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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 1997
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 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: (650) 966-1550
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
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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 16, 1998 was $411,856,747.
As of March 16, 1998, 37,655,474 shares of the registrant's Common Stock were
outstanding (net of Treasury Shares).
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Part
- --------- --------------
Definitive Proxy Statement with respect to III
the 1998 Annual Meeting of Stockholders
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<PAGE>
PART I
Item 1. BUSINESS
Overview
Scios Inc. ("Scios" or the "Company") is a biopharmaceutical company engaged
in the discovery, development, manufacture and commercialization of novel human
therapeutics based upon its capabilities in both protein-based and
small-molecule drug discovery and development. Scios has two major clinical
development programs. NATRECOR(R) nesiritide citrate has completed Phase III
clinical studies for the treatment of acute congestive heart failure. An NDA is
expected to be filed with the U.S. Food and Drug Administration in the first
half of 1998. FIBLAST(R) trafermin is in Phase II/III clinical trials for stroke
and in Phase II clinical trials for other vascular indications.
The Company focuses its proprietary research and development efforts
primarily in the areas of cardiorenal disorders and Alzheimer's disease. 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
molecular targets. The Company has research and development collaborations with
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, Eli Lilly and Company, The DuPont Merck Pharmaceutical Company,
Kaken Pharmaceutical Co., Ltd., and Novo Nordisk A/S. More detail is provided
below in "Business -- Products in Development."
In September 1997, the Company announced positive Phase III clinical results
from its pivotal efficacy study of NATRECOR(R) for the treatment of acute
congestive heart failure (CHF). In January, 1998, the Company announced the
successful conclusion of another clinical trial focused on the safety of
NATRECOR(R). In the next several months, the Company will file with the United
States Food and Drug Administration ("FDA") a New Drug Application ("NDA")
seeking approval to market NATRECOR(R) in the United States. The Company expects
to form a commercial partnership to market NATRECOR(R) with a multinational
pharmaceutical company.
Scios' collaborators on FIBLAST(R) are Kaken Pharmaceutical Co., Ltd.
("Kaken") of Japan, and the Wyeth-Ayerst Laboratories division of American Home
Products Corporation ("Wyeth-Ayerst"). In June 1996, Kaken filed an NDA seeking
approval to market FIBLAST(R) in Japan as a treatment for recalcitrant wounds.
In October 1996, Wyeth-Ayerst began working with Scios on the use of FIBLAST(R)
in the treatment of stroke and vascular disorders. During 1997, Wyeth-Ayerst and
Scios initiated two Phase II/III clinical trials in which FIBLAST(R) will be
evaluated in an aggregate of 1,800 patients for the treatment of stroke. In
April 1997, the Company announced the suspension of the development of
AURICULIN(R) anaritide based on the results of an interim analysis of data from
a 250-patient Phase III study on oliguric acute renal failure. The study was
suspended due to the low probability that a positive outcome could be obtained
with respect to its primary clinical endpoint, dialysis free survival.
AURICULIN(R) was under development in collaboration with Genentech, Inc.
Suspension of this development program, despite indications of success in
earlier trials, demonstrates the challenges and risks inherent in the Company's
business of pharmaceutical development.
The Company also has a profitable marketing and sales organization selling
third-party products that generate cash to help fund continued development of
the Company's proprietary products. This flex-time sales force markets a line of
psychiatric products. This includes four products that are sold under a license
from SmithKline Beecham Corporation: ESKALITH(R), ESKALITH CR(R) (lithium),
THORAZINE(R) (chlorpromazine), STELAZINE(R) (trifluoperazine) and PARNATE(R)
(tranylcypromine). In addition, in 1997 the Scios sales force marketed HALDOL(R)
Decanoate (haloperidol) for Ortho-McNeil Pharmaceutical, an affiliate of Johnson
& Johnson, and EFFEXOR(R) (venlafaxine HCl), which was co-promoted with
Wyeth-Ayerst. See "Business -- Marketing and Sales."
Prior to approval of its first product, Scios' financial strategy involves
careful management of cash while investing in its product pipeline, and
generating cash flow from its commercial operations and corporate partnerships
supporting specific products under development. Certain of the Company's product
candidates 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. Generally, the Company is also entitled to
royalties on commercial sales of products by its partner or will share in
profits in countries where Scios is co-marketing the product with its partner.
In some cases, Scios may receive all or part of its compensation in the form of
payments for the supply of the product.
<PAGE>
Scios is seeking to reach profitability in the next several years through
development of certain products, collaborations with corporate partners on other
products and the expansion of its marketing and sales capability. Until the
suspension of the development of AURICULIN(R), the Company had expected to
achieve profitability in 1998 based on development milestone payments related to
that product which the Company expected to receive from Genentech Inc. As these
events demonstrate, the Company's goal for achieving profitability, as well as
other statements in this Annual Report on Form 10-K concerning matters like the
results and timing of product development, future revenues, operations and
expenditures, regulatory approval and market introduction of the Company's
products are "forward-looking statements" which are subject to change. Each
statement is based on current expectations of the Company when the statement is
made and is subject to the risks and uncertainties inherent in the Company's
business. In accordance with the Private Securities Litigation Reform Act of
1995 ("PSLRA-95"), the Company reminds investors that all such "forward-looking
statements" are necessarily only estimates of future results and that the actual
results achieved by the Company may differ materially from these projections due
to a number of factors, including: (1) the demonstration of the safety and
efficacy of its products at each stage of clinical development; (2) timely
regulatory approval and patent and other proprietary rights protection for the
Company's products; (3) the actions of third parties, including collaborators,
licensees, manufacturing partners, and competitors; (4) market acceptance of the
Company's products; (5) the ability to manufacture product candidates in
commercial quantities at reasonable cost and in a manner acceptable to various
regulatory authorities; and (6) the accuracy of the Company's information
concerning the products and resources of competitors and potential competitors.
Factors creating uncertainty are discussed in more detail in individual sections
of this Annual Report on Form 10-K. In particular see "Business-Product
Development Activities and Risks" below and the "Outlook and Risks" sections of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 acquisition of Nova Pharmaceuticals, Inc., and
returned to using 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 (650) 966-1550.
<PAGE>
Product Development Activity Table
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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 Status Indications Partner (Territory)
- ------- ------ ----------- ------------------
<S> <C> <C> <C>
NATRECOR(R)(nesiritide Phase III complete Acute congestive heart failure Under negotiation
citrate) NDA Filing Spring 1998
NATRECOR(R)(nesiritide Phase II Post operative hypertension --
citrate)
FIBLAST(R)trafermin NDA submitted (Japan) Recalcitrant dermal wounds Kaken Pharmaceutical Co., Ltd.
FIBLAST(R)trafermin Phase II/III Stroke Wyeth-Ayerst Laboratories
FIBLAST(R)trafermin Phase II Peripheral vascular disease Wyeth-Ayerst Laboratories
FIBLAST(R)trafermin Phase II Coronary artery disease Wyeth-Ayerst Laboratories
VEGF121 Phase I Cardiovascular disease: gene GenVec,Inc.
therapy
VEGF121 Preclinical Cardiovascular disease: protein --
therapy
BNP diagnostic assay Marketed (Japan & Europe) Heart failure diagnosis/monitoring Shionogi Pharmaceutical Co., Ltd.
BNP diagnostic assay Development Heart failure diagnosis/monitoring Abbott Laboratories
Biosite Diagnostics
Serine protease Development Cardiopulmonary Bypass --
inhibitors
INSULINOTROPIN Preclinical Type 2 diabetes Novo Nordisk A/S
Secreted protein therapies Research Cardiovascular disorders --
Kinase inhibitors Research Cardiovascular disorders --
Beta-amyloid modulators Research Alzheimer's disease Eli Lilly and Company
The DuPont Merck Pharmaceutical
Company
<FN>
- --------------------
* "Research" denotes discovery research and initial bench scale production.
"Preclinical" denotes studies in animal models necessary to support an
application to the 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.
"NDA filed" means an application for commercial sale of a new drug has been
filed in the indicated country seeking approval to market the product in that
country for the covered indication.
</FN>
</TABLE>
<PAGE>
Product Development Activities and Risks
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Scios currently focuses its product research and development efforts on
proprietary novel therapeutics, principally in the areas of cardiorenal
disorders and Alzheimer's disease. 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 In Development," Scios' products are at
various stages of research and development, and in most cases further
development and testing will be required to determine their technical
feasibility and commercial viability. 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 to perform
certain activities or provide certain resources, and changes in governmental
regulation. Many of these factors will not be within the control of Scios. As a
result, there can be no assurance that any of the products described in this
Item 1 or resulting from Scios' research programs will be successfully
developed, prove to be safe and effective, meet applicable regulatory standards,
be capable of being produced in commercial quantities at reasonable costs, or be
successfully marketed.
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 and its collaborators deem 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
in order 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 misled 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, for any company 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 in pharmaceutical discovery and
development.
The Company particularly cautions investors that any decision to commence or
continue clinical trials in humans based on the results of preclinical work in
cell-based assays and animal models or an earlier clinical study does not
necessarily mean that the results achieved in subsequent human clinical studies
will be similar to those achieved in the earlier studies. A central issue in all
pharmaceutical development is how well a particular cell-based 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 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
specific subjects included in that 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. Uncertainty as to the outcome is inherent in every
clinical trial, even when a previous clinical study has produced a favorable
result. This was demonstrated in the Company's experience with AURICULIN(R). See
"Business -- Additional Products" below.
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 that the company selected or that such agency will place different
weight on various 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, which may include demonstrating that the new
product has superior properties or economic benefit. Because the regulators in
various countries operate under different regulatory systems and approaches, the
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 may 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 or delay of
approval to market a product.
