAWARE 95-3701481
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2450 Bayshore Parkway, Mountain View, California 94043-1173
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(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 966-1550
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Class D Warrants to purchase Common Stock
Contingent Payment Rights
Common Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 18, 1996 was $177,467,728.
As of March 18, 1996, 36,102,949 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Part
- --------------------------------------------------------------------------------
Definitive Proxy Statement with respect to III
the 1996 Annual Meeting of Stockholders
<PAGE>
PART I
Item 1. BUSINESS
General
Scios Inc. ("Scios" or the "Company") is a biopharmaceutical company engaged
in the discovery, development, manufacture and commercialization of novel human
therapeutics using its capabilities in both protein-based and small-molecule
drug discovery and development. The Company focuses its proprietary research and
development efforts on products to treat acute illnesses, primarily in the areas
of cardiovascular and renal disorders, and seeks to collaborate with corporate
partners in the development of products to treat chronic diseases. The Company
also has a marketing and sales organization selling third-party products that
generate cash to help fund continued development of the Company's proprietary
products. To date, none of the Company's proprietary products have been
developed to the commercialization stage.
The Company funds the development of proprietary products that address acute
illnesses, primarily in the areas of acute cardiovascular and renal disorders,
where it believes it has significant product candidates, a strong competitive
advantage and extensive technical expertise. The Company's lead products for
acute conditions are AURICULIN(R) anaritide for the treatment of oliguric acute
renal failure, which is being developed with Genentech, Inc., and NATRECOR(R)
BNP for the treatment of acute congestive heart failure. In May 1995, the
Company announced the results of its 500-patient Phase III clinical trial of
AURICULIN for the treatment of acute renal failure ("ARF"). While the results in
the broad population of ARF patients were a disappointment, there was a
significant clinical benefit in the prospectively-defined subgroup of oliguric
(abnormally low urine output) ARF patients. In October 1995, the Company began a
second, pivotal Phase III trial of AURICULIN in patients with oliguric ARF.
NATRECOR is currently in Phase II clinical studies for the treatment of acute
congestive heart failure. These products are discussed in more detail below in
"Business -- Products to Treat Acute Illness." Scios recently announced its
initiation of a Phase I/II clinical study of FIBLAST(R) trafermin for the
treatment of stroke. The Company is also continuing preclinical studies of
compounds for various other indications.
Therapies for chronic conditions, including FIBLAST for wound healing,
insulinotropin for Type II diabetes and a treatment for Alzheimer's disease,
have been licensed to corporate partners for development or are being developed
by Scios with funding from corporate partners. Under its arrangements with
corporate partners, Scios typically receives research and development funding,
payments for clinical supplies and/or milestone payments for achieving
scientific and clinical benchmarks. The Company is also entitled to royalties on
commercial sales of products and, in some cases, may receive additional revenues
from the manufacture of products. FIBLAST is the product being developed with a
partner that has reached the most advanced development stage. In 1996, Kaken
Pharmaceutical Co., Ltd., the Company's Japanese partner for FIBLAST, expects to
file a New Drug Application in Japan seeking approval to market FIBLAST for the
treatment of recalcitrant wounds. See "Business -- Products Being Developed in
Collaboration with Others."
Scios' financial strategy involves careful management of cash through
targeted investment in its acute-care pipeline, while underwriting a portion of
this investment with cash flow from its commercial operations, and generating
corporate partner funding for chronic-care products under development. Scios is
seeking to reach sustainable profitability by 1998 through development of its
acute-care products, collaborations with corporate partners on products for
chronic illness and the expansion of its marketing and sales capability. This
statement of the Company's goal may be deemed to be a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act of 1995. It
is based on current expectations of the Company, and the Company assumes no
obligation to update this information. As discussed in the respective sections
of this Annual Report on Form 10-K, numerous factors could cause actual results
to differ.
Scios was formed through the September 1992 merger (the "Merger") of Scios
with Nova Pharmaceutical Corporation ("Nova"). The Merger brought together
Scios' expertise in producing recombinant proteins with Nova's expertise in
synthesizing small molecules. As a result, Scios 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. In the Merger, the Company also acquired the basis for its present
commercial operations -- a flex time sales force and a line of psychiatric
products that the sales force markets. Subsequently, the Company added a
relationship on HALDOL(R) Decanoate, in which its sales force co-promotes the
product with Ortho-McNeil Pharmaceutical, an affiliate of Johnson & Johnson.
<PAGE>
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, to Scios Nova Inc. in
September 1992 following the Merger, and reverted to the name Scios Inc. in
March 1996. 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.
Product Development Activity Table
The following table summarizes certain information concerning Scios'
principal products under development. The information in the table is qualified
in its entirety by reference to the more detailed information concerning the
Company's products that is set forth elsewhere in this report:
<TABLE>
<CAPTION>
POTENTIAL APPLICATIONS/ DEVELOPER/CORPORATE
PRODUCT INDICATIONS STATUS* PARTNER (TERRITORY)
<S> <C> <C> <C>
AURICULIN(R) anaritide Oliguric acute renal failure Phase III clinical Scios/Genentech, Inc.
NATRECOR(R) BNP Acute congestive Phase II clinical Scios
heart failure
FIBLAST(R)trafermin Recalcitrant wounds (Japan) Phase III clinical Kaken Pharmaceutical Co., Ltd. (Asia)
Stroke Phase I clinical Scios
Coronary revascularization Preclinical Scios
Peripheral revascularization Preclinical Scios
Insulinotropin Type II diabetes Phase II clinical Pfizer Inc (worldwide)
Amyloid protease Alzheimer's disease Research Hoechst Marion Roussel, Inc.
inhibitors (worldwide)
Serine protease inhibitors Cardiovascular disorders Research Scios
Cell adhesion Inflammatory conditions Research Scios
inhibitors
<FN>
* "Research" denotes work up to and including discovery research and initial
production. "Preclinical" denotes studies in animal models necessary to support
an application to the Food and Drug Administration ("FDA") and foreign health
registration authorities to commence clinical testing in humans. Clinical trials
for pharmaceutical products are conducted in three phases. In Phase I, studies
are conducted to determine safety. In Phase II, studies are conducted to gain
additional safety information, as well as preliminary evidence as to the
efficacy and appropriate doses of the product. In Phase III, studies are
conducted to provide sufficient data for the statistical proof of safety and
efficacy, including dosing regimen. Phase III is the final stage of such
clinical studies prior to the submission of an application for approval of a new
drug or licensure of a biological product.
</FN>
</TABLE>
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Product Development Activities and Risks
Scios focuses its product development efforts on proprietary
therapeutics for acute illnesses, principally in the areas of acute
cardiovascular and renal disorders. 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. As
described in "Business -- Products to Treat Acute Illness" and "Business --
Products Being Developed in Collaboration with Others," Scios' 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. Except for descriptions of historical information contained in the
Business section of this Annual Report on Form 10-K, the matters discussed are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995 ("PSLRA-95") and intended to give investors an understanding of the
Company's plans and the challenges it faces in implementing them. These
forward-looking statements are based on current expectations and the Company
assumes no obligation to update this information. Numerous factors could cause
actual results to differ from those described in these forward-looking
statements. The Company cautions investors that its business is subject to
significant risks and uncertainties. In particular, the proposed development
schedules for the Company's products may be affected by a wide variety of
factors, including technological difficulties, proprietary technology and rights
developed by others, reliance on third parties for support, and changes in
governmental regulation. Many of these factors will not be within the control of
Scios.
In developing pharmaceutical products, the Company faces critical
challenges in at least three broad areas: the discovery of novel compounds that
are worth developing; the successful clinical testing in humans of candidate
compounds that the Company deems worthy of development; and competition in many
forms and areas. The discovery process in pharmaceutical development often
involves doing or understanding what has not previously been done or understood,
while working in biological systems that are not always predictable or
predictive. Pharmaceutical drug discovery is an inherently challenging and risky
undertaking in which numerous factors come into play in determining success or
failure. Some of the key factors include the ability to identify appropriate
targets and models to use in understanding complex disease processes, to
comprehensively screen many compounds under consistent conditions to identify
those which show promise, to build on insights gained from numerous and
frequently imperfect data points in selecting the compounds most likely to treat
the target disease, even though the target disease itself is not completely
understood (both as to what causes that disease and how the disease manifests
itself), and to avoid being mislead by false indicators. These efforts all take
place in increasingly competitive environments in which many companies are often
simultaneously trying to apply their resources and insights to the same targets
and challenges. How well a particular company marshals its resources to attack
an issue will often determine its success. Because it is impractical, if not
impossible, to do everything imaginable to acquire sufficient knowledge to
assure success in meeting these challenges, intuition, untested assumptions and
luck can sometimes play a significant role in determining a particular company's
success.
The Company particularly cautions investors that any decision to
commence clinical trials in humans based on the results of preclinical work in
in vitro assays and animal models does not necessarily mean that the results
achieved in human clinical studies will be similar to those achieved in the
preclinical models. A central issue in all pharmaceutical development is how
well a particular in vitro assay or preclinical animal model selected by the
investigator predicts the effectiveness of a drug candidate in treating the
target disorder in humans. While well-developed and well-tested models exist for
some disorders, often it is not possible to know with certainty the predictive
quality of a model until results in humans are obtained. In some cases, it turns
out that the selected model does not accurately predict the effect of a drug
candidate in humans or whether the product is safe to use in humans at all.
In clinical testing of compounds selected for development, the Company,
as do other companies developing pharmaceutical products, faces challenges in
several areas. In the clinical trial initiation phase, these factors include
creating a sound study design that will as effectively and efficiently as
possible reveal the safety and efficacy of a particular compound and then
finding appropriate clinical investigators who can identify and recruit patients
and follow the clinical protocol. Each clinical trial itself contains the risk
that a compound will not produce positive clinical results in the study
population or that it will produce ambiguous or mixed results in which the
benefits of the compound do not clearly enough outweigh any adverse side
effects, or that judgments will have been incorrect about how large the study
population needed to be to demonstrate the effects of the compound. When
clinical trials for a compound are completed, a vast quantity of data on a wide
range of topics must be assembled in a manner that will give regulatory
authorities the basis, following intense review by the FDA and comparable
regulators in other countries, to decide whether or not to approve the product
for marketing. Inherent in the regulatory review process is the risk that the
particular regulatory agency will not find sufficiently reliable the methods
which the company selected or that such agency may place different weight on
various
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factors and results than the developing company did. In addition, when another
company's product is already on the market to treat the target indication, the
company developing a new drug for the same indication faces additional
challenges, including demonstrating that the new product has superior
properties. Because the regulators in various countries operate under different
regulatory systems and approaches, their decisions and requirements with respect
to the clinical testing of a compound may vary from one country to another.
These issues and a company's inability to address them adequately may lead the
regulatory authority to put limits on how or for what indication a compound can
be marketed, which directly affects a product's commercial success. Failure to
deal with these factors to the satisfaction of the regulatory authority can also
lead to the denial of approval to market a product.
All of these factors and others combine to make drug development
extremely challenging and competitive. At the same time, these factors
contribute to the significant rewards and satisfaction that can accrue to the
personnel and stockholders of a company that successfully overcomes the
challenges of drug discovery and development and creates a new pharmaceutical
agent.
Products to Treat Acute Illness
The two leading products for which Scios is performing the primary
development activities, AURICULIN(R) anaritide and NATRECOR(R) BNP, have
resulted from the Company's program in natural human peptides that improve
kidney and heart function.
AURICULIN(R) anaritide. AURICULIN is a synthetic version of a human
hormone, atrial natriuretic peptide ("ANP"), which is produced in the heart and
has a range of biological activities known to be important in kidney and heart
function, including increasing the elimination of water and salt from the body.
ANP improves kidney function by increasing blood flow into the filtration units
of the kidney and restricting blood outflow.
In May 1995, the Company announced the results of its initial Phase III
clinical study of AURICULIN for the treatment of acute renal (kidney) failure
("ARF"). AURICULIN did not reduce the need for dialysis in the broad patient
population, nor did the drug reduce mortality. The initial phase III study did
demonstrate, however, that AURICULIN significantly reduced the need for dialysis
in a prospectively-defined subgroup of patients suffering from oliguric ARF
(patients with abnormally low urine output). The placebo-controlled
double-blinded study involved 504 patients at more than 60 centers. The primary
clinical endpoint in the initial Phase III study was a reduction in the need for
kidney dialysis in ARF patients. The study was also designed to evaluate
AURICULIN's potential for decreasing mortality and to increase 21-day
dialysis-free survival in such patients. The oliguric subgroup represented
approximately 24% of the 504-patient study. In the 120 oliguric ARF patients,
dialysis was required in 64% of the patients receiving AURICULIN compared to 87%
of the patients receiving placebo, a 26% reduction (p=0.005). Treatment with
AURICULIN also significantly increased the number of oliguric patients who
survived for 21 days without requiring dialysis (dialysis-free survival) from 8%
in the placebo-treated patients to 27% in patients treated with AURICULIN
(p=0.008). Treatment with AURICULIN did not significantly reduce mortality in
oliguric patients. Based on these results, discussions with the Food and Drug
Administration, and quantitative market research indicating that oliguric ARF
affects up to 80,000 patients in the United States each year, in October 1995,
Scios initiated a second phase III clinical study of AURICULIN for the treatment
of oliguric ARF. The study will enroll approximately 250 patients and is
expected to be conducted at 60 to 80 centers throughout the United States and
Canada. The primary clinical endpoint of the study is 21-day dialysis-free
survival. The study is designed to demonstrate whether patients with oliguric
ARF treated with AURICULIN have a higher rate of dialysis-free survival than
patients receiving a placebo. The study is also designed to evaluate the number
of oliguric ARF patients requiring acute dialysis at 14 days and patient
mortality at 21 days following treatment. As with all clinical studies, Scios is
not able to predict whether the results of the second phase III study begun in
October will be similar to those achieved in the first phase III study or
sufficient to achieve marketing approval.
