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 March 31, 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 94043
(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 __________
<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 March 31, December 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $18,535 $10,197
Marketable securities 3,500 13,322
Accounts receivable, net 1,471 5,215
Prepaid expenses 583 600
------------ ------------
Total current assets 24,089 29,334
Marketable securities, non-current 52,513 41,181
Investment in affiliate 10,150 10,537
Property and equipment, net 33,200 33,583
Other assets 1,934 2,236
------------ ------------
TOTAL ASSETS $121,886 $116,871
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,912 $1,685
Other accrued liabilities 7,559 11,134
Deferred contract revenue 11,951 11,652
Current portion of long-term debt and capital leases 141 339
------------ ------------
Total current liabilities 21,563 24,810
Long-term debt and capital leases 32,557 31,919
------------ ------------
Total liabilities 54,120 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:
38,368,210 and 38,032,120, respectively 38 38
Additional paid-in capital 415,481 411,045
Treasury stock (2,660) (4,758)
Notes receivable from stockholders (203) (13)
Net unrealized gains on securities 244 288
Accumulated deficit (345,134) (346,458)
------------ ------------
Total stockholders' equity 67,766 60,142
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $121,886 $116,871
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Product sales $8,430 $6,159
Co-promotion commissions 1,268 1,696
Research & development contracts 4,592 474
------------ ------------
14,290 8,329
------------ ------------
Costs and expenses:
Cost of goods sold 4,805 3,854
Research and development 10,527 10,880
Marketing, general and administration 4,715 5,326
Profit distribution to third parties 1,070 567
------------ ------------
21,117 20,627
------------ ------------
Loss from operations (6,827) (12,298)
Other income:
Investment income 987 791
Interest expense (650) (134)
Realized gains (losses) on securities 8,039 (105)
Other income, net 19 148
------------ ------------
8,395 700
Equity in net loss of affiliates (244) (611)
Minority interests -- 77
------------ ------------
Net income (loss) $1,324 ($12,132)
------------ ------------
Earnings (loss) per common share:
Basic $0.04 ($0.34)
------------ ------------
Diluted $0.03 ($0.34)
------------ ------------
Weighted average number of common shares outstanding used in calculation of:
Basic 37,273,536 35,831,662
------------ ------------
Diluted 38,835,221 35,831,662
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,324 ($12,132)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 971 1,345
Accrued long-term interest payable 638 --
Equity in net loss of affiliates 244 611
Minority interest -- (77)
Change in assets and liabilities:
Accounts receivable 3,744 1,302
Accounts payable 227 (1,615)
Other accrued liabilities (576) (3,489)
Other 128 192
Deferred contract revenue 299 5,000
------------ ------------
Net cash provided by (used in) operating activities 6,999 (8,863)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (588) (1,026)
Proceeds from sale of investment in affiliate 144 --
Sales/maturities of marketable securities 74,373 89,091
Purchases of marketable securities (75,927) (78,032)
------------ ------------
Net cash provided by (used in) investing activities (1,998) 10,033
------------ ------------
Cash flows from financing activities:
Issuance of common stock and collection of notes receivable from
stockholders, net 3,535 --
Purchase of treasury stock -- (349)
Payment of notes payable and capital leases (198) (116)
Proceeds from notes payable and capital leases -- 30,000
------------ ------------
Net cash provided by financing activities 3,337 29,535
------------ ------------
Net increase in cash and cash equivalents 8,338 30,705
Cash and cash equivalents at beginning of period 10,197 1,587
------------ ------------
Cash and cash equivalents at end of period $ 18,535 $ 32,292
------------ ------------
Supplemental cash flow data:
Cash paid during the period for interest ($12) ($134)
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains on securities ($44) ($256)
Investment in affiliate ($388) ($611)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<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 March 31, 1998 and the Company's consolidated results of
operations and cashflows for the three-month periods ended March 31,
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.
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. In 1997, common
equivalent shares are excluded from the computation of net loss per
common share - assuming dilution as their effect is anti-dilutive.
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.
<PAGE>
The following table sets forth the computation of Scios' basic and
diluted earnings (loss) per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------- ---------- ---------
<S> <C> <C>
Numerator
Basic
Net income (loss) $ 1,324 $(12,132)
Diluted
Net income (loss) $ 1,324 $(12,132)
Denominator
Basic
Weighted average shares 37,274 35,832
Effect of dilutive securities:
Employee stock options 1,562 ---
Weighted average shares and assumed
conversions 38,836 35,832
Basic earnings (loss) per share $ 0.04 $ (0.34)
Diluted earnings (loss) per share $ 0.03 $ (0.34)
<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 the 1997 diluted earnings calculation. Although
potentially dilutive, the payoff of the Genentech loan through the
issuance of common stock would have been anti-dilutive in both 1997 and
1998 and was therefore excluded from the calculations.
</FN>
</TABLE>
2. Subsequent Events
In April 1998, Scios and Ortho-McNeil Pharmaceutical, an
affiliate of Johnson and Johnson, agreed to terminate the co-promotion
contract for Haldol(R) Decanoate because of new generic competition.
Concurrently, the Company initiated a new agreement with Janssen
Pharmaceutica for the co-promotion of Janssen's product Risperdal(R)
(risperidone).