<PAGE>
The Company plans to continue the development of selected products primarily
under the sponsorship of corporate partners. The Company's alliances with Eli
Lilly and Company and The DuPont Merck Pharmaceutical Company in the Alzheimer's
field and with Kaken and Wyeth-Ayerst on FIBLAST(R) are examples. Continued
funding and participation by the Company's corporate partners under joint
development or 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 or license
agreements, Scios relies on its corporate partners to conduct all or a portion
of 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 wave of mergers among
the established pharmaceutical companies over the last few years 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.
All of these factors combine to make drug development extremely risky,
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 succeeds in creating and marketing a new
pharmaceutical agent.
Products in Development
- -----------------------
NATRECOR(R) BNP. In September, 1997, Scios announced positive Phase III
clinical results from its pivotal efficacy study of NATRECOR(R) BNP for the
treatment of acute congestive heart failure (CHF). Acute CHF affects
approximately one million people annually in the United States. In the study,
NATRECOR(R) produced improvements in patients' symptoms and two important
measures of heart function: pulmonary capillary wedge pressure (PCWP) and
cardiac index. The Company plans to file an NDA (New Drug Application) with the
Food and Drug Administration (FDA) in the first half of 1998 seeking approval in
the United States for the use of NATRECOR(R) for the short-term treatment of
CHF.
The randomized, double-blind, placebo-controlled study completed in
September, 1997 was designed to demonstrate the efficacy of NATRECOR(R) as a
therapy for the short-term treatment of CHF. One hundred and twenty-seven
patients with acutely decompensated CHF requiring hospitalization were enrolled
in the study. Patients received an infusion of either NATRECOR(R) (0.015 or
0.03(mu)g/kg/min) or placebo. The primary endpoint of the study was a reduction
in PCWP. Secondary endpoints included cardiac index and symptom improvement.
With respect to the primary endpoint, the analysis indicates that NATRECOR(R)
reduced PCWP by 20% (p=0.003) and 31% (p value is less than 0.001) in the 0.015
and 0.03(mu)g/kg/min dose groups, respectively, compared to placebo. Symptom
score and cardiac index also improved compared to placebo at a statistically
significant level.
The Company is seeking a commercial partner for NATRECOR(R). The Company
expects to grant its partner marketing rights on a global basis, subject to the
option of Scios to co-promote NATRECOR(R) in the United States under certain
circumstances. Scios also intends to retain the right to manufacture and supply
NATRECOR(R) for global sales. Discussions are currently underway with candidate
partners. For a discussion of certain rights in NATRECOR(R) related to its use
in another indication, see "Business -- Additional Projects -- AURICULIN(R)
anaritide." A number of pharmaceutical products are already marketed for the
treatment of acute CHF. Hence, the Company and any partner will need to
demonstrate positive clinical benefits and an ability to continue to produce
NATRECOR(R) cost-effectively in order to successfully introduce NATRECOR(R) into
this competitive market.
<PAGE>
This discussion of NATRECOR(R) includes forward-looking statements within
the meaning of the PSLRA-95, which are based on current information. Many
factors could influence the success of the Company's strategy for
commercializing NATRECOR(R) and the commercial success of the product,
principally including the reaction of various regulatory agencies, including the
FDA, to the data Scios has developed concerning the degree of efficacy and
safety of NATRECOR(R), the scope of any approval such agencies may grant for the
product, and Scios' success in selecting, negotiating an agreement with, and
then working with a partner to successfully exploit the opportunity. 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(R).
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. BNP is
made in the heart, and preclinical studies at the Company and elsewhere suggest
that BNP has the biological effects of 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 holds issued United States and European patents covering
human BNP, which currently expire in mid-May 2009. These 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 or limiting the patent. See "Business -- Patents and Proprietary
Rights."
FIBLAST(R) trafermin. FIBLAST(R) 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), to directly stimulate the growth of
connective tissue, and to possess certain neuroprotective properties, the
mechanisms of which are not yet fully understood. As described below, Scios is
working with two key partners on the development of FIBLAST(R) for a variety of
indications.
Since 1988, Scios has worked with Kaken Pharmaceutical Co., Ltd. ("Kaken"),
the Company's corporate partner for FIBLAST(R) in Japan. Pursuant to a 1988
agreement, Kaken has exclusive rights to develop and market FIBLAST(R) for all
indications in Japan, Korea, Taiwan, Hong Kong and the People's Republic of
China. Scios 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(R) 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(R) for the next several years for use
by Kaken. The agreements also establish a collaboration on manufacturing process
development between the companies and provide Kaken with a license to Scios'
manufacturing technology for FIBLAST(R). It is intended that at some point Kaken
will be able to manufacture FIBLAST(R) for its own use. However, the timing for
Kaken to assume this responsibility has not been determined. Under the 1994
agreements, Kaken will make payments to Scios for the supply of material, the
process development collaboration, and the license to FIBLAST(R) know-how,
patents and manufacturing technology.
Kaken conducted two Phase III trials in Japan for evaluation of FIBLAST(R)
in recalcitrant wounds. Based on the results of these studies, in June 1996
Kaken filed an NDA in Japan for this indication. Before it may begin to market
FIBLAST(R) in Japan, Kaken must obtain approvals from the Japanese authorities
with respect to the NDA for FIBLAST(R) 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(R) is safe and
effective in the treatment of recalcitrant wounds, and that processes and
facilities used by Scios for manufacturing the bulk drug substance used in
FIBLAST(R) are satisfactory. Although Japanese regulators will apply Japanese
standards and practices in reviewing Kaken's NDA seeking approval to market
FIBLAST(R), 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(R) in the United States for the treatment of recalcitrant wounds
(pressure sores and venous statis ulcers), the Company determined not to fund
additional clinical studies of FIBLAST(R) 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(R) in the United States for the
treatment of recalcitrant wounds.
<PAGE>
In 1996, Scios signed a Collaboration Agreement with the Wyeth-Ayerst
Laboratories division of American Home Products Corporation ("Wyeth-Ayerst")
creating a joint development and commercialization program to examine the use of
FIBLAST(R) in the treatment of stroke and cardiovascular disorders. Under the
terms of the agreement, Wyeth-Ayerst and Scios are collaborating in the
development and commercialization of FIBLAST(R) in North America, where the
companies will share development costs and profits. Scios has granted
Wyeth-Ayerst exclusive marketing rights outside of North America and the Pacific
Rim countries licensed to Kaken. Scios will receive royalties on sales outside
of North America and payments for bulk drug supply worldwide. In 1996,
Wyeth-Ayerst made a $12 million upfront payment to Scios in cash and will also
pay Scios up to $32 million in milestone payments upon achievement of key future
development events. In addition, Wyeth-Ayerst has provided a $12 million line of
credit that Scios may draw upon from time to time through December 2004 to fund
expansion of its manufacturing facility for FIBLAST(R).
In extensive preclinical studies, FIBLAST(R) has been shown to protect
neurons from damaging effects associated with stroke, including oxygen and
glucose deprivation, and glutamate release. FIBLAST(R) has demonstrated a
reduction of neuronal death in both permanent occlusion and reperfusion animal
models of stroke. Early in 1996, Scios began a Phase I/II study of FIBLAST(R)
for the treatment of stroke. This study was concluded in 1997, ultimately
enrolling 66 patients and further demonstrating the safety of FIBLAST(R) after
systemic administration. In 1997, Wyeth-Ayerst assumed the responsibility of
lead development party for FIBLAST(R) in stroke. In October, 1997, the Company
and Wyeth-Ayerst announced the initiation of two 900-patient Phase II/III
clinical trials of FIBLAST(R) in stroke. These studies are being conducted
principally in the United States and Europe.
Scios has also demonstrated in preclinical studies FIBLAST(R)'s
potential to increase blood flow to peripheral blood vessels and reduce the
complications of peripheral vascular disease ("PVD") through angiogenesis, or
the growth of new blood vessels. Scios is the lead development party for
FIBLAST(R) in PVD and a Phase II clinical trial has recently been initiated. In
a clinical study in collaboration with researchers at the National Institutes of
Health, Scios and Wyeth-Ayerst are exploring the potential of FIBLAST(R) to
increase blood flow to the heart in patients with advanced coronary artery
disease. The purpose of this study is to explore the possibility or reducing the
need for bypass surgery through the patient's growth of new blood vessels to
supply the heart.
Scios has also granted llicenses under its FIBLAST(R) patents and technology
to companies working to develop products in other areas. These include a non-
exclusive license to Orquest, Inc., a company developing products for the treat-
ment of bone fractures, and a license to Prizm Pharmaceuticals, Inc., a company
using bFGF for the trageted delivery of other pharmaceutical agents. Scios is
supplying Orquest with FIBLAST(R) for incorporation into Orquest's product.
Scios is obligated to make payments to Organon International ("Organon")
based on amounts received by Scios upon commercialization of FIBLAST(R).
Approximately $731,000 remains to be paid under the obligation, which stems from
the Company's 1989 reacquisition of certain FIBLAST(R) rights previously
licensed to Organon. The basic research on FIBLAST(R) was funded by
Biotechnology Research Partners, Ltd. See Note 11 of Notes to Consolidated
Financial Statements. See also "Business -- Patents and Proprietary Rights" for
a discussion of FIBLAST(R) patent issues.
Discovery Research. The Company also has conducted discovery research, both
on its own and in collaboration with other companies, to identify other agents
for development or new applications for agents under development by the Company
for other indications. The current focus of Scios' research effort is on the
discovery of agents for cardiorenal applications and on agents to prevent or
delay the onset of Alzheimer's disease.