On December 30, 1994, the Company entered into a Collaboration
Agreement (the "Collaboration Agreement") with Genentech, Inc. ("Genentech")
relating to the joint development and commercialization of AURICULIN for use in
the treatment of ARF. The Collaboration Agreement provides for the parties'
co-promotion of AURICULIN in the United States and Canada and gives Genentech
exclusive marketing rights in countries other than the United States and Canada
(the "Licensed Territory"). Scios will receive royalties on sales in the
Licensed Territory, a $30 million milestone payment upon receipt of United
States regulatory approval, and additional payments of up to $20 million upon
obtaining regulatory approvals and achieving certain sales levels in other
designated markets.
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The Company will bear the development costs of AURICULIN until the
receipt of regulatory approval in North America. Thereafter, all costs of
development and promotion within North America will be shared equally between
the two parties. Genentech will bear all costs for development and promotion
within the Licensed Territory.
If the Company does not file a New Drug Application ("NDA") for
AURICULIN 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 or another
natriuretic peptide product under development by Scios into the Collaboration
Agreement for use in the treatment of ARF or (ii) terminating the Collaboration
Agreement. This option could limit the Company's ability to enter into
collaborative arrangements on NATRECOR or any other natriuretic peptide product
until the expiration of such deadlines. If Genentech were to elect to bring a
product into the Collaboration Agreement in place of AURICULIN, the milestone
payments due with respect to such product would be reduced significantly.
Looking forward, there can be no assurance that the Company will ever
receive the requisite regulatory approvals to market AURICULIN or receive the
milestone payments called for by the Collaboration Agreement. In part, the
latter will depend on Genentech's assessment of the product's performance and
potential, which could differ from Scios' assessment. In addition, there can be
no assurance that AURICULIN (or any other 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. These and other statements about AURICULIN are
forward-looking within the meaning of the PSLRA-95 and actual results achieved
by the Company may vary. The actual results and time frame over which they are
achieved by the Company will be determined by numerous factors, principally
including the safety and efficacy of AURICULIN, which is to be determined in the
second pivotal Phase III trial currently being conducted, the Company's success
in enrolling patients in a timely manner, and the scope of any regulatory
approval for AURICULIN, which will require the regulators' acceptance of the
Company's work in a wide variety of areas in the development of AURICULIN and
depend on the regulators' analysis and interpretation of the clinical trial
results. See "Business -- Product Development Activities and Risks" for a
further discussion of these factors and their potential impact on
commercialization of the Company's products.
Concurrent with the signing of the Collaboration Agreement, Genentech
made (i) a $20 million equity investment in Scios by purchasing a new class of
nonvoting preferred stock and (ii) a $30 million loan commitment, which the
Company may draw against at any time through December 2002. See Note 2 of Notes
to Consolidated Financial Statements.
Scios has received from the FDA Orphan Drug designation of AURICULIN in
ARF. See "Business -- Government Regulation." In March 1994, the Company entered
into a long-term supply agreement pursuant to which a third party has been
contracted to produce bulk form AURICULIN for Scios via a synthetic process. See
"Business -- Manufacturing."
Scios' scientists were among the first groups to clone the gene
encoding human ANP, and the Company has produced the hormone synthetically and
using recombinant DNA technology. Scios has a worldwide, semi-exclusive license
to patent rights of Merck & Co., Inc. ("Merck"), including an issued United
States patent covering the ANP product currently under development by Scios.
This license is royalty free in the United States. The patent licensed to Scios
was issued to Merck at the conclusion of an interference proceeding that also
involved Scios' patent application covering human ANP. The patent, which is due
to expire in August 2007, allows the Company and Merck to prevent others from
marketing Scios' form of ANP in the United States. The Company also has an
exclusive license under the ANP patent rights of Queens University. These patent
rights include an issued European patent which covers numerous forms of ANP,
including that being developed by the Company. This European patent terminates
in December 2003. See "Business -- Patents and Proprietary Rights" for a further
discussion of the patent situation for AURICULIN.
Scios reacquired rights to AURICULIN from Wyeth-Ayerst Laboratories, a
division of American Home Products Corporation ("AHP"), in 1989. As
consideration for the reacquired rights, the Company made an initial payment to
AHP and agreed to make additional payments out of amounts received by Scios
(exclusive of research and development funding) upon completion of licensing or
other arrangements for the commercialization of AURICULIN. Approximately $5.7
million in milestone payments remain to be paid to AHP if AURICULIN is approved
for marketing. Scios' initial research on AURICULIN was funded by Biotechnology
Research Partners, Ltd. ("BRP"), to whom Scios owes certain payments upon the
commercialization of AURICULIN. See Note 10 of Notes to Consolidated Financial
Statements.
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NATRECOR(R) BNP. During 1994, Scios conducted Phase I/II clinical
studies of NATRECOR for the treatment of acute congestive heart failure ("CHF").
The results of the Phase I/II studies demonstrated significant improvements in
key measures of heart function following treatment with NATRECOR. Based on these
preliminary studies, in October 1994, the Company initiated Phase II studies for
the treatment of acute CHF. These studies include several dose-ranging and
safety trials and are expected to enroll approximately 200 patients. Contingent
on the results of these trials, Scios hopes to begin Phase III efficacy studies
of NATRECOR for acute CHF in 1996. This discussion of NATRECOR includes
forward-looking statements within the meaning of the PSLRA-95, which are based
on current information. Many factors could cause actual results to differ from
those described in these forward-looking statements, principally including the
rate of patient enrollment in the NATRECOR trials, the occurrence of unexpected
and severe side effects, the Company's ability to select a dosing regimen that
optimizes the performance of NATRECOR, and the degree of efficacy of NATRECOR as
shown in the various studies the Company is conducting. The current Phase II
clinical studies are expected to be completed in the first half of 1996, at
which point the Company will analyze the results and decide what future
development activities, if any, are appropriate. See "Business -- Product
Development Activities and Risks" for a further discussion of factors that can
impact the Company's commercialization of its products, including NATRECOR.
Acute CHF affects over one million people annually in the United
States. Because the market for treatment of CHF is very competitive, the
Company's success in commercializing NATRECOR will be particularly dependent not
only on strong clinical data but on its ability to produce NATRECOR cost
effectively. As a result, the Company is analyzing alternative methods of
manufacturing NATRECOR and expects to shift from using synthetically-produced
NATRECOR to using material produced by recombinant expression. This change to
producing material recombinantly will create additional challenges for the
development of NATRECOR. See "Business -- Manufacturing."
The Company believes that it was the first to discover human b-type
natriuretic peptide ("BNP"), whose gene it cloned in 1988, as a part of its
program in natural human peptides that improve heart and kidney function. Like
ANP, BNP is made in the heart, and preclinical studies at the Company and
elsewhere suggest that BNP has biological effects similar to ANP in increasing
the elimination of salt and water from the body, dilating blood vessels, and
decreasing the secretion of other hormones which lead to blood vessel
constriction and elevated blood pressure. The Company has an issued United
States patent covering human BNP, which has a term through May 2009. This and
other United States patents issued to Scios are subject to possible extension
due to time taken up in the regulatory approval process. In addition, all issued
patents are subject to the risk that they may be challenged by another entity
which may result in a court invalidating the patent. See "Business -- Patent and
Proprietary Rights."
Other Research. The Company also conducts exploratory research from
time to time on other agents and on new applications of agents under development
by the Company for other indications. Such projects include the Company's
research exploring novel applications for serine protease inhibitors and for
FIBLAST. The challenges and risks the Company faces in developing pharmaceutical
products are discussed in "Business -- Product and Development Activities and
Risks." In 1995, the Company and collaborators began investigating FIBLAST in
preclinical models of several acute-care indications, including stroke, coronary
revascularization and peripheral revascularization. Based on the results in
these preclinical models, in early 1996, the Company announced that it would
conduct a Phase I/II clinical trial in the use of FIBLAST to treat stroke. The
Company is also providing FIBLAST to the National Institutes of Health ("NIH")
to support a clinical trial NIH is conducting in coronary revascularization.
Preclinical work in peripheral revascularization is ongoing. See "Business --
Products Being Developed in Collaboration with Others -- Tissue Repair."
Proteases are biological processing agents that operate to cut proteins
into pieces variously triggering or affecting their function. Serine proteases
are a major class of proteases. In its serine protease inhibitors program, the
Company is attempting to develop molecules that inhibit specific serine
proteases. Lead compounds being tested in preclinical models appear to have
potential application in reducing complications associated with major
cardiovascular and inflammatory diseases.
Cell adhesion inhibitors are small-molecule compounds that inhibit
certain white cells, called neutrophils, from adhering to cells that line blood
vessels, an early step in the inflammatory process. This area of research is the
continuation of research and efforts to develop a class of compounds, called
leumedins, for the inhibition of neutrophil adhesion. Nova, and later Scios,
conducted early-stage clinical studies on leumedins, primarily leumedin compound
NPC 15669. In 1993, the Company determined that the safety profile of NPC 15669
did not warrant further clinical development of that compound and, since 1994,
the Company has focused its research efforts in this area on development of
second-generation compounds, called cell adhesion inhibitors, with potential
application in cardiovascular and inflammatory disorders. The Company has an
issued United States patent and pending United
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States and foreign applications covering certain classes of cell adhesion
inhibitor compounds of potential use in treating inflammatory conditions.
The Company has also conducted a research project on bradykinin
antagonists. The effort on the project was reduced in 1995 and the scope of the
Company's ongoing effort is under review in 1996. The bradykinin antagonist
project was undertaken by Nova on behalf of Nova Technology Limited Partnership
("NTLP"), a limited partnership that funded Nova's research and development of
certain projects. In December 1992, the Company exercised an option to acquire
all of the limited partnership interests of NTLP in exchange for Common Stock
and contingent royalty payments based on future product sales. The Company and
its licensees remain obligated to fund further development of the products
previously developed on behalf of NTLP (the bradykinin antagonist project and
certain drug delivery projects, which drug delivery products have been licensed
to third parties), unless Scios determines, in its reasonable judgment, that the
products to be funded are not commercially viable and technically feasible from
Scios' perspective. See Note 10 of Notes to Consolidated Financial Statements.
Products Being Developed in Collaboration with Others
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 and overall attitude towards
engaging in outside collaborations. Under several of its joint development and
license agreements, Scios 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 partner. The recent wave of
mergers among the established pharmaceutical companies and the downsizing and
shift in research strategy that often follows these mergers have underscored the
fact that corporate partners can change their strategy, and may sometimes drop
entirely the collaborations they or their predecessor have had with other
companies.
Tissue Repair
FIBLAST(R) trafermin. FIBLAST trafermin is Scios' form of human basic
fibroblast growth factor, an agent that has been shown to promote angiogenesis
(the growth of new blood vessels) and directly stimulate the growth of
connective tissue, as well as the outer layer of skin.
Since 1988, research and development of FIBLAST has been conducted by
both Scios and Kaken Pharmaceutical Co., Ltd. ("Kaken"), the Company's corporate
partner in Japan. Pursuant to a 1988 agreement, Kaken has exclusive rights to
develop and market FIBLAST for all indications in Japan, Korea, Taiwan, Hong
Kong and the People's Republic of China. The Company receives research and
development support payments, is entitled to receive additional payments as
regulatory milestones are met, and will receive royalties on any sales of
FIBLAST products by Kaken. In 1994, the Company and Kaken signed a series of
agreements expanding the 1988 agreement. Under the 1994 agreements, Scios will
manufacture FIBLAST for the next several years for use by Kaken. The agreements
also establish a manufacturing process development collaboration between the
companies and provide Kaken with a license to Scios' manufacturing technology
for FIBLAST. It is intended that Kaken be able to manufacture FIBLAST for its
own use in the future. Under the 1994 agreements, Kaken will make payments to
Scios for the supply of material, the process development collaboration, and the
license to FIBLAST manufacturing technology.
Kaken conducted two Phase III trials in Japan for evaluation of FIBLAST
in recalcitrant wounds. Kaken is analyzing the results of these studies and
assembling a complete set of data related to FIBLAST and its manufacture with a
view to filing an NDA in Japan for this indication. Kaken's decision on this
filing is expected to be made in 1996 and will depend in large measure on the
results obtained in the trials Kaken has conducted and the acceptability of the
manufacturing section of the NDA that Scios is preparing for Kaken. Before it
may begin to market FIBLAST in Japan, Kaken must obtain approvals from the
Japanese authorities with respect to the NDA for FIBLAST in the target
indication and also for product pricing in Japan. Obtaining these approvals is a
complex process involving a thorough review of the comprehensive set of data
that Kaken is required to submit. Approval for Kaken to market the product in
Japan will require that the Japanese authorities reach the conclusion that such
data demonstrate to the regulators' satisfaction that FIBLAST is safe and
effective in the treatment of recalcitrant wounds. Although Japanese regulators
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will apply Japanese standards and practices in reviewing Kaken's NDA seeking
approval to market FIBLAST, Kaken faces many of the same challenges and factors
that are discussed in "Business -- Product Development Activities and Risks."