Also in April 1998, Scios filed a New Drug Application with
the US Food and Drug Administration requesting approval for Natrecor(R)
(nesiritide) for the treatment of acute congestive heart failure.
On May 6, 1998, Scios announced the termination of a
co-promotion agreement with Wyeth-Ayerst Laboratories, a division of
American Home Products Corporation, under which Scios has been
co-promoting Effexor(R) (venlafaxine HCl), Wyeth-Ayerst's proprietary
antidepressant.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
In accordance with Federal law, Scios reminds readers that the
following discussion contains forward-looking statements about plans,
objectives, future results and intentions of Scios. 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 March 31, 1998 was $1.3 million
compared to a net loss of $12.1 million in the corresponding quarter of 1997.
Net income was primarily due to the gain realized on the sale of the Company's
entire equity interest in its subsidiary Karo Bio AB ("Karo Bio"), and higher
revenue from product sales and research and development contracts.
Total revenues for the three months ended March 31, 1998 increased to
$14.3 million from $8.3 million in the corresponding period of 1997. Product
sales from psychiatric products under license from SmithKline Beecham
Corporation (the "SB Products") increased to $8.4 million from $6.2 million for
the three months ended March 31, 1998 and 1997, respectively. Although SB
Product sales increased quarter-to-quarter, the Company continues to expect that
over time the sales of these products will erode because of competition from new
market entrants and generic drugs. Co-promotion commissions declined to $1.3
million in 1998 from $1.7 million in 1997. The decrease in co-promotion
commissions was the result of lower sales of Haldol(R) Decanoate. Contract
revenues for the three months ended March 31, 1998 increased $4.1 million from
the corresponding period in 1997, principally due to receipt of a milestone
payment from Novo Nordisk for development of insulinotropin, and funding for the
Company's Alzheimer's research program.
Total costs and expenses for the three months ended March 31, 1998 were
$21.1 million versus $20.6 million for the same period in 1997. Spending for
research and development decreased to $10.5 million in 1998 from $10.8 million
in 1997. Expenses for marketing, general and administration decreased to $4.7
million from $5.3 million for the three-month periods ended March 31, 1998 and
1997, respectively, because of a decrease in staffing and lower consulting
expenses. The first quarter increase from 1997 to 1998 in cost of goods and
profit distribution to third parties was the result of higher SB Product sales.
<PAGE>
Other income increased to $8.4 million in the quarter ended March 31,
1998 from $0.7 million in the comparable quarter of 1997. The increase was
principally due to a gain on the sale of the Company's entire interest in its
subsidiary, Karo Bio, 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. Interest expense increased $0.5 million in
the first quarter 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 equity
in the net loss of affiliates of $0.2 million in 1998 and $0.6 million in 1997
is the Company's proportional share of losses of Guilford Pharmaceuticals Inc.
("Guilford"), an affiliate of the Company which completed an initial public
offering in 1994. The Company's proportional share of Guilford was 7% and 10% on
March 31, 1998 and 1997, respectively. The Company's proportional share of
Guilford declined as a result of Guilford's issuance of additional common stock
in April 1997, and Scios' sale of 12,500 shares of Guilford stock in 1997 and
20,000 shares in 1998.
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; 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 Kaken Pharmaceutical Co., Ltd. in Japan and Wyeth-Ayerst
Laboratories in the United States, in developing and commercializing the
Company's products.
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $74.5 million at March 31, 1998, an increase of $9.8
million from December 31, 1997. The increase was primarily attributable to $7.7
million received from the sale of Karo Bio stock and the exercise of $3.5
million in stock options during the quarter, which was partially offset by net
operating expenses.
<PAGE>
The Company has experienced net operating losses since its inception
and expects to continue to incur losses for at least the next two years. The
Company's ability to achieve and sustain profitability, and therefore the rate
of utilization of the Company's current financial resources, will depend upon a
number of factors, including the Company's success in securing a partner for
Natrecor(R) (nesiritide), and the success and timeliness of its product
development, clinical trial, regulatory approval and product introduction
efforts. 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 $74.5 million at March 31, 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 Company's decisions concerning the degree
to which it will incur expenses to launch its products in the United States
market following the necessary regulatory approvals, the results of the
Company's partnering efforts, 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 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>
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.
May , 1998 By: /s/ Richard L. Casey
Date Richard L. Casey, Chairman and CEO
May , 1998 By: /s/ David Southern
Date David Southern, Controller
(Chief Accounting Officer)
<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 March 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 18,535
<SECURITIES> 56,013
<RECEIVABLES> 1,471
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,089
<PP&E> 69,296
<DEPRECIATION> 36,096
<TOTAL-ASSETS> 121,886
<CURRENT-LIABILITIES> 21,563
<BONDS> 32,557
38
0
<COMMON> 0
<OTHER-SE> 67,728
<TOTAL-LIABILITY-AND-EQUITY> 121,886
<SALES> 8,430
<TOTAL-REVENUES> 14,290
<CGS> 4,805
<TOTAL-COSTS> 21,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650
<INCOME-PRETAX> 1,324
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,324
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.03
</TABLE>