Cardiorenal Disease.
Vascular Endothelial Growth Factor. Scios is conducting pre-clinical studies
of the 121 amino acid form of VEGF (VEGF-121), another potent angiogenic
substance. The company has shown that VEGF-121 is effective in an animal model
of peripheral vascular disease following several different modes of
administration. Scios also intends to explore the possible use of VEGF-121 in
coronary artery disease. The Company has granted a license to GenVec Inc. for
the use of the gene encoding VEGF-121 in gene therapy paradigms. GenVec recently
entered phase I clinical testing of VEGF-121 gene therapy in the US in
collaboration with Parke-Davis. Scios has been awarded US and European patents
covering VEGF-121. Other companies hold patents on competing forms of VEGF.
<PAGE>
Serine Protease Inhibitors. Scios has designed novel variants of a
polypeptide Kunitz-type serine protease inhibitor and has filed patents on these
compounds. A series of these compounds inhibit key enzymes involved in
inflammatory and coagulation disorders. Scios is currently conducting
pre-clinical testing of these compounds in animal models associated with
excessive inflammation as a prelude to possible clinical development.
Cardiac Disease Genomics. The Company is conducting research to discover
novel genes that are functionally relevant to cardiac diseases. The Company has
assembled a series of technologies to assist in the identification of new
therapeutic factors and targets for drug discovery. The Company is working with
Synteni, a subsidiary of Incyte Pharmaceuticals, Inc., to analyze the expression
of cardiac genes on DNA chips. Scios is also a member of the DiscoverEase(TM)
program, which has been developed by Genetics Institute, Inc. to define the
function of novel secreted proteins.
Alzheimer's Disease. For over 10 years, the Company has conducted research
to develop new therapies for Alzheimer's disease primarily based on the
investigation of the B-amyloid precursor protein. During this time, the Company
has collaborated with a variety of pharmaceutical company partners. In 1997,
Scios formed separate research collaborations with Eli Lilly and Company and
with The DuPont Merck Pharmaceutical Corporation. Each of these collaborations
provides funding to Scios for the research it conducts, potential milestone
payments to Scios by the partner if certain events are achieved and the right of
the partner to commercialize resulting products subject to royalty payments to
Scios.
Previously, Scios had a research alliance with Marion Merrell Dow, Inc.
("MMD") which merged with Hoechst Roussel in 1995 to form Hoechst Marion
Roussel, Inc. ("HMR"). HMR terminated the collaboration in 1996, and in early
1997, the parties clarified certain issues concerning the rights of each party
to use the technology developed in the program. Among other terms, the
resolution included certain payments by HMR to Scios. HMR's decision to
terminate its collaboration with the Company represents an example of how a
change in the priorities of a corporate sponsor, such as HMR, can impact Scios.
This risk is discussed in the section "Business -- Product Development Activity
and Risks."
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. In the past, Scios divested or otherwise leveraged certain technologies
that were not central to its long-term business strategy and may continue to do
so in the future. Some of these programs are discussed below.
Insulinotropin. The Company initially developed insulinotropin under a
collaboration begun with Pfizer Inc. ("Pfizer") in 1988. After several years,
Pfizer assumed responsibility for clinical development. As part of that effort,
Pfizer initiated a collaboration with Novo Nordisk A/S of Denmark, a world
leader in insulin and diabetes care products. In 1996, Pfizer elected to
terminate its license from Scios on insulinotropin. Following a three month
review of the product, Novo Nordisk acquired an exclusive license from Scios
under a new agreement providing for Scios to receive from Novo Nordisk an
upfront payment, potential milestone payments based on time and events, and
royalties on product sales. Novo Nordisk is now responsible for development
activities for insulinotropin. 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 they 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 holds
an exclusive license to patent applications covering insulinotropin and certain
analogs held by Massachusetts General Hospital, which rights were licensed to
Novo Nordisk.
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 in Japan in
exchange for royalties on product sales. Shionogi began selling its BNP
diagnostic in Japan in 1996. In 1997, Scios granted Shionogi the right to sell
its radioimmunoassay (RIA)-BNP diagnostics in Europe. Scios has also granted
Abbott Laboratories and Biosite Diagnostics Incorporated the nonexclusive rights
under the Company's BNP patents to develop BNP diagnostics in the United States,
and the Company is now seeking to enter one more license agreement to
commercialize the diagnostic application of its BNP patent rights in additional
territories.
<PAGE>
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"). Following subsequent equity
offerings by Guilford and Scios' sale of a portion of its holdings, Scios'
ownership interest in Guilford is currently approximately 7%. Scios had
previously transferred to Guilford certain neuroscience technology, 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"). The most advanced
Guilford product is GLIADEL(R), which was approved for marketing in the United
States in 1996.
Drug Delivery Systems. Prior to Scios' acquisition of Nova in 1992, Nova had
been developing certain drug delivery systems. Its two most advanced projects
were the GLIADEL(R) 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(R), to Guilford. In 1994, the Company licensed to
another third party the drug delivery technology, including SEPTACIN(R), for all
uses outside the Guilford Field. Scios thereafter assigned its BIODEL(R) 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(R) and SEPTACIN(R) 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 11 of Notes to Consolidated Financial Statements for a
description of the Company's payment obligations to former limited partners.
AURICULIN(R) anaritide. AURICULIN(R) 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. 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(R) for use in the treatment of acute rental
failure ("ARF"). In 1997, Scios and Genentech suspended development of
AURICULIN(R) in ARF. Under the Collaboration Agreement, the Company bore the
development costs of AURICULIN(R) and Genentech will have certain options
described below because the Company will not file a NDA for AURICULIN(R) by
December 31, 1998. These options include (i) electing to bring NATRECOR(R) 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(R) 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(R), the
milestone payments due with respect to such product would be reduced by one-half
from the payments that would have been due upon the successful commercialization
of AURICULIN(R).
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, all of which has now converted to outstanding common
stock, and (ii) a $30 million loan commitment, which the Company drew down in
1997. See Note 3 of Notes to Consolidated Financial Statements.
Marketing and Sales
- -------------------
Once they have been approved for marketing, the Company ultimately intends
to promote 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 its commercial partner for any such product.
Presently, Scios generates revenues by marketing products that were developed by
others.
<PAGE>
Third-Party Products. The Company has a sales force of approximately 90
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 two other products: HALDOL(R)
Decanoate (haloperidol), a depot injection product to treat schizophrenia that
is distributed by Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of
Johnson & Johnson, and EFFEXOR(R) (venlafaxine HCl), an antidepressant that is
marketed by Wyeth-Ayerst. Since 1993, the Company has jointly promoted HALDOL(R)
with Ortho-McNeil 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(R), and generally indemnifies
Scios against product liability claims. The agreement with Ortho-McNeil is
expected to end in 1998. In 1996, Scios and Wyeth-Ayerst entered into an
agreement regarding Scios' promotion of EFFEXOR(R) to selected psychiatrists in
the United States. Under the agreement with Wyeth-Ayerst, Scios is compensated
based on increases in prescriptions written by the psychiatrists to whom Scios
promotes. Wyeth-Ayerst manufactures and distributes EFFEXOR(R), and generally
indemnifies Scios against product liability claims.
The Company has exclusive rights to market the following SB products in the
United States: ESKALITH(R) and ESKALITH CR(R) (lithium) for the treatment of
manic depressive illness, THORAZINE(R) (chlorpromazine) and STELAZINE(R)
(trifluoperazine) for the treatment of schizophrenia, 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) and for the maintenance in
good standing of all new drug applications 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 3 of Notes to Consolidated Financial Statements.
HALDOL(R), EFFEXOR(R) and the SB Products all face competition which is
likely to become greater over time. For the SB Products, 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. Generic
competition for HALDOL(R) is expected to be launched in the United States during
1998. This competition is likely to cause rapid erosion of the sales of
HALDOL(R). If generic competition is launched, the Company expects that its
HALDOL arrangement with Ortho-McNeil will end. Scios is seeking replacement
products to market for others. These statements are forward-looking within the
meaning of the PSLRA-95. Numerous factors will influence the impact that
competitive products will have on the Company's revenues from the SB Products
and the Company's co-promotion activities. These factors include the success of
the Company's and its partners' marketing strategies and efforts, the actual and
perceived features of competing products, the amount of the difference in price
of competing products, and the marketing effort by third parties on competing
products. Although past decreases in unit sales of the SB Products 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(R) (a controlled release formulation), where generic equivalents are
less available.
Although the Company is seeking to acquire the right to market additional
products, 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 ultimately plans to participate in
marketing certain of its proprietary products in the United States when and if
approved by the FDA. In the case of NATRECOR(R), the Company expects its
commercial partner to promote NATRECOR(R) in the United States on its own for
the first several years and for the Company to have the option to begin its
co-promotion alongside the partner upon certain events or the passage of time.
This section on Proprietary Products describes some of the challenges the
Company will face in developing the capability to market successfully its own
products. This discussion necessarily contains forward-looking statements within
the meaning of the PSLRA-95. These forward-looking statements are based on
current 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
eventually 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.
<PAGE>
Scios believes that its experience in marketing third-party products under
arrangements such as those described above will prove useful as 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 in
place all of 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, particularly
outside of North America, the Company will consider entering into additional
corporate partnerships with established pharmaceutical companies, as it has with
Wyeth-Ayerst for the promotion of FIBLAST(R) for stroke and cardiovascular
disorders. 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 only the bulk active ingredient in FIBLAST(R) in its own
facility and relies on third parties for the manufacture of other products,
including NATRECOR(R) and the final product form of FIBLAST(R). Scios has a
production facility which it believes enables it to produce the bulk active
ingredient of FIBLAST(R) and potentially other products for itself and others
under requirements for current Good Manufacturing Practices ("cGMP"). However,
the Company does not currently possess the staff or facilities that may be
necessary to manufacture any product in the 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. Having a low-cost
manufacturing capability for NATRECOR(R) and smoothly managing third-party
manufacturers 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."