Following the Company's completion in 1993 of Phase II clinical trials
of FIBLAST in the United States for the treatment of recalcitrant wounds
(pressure sores and neuropathic ulcers), the Company determined not to fund
additional clinical studies of FIBLAST for chronic illnesses, except under
sponsorship of a corporate partner. This decision was driven by the cost of the
extensive clinical trial program expected to be required for approval of such a
product in the United States. To date, the Company has not entered into such a
partnership for the development of FIBLAST in the United States for the
treatment of recalcitrant wounds. Scios is also conducting research on the use
of FIBLAST for treatment of certain acute illnesses. Scios is seeking a
corporate partner to co-develop FIBLAST with Scios for these acute indications.
As in the Company's agreement with Genentech on AURICULIN, such an agreement is
likely to involve a license by Scios outside of the United States and may
involve a co-development relationship in the United States and perhaps other
parts of North America. While the Company is seeking a partner for FIBLAST,
there can be no assurance that one will be obtained on terms acceptable to the
Company. See "Business -- Products to Treat Acute Illness -- Other Research."
The Company is obligated to make payments to Organon International
("Organon") based on amounts received by Scios upon commercialization of
FIBLAST. Approximately $1.9 million remain to be paid under the obligation,
which stems from the Company's 1989 reacquisition of certain FIBLAST rights
previously licensed to Organon. The basic research on FIBLAST was funded by
Biotechnology Research Partners, Ltd. ("BRP"). See Note 10 of Notes to
Consolidated Financial Statements. See also "Business -- Patents and Proprietary
Rights" for a discussion of FIBLAST patent issues.
Alzheimer's Disease
(beta)-Amyloid Precursor Protein. In July 1992, Scios formed a research
alliance with Marion Merrell Dow, Inc. ("MMD") to jointly develop new therapies
for Alzheimer's disease. The program is focusing on developing pharmaceuticals
that prevent the formation of (beta)-amyloid deposits in the brain. MMD merged
with Hoechst Roussel in 1995 to form Hoechst Marion Roussel, Inc. ("HMR"). For a
discussion of the potential impact of such a merger on the priorities of a
corporate sponsor such as HMR, see the opening paragraph of this section
"Business -- Products Being Developed in Collaboration with Others." HMR will
have exclusive worldwide rights to develop and market Alzheimer's drugs
discovered by the alliance, if any. HMR is funding the ongoing work at the
Company in this field. In addition, Hoechst Roussel was conducting research in
the Alzheimer's field prior to the merger creating HMR and the degree to which
this Hoechst Roussel research will impact or be excluded or included in the
program with Scios has yet to be analyzed fully. In addition, HMR could decide
that it no longer wishes to collaborate with Scios as of the end of their
current research commitment which extends through June 1997. If a product from
the collaboration on Alzheimer's disease advances into development and
commercialization by HMR, the Company would receive substantial milestone
payments and royalties. In 1995, the Company was issued a United States patent
covering transgenic mice that develop brain tissue deposits characteristic of
those found in humans with Alzheimer's disease, which technology is one of the
bases for the parties' collaboration.
Metabolic Disorders
Insulinotropin. Through its former subsidiary, Metabolic Biosystems,
Inc., the Company developed insulinotropin in collaboration with Pfizer Inc
("Pfizer"). For several years, Pfizer has been conducting various Phase II
clinical trials to assess the use of insulinotropin for the treatment of Type II
diabetes. Insulinotropin appears to be a potent peptide that stimulates insulin
release when blood sugar levels are above normal. Type II diabetics do not
release enough insulin from the pancreas when blood glucose levels rise in
response to eating a meal and become progressively more resistant to insulin
action in stimulating glucose uptake by muscle and fat tissue. Insulinotropin
controls blood glucose levels in Type II diabetics by stimulating insulin
release and perhaps by overcoming insulin resistance. Present therapies for Type
II diabetics include insulin injections and oral hypoglycemic agents, which can
induce dangerously low blood sugar levels. If insulinotropin stimulates insulin
release only when blood sugar levels are above normal, it may have a lower risk
of this serious side effect. The Company has produced insulinotropin
synthetically and using recombinant DNA technology.
The Company holds an exclusive license to patent applications covering
insulinotropin held by Massachusetts General Hospital, which rights were
licensed to Pfizer as part of the research collaboration. A United States patent
licensed exclusively to the
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Company covers the form of insulinotropin being developed by Pfizer under
license from the Company. The term of the patent extends through June 2009. An
additional issued patent and a pending application cover other forms of
insulinotropin.
Under the parties' original collaboration agreement, Pfizer had the
right to commercialize products on an exclusive, worldwide basis under a
royalty-bearing license. In early 1994, Scios and Pfizer amended the terms of
their collaboration agreement. Scios agreed to reduce future royalties and
surrender co-marketing and manufacturing rights in exchange for the addition of
product development milestone payments to Scios. As a part of the amendment,
Pfizer also terminated its rights to other technologies developed in the
collaboration.
Additional Projects
The Company has from time to time pursued product development
activities outside of the focus areas described above, some of which programs
are discussed below. Scios intends to divest or otherwise leverage technologies
which it concludes are not central to its long-term business strategy.
BNP Diagnostic. Third-party researchers have determined that the level
of circulating brain natriuretic peptide (BNP) may be a good basis for a
diagnostic to identify and track patients suffering from congestive heart
failure. Scios has licensed to Shionogi and Co., Ltd. ("Shionogi") the right
under the Company's patent position on BNP to develop diagnostic products for
Japan in exchange for royalties on product sales. In 1994, Shionogi received
Japanese regulatory approval to market a radioimmunoassay diagnostic kit
employing the technology, but as of February 1996 had not yet received the
necessary pricing approval from Japanese regulators to begin marketing the
diagnostic kit. Scios is now seeking to enter into agreements with other
companies to commercialize this application of its BNP patent rights in
additional territories.
CNS Disorders; Guilford Pharmaceuticals. In June 1994, Guilford
Pharmaceuticals Inc. ("Guilford"), at that time a majority-owned subsidiary of
the Company, completed an initial public offering of $15 million of common stock
to pursue the development of pharmaceutical products for the treatment of
diseases of the central nervous system (CNS). As a result of the offering,
Scios' ownership interest in Guilford was reduced to approximately 29%. A
subsequent offering in August 1995 reduced Scios' ownership to approximately
16%, and a recently-completed offering in March 1996 has further reduced Scios'
ownership to approximately 12%. Scios had previously transferred to Guilford
certain neuroscience technology originally developed by Nova, and had licensed
to Guilford the GLIADEL(R) implant project and related drug delivery technology
described below for application in the treatment of tumors of the central
nervous system and cerebral edema ("Guilford Field"). Guilford is using the
funding it has raised in the public market to develop products based on these
technologies. The most advanced Guilford product is GLIADEL, for which Guilford
filed an NDA in the United States in early 1996.
Drug Delivery Systems. Prior to the Merger, Nova had been developing
certain drug delivery systems. Its two most advanced projects were the GLIADEL
implant to treat primary brain cancer and the SEPTACIN(R) implant for the
treatment of osteomyelitis, a serious bone infection. These projects were
developed pursuant to a license agreement with the Massachusetts Institute of
Technology ("MIT") relating to MIT's BIODEL(R) drug delivery technology. As
noted above, the Company licensed a portion of the drug delivery technology,
including GLIADEL, to Guilford. In 1994, the Company licensed to another third
party the drug delivery technology, including SEPTACIN, for all uses outside the
Guilford Field. Scios thereafter assigned its BIODEL license rights back to MIT,
which will administer these licenses. The Company and MIT will receive royalty
and milestone payments under the license agreements with Guilford and the other
licensee as products are developed. The licensees are also obligated to meet
certain diligence standards in pursuing development of their respective product
candidates. The GLIADEL and SEPTACIN projects were undertaken by the Company on
behalf of Nova Technology Limited Partnership, the limited partnership that
funded Nova's research and development on these projects. See Note 10 of Notes
to Consolidated Financial Statements for a description of the Company's payment
obligations to former limited partners.
Human Lung Surfactant ("hLS"). In early 1996, the Company entered into
an agreement with Byk Gulden Pharmazeutika ("Byk Gulden"), transferring to Byk
Gulden all of the Company's interest in a portfolio of issued patents on the
protein components of lung surfactant, some of which were based on Scios' own
work and some of which Scios had obtained under an assignment of patents and
patent applications owned by Children's Hospital Medical Center of Cincinnati.
The Company received an initial payment and will receive additional fixed
payments if Byk Gulden commercializes an hLS product. Scios will not receive
royalties on sales by Byk Gulden.
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Marketing and Sales
Once they have been approved for marketing, the Company ultimately
intends to sell certain of its proprietary products in the United States through
its own sales force for some or all approved indications. This could be done by
the Company alone or jointly with other companies, such as is the case for the
Company's co-promotion agreement on AURICULIN with Genentech. Presently, Scios
generates revenues by marketing products that were developed by others.
Third-Party Products. The Company has a sales force of approximately 85
representatives who are employed exclusively by the Company and work on a
part-time basis marketing psychiatric products. The Company currently markets in
the United States four psychiatric products under license from SmithKline
Beecham Corporation ("SB") and co-promotes a fifth product distributed by
Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of Johnson & Johnson.
Since 1993, the Company has jointly promoted with Ortho-McNeil
HALDOL(R) Decanoate (haloperidol) for the treatment of schizophrenia. Under the
agreement, the Company receives quarterly payments based on total sales of the
product. Ortho-McNeil manufactures and distributes HALDOL, and generally
indemnifies Scios against product liability claims. The five-year agreement may
be extended up to an additional three years upon the Company's attainment of
revenue goals. In 1995, HALDOL faced significant competition from RISPERDAL(R),
a newly-launched product of another company.
The Company has exclusive rights to market the following SB products in
the United States: THORAZINE(R) (chlorpromazine) and STELAZINE(R)
(trifluoperazine) for the treatment of schizophrenia, ESKALITH(R) and ESKALITH
CR(R) (lithium) for the treatment of manic depressive illness, and PARNATE(R)
(tranylcypromine) for the treatment of depression (collectively, the "SB
Products"). SB currently manufactures and distributes the SB Products. SB may
discontinue manufacturing one or more of the products if it gives the Company at
least 12 months' notice, in which case Scios has the right to manufacture such
product(s). SB is responsible for all 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 with respect to the SB
Products. The agreement also grants Scios certain rights to indemnification from
SB for product liability claims. The Company is obligated to spend certain
amounts for marketing support based on the prior year's net sales and to
reimburse SB for certain third-party royalty payments. Scios pays SB 40% of the
Company's net profits (as defined in the Company's agreement with SB) from
United States sales of the SB Products. See Note 2 of Notes to Consolidated
Financial Statements.
The SB Products have a well-established reputation; however, 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. This is a forward-looking statement within the meaning of the PSLRA-95.
Numerous factors will influence the degree of impact that competitive products
have on the Company's revenues from the SB products, including the success of
the Company's marketing strategies and efforts, the amount of the difference in
price from competing products, and the marketing effort by third parties on
competing products. Although past decreases in unit sales have been partially
offset by price increases, there can be no assurance that the market will accept
any additional price increases. Among the SB Products, the Company has placed
particular marketing emphasis on those product formulations, such as ESKALITH CR
(a controlled release formulation), where no generic equivalents are available.
Scios plans to acquire or license from third parties additional products
that can be promoted by the Company's sales force. The Company will consider not
only additional psychiatric products, but also products in other therapeutic
areas. Except for historical statements, this section entitled "Marketing and
Sales" contains forward-looking statements within the meaning of the PSLRA-95.
Although the Company is actively seeking to acquire additional product rights,
numerous factors will determine whether and when the Company is able to do so
and then the degree to which the Company realizes net revenue contribution from
marketing such additional products. Factors influencing the availability of such
additional products on terms favorable to the Company include the ability of the
Company to demonstrate success under its current agreements, the willingness of
other companies to enter into such agreements with the Company, which will be
based in part on where such companies elect to deploy their own marketing
resources, and competition from other companies offering marketing assistance
similar to that offered by the Company.
Proprietary Products. The Company currently plans to participate in
marketing certain of its proprietary products in the United States when and if
approved by the FDA. This section on Proprietary Products describes challenges
the Company faces in developing the capability to market successfully its own
products. Except for descriptions of historical information, this discussion
contains forward-looking statements within the meaning of the PSLRA-95. These
forward-looking statements are based on current
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expectations, and the Company assumes no obligation to update this information.
Numerous factors, including those discussed below, could cause actual results to
differ from those described in these forward-looking statements. Under certain
circumstances, the Company could abandon its plans to market certain of its own
products in the United States in favor of granting outright licenses of its
products and technology. The Company has pursued (and expects to pursue for the
foreseeable future) a strategy of entering into licensing arrangements with
other companies as the means to make its products available outside of the
United States.
Scios believes that its experience in marketing third-party products
under arrangements such as those described above will prove useful when it
prepares to market its own products. However, to date, Scios' marketing
experience has been limited to psychiatric products, and the Company does not
currently have the resources to market the products it is seeking to develop.
