FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-11749
Scios Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-3701481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Scios Inc.
2450 Bayshore Parkway
Mountain View, CA 94043x
(Address of principal executive offices) (Zip code)
(650) 966-1550
(Registrant's telephone number including area code)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.001 par value 38,368,652
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $6,697 $10,197
Marketable securities 3,144 13,322
Accounts receivable 11,355 5,215
Prepaid expenses 313 600
------------- -----------
Total current assets 21,509 29,334
Marketable securities, non-current 67,852 41,181
Investment in affiliate 9,569 10,537
Property and equipment, net 32,773 33,583
Other assets 1,869 2,236
------------- -----------
TOTAL ASSETS $133,572 $116,871
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,813 $1,685
Other accrued liabilities 6,131 11,134
Deferred contract revenue 11,681 11,652
Current portion of long-term debt and capital leases 42 339
------------- -----------
Total current liabilities 21,667 24,810
Long-term debt and capital leases 33,194 31,919
------------- -----------
Total liabilities 54,861 56,729
------------- -----------
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000
shares authorized; none issued and outstanding: -- --
Common stock; $.001 par value; 150,000,000
shares authorized; issued and outstanding:
38,368,652 and 38,032,120, respectively 38 38
Additional paid-in capital 415,903 411,045
Treasury stock (2,299) (4,758)
Notes receivable from stockholders (384) (13)
Net unrealized gains on securities 284 288
Accumulated deficit (334,831) (346,458)
------------- -----------
Total stockholders' equity 78,711 60,142
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,572 $116,871
------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
--------------- -------------- ---------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales $4,729 $7,537 $13,159 $13,696
Co-promotion commissions 1,985 1,423 3,253 3,119
Research & development contracts 22,881 1,922 27,473 2,396
--------------- -------------- ---------------- --------------
29,595 10,882 43,885 19,211
--------------- -------------- ---------------- --------------
Costs and expenses:
Cost of goods sold 2,985 4,369 7,790 8,223
Research and development 11,930 13,059 22,457 23,939
Marketing, general and administration 4,486 5,022 9,198 10,348
Profit distribution to third parties 128 896 1,198 1,463
--------------- -------------- ---------------- --------------
19,529 23,346 40,643 43,973
--------------- -------------- ---------------- --------------
Income (loss) from operations 10,066 (12,464) 3,242 (24,762)
Other income:
Investment income 962 1,136 1,948 1,927
Interest expense (643) (750) (1,292) (884)
Realized gains (losses) on securities 39 (74) 8,077 (179)
Other income, net 460 1 477 149
--------------- -------------- ---------------- --------------
818 313 9,210 1,013
Equity in net loss of affiliates (581) (525) (825) (1,136)
Minority interests -- -- -- 77
--------------- -------------- ---------------- --------------
Net income (loss) $10,303 ($12,676) $11,627 ($24,808)
--------------- -------------- ---------------- --------------
Earnings (loss) per common share:
Basic $0.27 ($0.35) $0.31 ($0.69)
--------------- -------------- ---------------- --------------
Diluted $0.26 ($0.35) $0.30 ($0.69)
--------------- -------------- ---------------- --------------
Weighted average number of common shares outstanding used in calculation of:
Basic 37,850,807 35,826,469 37,562,172 35,829,065
--------------- -------------- ---------------- --------------
Diluted 42,092,920 35,826,469 38,733,164 35,829,065
--------------- -------------- ---------------- --------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,627 ($24,808)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,909 2,738
Accrued long-term interest payable 1,275 638
Equity in net loss of affiliates 824 1,136
Minority interest -- (77)
Change in assets and liabilities:
Accounts receivable (6,140) (1,202)
Accounts payable 2,128 (824)
Other accrued liabilities (5,004) (2,600)
Other 282 508
Deferred contract revenue 29 8,120
----------- ------------
Net cash provided by (used in) operating activities 6,930 (16,371)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment (1,099) (1,953)
Proceeds from sale of investment in affiliate 144 --
Sales/maturities of marketable securities 148,264 101,525
Purchases of marketable securities (164,759) (98,115)
----------- ------------
Net cash provided by (used in) investing activities (17,450) 1,457
----------- ------------
Cash flows from financing activities:
Issuance of common stock and collection of notes receivable from
stockholders, net 7,317 --
Purchase of treasury stock -- (1,767)
Payment of notes payable and capital leases (297) (275)
Proceeds from notes payable and capital leases -- 30,000
----------- ------------
Net cash provided by financing activities 7,020 27,958
----------- ------------
Net increase (decrease) in cash and cash equivalents (3,500) 13,044
Cash and cash equivalents at beginning of period 10,197 1,587
=========== ============
Cash and cash equivalents at end of period $ 6,697 $ 14,631
=========== ============
Supplemental cash flow data:
Cash paid during the period for interest ($12) ($246)
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains on securities ($4) ($86)
Investment in affiliate ($969) $ 4,948
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Accounting Policies
The unaudited consolidated financial statements of Scios Inc.