To the extent Scios has from time to time had capacity available in its
production facility, it has performed contract manufacturing for third parties
and the Company has produced for third-party customers pharmaceutical grade
supplies of products of interest to such third parties. The Company may engage
in similar work in the future.
Ortho-McNeil manufactures HALDOL(R), Wyeth-Ayerst manufactures EFFEXOR(R)
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."
<PAGE>
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 57
issued United States patents and 27 United States pending patent applications
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 NATRECOR(R), FIBLAST(R), and insulinotropin.
The Company's patent position with respect to certain principal products under
development is described above in the section discussing each product. 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.
This section entitled "Patents 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 product development areas discussed above.
NATRECOR. Scios has been issued United States, European and Japanese patents
covering human BNP. As opposition proceeding has been filed against Scios'
Japanese patent. 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 filed an opposition to the Daiichi patent.
On February 3, 1998, the Opposition Division of the European Patent Office
issued a ruling upholding the validity of the Daiichi patent. Scios plans to
appeal this ruling. If Scios does not succeed in invalidating the Daiichi patent
through the appeal proceeding or in subsequent legal proceedings, Scios' ability
to develop NATRECOR(R) commercially in Europe might be hindered or prevented if
it were unable to obtain a license.
FIBLAST(R). 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. On May 7, 1996, Scios received
a United States patent covering the recombinant production of human basic FGF.
On February 18, 1997, Scios received a United States patent covering
recombinantly produced human basic FGF.
<PAGE>
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 trafermin, Scios' form of basic FGF
known by the product name FIBLAST(R). An opposition proceeding has been
instituted against this patent by Chiron Corp. and Pharmacia S.p.A. In June
1996, the Opposition Division of the European Patent Office upheld the validity
of the Scios patent; however, the opponents have filed an appeal against this
ruling. 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 filed an opposition to this patent and
in September, the Opposition Division revoked the patent; however, Salk has
filed an appeal against this ruling. The results of these opposition proceedings
cannot be predicted with certainty.
In March 1994, the Company obtained a non-exclusive license to make, use and
sell FIBLAST(R) 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. NATRECOR(R), FIBLAST(R) and AURICULIN(R), are registered
trademarks of Scios. ESKALITH(R), ESKALITH CR(R), THORAZINE(R), STELAZINE(R) and
PARNATE(R) are registered trademarks of SB. HALDOL(R) is a registered trademark
of McNeilab, Inc. EFFEXOR(R) is a registered trademark of Wyeth-Ayerst.
GLIADEL(R) is the registered trademark of Guilford. Approval of the generic
compound name used with NATRECOR(R) -- nesiritide citrate -- is pending before
USAN.
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. Many of these companies have
substantially greater financial, marketing and human resources than Scios. In
the case of NATRECOR(R), a number of products are already marketed for the
treatment of acute CHF. Hence, the Company will need to demonstrate positive
clinical benefits and an ability to continue to produce NATRECOR(R)
cost-effectively in order to successfully introduce NATRECOR(R) into this
competitive market. FIBLAST(R) and VEGF121 face potential competition from other
growth factors.
There can be no assurance that technological developments or superior
marketing capabilities possessed by competitors will not materially adversely
affect the commercial potential of the Company's products. In addition, if the
Company commences significant commercial sales of products, manufacturing
efficiency and marketing capability are likely to be significant competitive
factors. With respect to products no longer covered by patents, such as the SB
Products and HALDOL(R), Scios faces, or expects to face, 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.
<PAGE>
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. Accordingly,
numerous factors will impact the timing, extent and value of any regulatory
approvals that may be obtained for the Company's products, including 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 availability of adequate resources to
regulatory agencies which will impact the speed of regulatory review, and the
price the Company is able to charge for its products.
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 that 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 10 of Notes to Consolidated
Financial Statements.
<PAGE>
Employees
- ---------
The Company had 350 employees as of December 31, 1997, of which 210 were
engaged in research, product and clinical development and 92 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 $937,000. 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(R). In 1995, the
Company began leasing a 52,000 square foot building in Sunnyvale, California,
and constructed research laboratories. The Company relocated its discovery
research group to the Sunnyvale facility in September 1996. The Company's annual
lease payments for the Sunnyvale facility are approximately $730,000. The
Company expended approximately $2.5 million in capital expenditures in 1997 and
anticipates spending approximately $2.5 million in capital expenditures in 1998.
The Company owns a 57,428 square foot administrative and laboratory building
in Baltimore, Maryland (the "Holabird Facility"). Approximately 67% of the
Holabird Facility is currently leased to third parties under short-term leases
extending through July, 1999 (32,700 square feet) and July, 2000 (approximately
10,000 square feet). The Company is endeavoring to sell the Holabird Facility.
Item 3. LEGAL PROCEEDINGS
In September 1996, the United States District Court for the Northern
District of California dismissed with prejudice a lawsuit that had been filed by
certain stockholders in May 1995 against the Company and Richard L. 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 action alleged 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(R).
The plaintiffs appealed the District Court's ruling in favor of the Company, but
withdrew their appeal with prejudice immediately prior to the oral hearing. As a
result, the action against the Company has been terminated.
In November 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 believes
that its exposure for clean costs is approximately $90,000, and it has created a
reserve for such exposure.
The Company is also involved in certain legal proceedings related to
patents and patent application covering its products. See "Business -- Patents
and Proprietary Rights."
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.
<PAGE>
MANAGEMENT
Executive Officers
- ------------------
The executive officers of the Company and their ages at March 16, 1998 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard L. Casey 51 Chairman of the Board,
President and Chief
Executive Officer
Elliott B. Grossbard, M.D. 50 Senior Vice President of
Development
John H. Newman 47 Senior Vice President,
General Counsel and
Secretary
Jack Cohen, Ph.D. 61 Vice President, Quality
& Regulatory
Thomas L. Feldman 47 Vice President of
Commercial Operations
John A. Lewicki, Ph.D. 46 Vice President of
Research
Armin H. Ramel, Ph.D. 71 Vice President of
Product Development
</TABLE>
Mr. Casey is Chairman of the Board, President and Chief Executive Officer of
Scios Inc. He joined Scios in December 1987 and has served as a Director since
that time. 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, in various positions including Director of
Marketing Research, Director of Sales, Vice President and 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 U.S. Peace Corps in Ethiopia. Mr. Casey serves on the boards of
Guilford Pharmaceuticals Inc., an affiliated publicly-held development-stage
neuroscience company located in Baltimore, Maryland; VIVUS, Inc., a
publicly-held medical devices company located in Mountain View, California; and
Karo Bio AB, an affiliated privately-held Swedish biotechnology company.
Dr. Grossbard joined Scios in 1991 as Vice President of Medical and
Regulatory Affairs and became Senior Vice President in 1996. 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.
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, Vice President of Legal Affairs, General Counsel
and Secretary in March 1992 and Senior Vice President, General Counsel and
Secretary in February 1998. Prior to joining Scios, Mr. Newman was an attorney
in private practice.
Dr. Cohen joined Scios in 1992 as Vice President of Quality and became Vice
President of Quality & Compliance in 1994, and the Vice President of Quality &
Regulatory in September, 1997. Prior to joining the Company, Dr. Cohen was
the Director, Technical Resource Planning for Syntex Corporation. From 1981
to 1991, he was Vice President, Quality Assurance at Syntex Laboratories, Inc.
and prior to that from 1978 to 1981, the Director, Quality Control.
<PAGE>
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. 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.
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 Inc. 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.
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, 1997 there
were approximately 5,607 stockholders of record of the Company's Common Stock.
The Class D Warrants are exercisable through June 1998 at a price of $26.74 per
share.
<TABLE>
<CAPTION>
Common Stock
------------
FY 1997 FY 1996
------- -------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Q1 8-3/4 5-3/8 5-11/16 4-1/16
Q2 7 3-5/8 8-3/16 4-1/16
Q3 9-7/8 5-7/8 7-3/16 5
Q4 10-5/8 6-7/8 7-1/8 4-5/8
Year 10-5/8 3-5/8 8-3/16 4-1/16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class D Warrants
----------------
FY 1997 FY 1996
------- -------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Q1 1-3/16 1/4 1-3/16 1/2
Q2 3/4 3/8 1-1/4 13/32
Q3 1 3/8 7/8 3/8
Q4 11/16 1/4 3/4 3/8
Year 1-3/16 1/4 1-1/4 3/8
</TABLE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
(Dollars in thousands, except per share amounts)
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 47,429 $ 64,223 $ 49,187 $ 53,667 $ 47,568
Loss from operations (39,737) (22,053) (28,175) (31,719) (43,237)
Other income 2,254 4,497 5,049 4,045 6,298
Net loss (38,667) (18,403) (26,382) (27,961) (36,579)
Net loss per common share and
per common share assuming
dilution (1.07) (0.51) (0.74) (0.79) (1.05)
Cash and securities 64,700 62,170 87,069 104,439 108,271
Working capital (4,524) (5,838) 11,642 38,942 96,334
Total assets 116,871 113,961 131,550 146,096 151,278
Long-term obligations 31,919 426 1,082 1,739 2,323
Stockholders' equity 60,142 93,628 109,394 126,438 135,299
Employees at year end 350 335 301 283 337
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements about plans,
objectives, future results and intentions of Scios Inc. (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 those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below, as well as in other sections of this Annual Report on
Form 10-K for the year ended December 31, 1997.