The commercialization of the Company's major products will require significant
financial resources, as well as sales, marketing and distribution capabilities.
In order to provide funds and expertise to meet these requirements, the Company
will consider entering into additional corporate partnerships with established
pharmaceutical companies, as it has with Genentech for the co-promotion of
AURICULIN. There can be no assurance that the Company will be able to enter into
such partnerships on favorable terms or develop such a marketing capability on
its own. Scios believes that such collaborations may enable it to speed the
timing of product launch and increase market penetration of selected new
therapies. However, such a partnering arrangement could also result in a lower
level of income to Scios than if it marketed the products entirely on its own.
See "Business -- Product Development Activities and Risks."
The Company's ability to commercialize its products successfully 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. Government and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products. Market acceptance of Scios
products would be adversely affected if adequate coverage and reimbursement
levels are not provided for approved uses of Company products. In addition, in
view of expressed governmental concerns over drug prices and other healthcare
costs, there can be no assurance that future government and private cost control
initiatives will not adversely affect the Company's ability to maintain price
levels on its products sufficient to realize an appropriate return on
development efforts.
Manufacturing
Scios has concentrated its resources on product discovery and
development prior to investing substantially in manufacturing capability. To
date, the Company has produced in its own facility only FIBLAST in limited
quantities sufficient for clinical trials and relies on third parties for the
manufacture of other products, including AURICULIN and NATRECOR. Scios has a
production facility which it believes enables it to produce FIBLAST and
potentially other products for itself and others under requirements for current
Good Manufacturing Practices ("cGMP"). The Company does not currently possess
the staff or facilities that may be necessary to manufacture any product in
commercial quantities that may be required in the long term. The 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 that Scios will be able to meet manufacturing
quantity and quality requirements through the use of such arrangements.
AURICULIN is currently produced by third-party manufacturers under
contract to Scios. The Company has a long-term agreement for the supply of
AURICULIN in bulk form, and has 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 fill and finish manufacturer to provide material to Scios on a timely
basis would cause delays in supply that could have a material adverse effect on
the Company's business. To date, the Company has also engaged third parties to
manufacture clinical supplies of NATRECOR via a synthetic process. The Company
is also developing with Biochemie Gesellschaft m.b.H. of Austria, a unit of
Sandoz Ltd., the recombinant process for the long-term production of NATRECOR.
The Company will need to introduce such material into its clinical program on a
basis acceptable to regulatory authorities. This may impact the timeline for the
development of NATRECOR and, if approved, the timing on which material produced
by the recombinant process can begin to be used for sale. Creating a low cost
manufacturing capability for NATRECOR and smoothly integrating product produced
by such method into clinical development activities are expected to be keys to
commercializing this product successfully and on a timely basis. Failure to do
so could adversely impact the commercial success of the product. See "Business
- -- Competition."
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To the extent Scios may from time to time have capacity available in
its production facility, it intends to pursue opportunities to perform contract
manufacturing for third parties. In 1994 and 1995, the Company produced for
third-party customers pharmaceutical grade supplies of products of interest to
such third parties.
Ortho-McNeil manufactures HALDOL, and SB manufactures the SB Products.
If SB were to discontinue manufacturing the SB Products and the Company wished
to continue selling the products, the Company would have to develop additional
facilities to manufacture independently on a large scale or enter into an
arrangement with a third party to manufacture such products. See "Business --
Marketing and Sales."
Patents and Proprietary Rights
Scios is seeking patent protection for proprietary technology and
products in the United States and abroad to prevent others from unfairly
capitalizing on its investment in research. 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 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 or
that confidentiality agreements on which the Company relies to protect trade
secrets will be honored.
The Company currently owns or holds exclusive rights to approximately
42 issued United States patents and 38 United States patent applications pending
covering its proprietary technology and products. The Company also files foreign
applications corresponding to most of its United States applications. Scios'
issued patents include patents on AURICULIN, NATRECOR, FIBLAST, cell adhesion
inhibitors, bradykinin antagonists, and insulinotropin. The Company's patent
position with respect to certain principal products under development is
described above. See "Business -- Product Development Activities and Risks." If
a patent issues prior to marketing approval, as has been the case with all of
the Company's issued patents to date, Scios can apply for extension of the
patent term for a limited period of time to make up for a portion of the patent
term lost to the regulatory approval period. The actual period of the extension
varies but generally cannot exceed five years. In certain of its third-party
agreements, the absence of a patent covering a product licensed by Scios could
reduce the royalties due to the Company under the agreements.
Except for historical descriptions, this section entitled "Patent and
Proprietary Rights" contains forward-looking statements under the PSLRA-95.
Actual results will vary depending on numerous factors, many of which are
discussed. Investors should appreciate that the patent position of biotechnology
and pharmaceutical firms is generally highly uncertain and involves complex
legal and factual questions. Although Scios 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 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. 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' future operations could be materially and
adversely affected. Described below are patent positions of other companies of
which Scios is aware that potentially overlap the Company's principal research
and product development areas discussed above.
AURICULIN. On June 14, 1988, a United States patent issued to Organogen
Medizinisch-Molekularbiologische Forschungsgesellschaft m.b.H. containing claims
to biologically active fragments of cardiodilatin, a natriuretic peptide
precursor. Scios believes that the claims of the patent may not reasonably be
construed to cover the form of ANP being developed by Scios and, to the extent
any claims of the patent may be interpreted to cover AURICULIN, reasonable
grounds exist for asserting the invalidity of such claims. If any claims of this
patent were determined to be valid and construed to cover the form of ANP being
developed by Scios, Scios' ability to develop AURICULIN commercially might be
hindered or prevented if it were unable to obtain a license. A corresponding
patent has been issued by the European Patent Office. This patent is currently
involved in an opposition proceeding in Europe in which Scios is participating.
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NATRECOR. Scios has been issued United States and European patents
covering human BNP. Scios is aware that Daiichi Pharmaceutical Co., Ltd., Tokyo
("Daiichi") has filed patent applications on porcine BNP in Japan and on human
BNP worldwide. The filing dates of the Daiichi applications covering human BNP
are later than those of the Company. On July 12, 1995 the European Patent Office
issued a patent to Daiichi containing claims that overlap with certain claims of
Scios' issued European patent. Scios has filed an opposition to the Daiichi
patent. If Scios does not prevail in the opposition proceeding, Scios' ability
to develop NATRECOR commercially in Europe might be hindered or prevented if it
were unable to obtain a license.
FIBLAST. In February 1991, a United States patent with one claim
covering a form of fibroblast growth factor (FGF) protein was issued to
Synergen, Inc. ("Synergen"), which was later acquired by Amgen Inc. In June
1991, a United States patent with one claim covering the DNA for the same form
of FGF was issued to Synergen. Based on a review of the publicly-available
documents relating to these patents, Scios believes that the Synergen form of
FGF or DNA differs from the form of FGF produced by the Company. On August 8,
1995, following a decision favorable to Scios in a patent interference
proceeding with the Salk Institute for Biological Studies ("Salk"), Scios
received a United States patent covering DNA sequences, expression vectors and
microorganisms used in the recombinant production of human basic FGF. Scios also
has a pending application covering the recombinant production of human basic
FGF, which the United States Patent and Trademark Office has indicated to be
allowable.
In October 1992, a United States patent was issued to Salk which
contains claims directed to substantially pure mammalian basic FGF containing
the 146 amino acid sequence of bovine basic FGF or a naturally occurring
homologous sequence of another mammalian species. If any claim of this patent
were determined to be valid and construed to cover Scios' human basic FGF, the
Company's ability to develop basic FGF might be hindered or prevented if it were
unable to obtain a license. Scios' outside counsel has reviewed the
publicly-available documents relating to the Salk patent. Based upon this
review, such counsel has opined that, to the extent any claims of the patent may
be interpreted to cover human basic FGF, such claims are overly broad and would
likely be held invalid by an informed court.
In May 1994, the European Patent Office issued European Patent No. 0
248 819 to Scios covering recombinantly-produced human trafermin, Scios' form of
basic FGF known by the product name FIBLAST. An opposition proceeding has been
instituted against this patent by Chiron Corp. and Pharmacia S.p.A. In August
1994, the European Patent Office issued European Patent No. 0 228 449 to Salk
covering the 146 amino acid sequence of bovine basic FGF or an equivalent or
analog thereof. The Company has filed an opposition to this patent. The results
of such opposition proceedings cannot be predicted with certainty.
In March 1994, the Company obtained a non-exclusive license to make,
use and sell FIBLAST under a United States patent issued to Harvard University
containing claims to purified cationic (basic) FGF. The Harvard patent is based
on a patent application having a filing date earlier than the application which
formed the basis for the Salk patent.
Trademarks. AURICULIN(R), NATRECOR(R)and FIBLAST(R) are registered
trademarks of Scios. THORAZINE(R), STELAZINE(R), ESKALITH(R), ESKALITH CR(R) and
PARNATE(R) are registered trademarks of SB. HALDOL(R) is a registered trademark
of McNeilab, Inc.
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, including products in some of the
Company's major product areas. Many of these companies have substantially
greater financial, marketing and human resources than Scios. With respect to
AURICULIN, Scios is not aware of any currently-marketed treatment for ARF but
believes other companies are attempting to develop forms of natriuretic peptides
for indications similar to those being pursued by Scios. In the case of
NATRECOR, a number of products are already marketed for the treatment of acute
CHF. Hence, the Company will need to demonstrate strong clinical results and an
ability to produce NATRECOR cost-effectively in order to introduce NATRECOR into
this competitive market.
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
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factors. With respect to products no longer covered by patents, such as the SB
Products, Scios 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 expects that there will be continued
competition for highly qualified scientific, technical and managerial personnel.
This section entitled Competition contains forward-looking statements within the
meaning of the PSLRA-95. Numerous factors, including the factors identified
above, could cause actual results to differ from those described in these
forward-looking statements.
Government Regulation
The industry in which the Company participates -- the development and
marketing of pharmaceutical products -- is heavily regulated. As is true for all
companies developing pharmaceuticals, the Company's research and development
activities and the production and marketing of its products are subject to
extensive regulation for safety and efficacy by numerous governmental
authorities in the United States and other countries. This regulation is a
significant factor in the production and marketing of the products resulting
from Scios' research and development activities. Testing, production and
marketing of pharmaceutical products for human use require approval of the FDA
and comparable authorities in other countries. Over the next several years,
Scios expects to increase substantially its internal resources and expenditures
to meet these requirements for the products it is developing. See "Business --
Product Development Activities and Risks."
The procedure for seeking and obtaining the required governmental
approvals for a new product involves many steps, beginning with animal testing
to determine safety and potential toxicity. In addition, extensive human
clinical testing is required to demonstrate the efficacy, optimal dose and
safety of each product. The time and expense required to perform clinical
testing can far exceed the time and expense of developing the product prior to
clinical testing. Whether undertaken by the Company or its commercial partners,
the process of seeking and obtaining these approvals for a new product is likely
to take a number of years and involves the expenditure of substantial resources.
In addition, there can be no assurance that any of the Company's products will
obtain the necessary approvals on a timely basis, if at all. The regulatory
environment is constantly evolving and one of the demands on companies in the
pharmaceutical industry is to take account of and anticipate these changes in
order to minimize negative impact on the Company or its product development
timelines. As a developer of pharmaceutical products, the Company and its
commercial partners must also deal with differences in the regulatory
requirements of different countries. Although there is an effort at greater
harmonization of regulatory standards, differences still impact whether and in
what time frame a product may be approved in a particular country, if at all.
Because of these differences between countries, approval in one country does not
assure approval in another.
Even if initial FDA approval is obtained for a product, 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. Except
for the continued marketing of the psychiatric products produced by third
parties, marketing approval of the Company's first human therapeutic product is
not expected before 1997, at the earliest, and significant income will not be
generated by the Company until after such approval is obtained. The
forward-looking statements within the meaning of the PSLRA-95 in this section
are based on current expectations. Actual results may differ from those
described above depending on numerous factors, such as changes in regulatory
requirements, which may either decrease or increase the burden on the Company,
the level of side effects exhibited by the Company's products as compared to
their beneficial effects, the speed of regulatory review, and the price the
Company is able to charge for its products.
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
14
<PAGE>
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 in ARF. Various amendments of the Orphan
Drug Act have been considered by Congress from time to time, some of which, if
passed, could reduce the benefits to Scios of orphan drug status.
FDA regulations require that any drug to be tested in humans must be
manufactured according to cGMP regulations. This has been extended to include
drugs that 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, state and local laws and regulations
relating to safe working conditions, laboratory practices, the experimental use
of animals, and the storage, 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 or may be
applicable to such 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 and local regulations. Although
the Company believes that its safety procedures for handling and disposing of
hazardous materials comply with prescribed regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
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 California headquarters, the Company incurred costs of
approximately $370,000 for chemical disposal, storage and related costs.
Furthermore, the Company employs third-party contractors who it believes to be
reliable to perform certain work in connection with the disposal of hazardous
materials generated in the Company's research in compliance with applicable
laws. Notwithstanding such reliance, the Company may remain responsible for the
materials and the actions of its contractors related to such materials. From
time to time, the Company has been notified that certain of its contractors may
not have disposed of such materials in full compliance with applicable laws and
that the Company may be required to contribute to the cost of environmental
clean-up efforts. See Item 3 below and Note 9 of Notes to Consolidated Financial
Statements.