("Scios" or the "Company") reflect, in the opinion of management, all
adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's consolidated financial
position at June 30, 1998 and the Company's consolidated results of
operations and cash flows for the three- and six-month periods ended
June 30, 1998 and 1997. Interim-period results are not necessarily
indicative of results of operations or cash flows for a full-year
period.
These financial statements and the notes accompanying them
should be read in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1997. Investors are encouraged to
review the Form 10-K for a broader discussion of the Company's business
and the opportunities and risks inherent in the Company's business.
Copies of the 10-K are available from the Company on request.
The year-end balance sheet data were derived from audited
financial statements, but do not include all disclosures required by
generally accepted accounting principles.
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. This statement requires the
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined
as net income plus revenues, expenses, gains, and losses that, under
generally accepted accounting principles, are excluded from net income.
The components of comprehensive income which are excluded from net
income are not significant, individually or in aggregate, and
therefore, no separate statement of comprehensive income has been
presented.
Effective December 31, 1997, the Company adopted Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share" and,
accordingly, all prior periods presented have been restated. Basic net
income (loss) per share is calculated using the weighted average number
of common shares outstanding for the period. Diluted net income (loss)
is calculated using the weighted average number of common and dilutive
common equivalent shares outstanding during the period.
<PAGE>
The following table sets forth the computation of the
Company's basic and diluted earnings (loss) per share (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
----------------------------------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator
Basic
Net income (loss) $ 10,303 $ (12,676) $ 11,627 $ (24,808)
------ ------ ------ ------
Diluted
Net income (loss) $ 10,303 $ (12,676) $ 11,627 $ (24,808)
Add: Genentech interest 638 --- --- ---
------ ------ ------ ------
Net income (loss) $ 10,941 12,676 11,627 $ (24,808)
------ ------ ------ ------
Denominator
Basic
Weighted average shares 37,851 35,826 37,562 35,829
Effect of dilutive securities:
Genentech conversion of
loan to common stock 3,000 --- --- ---
Employee stock options 1,242 --- 1,171 ---
------ ------ ------ ------
Weighted average shares and
assumed conversions 42,093 35,826 38,733 35,829
------ ------ ------ ------
Basic earnings (loss) per share $ 0.27 $ (0.35) $ 0.31 $ (0.69)
------ ------ ------ ------
Diluted earnings (loss) per share $ 0.26 $ (0.35) $ 0.30 $ (0.69)
------ ------ ------ ------
<FN>
-----------------------------------------
The potentially dilutive effect of outstanding options to purchase
common stock would have been anti-dilutive in 1997, and they were
therefore excluded from both 1997 diluted earnings calculations. If
the Genentech loan were paid through the issuance of common stock
instead of cash, it would be dilutive in the three-month period ended
June 30, 1998, but anti-dilutive for the same period in 1997 and for
the six-month periods in 1998 and 1997. Therefore, shares for the
Genentech loan were included in calculations for diluted earnings per
share in the current quarter in 1998, but excluded from calculations
for all other periods in 1998 and 1997.
</FN>
</TABLE>
2. Subsequent Events
On July 21, 1998, Wyeth-Ayerst Laboratories, a division of
American Home Products Corporation, and the Company announced the
termination of the North American Phase II/III clinical study of
Fiblast(R) (trafermin) in acute stroke and the continuation of a
similar Phase II/III study in Europe. While the two trials were similar
in design, they differed significantly in the duration over which
Fiblast(R) (trafermin) was administered. A detailed review of the data
from the North American stroke trial is in progress by both companies.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In accordance with Federal law, the Company reminds readers that the
following discussion contains forward-looking statements about plans,
objectives, future results and intentions of the Company. These forward-looking
statements are based on the current expectations of the Company, and the Company
assumes no obligation to update this information. Realization of these plans and
results involves risks and uncertainties, and the Company's actual results could
differ materially from the historical results or future plans discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those items discussed below, as well as the considerations discussed
in the Company's Form 10-K for the year ended December 31, 1997.
Operating Results
Net income for the quarter ended June 30, 1998 was $10.3 million
compared to a net loss of $12.7 million in the corresponding quarter of 1997.
For the six-month periods ended June 30, 1998 and 1997, net income was $11.6
million and the net loss was $24.8 million, respectively. For both the three-
and six-month periods, the increase in net income was primarily due to the
increase in contract revenue from signing an agreement with Bayer AG ("Bayer")
for the commercialization of the Company's product Natrecor(R) (nesiritide).