Operating Results (1997, 1996 and 1995)
- -----------------
Total revenues for Scios were $47.4 million in 1997, $64.2 million in 1996
and $49.2 million in 1995. The revenue decline from 1996 to 1997 was the result
of lower product sales, co-promotion commissions and research and development
contract revenues. The revenue increase from 1995 to 1996 was due to higher
research and development contract revenues and co-promotion commissions.
<PAGE>
Revenue from product sales of certain psychiatric products ("SB Products")
under license from SmithKline Beecham Corporation ("SB") was $35.2 million,
$38.2 million and $41.4 million in 1997, 1996 and 1995, respectively. Product
sales declined 8% each year due to competition from generic drugs and new
competing products.
Co-promotion commissions were $5.8 million, $6.5 million, and $2.3 million
in 1997, 1996 and 1995, respectively. The Company receives co-promotion
commissions under agreements 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 with Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of American Home Products Corporation, for the
co-promotion of Wyeth-Ayerst's psychiatric product EFFEXOR(R) (venlafaxine HCl).
Co-promotion revenue under both agreements is based on achieving aggregate sales
levels over contract years, which do not coincide with calendar years.
Consequently, annual revenue recognition is based, in part, on the Company's
forecast of sales for the respective contract years. Co-promotion commissions
decreased from 1996 to 1997 as a result of lower sales of HALDOL(R) Decanoate.
Co-promotion commissions increased from 1995 to 1996 as a result of higher sales
of HALDOL(R) Decanoate and from revenue recognized for seven months of contract
year sales of EFFEXOR(R) (venlafaxine HCl) under the agreement with Wyeth-Ayerst
effective June of 1996.
Revenues from research and development contracts were $6.4 million in 1997,
$19.5 million in 1996 and $5.5 million in 1995. The decrease from 1996 to 1997
and the increase from 1995 to 1996 were principally due to receipt of $12.0
million in 1996 from Wyeth-Ayerst upon entering into a collaboration agreement
for the development and commercialization of FIBLAST(R) trafermin ("FIBLAST")
for the treatment of neurological and cardiovascular disorders and $2.0 million
received under other agreements. In 1996, the payment from Wyeth-Ayerst
accounted for 62% of total research and development contract revenue. Revenues
under collaborations to study Alzheimer's disease comprised approximately 44%,
8% and 32% of contract revenue in 1997, 1996 and 1995, respectively. Revenues
under the collaboration with Kaken Pharmaceutical Co., Ltd. ("Kaken") to develop
FIBLAST(R) in Japan for the treatment of dermal ulcers, were 3%, 9% and 30% of
contract revenue in 1997, 1996 and 1995, respectively.
Cost of goods sold for the SB Products was $20.2 million, $22.3 million and
$24.7 million in 1997, 1996 and 1995, respectively. The declines from year to
year were principally the result of lower unit sales. Gross margins improved to
43% in 1997 from 42% in 1996 and 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.
Research and development expenses were $41.9 million in 1997, $39.4 million
in 1996 and $29.3 million in 1995. The increases year to year were the result of
higher staffing levels, greater expenses for clinical trials and the purchase of
drug supply to support further development of the Company's lead products.
Marketing, general and administrative expenses were $20.7 million in 1997,
$19.8 million in 1996, and $18.2 million in 1995. The spending increase from
1996 to 1997 was principally due to higher staffing levels. The spending
increase from 1995 to 1996 was principally due to higher depreciation resulting
from facility improvements.
The profit distribution to third parties of $4.4 million, $4.8 million and
$5.1 million in 1997, 1996 and 1995, respectively, represents SB's share of the
net profits from sales of the SB Products. The decreases year to year were
principally due to declining product sales.
Other income was $2.3 million in 1997, $4.5 million in 1996 and $5.0
million in 1995. The decrease from 1996 to 1997 was due to lower investment
income from the Company's invested portfolio and the addition of interest
expense on the $30 million loan from Genentech that was drawn down in March
1997. The decrease from 1995 to 1996 was due to lower investment income from the
Company's invested portfolio and higher royalty expenses offset in part by gains
on the sale of 200,000 shares of Guilford Pharmaceuticals Inc. ("Guilford")
stock and other marketable securities in the Company's investment portfolio.
The $1.3 million net loss in equity of affiliate in 1997 and $3.3 million
loss in 1995, was the result of Guilford losses in those respective years. The
$0.3 million gain in equity in affiliate in 1996 was the result of profitable
operations of Guilford in 1996. The Company's percent ownership in Guilford has
declined from 62% in May 1994 to 7% at December 31, 1997 as a result of
Guilford's public stock offerings and sales of Guilford stock by Scios. Since
Guilford's initial public stock offering in June 1994, the Company has used the
equity method of accounting for its investment. Prior to the public stock
offering, the financial results of Guilford were consolidated with those of the
Company. The minority interest of $0.1 million in 1997 and $(1.1) million in
1996 is the net income or expense associated with the minority partners of the
Biotechnology Research Partnership.
<PAGE>
Outlook and Risks
- -----------------
The Company is striving to achieve profitability in the next several years.
The ability of the Company to achieve profitability depends principally upon:
(i) the Company's success in obtaining FDA approval for and commercializing its
lead product NATRECOR(R) (nesiritide citrate); (ii) the Company's progress in
developing additional products such as FIBLAST(R), and its ability to
demonstrate safety and efficacy of these products and subsequently commercialize
them; (iii) the Company's success in generating operating profits from marketing
and selling in-licensed products such as the SB Products, HALDOL(R) Decanoate,
EFFEXOR(R) (venlafaxine HCl) and any third-party products, which success will
depend on the Company's ability to establish and maintain profitable
arrangements under which to represent the products of third parties and on the
respective product's success in the marketplace; and (iv) 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 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 or
with a partner, 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 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.
Further development of the Company's products will require substantial
additional investment to cover, among other things, the costs of marketing and
sales expenses associated with product introductions, the securing of
commercial-scale manufacturing capability and the completion of clinical trials
for new and expanded indications. While market introduction of new products may
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 that 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 Food and Drug
Administration and what, if any, income can be obtained from potential
third-party licensees. In the case of NATRECOR(R), the Company is reviewing a
number of alternative arrangements for the sale and marketing of the product
once FDA approval has been obtained. In the case of FIBLAST(R) for use in
neurological and cardiovascular disorders, development and commercialization
expenses and any subsequent revenues will be shared with Wyeth-Ayerst at varying
percentages.
Sales of the SB Products, in total, are likely to continue to decline
during the next few years because of continuing or new competition from generic
products or new market entrants. The Company hopes to offset any such decrease
with payments received for the co-promotion of other third-party products such
as HALDOL(R) Decanoate and EFFEXOR(R) (venlafaxine HCl) that are currently being
co-promoted. 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. The HALDOL(R) Decanoate agreement is expected to end
in 1998 and the Company is endeavoring to secure a replacement product.
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.
<PAGE>
The Company is reviewing its existing software programs for year 2000
compliance and believes its internal application systems are currently in
compliance, or will be, upon completion of some software upgrades scheduled for
implementation in 1999. The Company does not expect the cost of these upgrades
to have a material impact on the Company's financial results. The Company is not
able to ensure that all third parties with whom it works will achieve year 2000
compliance for systems related to their interactions with the Company.
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 $64.7 million at December 31, 1997, an increase of $2.5
million from December 31, 1996. The increase was mainly attributable to the draw
down of a $30 million loan from Genentech Inc. which was offset by $21.6 million
used to fund operations, $2.5 million of spending on property, plant and
equipment and $1.8 million used for the purchase of treasury stock. Working
capital increased from $(5.8) million at December 31, 1996 to $4.5 million at
December 31, 1997. The change resulted principally from an increase in the
amount of marketable securities classified as current assets.
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. As of December 31, 1997, the Company had purchased
1,029,500 shares at an aggregate price of $4.8 million under this program.
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
- -----------------
The Company's cash, cash equivalents and marketable securities of
approximately $64.7 million at December 31, 1997, together with revenues from
product sales, royalties, 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 by the sale of all, or a portion of, its equity
investments in Guilford and KaroBio AB, a Swedish company in which Scios holds
an 18% ownership position. The Company also has a $12.0 million line of credit
from Wyeth-Ayerst available to expand its manufacturing facility for FIBLAST(R).
The Company believes its cash resources and lines of credit will be sufficient
to meet its capital requirements for the next several years. Key factors which
will affect future cash use and the timing of the Company's need to seek
additional financing include the Company's decision concerning the degree to
which it will incur expenses to launch its products such as NATRECOR in the
United States market following the necessary regulatory approvals, 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 Division from co-promoting
and marketing products for third parties.
Over the long term, the Company may 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.
<PAGE>
Recent Pronouncements
- ---------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of comprehensive
income and becomes effective for the Company for the fiscal year, beginning
after December 15, 1997, with reclassification of earlier financial statements
for comparative purposes. Comprehensive income generally represents all changes
in stockholders' equity except those resulting from investments or contributions
by stockholders. The Company is evaluating alternative formats for presenting
this information, but does not expect this pronouncement to materially impact
the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic area and major
customers. This statement supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise." The new
standard becomes effective for the fiscal year beginning after December 15,
1997, and requires that comparative information from earlier years be restated
to conform to the requirement of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and 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.
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 1998 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 1998 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 1998 Annual Meeting of Stockholders.
<PAGE>
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 1998 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
Schedules at page F-1 of this Form 10-K.
(2) Financial Statement Schedules. See Index to Financial Statements
and Schedules at page F-1 of this Form 10-K.