Employees
The Company had 301 employees as of December 31, 1995, of which 164
were engaged in research, product and clinical development and 85 were part-time
employees (primarily its sales force).
Item 2. PROPERTIES
The Company's headquarters facility in Mountain View, California
consists of three buildings owned by the Company and land occupied under a
long-term ground lease. The ground lease rates are fixed through July 2010.
Future minimum ground lease payments over the next five years total
approximately $869,000. The three buildings represent 98,000 square feet of
office and laboratory space. The Company presently occupies approximately 88,000
square feet and leases the remaining space. The Mountain View facility includes
a 13,000 square foot combination process and product development and biological
testing facility in which Scios has produced bulk and clinical supplies of
FIBLAST. In 1995, the Company leased a 52,000 square foot building in Sunnyvale,
California, and is in the process of constructing research laboratories. The
Company will relocate its discovery research group to the Sunnyvale facility in
mid-1996. The Company's annual lease payments for the Sunnyvale facility are
approximately $625,000. The Company expended approximately $5.7 million in
capital expenditures in 1995 and anticipates spending approximately $6.0 million
in capital expenditures in 1996.
Prior to February 1995, the Company occupied under lease a total of
57,428 square feet of administrative and laboratory facilities in Baltimore,
Maryland (the "Holabird Facility"). In 1994, the Company consolidated its
research and development activities at the Holabird Facility with those in
California. As a result, the Company laid off certain employees, transferred
others to California and, in early 1995, moved its Baltimore commercial
operations and clinical groups, previously located at the Holabird Facility, to
a new site in downtown Baltimore. In February 1995, Scios purchased the Holabird
Facility for $3 million pursuant to an option contained in the lease and also
received assignment of the underlying ground lease, which has a term through
2012. During 1995, the Company secured tenants for parts of the facility under
short-term leases and is endeavoring to sell the facility. The commercial
15
<PAGE>
operations group and certain clinical employees now occupy 7,070 square feet
under a five-year lease in Baltimore's Inner Harbor area. The Company's annual
lease payments at this facility are approximately $106,000.
Item 3. LEGAL PROCEEDINGS
On May 25, 1995, the Company was served with three complaints filed in
the United States District Court for the Northern District of California by
three stockholders. The actions were filed against the Company and Richard
Casey, its Chairman and Chief Executive Officer, on behalf of the individual
plaintiffs and on behalf of other purchasers of the Company's stock during the
period from October 6, 1993 to May 2, 1995. The complaints, which were combined
in August 1995 into a consolidated complaint, allege violations of federal
securities laws claiming that the defendants issued a series of false and
misleading statements, including filings with the Securities and Exchange
Commission, regarding the Company and clinical trials involving AURICULIN. The
complaints seek unspecified compensatory and punitive damages, attorneys fees
and costs. On December 1, 1995, the court heard oral argument on defendants'
motion to dismiss the complaint. The parties are awaiting the court's decision.
Discovery has not yet commenced. The Company believes it has meritorious
defenses and intends to defend the lawsuit vigorously.
On November 29, 1995, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the alleged
disposal of hazardous substances by a subcontractor of Nova Pharmaceutical
Corporation, which was acquired by the Company in 1992. The Company is one of
many potentially responsible parties that have been identified as associated
with this specific site. The Company is in the process of responding to the
EPA's request for additional information on materials disposed of at this site.
The ultimate outcome of this action cannot presently be determined. Accordingly,
no provision for any liability or loss that may result from adjudication or
settlement thereof has been made in the accompanying consolidated financial
statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
MANAGEMENT
Executive Officers
The executive officers of the Company and their ages at March 18, 1996 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Richard L. Casey 49 Chairman of the Board, President and
Chief Executive Officer
Thomas L. Feldman 45 Vice President of Commercial Operations
Elliott B. Grossbard, M.D. 48 Vice President of Medical and
Regulatory Affairs
John A. Lewicki, Ph.D. 44 Vice President of Research
Arlene M. Morris 44 Vice President of Business Development
John H. Newman 45 Vice President of Legal Affairs,
General Counsel and Secretary
Armin H. Ramel, Ph.D. 70 Vice President of Product Development
</TABLE>
16
<PAGE>
Mr. Casey is Chairman of the Board, President and Chief Executive Officer of
Scios. He joined Scios in December 1987 as President and Chief Executive
Officer, and has served as a Director since that time. Mr. Casey was elected
Chairman of the Board in November 1992. From early 1985 to 1987, he was with
ALZA Corporation as Executive Vice President and President of ALZA
Pharmaceuticals. From 1976 to 1985, he worked for Syntex Corporation. He joined
Syntex Laboratories in 1976 as a manager and became director of marketing
research in the following year. In 1979, he was named director of sales, in 1981
was promoted to vice president and in 1983 was appointed general manager of
Syntex Medical Diagnostics. Mr. Casey began his career in pharmaceuticals as a
sales representative for Eli Lilly and Company. From 1968 to 1970, Mr. Casey
served in the United States Peace Corps in Ethiopia. Mr. Casey serves on the
boards of Guilford Pharmaceuticals Inc., Karo Bio AB, an affiliated Swedish
biotechnology company, and VIVUS, Inc., a publicly-traded medical devices
company located in Menlo Park, California.
Mr. Feldman joined Scios in January 1995 as Vice President of Commercial
Operations. Prior to joining the Company, Mr. Feldman was responsible for sales
and marketing activities in two pharmaceutical companies affiliated with Johnson
& Johnson. From 1993 through 1994, Mr. Feldman was National Sales Manager at
Ortho Pharmaceutical Corporation. From 1973 to 1993, Mr. Feldman held various
sales and marketing positions at McNeil Pharmaceutical, where he most recently
served as National Sales Manager from 1990 to 1993.
Dr. Grossbard joined Scios in 1991 as Vice President of Medical and
Regulatory Affairs. Immediately prior to joining Scios, he was Vice President of
Medical Affairs for HemaGen/PFC, a privately-held company developing
perfluorocarbon products for oxygen transport and as blood substitutes. From
1982 to 1990, he was Associate Director and later Director of Clinical Research
for Genentech, in charge of the clinical development of Alteplase (TPA). From
1978 to 1980, as an Assistant Attending Physician at Memorial Hospital and
Assistant Professor of Medicine at Cornell Medical School, he helped to
establish the Bone Marrow Transplant Service at Memorial Hospital. He received
his M.D. from the Columbia College of Physicians and Surgeons in 1973, trained
in internal medicine at Massachusetts General Hospital in Boston and received
subspecialty training in hematology at the Columbia-Presbyterian Medical Center
and the Memorial Sloan-Kettering Cancer Center in New York.
Dr. Lewicki joined Scios in 1983 as a Scientist, and became Senior Scientist
in 1984, Vice President, Research in August 1986, Vice President and Deputy
Director, Research in March 1987, and Vice President and Director of Research in
February 1988. Dr. Lewicki received his Ph.D. in Physiology/Pharmacology from
the University of California, San Diego in 1979. From 1979 to 1981, Dr. Lewicki
conducted postdoctoral research at the University of Virginia, Department of
Internal Medicine, and, from 1981 to 1983, he was a research pharmacologist at
Stanford University, Division of Clinical Pharmacology.
Mrs. Morris joined the Company in April 1993 as Vice President of Business
Development. From 1989 until joining Scios, Mrs. Morris served as Vice President
of Business Development at McNeil Pharmaceutical, an affiliate of Johnson &
Johnson, where she was responsible for licensing and new product development.
From 1977 to 1989, Mrs. Morris held various sales and marketing positions at
McNeil. Mrs. Morris began her career in pharmaceuticals as a sales
representative for Syntex Corporation.
Mr. Newman joined Scios in 1983 as Vice President, General Counsel and
Secretary, and became Vice President of Commercial Development, General Counsel
and Secretary in December 1989 and Vice President of Legal Affairs, General
Counsel and Secretary in March 1992. Prior to joining Scios, Mr. Newman was an
attorney in private practice. Mr. Newman serves on the board of Guilford
Pharmaceuticals Inc.
Dr. Ramel joined the Company in July 1993 as Vice President of Product
Development. Prior to joining Scios, Dr. Ramel spent eleven years at Genentech,
most recently as Senior Director of Process Sciences, which consisted of three
departments: Cell Culture and Fermentation, Product Recovery, and Pharmaceutical
R&D. Prior to joining Genentech, he was Director of the Biopolymer Research
Department at Hoffmann-La Roche. He held academic positions at the University of
Basel, Switzerland, SUNY at Buffalo and Boston University Medical School, and
was a postdoctoral fellow at UC Berkeley's Biochemistry and Virus Laboratory. In
addition, he was an NIH fellow for two years. Dr. Ramel holds a Ph.D. in
Physical Chemistry from the University of Basel. He serves on the board of
Sepragen Corporation, a publicly-held manufacturer of bioprocessing equipment
used in the production of biopharmaceuticals.
17
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Class D Warrants are traded on the Nasdaq
National Market System under the symbols SCIO and SCIOZ, respectively. The
tables below set forth the high and low sales prices as reported by Nasdaq for
the Common Stock and the Class D Warrants during the last two fiscal years.
Prices represent quotations among dealers without adjustment for retail markups,
markdowns or commissions, and may not represent actual transactions. No cash
dividends have been paid on Common Stock, and the Company does not anticipate
paying cash dividends in the foreseeable future. As of December 31, 1995, there
were approximately 7,066 stockholders of record of the Company's Common Stock.
<TABLE>
<CAPTION>
Common Stock
FY 1995 FY 1994
<S> <C> <C> <C> <C>
High Low High Low
Q1 8-3/4 6-5/8 11-1/8 7-1/8
Q2 7-5/8 2-7/8 8-1/8 5-1/4
Q3 4-7/8 3-11/16 8-1/2 5-1/2
Q4 4-9/16 3-1/4 7-5/8 4-3/4
Year 8-3/4 2-7/8 11-1/8 4-3/4
</TABLE>
<TABLE>
<CAPTION>
Class D Warrants
FY 1995 FY 1994
<S> <C> <C> <C> <C>
High Low High Low
Q1 2-7/16 1-3/4 3-5/8 2-1/4
Q2 2 21/32 2-3/4 1-1/2
Q3 1 11/16 2-3/4 1-7/8
Q4 15/16 9/16 3 1-3/4
Year 2-7/16 9/16 3-5/8 1-1/2
</TABLE>
18
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 1994 1993 1992* 1991
Revenues $ 49,187 $ 53,667 $ 47,568 $ 25,085 $ 7,357
Loss from operations (28,175) (31,719) (43,237) (138,703) (21,189)
Other income 5,049 4,045 6,298 7,338 5,536
Net loss (26,382) (27,961) (36,579) (131,946) (17,251)**
Net loss per common share (0.74) (0.79) (1.05) (5.76) (1.18)
Cash and securities 87,069 104,439 108,271 134,660 126,680
Working capital 11,642 38,942 96,334 42,842 93,417
Total assets 131,550 146,096 151,278 182,398 160,972
Long-term obligations 1,082 1,739 2,323 401 --
Stockholders' equity 109,394 126,438 135,299 169,144 156,092
Employees at year end 301 283 337 382 167
- -------------------
<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 former subsidiary, Metabolic Biosystems Inc.
</FN>
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating Results (1995, 1994 and 1993)
Total revenues for Scios Inc. ("the Company") were $49.2 million in 1995,
$53.7 million in 1994 and $47.6 million in 1993. The 1995 revenue decrease from
1994 was due to a decline in research and development contract revenues, lower
co-promotion commissions recognized under the Company's agreement with
Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of Johnson & Johnson,
for the co-promotion of Ortho-McNeil's psychiatric product HALDOL(R) Decanoate
and lower product sales of certain psychiatric products (the "SB Products")
under license from SmithKline Beecham Corporation ("SB"). The 1994 increase over
1993 was principally due to higher contract revenues and an increase in
co-promotion commissions earned under the agreement with Ortho-McNeil.
Revenue from product sales (SB Products) was $41.4 million, $42.8 million
and $43.6 million in 1995, 1994 and 1993, respectively. Product sales declined
3% from 1994 to 1995 and 2% from 1993 to 1994 as a result of generic competition
with sales of the SB Products.
Co-promotion commissions were $2.3 million, $3.8 million, and $0.5 million
in 1995, 1994 and 1993, respectively. Because co-promotion commissions under the
agreement with Ortho-McNeil are based on aggregate sales levels achieved over an
August to July contract year, revenue recognition is based, in part, on the
Company's forecast of sales for the contract year. Commissions declined from
1994 to 1995 because the actual sales for the year ended July 1995, were less
than the Company's forecast at December 31, 1994. The increase from 1993 to 1994
was the result of commissions being earned over a twelve-month period in 1994
versus a five-month period in 1993.