Total revenues for the three months ended June 30, 1998 were $29.6
million versus $10.9 million for the corresponding quarter in 1997, and $43.9
million and $19.2 million for the six-month periods ended June 30, 1998 and
1997, respectively. The year-to-year increase was principally due to $20.0
million in contract revenue recognized upon entering into a worldwide strategic
alliance with Bayer for the commercialization of Natrecor(R) (nesiritide),
receipt of a milestone payment from Novo Nordisk for development of
insulinotropin, and funding for the Company's Alzheimer's research program.
Product sales from psychiatric products under license from SmithKline Beecham
Corporation (the "SB Products") decreased to $13.2 million from $13.7 million
for the six-month periods ended June 30, 1998 and 1997, and to $4.7 million from
$7.5 million for the three months ended June 30, 1998 and 1997, respectively. SB
Product sales decreased year-to-year, and the Company expects that over time the
sales of these products will continue to erode because of competition from new
market entrants and generic drugs. For the three- and six-month periods ended
June 30, 1998, co-promotion commissions were $2.0 million and $3.3 million
versus $1.4 million and $3.1 million for the same periods in 1997. The increase
in co-promotion commissions was the result of changes in the product lines
promoted by the Company in the second quarter of 1998. In April 1998, the
Company entered into a new agreement with Janssen Pharmaceutica for the
co-promotion of Janssen's product Risperdal(R) (risperidone). In the same time
frame, the Company and Ortho-McNeil Pharmaceutical, an affiliate of Johnson and
Johnson, agreed to terminate their co-promotion contract for Haldol(R) Decanoate
because of new generic competition. In May 1998, the Company announced the
termination of the co-promotion agreement with Wyeth-Ayerst Laboratories under
which the Company had been co-promoting Effexor(R) (venlafaxine HCl).
<PAGE>
Total costs and expenses for the three and six months ended June 30,
1998 were $19.5 million and $40.6 million, respectively, versus $23.3 million
and $44.0 million for the same periods in 1997. For the current quarter,
spending for research and development decreased to $11.9 million in 1998 from
$13.1 million in 1997, and to $22.5 million from $23.9 million in the six-month
periods ended June 30, 1998 and 1997. The year-to-year decreases for both the
three- and six-month periods were primarily due to a reduction in clinical trial
expenses. Expenses for marketing, general and administration decreased for the
six-month periods to $9.2 million from $10.3 million, and to $4.5 million from
$5.0 million for the three-month periods ended June 30, 1998 and 1997,
respectively. The year-to-year decreases were principally due to lower
depreciation expenses for leasehold improvements in 1998 compared to 1997. The
decreases in cost of goods and profit distribution to third parties from 1997 to
1998 were the result of lower SB Product sales in 1998.
Other income increased to $0.8 million in the quarter ended June 30,
1998 from $0.3 million in the comparable quarter of 1997. For the six-month
periods ended June 30, 1998 and 1997, other income increased to $9.2 million
from $1.0 million. The increase for the six-month period was principally due to
a gain on the sale of the Company's entire interest in its subsidiary, Karo Bio
AB, a Swedish biotechnology company, through a public stock offering completed
in March 1998. Following the sale of its stock, the Company no longer has any
financial interest in the results of Karo Bio. For the six-month periods ended
June 30, 1998 and 1997, interest expense increased from 1997 to 1998 due to
interest on the loan from Genentech Inc., which was drawn down at the end of the
first quarter of 1997.
The increase in equity in the net loss of affiliates for both the
three- and six-month periods, was the result of the company's share of losses of
Guilford Pharmaceuticals Inc., in which it has a 7% ownership.
The ability of the Company to achieve profitability depends principally
on the Company's success in developing and commercializing its own products and
on its ability to complete agreements with third parties that result in
additional revenue. Among the factors that will determine the Company's success
in commercializing its products are: the demonstrated safety and efficacy of
products in development; the cost of and the time taken to complete clinical
trials and regulatory submissions; the timing and scope of regulatory approvals,
particularly with respect to the Company's lead products Natrecor(R)
(nesiritide) and Fiblast(R) (trafermin); the Company's ability to secure a
cost-effective supply of product; the Company's success in developing and
implementing cost effective sales and marketing strategies either on its own
behalf or in partnership with other companies; and the level of market
acceptance if products are approved, both at product launch and over time. The
Company's ability to raise additional revenue through third parties will be
dependent on the factors described above, as well as other factors such as: its
success in marketing and selling the third-party products which it may acquire
the right to co-promote; the disposition of various patent proceedings related
to the protection of the Company's potential products; the perceived value of
the Company's current product portfolio and research programs to outside
parties; and the success of third parties, such as Bayer and Wyeth-Ayerst
Laboratories (in the United States and Europe), Kaken Pharmaceutical Co., Ltd.