(3) Exhibits. See Exhibit Index at page 24 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 1997.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Page
------ ----
<S> <C> <C>
3.1 Certificate of Incorporation.........................................................Q
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
<PAGE>
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
10.18 Form of Purchase Option Agreement between each of the limited
partners of Nova Technology Limited Partnership and Nova..............................I
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
10.27 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.........................................................Q
10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between
the Registrant and Genentech, Inc.....................................................Q
10.34 Note Agreement dated December 30, 1994 between the Registrant
and Genentech, Inc....................................................................Q
10.35 Assignment of Lease dated March 22, 1995 for premises located
at 820 West Maude Avenue, Sunnyvale, California.......................................R
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.................................................................R
10.37 Lease Agreement dated January 20, 1995 between the Registrant
and PDL-RTKL Associates, a Maryland General Partnership...............................R
21.1 Subsidiaries of Registrant............................................................S
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Powers of Attorney. Reference is made to page 27.
- -------------------
<PAGE>
<FN>
* Management contract or compensatory plan or arrangement.
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.
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.
Q Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994
and incorporated herein by reference.
R Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 and incorporated herein by reference.
S Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1996
and incorporated herein by reference.
</FN>
</TABLE>
<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 27, 1998 By:___________________________
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard L. Casey Chairman of the Board, President and Chief March 27, 1998
------------------------------ Executive Officer (Principal Executive Officer)
Richard L. Casey
/s/ David Southern Controller March 27, 1998
------------------------------- (Principal Accounting Officer)
David Southern
/s/ Samuel H. Armacost Director March 27, 1998
---------------------------
Samuel H. Armacost
/s/ Myron Du Bain Director March 27, 1998
------------------------------
Myron Du Bain
/s/ Donald B. Rice Director March 27, 1998
--------------------------------
Donald B. Rice
/s/ Charles A. Sanders Director March 27, 1998
------------------------------
Charles A. Sanders
/s/ Robert W. Schrier Director March 27, 1998
-------------------------------
Robert W. Schrier
/s/ Burton E. Sobel Director March 27, 1998
---------------------------------
Burton E. Sobel
/s/ Solomon H. Snyder Director March 27, 1998
----------------------------
Solomon H. Snyder
/s/ Eugene L. Step Director March 27, 1998
--------------------------------
Eugene L. Step
</TABLE>
<PAGE>
FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Accountants............................................F-2
Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996 ..........................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................................F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995................................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 of
Scios Inc.:
We have audited the accompanying consolidated balance sheets of Scios
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 30, 1998
F-2
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS December 31,
1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,197 $1,587
Marketable securities 13,322 6,888
Accounts receivable 5,215 4,808
Prepaid expenses 600 786
------------ -----------
Total current assets 29,334 14,069
Marketable securities, non-current 41,181 53,695
Investment in affiliate 10,537 6,939
Property and equipment, net 33,583 36,839
Other assets 2,236 2,419
------------ -----------
TOTAL ASSETS $116,871 $113,961
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks -- $3,000
Accounts payable 1,685 2,507
Other accrued liabilities 11,134 10,011
Deferred contract revenue 11,652 3,666
Current portion of long-term debt and capital leases 339 723
------------ -----------
Total current liabilities 24,810 19,907
Long-term debt and capital leases 31,919 349
Minority interests -- 77
------------ -----------
TOTAL LIABILITIES 56,729 20,333
------------ -----------
Commitments and contingencies (Notes 9, 10 and 11)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares authorized;
issued and outstanding: 0 and 12,632, respectively
(liquidation -- --
preference of $0 and $12,000, respectively)
Common stock; $.001 par value; 150,000,000 shares authorized;
issued and outstanding: 38,032,120 and 36,506,297, respectively 38 37
Additional paid-in capital 411,045 404,456
Treasury stock (4,758) (2,991)
Notes receivable from stockholders (13) (13)
Unrealized gains (losses) on securities 288 (70)
Accumulated deficit (346,458) (307,791)
------------ -----------
Total stockholders' equity 60,142 93,628
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $116,871 $113,961
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales $35,193 $38,189 $41,396
Co-promotion commissions 5,822 6,503 2,331
Research & development contracts 6,414 19,531 5,460
------ ------ -----
47,429 64,223 49,187
------ ------ ------
Costs and expenses:
Cost of goods sold 20,179 22,313 24,742
Research and development 41,907 39,424 29,341
Marketing, general and administration 20,720 19,779 18,226
Profit distribution to third parties 4,360 4,760 5,053
------ ------ ------
87,166 86,276 77,362
------ ------ ------
Loss from operations (39,737) (22,053) (28,175)
Other income:
Investment income 3,966 6,361 5,481
Interest expense (2,229) (419) (198)
Other income (expense) 517 (1,445) (234)
----- ------- ------
2,254 4,497 5,049
Equity in net income (loss) of affiliate (1,261) 274 (3,256)
Minority interests 77 (1,121) --
--------- --------- --------
Net loss ($38,667) ($18,403) ($26,382)
--------- --------- --------
Net loss per common share and per common ($1.07) ($0.51) ($0.74)
share - assuming dilution ------- ------- -------
Shares used in computing net loss per
common
share and per common shares - assuming 36,105,797 35,885,922 35,809,876
dilution ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(38,667) $(18,403) $(26,382)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 5,740 5,330 3,882
Accrued long-term interest payable 1,919 -- --
(Gain) loss on sale of assets -- (2,620) 241
Equity in net (income) loss of affiliates 1,261 (274) 3,256
Minority interest (77) 1,121 --
Change in assets and liabilities:
Accounts receivable (407) (1,794) 585
Accounts payable (822) (2,315) 477
Other accrued liabilities 1,123 2,148 (1,821)
Other 370 (206) (60)
Deferred contract revenue 7,986 (2,109) 3,331
------------ ----------- ------------
Net cash used by operating activities (21,574) (19,122) (16,491)
------------ ----------- ------------
Cash flows from investing activities:
Purchase of affiliates warrants -- -- (167)
Purchase of property and equipment (2,490) (6,682) (5,698)
Proceeds from sale of investment in affiliate 90 3,600 --
Proceeds from sale of assets 6 44 163
Sales/maturities of marketable securities 264,745 219,027 220,754
Purchases of marketable securities (258,307) (196,036) (227,324)
------------ ----------- ------------
Net cash provided by (used in) 4,044 19,953 (12,272)
investing activities ------------ ----------- ------------
Cash flows from financing activities:
Issuance of common stock and collection of
notes receivable from stockholders, net 1,641 601 519
Purchase of treasury stock (1,767) (2,024) (967)
Payments of notes payable and capital leases (3,734) (668) (616)
Proceeds from notes payable and capital leases 30,000 -- 3,000
------------ ----------- ------------
Net cash provided by (used in) 26,140 (2,091) 1,936
financing activities ------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents 8,610 (1,260) (26,827)
Cash and cash equivalents at beginning of year 1,587 2,847 29,674
------------ ----------- ------------
Cash and cash equivalents at end of year $ 10,197 $ 1,587 $ 2,847
------------ ----------- ------------
Supplemental cash flow data:
Cash paid during the period for interest $309 $419 $203
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains (losses) $358 $(648) $2,887
on securities
Investment in affiliate 4,949 4,708 6,026
Incentive plan awards $-- $-- $873
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Notes Unrealized
Common Stock Additional Preferred Receivable Gains
--------------------- 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 35,283,200 $35 $391,745 $ -- $ -- ($27) $ (2,309) $(263,006)$126,438
December 31, 1994
Conversion of preferred 500,000 1 (1) --
Purchase of treasury stock ( 967) (967)
Options exercised 123,171 512 512
Notes receivable from
stockholders 7 7
Incentive plan awards 102,684 873 873
Changes in 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 36,009,055 36 399,155 -- ( 967) (20) 578 (289,388) 109,394
December 31, 1995
Conversion of preferred 342,100 1 (1) --
Purchase of treasury stock ( 2,024) (2,024)
Options exercised 155,142 594 594
Notes receivable from
stockholders 7 7
Changes in unrealized gains
on available-for-sale
securities (648) (648)
Investment in Guilford 4,708 4,708
Net loss (18,403) (18,403)
-------------------------------------------------------------------------------------------------------------------------------
Balances at 36,506,297 37 404,456 -- ( 2,991) (13) (70) (307,791) 93,628
December 31, 1996
Conversion of preferred 1,263,200 1 (1) --
Purchase of treasury stock ( 1,767) (1,767)
Options exercised 262,621 1,641 1,641
Stock issued for services 2 --
Changes in unrealized gains
on available-for-sale
securities 358 358
Investment in Guilford 4,949 4,949
Net loss (38,667) (38,667)
-------------------------------------------------------------------------------------------------------------------------------
Balances at 38,032,120 $38 $411,045 $ -- ($4,758) ($13) $288 ($346,458) $60,142
December 31, 1997
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SCIOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
-------------------------------------
Scios Inc. (the "Company") is a biopharmaceutical company engaged in
the discovery, development, manufacture and commercialization of novel
human therapeutics. The Company's research and development efforts are
primarily focused on cardiorenal disorders and Alzheimer's disease.
The Company has research and development collaborations with a number
of other biopharmaceutical companies under which it may share costs
and revenues. Scios' commercial operations division also markets six
psychiatric products in the United States in co-operation with the
Company's partners. In the course of its development activities, the
Company has sustained operating losses and expects such losses to
continue through at least 1998.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of Scios
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. The Company accounts for its 7% ownership
in Guilford Pharmaceuticals Inc. ("Guilford") under the equity method
because it has representation on Guilford's Board of Directors.