Revenue from research and development contracts was $5.5 million in 1995,
$7.1 million in 1994 and $3.5 million in 1993. The decrease from 1994 to 1995
was due primarily to a milestone payment from Pfizer Inc and a final payment
under an agreement with E. Merck, both of which were received in 1994. The
increase in contract revenue from 1993 to 1994 was principally due to payments
associated with the renegotiation of contracts with Pfizer Inc for the
development of insulinotropin and from Kaken Pharmaceutical Co., Ltd. ("Kaken")
for the licensing of the Company's basic fibroblast growth factor manufacturing
technology and initiation of Phase III clinical trials in Japan. Revenues under
a collaboration with Hoechst Marion Roussel to study Alzheimer's disease
comprised approximately 32%, 26% and 49% of contract revenue in 1995, 1994 and
1993, respectively, while revenues under the collaboration with Kaken were 30%,
31% and 19% of contract revenue in 1995, 1994 and 1993, respectively.
Cost of goods sold for the SB Products was $24.7 million, $26.5 million and
$28.8 million in 1995, 1994 and 1993, respectively. The declines from year to
year were principally the result of lower unit sales. Gross margins improved
from 34% in 1993 to 38% in 1994 to 40% in 1995 due to a sales mix shift towards
higher margin products and annual price increases. Future changes in gross
margins will be principally dependent upon the effects of price increases,
competition in the marketplace and changes in the product mix.
19
<PAGE>
Research and development expenses were $29.3 million in 1995, $34.5 million
in 1994 and $39.5 million in 1993. The decline from 1994 to 1995 reflects the
1994 consolidation of Baltimore, Maryland research and development operations
with the Company's operations in California. The 1994 decrease from 1993 was due
to a reduction in staffing associated with a strategic refocusing of the
Company.
Marketing, general and administrative expenses were $18.2 million in 1995,
$15.7 million in 1994 and $18.2 million in 1993. The increase in spending from
1994 to 1995 was primarily the result of higher sales and marketing expenses and
spending to support expanded business development and computer automation
activities. The decline in spending from 1993 to 1994 was principally due to
expense reductions in general and administrative areas associated with the
strategic refocusing and the consolidation of research and development
operations.
The profit distribution to third parties of $5.1 million, $5.2 million and
$4.3 million in 1995, 1994 and 1993, respectively, represents SB's share of the
net profits from sales of the SB Products. The decrease from 1994 to 1995 was
the result of higher sales and marketing expenses offsetting higher gross
margins. The 1994 increase over 1993 was due to higher gross margins and lower
sales and marketing expenses attributable to SB Product sales.
The restructuring charge of $3.5 million recorded in 1994 was the result of
the Company's closure of its research and development facility in Baltimore,
Maryland and the transfer of certain research and development operations to the
Company's California facilities. The consolidation was undertaken to eliminate
redundancies, reduce future expenses and increase productivity by concentrating
research and development activities.
Other income increased to $5.0 million in 1995 from $4.0 million in 1994.
The increase was due to a net gain on sales of securities in 1995 versus a net
loss on sales of securities in 1994 and increased interest earnings resulting
from higher average interest rates on the invested portfolio. The decrease in
other income from $6.3 million in 1993 to $4.0 million in 1994 resulted from
lower income generated by the Company's investment portfolio, lower rental
income from sublease tenants and higher royalty expense associated with the
higher contract revenues in 1994.
The increase in equity in the net loss of affiliates from $0.9 million in
1994 to $3.3 million in 1995 was the result of higher losses of the Company's
subsidiary, Guilford Pharmaceuticals Inc. ("Guilford"). The Company's percent
ownership in Guilford declined from 62% to 29% as a result of Guilford's initial
public stock offering in June 1994, and from 29% to 16% as a result of a
secondary stock offering in August 1995. Since Guilford's initial public stock
offering, the Company has used the equity method of accounting for its
investment. 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's losses.
Outlook and Risks
Except for descriptions of historical information contained herein, the
matters discussed in this Outlook and Risks section are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Numerous factors could cause
actual results to differ from those described in these forward-looking
statements. The Company cautions investors that its business is subject to
significant risks and uncertainties.
The Company expects to continue to incur losses for several more years. The
ability of the Company to achieve profitability depends principally upon: (i)
the safety and efficacy of the Company's products, the progress of its product
development efforts, its success in enrolling patients in clinical trials and
the timing and scope of regulatory approvals, particularly with respect to the
Company's lead products AURICULIN(R) anaritide ("AURICULIN") and NATRECOR(R)
BNP; (ii) the Company's success in generating operating profits from marketing
and selling the SB Products, HALDOL(R) Decanoate and additional third-party
product rights which it may acquire, the Company's ability to establish and
maintain profitable arrangements under which to represent the products of third
parties, the impact of competing products and the Company's ability to forecast
future trends affecting the timing of revenue recognition, such as the level of
Medicaid rebates and rate of sales growth over a particular period and
continuing availability of these products from its partners; and (iii) the
development of new third-party funding sources and other revenues to support
continuing research and development programs and the results realized by third
parties on whom the Company may rely
20
<PAGE>
to sell its products, particularly outside of the United States. Profitability
will also be affected by the Company's ability to undertake complex
manufacturing processes in a cost-effective manner to scale-up and then
manufacture products the Company expects to market directly and any products
manufactured for third parties. With limited manufacturing resources of its own,
the Company has entered into contracts with, and is dependent upon, third-party
suppliers for the manufacture of its current lead products. Although the Company
does not currently foresee a supply problem, future product supply and the
Company's profitability could be affected by events at these suppliers over
which the Company has limited control.
In the second quarter of 1995, the Company announced the results of a Phase
III clinical study of its AURICULIN product for the treatment of acute renal
(kidney) failure ("ARF"). The analysis of the results revealed that AURICULIN
did not decrease the need for dialysis in the total patient population, but it
did appear to have a positive clinical benefit in patients with a particular
form of ARF called oliguria (patients producing very low levels of urine). In
the third quarter of 1995, the Company began a confirmatory Phase III clinical
study of AURICULIN for the treatment of oliguric ARF. The Company's eventual
success in commercializing AURICULIN will be dependent on the rate of clinical
trial enrollment, the degree of efficacy demonstrated in the current trial and
the speed of review by the United States Food and Drug Administration ("FDA").
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 and start-up
costs. 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.
Principal factors which could affect the level of new product revenues will
include the rate of market penetration, the availability of alternative
therapies, the price charged by the Company per course of therapy, the breadth
of the approved indication allowed by the FDA and what, if any, income can be
obtained from potential third-party licensees. In the case of AURICULIN, the
Company alone is responsible for continued development costs, but marketing and
other costs will be shared by Genentech, Inc. ("Genentech") in the United States
and Canada. However, Genentech will also share in any marketing profits from
AURICULIN sales in the United States and Canada.
Sales of the SB Products are likely to continue 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 payments received for its
co-promotion of HALDOL(R) Decanoate, revenues from the promotion of any
additional third-party products, or reductions in sales and marketing expenses.
Factors influencing the availability of such additional products on terms
favorable to the Company include the ability of the Company to demonstrate
success under its current agreements and the willingness of other companies to
enter into such agreements with the Company based on where such companies wish
to deploy their resources.
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 sponsors' other
product opportunities and their assessment of the continued benefit of
sponsoring a particular program at the Company. Other licenses and 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 at both
the Company and in the biopharmaceutical industry in general.
Liquidity and Capital Resources
Combined cash, cash equivalents and securities (both current and
non-current) totaled $87.1 million at December 31, 1995, a decrease of $17.3
million from December 31, 1994. The decrease is mainly attributable to the $16.5
million used to fund operations, $5.7 million of spending on property, plant and
equipment and $1.0 million used for the purchase of treasury stock partially
offset by $3.0 million of new debt arrangements and a $2.9 million net
unrealized gain on securities. Working capital decreased from $38.9 million at
December 31, 1994 to $11.6 million at December 31, 1995. The decrease resulted
principally from the operating loss, the investment into long-term marketable
securities of the cash received from Genentech for the purchase of
21
<PAGE>
preferred stock and from an increase in current liabilities due to the deferral
of revenue associated with the future delivery of FIBLAST(R) trafermin product
to Kaken.
In November 1995, the Company announced that its board of directors had
authorized the expenditure of up to $6.0 million for the repurchase of shares of
the Company's common stock. Repurchases are made on the open market from time to
time, with the stock being used to partially offset the dilution associated with
issuing new shares under the Company's employee benefit and stock option
programs and other future corporate purposes. At December 31, 1995, the Company
had spent $1.0 million for the purchase of 250,000 shares.
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 Company's net operating losses and 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 1992 merger with Nova Pharmaceutical
Corporation will be subject to annual limitations.
Outlook and Risks
Except for descriptions of historical information contained herein, the
matters discussed in this Outlook and Risks section are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Numerous factors could cause
actual results to differ from those described in these forward-looking
statements. The Company cautions investors that its business is subject to
significant risks and uncertainties.
The Company's cash, cash equivalents and marketable securities of
approximately $87.1 million at December 31, 1995, 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 for other general purposes. In
addition to its cash and marketable securities balances, the Company may also
fund operations through draw downs of its $30 million loan commitment from
Genentech or the sale of all, or a portion of, its investment in Guilford. The
Company believes its cash resources will be sufficient to meet its capital
requirements for the next three years. Key factors which will affect future cash
use and the timing of the Company's need to seek additional financing include
the results of the Company's partnering efforts and the timing and amounts
realized from licensing and partnering activities, the rate of spending required
to develop the Company's products and respond to changing business conditions
and the net contribution produced by the Commercial Operations group in
marketing current and future products for third parties.
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. Factors influencing the availability of additional funding
include the Company's progress in product development, investor perception of
the Company's prospects and the general conditions of the financial markets.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules
appearing on page F-1 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors. The information required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information contained in the section captioned "Election of Directors" of
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders.
Identification of Executive Officers. See pages 17 and 18 of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the sections captioned "Executive
Compensation" and "Stock Option Grants and Exercises" of the Company's
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Security
Ownership of Management and Principal Stockholders" of the Company's definitive
Proxy Statement for the 1996 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Transactions" of the Company's definitive Proxy Statement for
the 1996 Annual Meeting of the Stockholders.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. See Index to Financial Statements and
Financial Statement Schedules at page F-1 of this Form 10-K.
(2) Financial Statement Schedules. See Index to Financial Statements
and Financial Statement Schedules at page F-1 of this Form 10-K.
(3) Exhibits. See Exhibit Index at page 23 of this Form 10-K.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed in the
last quarter of 1995.
EXHIBIT INDEX
Exhibit
Number Page
3.1 Certificate of Incorporation...................................R
23
<PAGE>
3.2 Bylaws..........................................................J
10.1 Biotechnology Research Partners, Ltd. Agreement of Limited
Partnership dated October 29, 1982; Development Contract,
Technology License Agreement and Joint Venture Agreement
between Biotechnology Research Partners, Ltd. and the
Registrant dated December 29, 1982; Promissory Note dated
December 29, 1982; and Memorandum of Understanding between
Battery Park Credit Company and Biotechnology Research
Partners, Ltd. dated December 28, 1982.........................A
10.2 1983 Incentive Stock Option Plan, as amended, and form of
Stock Option Agreement, Promissory Note and Pledge
Agreement.......................................................E
10.3 Common Stock Purchase Agreement dated April 15, 1985 between
the Registrant and American Home Products Corporation...........B
10.4 Agreement of Purchase and Sale (Real Estate) and Joint Escrow
Instructions by and between Charleston Properties and Bio-Shore
Holdings, Ltd. dated December 30, 1986..........................C
10.5 1986 Supplemental Stock Option Plan, as amended, and form of
Stock Option Agreement, Promissory Note and Pledge Agreement....E
10.6 Rights Exercise Agreement between the Registrant and American
Home Products Corporation dated February 28, 1986 and Letter
of March 26 and May 16, 1986....................................B
10.8 Employment Letter dated November 11, 1987 between the
Registrant and Richard L. Casey.................................D
10.9 Rights Agreement dated as of June 18, 1990 between the
Registrant and The First National Bank of Boston................F
10.11 1992 Equity Incentive Plan...... ...............................H
10.12 Agreement and Plan of Reorganization by and among the
Registrant, Nova Pharmaceutical Corporation and DD
Acquisition Subsidiary, Inc. dated as of May 12, 1992,
as amended, July 17, 1992.......................................J
10.13 Form of Technology Transfer Agreement between Nova
Technology Limited Partnership, Nova and Nova
Technology Corporation..........................................I
10.14 Form of Manufacturing and Marketing Agreement between Nova
Technology Limited Partnership and Nova.........................I
10.15 Amended and Restated Agreement of Limited Partnership
of Nova Technology Limited Partnership..........................I
10.16 Form of Research Agreement between Nova Technology
Limited Partnership and Nova....................................I
10.17 Form of Guaranty given by Nova to Nova Technology
Limited Partnership and its limited partners....................I
10.18 Form of Purchase Option Agreement between each of the
limited partners of Nova Technology Limited
Partnership and Nova............................................I
24
<PAGE>
10.19 Nonemployee Director Stock Option Plan.........................G
10.20 Warrant Agreement dated December 1, 1987 between the
Registrant and IBJ Schroder Bank & Trust Company...............K
10.21 Consulting Agreement dated August 1, 1993 between the
Registrant and Solomon H. Snyder, MD...........................P
10.22 Consulting Agreement dated September 3, 1992 between the
Registrant and Hans Mueller....................................Q
10.24 Agreement dated March 21, 1986 between Celanese and Nova,
including option agreement and other exhibits thereto..........L
10.25 Purchase Option Agreements dated December 1, 1987 and
December 30, 1987 between Nova and the limited partners
Nova Technology Limited Partnership............................K
10.26 Warrant Agreement dated December 1, 1987 between Nova
and Dean Witter Reynolds Inc...................................K
10.27 Purchase Agreement dated as of July 29, 1988 between
Nova and SKB Properties, Ltd...................................M
10.29 CNS Psychiatric Products Agreement dated June 30,
1990 between SmithKline Beecham Corporation and Nova...........N
10.30 Master Security Agreement, Promissory Note and
Negative Covenant Agreement, each dated April 28, 1993,
between the Registrant and General Electric Capital
Corporation....................................................O
10.31 Master Lease Agreement dated July 16, 1993 between the
Registrant and General Electric Capital Corporation............O
10.32 Collaboration Agreement dated December 30, 1994 between
the Registrant and Genentech, Inc..............................R
10.33 Preferred Stock Purchase Agreement dated December 30,
1994 between the Registrant and Genentech, Inc.................R
10.34 Note Agreement dated December 30, 1994 between the
Registrant and Genentech, Inc..................................R
10.35 Assignment of Lease dated March 22, 1995 for premises
located at 820 West Maude Avenue, Sunnyvale, California........S
10.36 Special Warranty Deed of Improvements dated February 24,
1995 from Rouse-Teachers Properties, Inc. ("RTP") to the
Registrant and Assignment of Ground Lease dated
February 22, 1995 from RTP to the Registrant...................S
10.37 Lease Agreement dated January 20, 1995 between the
Registrant and PDL-RTKL Associates, a Maryland General
Partnership....................................................S
11.1 Computation of Loss per Share......Filed electronically herewith
21.1 Subsidiaries of Registrant.........Filed electronically herewith
25
<PAGE>
23.1 Consent of Coopers & Lybrand......Filed electronically herewith
24.1 Powers of Attorney. Reference is made to page 28.
- -------------------
A Filed as an exhibit to Form S-1 Registration Statement (File No.