(in Japan) and Novo Nordisk A/S in developing and commercializing the Company's
products.
<PAGE>
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $77.7 million at June 30, 1998, an increase of $13.0
million from December 31, 1997. The increase was due to $6.9 million from
operations and $7.3 million from the exercise of stock options partially offset
by $1.1 million of property and equipment purchases. Included in the cash
provided by operating activities was $13.9 million received from Bayer AG
immediately upon signing of the worldwide strategic alliance to market
Natrecor(R) (nesiritide), $7.7 million received from the sale of Karo Bio stock
and a $6.1 million receivable from Bayer which was temporarily withheld pending
resolution of the Company's foreign tax filing status and has subsequently been
received.
The Company expects to continue to incur losses until it is able to
achieve significant product revenues from the sale of Natrecor(R) (nesiritide).
Because the Bayer agreement for Natrecor(R) (nesiritide ) provides for sizable
milestone payments that are dependent on regulatory approvals in the United
States and Europe, quarter to quarter financial performance during the next few
years is expected to show significant fluctuation. The Company's utilization of
current financial resources will depend upon a number of factors including the
success of Bayer and the Company in securing regulatory approval for Natrecor(R)
(nesiritide) and gaining market acceptance for this product, the timeliness of
its product development efforts, clinical trials, manufacturing capabilities,
regulatory approvals and product introduction efforts for additional products or
indications. Other contributing factors will be the Company's ability to develop
new revenue sources to support research and development programs and its success
in marketing and promoting the products of third-parties that may be licensed by
the Company.
The Company's cash resources of $77.7 million at June 30, 1998,
together with revenues from product sales, collaborative agreements and interest
income, proceeds from the sale of stock held as equity investments, and any
funding from existing or future debt arrangements, will be used to support
current and new clinical trials for proprietary products under development, to
support commercialization efforts for prospective products and for other general
purposes. The Company believes its cash resources will be sufficient to meet its
operating and capital requirements for at least the next several years. Key
factors that 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, the rate of spending required to develop the Company's products and
respond to changing business conditions, the degree to which the Company will
incur expenses to launch its products following the necessary regulatory
approvals and the net contribution produced by the Company's ability to
co-promote and market 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 products currently under development, and it will consider
collaborative arrangements and additional public or private financings,
including additional equity financings. Factors influencing the availability of
additional funding include, but are not limited to, the Company's progress in
product development, investor perception of the Company's prospects and the
general conditions of the financial markets.
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 12, 1998.
(a) The following individuals were elected directors of the Company,
each to serve until a successor is elected:
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Name Each Director From Each Director
<S> <C> <C>
Samuel H. Armacost 32,372,299 454,188
Richard L. Casey 32,297,785 528,702
Myron Du Bain 32,293,972 532,515
Donald B. Rice, Ph.D. 32,523,439 303,048
Charles A. Sanders, M.D. 32,503,825 322,662
Robert W. Schrier, M.D. 31,699,531 1,126,956
Solomon H. Snyder, M.D. 32,521,027 305,460
Burton E. Sobel, M.D. 32,312,308 514,179
Eugene L. Step 32,506,279 320,208
</TABLE>
(b) The following matters were approved by stockholder vote, with
votes cast as indicated:
To ratify and approve amendments to the Company's 1992 Equity Incentive
Plan:
Votes for: 31,136,905
Votes against 1,509,230
Abstentions: 180,352
To ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for fiscal year 1998:
Votes cast for: 32,660,707
Votes cast against: 97,870
Abstentions: 67,910
Broker non-votes were not relevant to the foregoing matters.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIOS INC.
August 12, 1998 By: /s/ Richard L. Casey
Date Richard L. Casey, Chairman and CEO
August 12, 1998 By: /s/ David Southern
Date David Southern, Controller
(Chief Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations, and
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ending June 30, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> $ 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-01-1998
<CASH> 6,697
<SECURITIES> 70,996
<RECEIVABLES> 11,355
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,509
<PP&E> 69,807
<DEPRECIATION> 37,034
<TOTAL-ASSETS> 133,572
<CURRENT-LIABILITIES> 21,667
<BONDS> 33,194
0
0
<COMMON> 38
<OTHER-SE> 78,673
<TOTAL-LIABILITY-AND-EQUITY> 133,572
<SALES> 13,159
<TOTAL-REVENUES> 43,885
<CGS> 7,790
<TOTAL-COSTS> 40,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,292
<INCOME-PRETAX> 11,627
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,627
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
</TABLE>