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 maturities of
less than ninety days, at the time acquired, to be cash equivalents.
Marketable Securities
All marketable securities at December 31, 1997 and 1996 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.
Realized gains and losses on sales of all such securities are reported
in earnings and computed using the specific identification cost
method.
Business Risk and Credit Concentration
A majority of the Company's revenues are derived from product sales,
which consist entirely of sales in the United States under a license
agreement with SmithKline Beecham Corporation ("SB") (see Note 3). 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.
F-7
<PAGE>
The Company's excess cash is invested in a diversified portfolio of
securities consisting of United States 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 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 3) is recognized in the period in
which the products are shipped. Provision is made for estimated
returns and allowances, cash discounts and rebates attributable to
Medicaid programs.
Co-promotion Commissions
Revenue from co-promotion commissions (see Note 3) is recognized based
on estimated sales levels of Ortho-McNeil Pharmaceutical's psychiatric
product HALDOL(R) Decanoate and Wyeth-Ayerst Laboratories' psychiatric
product EFFEXOR(R) (venlafaxine HCl) for their respective contract
years.
Contract Revenues
Research and development contract revenues from cost-reimbursement
agreements are recorded as the related expenses are incurred, up to
contractual limits. Payments received that 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, license payments irrevocably received and royalty payments due
form licensees based on sales to third parties are recognized as
revenues upon receipt. Research and development expenses in 1997, 1996
and 1995 include approximately $2.1 million, $1.9 million and $1.4
million, respectively, incurred in connection with programs subject to
cost reimbursement, collaborative or other performance agreements.
Per Share Data
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 loss per
share is calculated using the weighted average number of common shares
outstanding for the period. Diluted net loss per share is calculated
using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent
shares are excluded from the computation of net loss per common
share-assuming dilution as their effect is antidilutive.
Stock Based Compensation
The Company accounts for stock based compensation using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Treasury Stock
Treasury stock is stated at cost and is considered issued
and outstanding.
F-8
<PAGE>
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 marketable securities, which are separately
disclosed elsewhere, are based on quoted market prices for the same or
similar instruments.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued State-
ment of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." This statement establishes require-
ments for disclosure of comprehensive income and becomes effective for
the Company for the fiscal year, beginning after December 15, 1997,
with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative
formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of
operations.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for
related disclosures about products and services, geographic area and
major customers. This statement supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." The new standard becomes effective for the
fiscal year beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform
to the requirement of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
3. Joint Business Arrangements
---------------------------
a. Agreement with SmithKline Beecham Corporation
Under the terms of an agreement with SB, the Company has the exclusive
rights to market certain SB Products in the United States. 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
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 in the United States. Under the agreement, the Company
receives payments based on achieving specified sales levels over a
contract year beginning in August and ending in July. Ortho-McNeil
manufactures and distributes the product. The agreement is expected to
end in 1998.
F-9
<PAGE>
c. Agreements with Wyeth-Ayerst Laboratories
In April 1996, the Company entered into a four-year agreement with
Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), an affiliate of American
Home Products Corporation, to promote the antidepressant EFFEXOR(R)
(venlafaxine HCl) to selected psychiatrists in the United States. Under
the agreement, the Company receives payments based on achieving
specified increases in sales to the selected psychiatrists over an
adjusted base level during each contract year beginning in June.
Wyeth-Ayerst manufactures and distributes the product. The agreement may
be terminated by either party during the contract period if certain
sales targets are not met.
In October 1996, the Company entered into a collaboration agreement with
Wyeth-Ayerst for the joint development and commercialization of
FIBLAST(R) trafermin ("FIBLAST") for the treatment of neurological and
cardiovascular disorders. The two companies will co-promote FIBLAST(R)
for these indications in North America and share development costs and
profits. Wyeth-Ayerst received exclusive marketing rights outside North
America except for certain Pacific Rim countries in return for a royalty
on sales and payments for bulk drug supply worldwide. Wyeth-Ayerst has
provided a $12.0 million line of credit that the Company may use to fund
expansion of its manufacturing facility for FIBLAST (see Note 9).
d. 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. Concurrent with the collaboration
agreement, Genentech purchased $20.0 million of Scios preferred stock,
convertible into approximately 2.1 million shares of common stock and
provided a $30.0 million loan to the Company in the form of a letter of
credit (see Note 9) which the company drew down in March of 1997. The
loan plus accrued interest is payable in cash or stock or a combination
thereof. As of December 31, 1997, Genentech had converted all shares of
preferred stock into common stock. In 1997, Scios and Genentech
suspended development of AURICULIN based upon the negative results of an
interim study.
e. Agreements 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. Under the 1994 agreements, the Company will
collaborate with Kaken to further develop the FIBLAST manufacturing
process, provide Kaken a license to the Company's FIBLAST manufacturing
technology and supply FIBLAST product. In return, the Company will
receive milestone payments which are contingent on Kaken's continuing
development of the product. On December 31, 1997, $11.5 million of the
Company's deferred revenue consisted of payments received to date under
these agreements.
f. Agreement with Eli Lilly and Company
In May 1997, the Company entered into a research collaboration with Eli
Lilly and Company ("Lilly") for the development of drugs to prevent or
retard the progression of Alzheimer's disease. Under the terms of the
agreement, Lilly will fund research at Scios and will have the first
opportunity to develop products from the collaboration. Scios may elect
to develop other products from the collaboration. The commercialization
partner will make milestone and royalty payments to the other partner.
4. Affiliate
---------
In June 1994, Guilford, then a fully-consolidated subsidiary of the
Company, completed an initial public offering which decreased the
Company's ownership 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. Due to subsequent public stock offerings, and the
sale by the Company of 200,000 shares of Guilford stock in 1996 and
12,500 shares in 1997, the Company's ownership in Guilford has been
reduced to 7%. The Company has continued to use the equity method of
accounting for its investment in Guilford because it has representation
on Guilford's Board of Directors.
F-10
<PAGE>
5. Marketable Securities
---------------------
Unrealized gains and losses on marketable securities at December 31,
1997 by classification were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
(in thousands) Cost Basis Gains Losses Fair Value
---------- ----- ------ ----------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government &
Government Agency
securities $24,915 $100 $ (5) $25,010
Corporate Bonds 29,300 112 (14) 29,398
Equity investments -- 95 -- 95
------- --- ----- --
Total $54,215 $307 $ (19) $54,503
======= ===== ===== =======
</TABLE>
Unrealized gains and losses on marketable securities at December 31,
1996 by classification were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
(in thousands) Cost Basis Gains Losses Fair Value
---------- ----- ------ ----------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government &
Government Agency
securities $45,679 $47 $(224) $45,502
Corporate Bonds 14,974 32 (49) 14,957
Equity investments -- 124 -- 124
------- ---- ---- ------
Total $60,653 $203 $(273) $60,583
======= ===== ===== =======
</TABLE>
At December 31, 1997, scheduled maturities for debt securities were less
than one year for $13,322,000 and between one and five years for
$41,086,000.
The Company realized gains of $176,000 and losses of $298,000 on the
disposal of marketable securities during 1997 and gains of $279,000 and
losses of $379,000 on the disposal and write-down of marketable
securities during 1996.
F-11
<PAGE>
6. Property and Equipment
----------------------
<TABLE>
<CAPTION>
December 31,
------------
(in thousands) 1997 1996
---- ----
<S> <C> <C>
Laboratory equipment $11,880 $10,408
Computer and related equipment 4,103 3,136
Furniture and other 2,421 2,239
Buildings and building improvements 48,951 47,253
------ -------
67,355 63,036
Accumulated depreciation and
amortization (35,125) (29,424)
------- -------
32,230 33,612
Construction in progress 1,353 3,227
------ -------
$33,583 $36,839
======= =======
</TABLE>
7. Other Assets
------------
<TABLE>
<CAPTION>
December 31,
------------
(in thousands) 1997 1996
---- ----
<S> <C> <C>
Deposits $ 387 $ 193
Other assets 188 216
Equity investments 1,067 1,000
Employee notes receivable 594 1,010
---- -----
$2,236 $2,419
====== ======
</TABLE>
8. Other Accrued Liabilities
-------------------------
<TABLE>
<CAPTION>
December 31,
------------
(in thousands) 1997 1996
---- ----
<S> <C> <C>
Accrued Medicaid rebates $ 1,191 $ 1,393
Accrued payroll 2,881 3,502
Profit distribution to third parties 1,911 1,210
Accrued clinical trial expenses 200 832
Accrued royalties payable 51 1,790
Deferred equity purchase 3,000 --
Other 1,900 1,284
------ ------
$11,134 $10,011
======= =======
</TABLE>
9. Lease and Debt Commitments
--------------------------
a. Operating leases
The Company leases facilities in California and the land on which the
Company's Mountain View, California facilities are located under
operating leases. 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 certain laboratory and computer equipment.
F-12
<PAGE>
Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>
Land and
Facilities Equipment
Operating Operating
(in thousands) Leases Leases
------ ------
<S> <C> <C>
1998 $ 910 $538
1999 944 327
2000 980 --
2001 1,016 --
2002 268 --
Thereafter 1,855 --
----- ----
$5,973 $865
====== ====
</TABLE>
Rent expense for all facilities operating leases was approximately
$1,112,000, $1,177,000 and $456,000 in 1997, 1996 and 1995,
respectively.
b. Borrowing arrangements
At December 31, 1997, the Company's debt consisted 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 1997, the Company repaid a $3 million bank loan entered
into in 1995 and renewed in 1996.