2-86086), as amended, and incorporated herein by reference.
B Filed as an exhibit to Form S-1 Registration Statement (File No.
33-3186), as amended, and incorporated herein by reference.
C Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1986
and incorporated herein by reference.
D Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987
and incorporated herein by reference.
E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988
and incorporated herein by reference.
F Filed as an exhibit to Form 8-K filed on June 19, 1990 and Form 8-A
Registration Statement filed on June 20, 1990 and incorporated herein by
reference.
G Filed as an exhibit to Form S-8 Registration Statement (File No.
33-39878) filed on April 8, 1991 and incorporated herein by reference.
H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991
and incorporated herein by reference.
I Filed as an exhibit to Form S-1 Registration Statement (File No.
33-14937) filed on behalf of Nova Technology Limited Partnership
and incorporated herein by reference.
J Filed as an exhibit to Form S-4 Registration Statement (File No.
33-49846) filed on July 22, 1992 and incorporated herein by reference.
K Filed as an exhibit to Form S-3 Registration Statement of Nova (File No.
33-14938) and incorporated herein by reference.
L Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1985 and incorporated herein by reference.
M Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and
incorporated herein by reference.
N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1990 and incorporated herein by reference.
O Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 and incorporated herein by reference.
P Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 and incorporated herein by reference.
Q Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1992
and incorporated herein by reference.
R Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994
and incorporated herein by reference.
S Filed as an exhibit to Quarterly Report on Form 10-R for the quarter
ended March 31, 1995 and incorporated herein by reference.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCIOS INC.
Date: March 28, 1996 By /s/ Richard L. Casey
Richard L. Casey
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard L.
Casey his attorney-in-fact, with the power of substitution, for him in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that the said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard L. Casey Chairman of the Board, March 28, 1996
Richard L. Casey President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Kevin P. McPherson Controller March 28, 1996
Kevin P. McPherson (Principal Accounting Officer)
/s/ Myron Du Bain Director March 28, 1996
Myron Du Bain
/s/ William F. Miller Director March 28, 1996
William F. Miller
/s/ Donald E. O'Neill Director March 28, 1996
Donald E. O'Neill
/s/ Robert W. Schrier Director March 28, 1996
Robert W. Schrier
/s/ Burton E. Sobel Director March 28, 1996
Burton E. Sobel
/s/ Solomon H. Snyder Director March 28, 1996
Solomon H. Snyder
/s/ Eugene L. Step Director March 28, 1996
Eugene L. Step
27
<PAGE>
FINANCIAL STATEMENTS AND SCHEDULES Page
Report of Independent Accountants.........................................F-2
Consolidated Balance Sheets at December 31, 1995 and
December 31, 1994 .......................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993.........................................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.........................................F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 ............................F-6
Notes to Consolidated Financial Statements ...............................F-7
Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the information
is included in the consolidated financial statements or notes thereto.)
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Scios Inc.:
We have audited the accompanying consolidated balance sheets of Scios Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. 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 Inc. and
subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
February 6, 1996
F-2
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1995 1994
------------ ------------
(In thousands, except share data)
<S> <C>
Assets
Current assets:
Cash and cash equivalents $2,847 $29,674
Available-for-sale securities 25,986 22,441
Accounts receivable 3,014 3,599
Prepaid expenses 869 1,147
------------ ------------
Total current assets 32,716 56,861
Available-for-sale securities, non-current 58,236 52,324
Investment in affiliates 2,937 --
Property and equipment, net 35,531 35,118
Other assets 2,130 1,793
------------ ------------
Total Assets $131,550 $146,096
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $3,000 --
Accounts payable 3,778 3,301
Other accrued liabilities 7,863 11,557
Deferred contract revenue 5,775 2,444
Current portion of long-term debt 658 617
------------ ------------
Total current liabilities 21,074 17,919
Long-term debt 1,082 1,739
Commitments (Notes 8, 9 and 10)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000
shares authorized; issued and outstanding:
16,053 and 21,053, respectively -- --
Common stock; $.001 par value; 150,000,000
shares authorized; issued and outstanding:
36,009,055 and 35,283,200, respectively 36 35
Additional paid-in capital 399,155 391,745
Treasury stock (967) --
Notes receivable (20) (27)
Unrealized gains (losses) on securities 578 (2,309)
Accumulated deficit (289,388) (263,006)
------------ ------------
Total stockholders' equity 109,394 126,438
------------ ------------
Total Liabilities and Stockholders' Equity $131,550 $146,096
------------ ------------
</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, 1995 1994 1993
--------------- --------------- -------------
(In thousands, except share data)
<S> <C> <C> <C>
Revenues:
Product sales $41,396 $42,792 $43,585
Co-promotion commissions 2,331 3,770 500
Research & development contracts 5,460 7,105 3,483
--------------- --------------- -------------
49,187 53,667 47,568
--------------- --------------- -------------
Costs and expenses:
Cost of goods sold 24,742 26,541 28,782
Research and development 29,341 34,491 39,490
Marketing, general and administration 18,226 15,681 18,190
Profit distribution to third parties 5,053 5,173 4,343
Restructuring charges -- 3,500 --
--------------- --------------- -------------
77,362 85,386 90,805
--------------- --------------- -------------
Loss from operations (28,175) (31,719) (43,237)
Other income:
Investment income 5,283 4,386 6,592
Other expense (234) (341) (294)
--------------- --------------- -------------
5,049 4,045 6,298
Equity in net loss of affiliates (3,256) (883) (15)
Minority interests -- 596 375
--------------- --------------- -------------
Net loss ($26,382) ($27,961) ($36,579)
--------------- --------------- -------------
Net loss per common share ($0.74) ($0.79) ($1.05)
--------------- --------------- -------------
Weighted average number of
common shares outstanding 35,809,876 35,219,442 34,768,195
--------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
----------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($26,382) ($27,961) ($36,579)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 3,882 4,693 4,588
Deferred contract revenue 3,331 1,827 --
Loss on sale of assets 241 96 189
Other 3,256 1,898 1,219
Change in assets and liabilities
Accounts receivable 585 (915) 2,211
Accounts payable 477 1,133 321
Other accrued liabilities (1,821) 671 (513)
Other (60) (997) 149
----------- ----------- ------------
Net cash used by operating activities (16,491) (19,555) (28,415)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of affiliate's warrants (167) -- --
Payments for property and equipment (5,698) (3,432) (2,516)
Proceeds from sale of assets 163 157 58
Sales/maturities of marketable securities 220,754 454,147 266,226
Purchases of marketable securities (227,324) (435,036) (229,325)
----------- ----------- ------------
Net cash provided (used) by investing activities (12,272) 15,836 34,443
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 20,000 --
Issuance of common stock and collection of notes
receivable from stockholders, net 519 411 2,032
Purchase of treasury stock (967)
Issuance of notes payable 3,000 -- --
Issuance of long-term debt -- -- 2,801
Payments of long-term debt (616) (605) (349)
----------- ----------- ------------
Net cash provided by financing activities 1,936 19,806 4,484
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (26,827) 16,087 10,512
Cash and cash equivalents at beginning of period 29,674 13,587 3,075
----------- ----------- ------------
Cash and cash equivalents at end of period $2,847 $29,674 $13,587
----------- ----------- ------------
Supplemental cash flow data:
Cash paid during the period for interest 203 256 162
Supplemental disclosure of non-cash investing and financing:
Net unrealized securities gains (losses) 578 (2,309) --
Investment in affiliate 6,026 -- --
Incentive plan awards $873 $578 $449
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Preferred Receivable Unrealized
-------------------- Paid-In Stock Treasury from Losses on Accumulated
Shares Par Value Capital Par Value Stock Stockholders Securities Deficit Total
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 34,618,112 $35 $367,660 $ -- $ -- ($85) $ -- ($198,466) $169,144
Options exercised 409,255 2,106 2,106
Notes receivable from
stockholders (74) (74)
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 71,702 375 375
Notes receivable from stockholders 132 132
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
Conversion of preferred stock 500,000 --
Purchase of treasury stock (967) (967)
Options exercised 123,171 512 512
Notes receivable from stockholders 7 7
Incentive plan awards 102,684 1 872 873
Unrealized gains on
available-for-sale securities 2,887 2,887
Investment in Guilford 6,026 6,026
Net loss (26,382) (26,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 36,009,055 $36 $399,155 $ -- ($967) ($20) $578 ($289,388) $109,394
- ------------------------------------------------------------------------------------------------------------------------------------
</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
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash 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
("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities." All marketable securities at December 31, 1995
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 SFAS 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.
Realized gains and losses on sales of all such securities are reported
in earnings and computed using the specific identification cost
method.
F-7
<PAGE>
Business Risk and Credit Concentration
A majority of the Company's revenues are derived from product sales,
which consist entirely of sales under a license agreement with
SmithKline Beecham Corporation ("SB") (see Note 2). Any factor
adversely affecting demand for, or supply of, the psychiatric products
covered by the license agreement could materially adversely affect the
Company's business and financial performance.
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 SB (see Note 2) 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.
Co-promotion Commissions
Revenue from co-promotion commissions (see Note 2) is recognized based
on estimated sales levels of Ortho-McNeil Pharmaceutical's psychiatric
product HALDOL(R)Decanoate for the contract year.
Contract Revenues
Research and development contract revenue 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 1995, 1994
and 1993 include approximately $1.4 million, $2.9
F-8
<PAGE>
million and $3.1 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, adjusted for treasury stock. Stock
options, warrants and preferred stock are antidilutive and therefore
excluded from the calculation.
Treasury Stock
Treasury stock is stated at cost and is considered issued and
outstanding.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities, approximate fair value due to
their short maturities. Based on borrowing rates currently available
to the Company for loans with similar terms, the carrying value of
notes payable and capital lease obligations approximates fair value.
Estimated fair values for short-term investments, which are separately
disclosed elsewhere, are based on quoted market prices for the same or
similar instruments.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires the Company to review for impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. SFAS No. 121 will become
effective for the Company's year ending December 31, 1996. The Company
has studied the implications of SFAS No. 121 and, based on its initial
evaluation, does not expect it to have a material impact on the
Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," which establishes a fair-value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method
of accounting. The Company will continue to account for employee stock
options under APB
F-9
<PAGE>
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123 disclosures will be effective for fiscal year 1996.
2. Joint Business Arrangements
a. Agreement with SmithKline Beecham
Under the terms of an agreement with SB, the Company has the exclusive
United States 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 certain product liability insurance. The Company pays SB
40% of net profits, as defined in the agreement, from United States
sales of the SB Products.
b. Agreement with Ortho-McNeil Pharmaceutical
In July 1993, the Company entered into a five-year agreement with
Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of Johnson &
Johnson, to jointly promote the injectable antipsychotic HALDOL(R)
Decanoate. Under the agreement, the Company receives payments based on
achieving specified levels of sales over a contract year beginning in
August and ending in July. Ortho-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(R) anaritide ("AURICULIN") 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 other markets outside North America in return for a
royalty on sales. Concurrent with the collaboration agreement, Genentech
purchased $20 million of Scios 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
8). The loan can be drawn down through the year 2002. Genentech has also
agreed to pay Scios up to $50 million in milestone payments upon the
achievement of key development events and commercial targets. At
December 31, 1995, no milestone payments had been made and Genentech had
converted preferred stock equivalent to 500,000 shares of common stock.
F-10
<PAGE>
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(R) trafermin ("FIBLAST"). Under the new
agreements, the Company will collaborate with Kaken to further develop
the FIBLAST manufacturing process, supply 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.
On December 31, 1995, the Company's deferred revenue included a portion
of milestone payments received to date under these agreements.
3. Affiliates
In June 1994, Guilford Pharmaceuticals Inc. ("Guilford"), then 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. Guilford
completed a secondary stock offering in August 1995, which reduced the
Company's ownership to 16%. The Company has continued to use the equity
method of accounting for its investment in Guilford because it has
significant representation on Guilford's Board of Directors. As of
December 31, 1995, the Company had written up its investment in Guilford
by $6 million in accordance with Staff Accounting Bulletin 5:H.
4. Available-For-Sale Securities
Unrealized gains and losses on available-for-sale securities at December
31, 1995 by classification were as follows:
<TABLE>
<CAPTION>
Fair Cost Unrealized Unrealized
(in thousands) Value Basis Gains Losses Net
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government
& Government
Agency Securities $61,876 $61,507 $425 $(56) $369
Corporate Bonds 22,346 22,137 235 (26) $209
------ ------ --- --- ----
Total $84,222 $83,644 $660 $(82) $578
======= ======= ==== ==== ====
</TABLE>
F-11
<PAGE>
At December 31, 1995, scheduled maturities for available-for-sale
securities was less than one year for $25,986,000 and between one and
five years for $58,236,000.
The Company realized gains of $998,000 and losses of $929,000 on the
disposal and write-down of available-for-sale securities during 1995.
5. Property and Equipment
<TABLE>
<CAPTION>
December 31, 1995 1994
------------ ---- ----
(in thousands)
<S> <C> <C>
Laboratory equipment $9,026 $12,012
Computer and related equipment 3,239 4,138
Furniture and other 1,623 2,782
Buildings and building improvements 43,483 41,371
------ ------
57,371 60,303
Accumulated depreciation and
amortization (24,709) (26,532)
------- -------
32,662 33,771
Construction in progress 2,869 1,347
----- -----
$35,531 $35,118
======= =======
6. Other Assets
December 31, 1995 1994
------------ ---- ----
(in thousands)
Deposits $318 $127
Other assets 364 268
Employee notes receivable 1,410 1,360
Acquired technology 38 38
-- --
$2,130 $1,793
====== ======
</TABLE>
F-12
<PAGE>
7. Other Accrued Liabilities
<TABLE>
<CAPTION>
December 31, 1995 1994
------------ ---- ----
(in thousands)
<S> <C> <C>
Accrued Medicaid rebates $ 1,864 $ 2,387
Accrued payroll 1,708 2,640
Profit distribution to third parties 1,639 1,645
Restructure reserve -- 2,290
Accrued clinical trial expenses 752 658
Other 1,900 1,937
----- -----
$7,863 $11,557
====== =======
</TABLE>
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 California facilities. Of the total
restructuring charge, severance and related costs accounted for 49%,
asset write-downs 27%, facility carrying costs 13% and chemical disposal
and other expenses 11%.
As of December 31, 1995, actual cash expenditures incurred as a result
of the restructuring plan were approximately $2.6 million. No additional
charges were recorded. 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, and is
currently seeking to lease-out or sell the building.
8. Lease and Debt Commitments
a. Operating Leases
Under various operating leases, the Company leases facilities in
California and Maryland and the land on which the Company's
Mountain View, 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. In
addition, the Company has entered into operating leases covering
laboratory and computer equipment.
F-13
<PAGE>
Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>
Facilities Equipment
Operating Operating
(in thousands) Leases Leases
------ ------
<S> <C> <C>
1996 $914 $457
1997 983 411
1998 1,009 346
1999 1,044 --
2000 977 --
---- --- ----
$4,927 $1,214
====== ======
</TABLE>
Rent expense for all facilities operating leases was approximately
$456,000, $565,000 and $601,000 in 1995, 1994 and 1993,
respectively.
b. Capital Leases and Borrowing Arrangements
At December 31, 1995, long-term debt and capital lease commitments
were:
<TABLE>
<CAPTION>
Capital
(in thousands) Leases Debt
------ ----
<S> <C> <C>
1996 $ 128 $ 680
1997 9 778
1998 -- 374
1999 -- --
2000 -- --
----- -----
137 1,832
Less future interest (13) (216)
----- -----
$ 124 $1,616
===== ======
</TABLE>
Long-term debt consists of two five-year notes, secured by equipment,
at interest rates of 9.9% and 9.8%, due in April 1998 and October
1998, respectively. Under the terms of the notes, the Company is
required to maintain certain covenants concerning minimal tangible net
worth, current ratio, liabilities to net worth ratio and minimum cash
and marketable securities balances.
In December 1995, the Company secured a $3 million bank loan payable
in June 1996 at a floating interest rate .75% above the six month
LIBOR rate. On December 31, 1995, the six month LIBOR rate was 5.51%.
The loan is secured by $3.3 million of restricted Government
securities.
F-14
<PAGE>
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
common stock, at the prevailing market price, at the Company's option
at any time through December 31, 2002. No amounts were outstanding
under the agreement at December 31, 1995.
9. Litigation
On May 25, 1995, the Company was served with three complaints filed in
the U.S. District Court for the Northern District of California by three
stockholders. The actions were filed against the Company and Richard
Casey, its Chairman and Chief Executive Officer, on behalf of the
individual plaintiffs and on behalf of other purchasers of the Company's
stock during the period from October 6, 1993 to May 2, 1995. The
complaints, which were combined in August 1995 into a consolidated
complaint, allege violations of federal securities laws claiming that
the defendants issued a series of false and misleading statements,
including filings with the Securities and Exchange Commission, regarding
the Company and clinical trials involving AURICULIN. The complaints seek
unspecified compensatory and punitive damages, attorneys fees and costs.
On December 1, 1995, the court heard oral argument on defendants' motion
to dismiss the complaint. The parties are awaiting the court's decision.
Discovery has not yet commenced. The Company believes it has meritorious
defenses and intends to defend the lawsuit vigorously.
On November 29, 1995, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the
alleged disposal of hazardous substances by a subcontractor of Nova
Pharmaceutical Corporation ("Nova"), which the Company acquired in 1992.
The Company is one of many potentially responsible parties that have
been identified as associated with this specific site. The Company is in
the process of responding to the EPA's request for additional
information on materials disposed of at this site. The ultimate outcome
of this action cannot presently be determined. Accordingly, no provision
for any liability or loss that may result from adjudication or
settlement thereof has been made in the accompanying consolidated
financial statements.
10. Research Commitments
The Company's commitments for research sponsorship payments to
collaborators and institutions during 1996, 1997 and 1998 aggregate
approximately $25,000.
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
F-15
<PAGE>
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
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.
As of December 31, 1995, no payments have been made to the minority
partners creditable against the purchase price.
In December, 1992, the Company exercised its option to acquire all
interests in Nova Technology Limited Partnership ("NTLP") for $20.4
million and transaction costs of $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.
11. Stockholders' Equity
As part of the 1992 merger with Nova, the outstanding Nova warrants were
converted into warrants to purchase approximately 4,645,000 shares of
Scios Inc. common stock. At December 31, 1995, warrants were outstanding
to purchase approximately 2,359,000 shares at prices ranging from $8.84
to $55.13 per share and are exercisable in increments that expire over
the period from June 1996 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 16,053 shares of preferred stock issued and outstanding at
December 31, 1995. These non-voting shares, which are convertible at the
option of the holder into 1,605,300 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 Scios Inc. common
stock and preference upon a merger or liquidation of the Company equal
to the $950 per share purchase price.
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.
F-16
<PAGE>
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 the first day of the month after hire and can
elect to contribute to the plan up to 15% of their salary subject to
current statutory limits. In 1995, the Company matched employee
contributions at a rate of 100% to a maximum of $3,000 per employee,
except where restricted by statutory limits. The company contribution
vests over a three-year period. Company contributions to the plan
totaled approximately $537,000 in 1995, $794,000 in 1994, and $845,000
in 1993.
Under the Company's stock option plans, the Board of Directors has the
authority to determine to whom options will be granted, the number of
shares, the vesting period and the exercise price (which cannot be less
than fair market value at date of grant for incentive stock options or
85% of fair market value for nonstatutory options). The options are
exercisable at times and in increments as specified by the Board of
Directors, generally expire ten years from date of grant and fully vest
over periods from three to five years. The following shares are
authorized and available for grant as of December 31, 1995:
<TABLE>
<CAPTION>
Shares
Plan Shares Options Available
Title Authorized Outstanding For Grant Option Price
----- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
1983/86 2,200,000 1,160,394 31,500 Not less than 85% FMV
1989 170,000 43,000 -- Fair Market Value
1992 3,500,000 2,620,149 446,387 Not less than 85% FMV
NQ 443,161 8,000 -- Not less than 85% FMV
</TABLE>
F-17
<PAGE>
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)
<S> <C> <C> <C>
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
Granted 780,580 $3.50-$7.50 5,512
Exercised (123,171) $0.16-$7.13 (513)
Canceled (520,701) $2.56-$21.13 (4,236)
-------- ------
Balances at December 31, 1995 3,831,543 $2.56-$21.13 $29,022
========= =======
</TABLE>
At December 31, 1995, options to purchase 2,412,092 shares were fully
vested.
13. Significant Customers
In 1995, 1994 and 1993, no individual customers contributed more than
10% of total revenues.
In 1995, of the $3.0 million in accounts receivable, $1.9 million was a
receivable from SB for December sales of the SB Products, $0.6 million
was a receivable from Ortho-McNeil based on achieving specific sales
levels and $0.3 million was from Connective Therapeutics for contract
manufacturing services.
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.
F-18
<PAGE>
The Company has federal and state income tax net operating loss ("NOL")
carryforwards at December 31, 1995 for tax purposes available as
follows:
Federal NOL $228,000,000
State NOL 46,000,000
Federal research credit 8,500,000
State research credit 1,500,000
These federal and state NOL carryforwards expire in the years 1998
through 2010, and 1996 through 2000, respectively. The federal and state
research credit carryforwards expire in the years 1998 through 2010, and
2002 through 2010, respectively.
Due to a change in the ownership of the Company, as defined, a portion
of the federal and state NOL carryover is subject to an annual
utilization limitation. Should another change in ownership occur, future
utilization of the Company's NOL carryforwards may be subject to
additional limitations.
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 1995 1994
---------------------- ---- ----
(in thousands)
<S> <C> <C>
Depreciable and amortizable
assets, primarily technology $ 6,800 $ 6,000
Other accrued liabilities 3,200 3,100
State (net of federal benefit) 5,000 3,800
Net operating loss carryforward 76,600 70,000
Research credit 8,500 7,500
Valuation allowance (100,100) (90,400)
-------- -------
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-19
<PAGE>
SCIOS INC.
Computation of Net Loss Per Share
(Calculated in accordance with the
guidelines of item 601 of
Regulation S-K. The effect of stock
options on loss per share is
anti-dilutive).
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
PRIMARY:
Average common shares outstanding 35,809,876 35,219,442 34,768,195
Net effect of dilutive stock options -
based on treasury stock method 86,485 292,341 486,855
----------------- ----------------- -----------------
Average common and common equivalent
shares outstanding 35,896,361 35,511,783 35,255,050
----------------- ----------------- -----------------
Net loss $(26,382,000) $(27,961,000) $(36,579,000)
----------------- ----------------- -----------------
Net loss per share ($0.73) ($0.79) ($1.04)
----------------- ----------------- -----------------
FULLY DILUTED:
Average common shares outstanding 35,809,876 35,219,442 34,768,195
Net effect of dilutive stock options -
based on treasury stock method 79,786 291,847 1,291,326
----------------- ----------------- -----------------
Average common and common equivalent -
shares outstanding 35,889,662 35,511,289 36,059,521
----------------- ----------------- -----------------
Net loss $(26,382,000) $(27,961,000) $(36,579,000)
----------------- ----------------- -----------------
Net loss per share ($0.74) ($0.79) ($1.01)
----------------- ----------------- -----------------
</TABLE>
See notes to consolidated financial statements
Exhibit 11.1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
BIO-SHORE MANAGEMENT CORPORATION,
a California corporation
CALIFORNIA BIOTECHNOLOGY RESEARCH, INC.,
a California corporation
SN PROPERTIES, INC.
a Maryland corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Scios Inc. on Form S-8 (File No. 2-90477, File No. 2-97606, File No. 33-39878
and File No. 33-51590) and Form S-3 (File No. 33-18958) of our report dated
February 6, 1996 on our audits of the consolidated financial statements of Scios
Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of three
years in the period ended December 31, 1995 which report is included in this
Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND LLP
San Jose, California
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED 12-31-95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000726512
<NAME>SCIOS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,847
<SECURITIES> 84,222
<RECEIVABLES> 3,014
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,716
<PP&E> 60,240
<DEPRECIATION> 24,709
<TOTAL-ASSETS> 131,550
<CURRENT-LIABILITIES> 21,074
<BONDS> 1,082
0
0
<COMMON> 36
<OTHER-SE> 109,358
<TOTAL-LIABILITY-AND-EQUITY> 131,550
<SALES> 41,396
<TOTAL-REVENUES> 49,187
<CGS> 24,742
<TOTAL-COSTS> 77,362
<OTHER-EXPENSES> (1,793)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (26,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,382)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.74)
</TABLE>