As part of the AURICULIN agreement, Genentech committed to loan the
Company up to $30 million. The $30 million was drawn down in March of
1997, and bears interest at the prime rate (8.5% at December 1997).
The loan and accrued interest 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.
c. Wyeth-Ayerst loan commitment
As part of the FIBLAST agreement, Wyeth-Ayerst has committed to loan
the Company up to $12 million to fund expansion of the Company's
manufacturing facility for FIBLAST. The loan can be drawn down
through the year 2004, and will bear interest at the one-year LIBOR
rate plus 0.225% (5.894% at December 31, 1997). No amounts were
outstanding under the agreement at December 31, 1997.
10. Litigation
----------
On December 10, 1997, the Company announced that the plaintiffs in the
securities class action against the Company had dismissed their appeal
of a September 1996 Federal Court judgment in favor of Scios. The
judgment in the United States District Court for the Northern District
of California dismissed with prejudice a lawsuit that had been filed
by certain stockholders in May, 1995 against the Company and Richard
L. 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 action alleged 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.
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 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 discussions with the EPA to finalize the amount of potential
liability.
F-13
<PAGE>
11. Research and Development Commitments
------------------------------------
a. Research commitments
The Company's commitments for research sponsorship payments to
collaborators and institutions during 1998, 1999 and 2000 aggregate
approximately $82,000.
b. Commitments to research partnerships
Under the Company's collaboration agreement with Wyeth-Ayerst for the
development and commercialization of FIBLAST, the Company is obligated
to pay 30% of the joint development expenses with Wyeth-Ayerst
responsible for the remaining 70%.
In 1988, the Company exercised its option to purchase the interests of
Biotechnology Research Partners, a limited partnership in a joint
venture and made a down payment of $575,000. The balance of the
purchase price is to be paid in quarterly installments in accordance
with the following formula: (i) until the minority partners have
received payments of approximately $22.8 million, the Company will pay
approximately 37% of the royalty income from third-party licenses and
approximately 3.7% of the Company's gross sales of Partnership
products; (ii) thereafter, until the minority 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.
Partnership products for which minority partners will receive payments
include AURICULIN and FIBLAST.
In December 1992, the Company exercised its option to acquire all
interests in Nova Technology Limited Partnership for $20.4 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. As of December 31, 1997, $51,000 was accrued for payment
in 1998 as a result of royalties associated with the commercialization
of Guilford Pharmaceuticals' GLIADEL(R) wafer.
12. Stockholders' Equity
--------------------
At December 31, 1997, warrants were outstanding to purchase
approximately 789,000 shares of the Company's common stock at $26.74
per share and are exercisable through June 1998.
a. Convertible preferred stock
The Company's convertible 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 no shares of preferred stock issued and
outstanding at December 31, 1997. In 1997, Genentech converted 12,632
shares of preferred stock into 1,263,200 shares of common stock.
F-14
<PAGE>
b. Common Stock
The Company has a Common Share Purchase Rights Plan under which
stockholders have a right to purchase for each share held, one share
of the Company's common stock at a 50% discount and, in certain
circumstances, a share of common stock of an acquirer at a similar
discount. The rights become exercisable, at $55.00 per right, in the
event of an acquisition or tender offer which results in the
acquisition of 20% or more of the Company's common stock. The rights
may be redeemed, in certain circumstances, at $0.01 per right and
expire on July 31, 2000.
13. 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 salary
subject to current statutory limits. In 1997, the Company matched
employee contributions at a rate of 100% to a maximum of $3,000 per
employee, except as restricted by statutory limits. The Company
contribution is 100% vested at the end of an employee's third year of
employment. Company contributions to the plan totaled approximately
$664,000 in 1997, $649,000 in 1996 and $633,000 in 1995.
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 ("FMV") for nonstatutory options).
To date, the Company has only granted options at prices equal to the
fair market value at the time of the grant. 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, 1997:
<TABLE>
<CAPTION>
Shares
Plan Shares Options Available
Title Authorized Outstanding for Grant Option Price
----- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
1983/86 2,200,000 939,027 -- Not less than 85% of FMV
1989 170,000 25,000 -- Fair Market Value
1992 5,000,000 2,461,765 1,793,121 Not less than 85% of FMV
1996 700,000 560,350 134,848 Not less than 85% of FMV
NQ 443,161 -- -- Not less than 85% of FMV
</TABLE>
F-15
<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, 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 (512)
Canceled (520,701) $2.56-$21.13 (4,237)
--------- ------------ -------
Balances at December 31, 1995 3,831,543 $2.56-$21.13 $29,022
Granted 627,000 $4.56-$ 6.88 3,579
Exercised (155,142) $2.56-$ 7.13 (594)
Canceled (527,078) $3.50-$21.13 (3,797)
-------- ------------ -------
Balances at December 31, 1996 3,776,323 $3.50-$21.13 $28,210
Granted 819,740 $6.06-$ 8.13 5,266
Exercised (262,621) $4.13-$ 9.13 (1,641)
Canceled (347,300) $5.44-$15.06 (2,491)
-------- ------------ -------
Balances at December 31, 1997 3,986,142 $3.50-$21.13 $29,344
========= ============ =======
</TABLE>
The following pro forma information has been prepared following the
provisions of SFAS No. 123 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
December 31,
------------
(in thousands, except per share amounts) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported ($38,667) ($18,403) ($26,382)
Net loss - pro forma (40,163) (19,029) (26,617)
Net loss per common share ($1.07) ($0.51) $(0.74)
and per common share -
assuming dilution -
as reported
Net loss per share ($1.10) ($0.53) $(0.74)
and per common share -
assuming dilution -
pro forma
</TABLE>
F-16
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes single option pricing method assuming the
following parameters:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.87 6.41 6.41
Expected life (years) 5 5 5
Volatility .7920 .8134 .8134
Dividend yield -- -- --
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and
1995 was $4.33, $3.92 and $4.88 respectively.
The impact on pro forma loss per share and net loss in the table above
may not be indicative of the effect in future years as options vest
over several years and the Company continues to grant stock options to
employees. This policy may or may not continue.
The options outstanding by range of exercise price at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
Weighted
Number of Average Weighted
Options Remaining Average
Exercise Price Outstanding Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3.50-$ 6.13 1,170,118 7.93 $ 5.74
$6.25-$ 7.00 528,664 2.60 $ 6.74
$7.13-$ 7.13 907,412 4.81 $ 7.13
$7.21-$ 9.00 850,890 6.96 $ 7.84
$9.13-$21.13 529,058 4.00 $ 11.20
------------ --------- ---- ------
$3.50-$21.13 3,986,142 5.78 $ 7.36
============ ========= ==== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Weighted
Number of Average Weighted
Options Remaining Average
Exercise Price Outstanding Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3.50-$ 6.13 789,066 7.83 $ 5.47
$6.50-$ 7.00 674,932 3.36 $ 6.81
$7.13-$ 7.13 919,190 5.75 $ 7.13
$7.21-$ 9.00 837,696 7.53 $ 7.82
$9.13-$21.13 555,439 4.91 $ 11.15
------------ --------- ---- ------
$3.50-$21.13 3,776,323 6.03 $ 7.47
============ ========= ==== =======
</TABLE>
F-17
<PAGE>
The options currently exercisable by range of exercise price at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
Number of Weighted
Options Average
Exercise Price Exercisable Exercise Price
-------------- ----------- --------------
<S> <C> <C>
$3.50-$ 6.13 461,127 $ 5.74
$6.50-$ 7.00 423,078 $ 6.82
$7.13-$ 7.13 897,912 $ 7.13
$7.21-$ 9.00 243,157 $ 8.08
$9.13-$21.13 529,058 $11.20
------------ --------- ------
$3.50-$21.13 2,554,332 $ 7.76
============ ========= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Number of Weighted
Options Average
Exercise Price Exercisable Exercise Price
-------------- ----------- --------------
<S> <C> <C>
$3.50-$ 6.13 297,180 $ 5.67
$6.50-$ 7.00 530,103 $ 6.82
$7.13-$ 7.13 752,723 $ 7.13
$7.21-$ 9.00 243,598 $ 8.12
$9.13-$21.13 539,710 $11.16
------------ --------- ------
$3.50-$21.13 2,363,314 $ 7.90
============ ========= =======
</TABLE>
14. Significant Customers
---------------------
In 1997 and 1995, no individual customer or partner contributed more
than 10% of total revenues. In 1996, Wyeth-Ayerst contributed 21% of
total revenues.
At December 31, 1997, the $5.2 million in accounts receivable included
the following receivables associated with Commercial Operations: $0.6
million from Ortho-McNeil, $0.9 million from Wyeth-Ayerst and $3.2
million from SB.
15. Income Taxes
------------
The Company's 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.
The Company has federal and state income tax net operating loss ("NOL")
and research credit carryforwards at December 31, 1997 for tax purposes
available as follows:
FederalNOL $275,000,000
State NOL 9,600,000
Federal Research Credit 10,200,000
State Research Credit 3,000,000
These federal and state NOL carryforwards expire in the years 1998
through 2012, and 1998 through 2002, respectively. The federal and state
research credit carryforwards expire in the years 1998 through 2012, and
2002 through 2012, respectively.
F-18
<PAGE>
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,
(in thousands) 1997 1996
----------- --------
<S> <C> <C>
Depreciable and amortizable
assets, primarily technology $ 7,900 $ 8,500
Other accrued liabilities 4,800 3,400
State (net of federal benefit) 8,800 7,000
Net operating loss carryforward 93,600 84,600
Research credit 10,200 9,500
Valuation allowance (125,300) (113,000)
--------- --------
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>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Scios Inc. on Form S-8 (File Nos. 2-90477, 2-97606, 33-39878, 33-51590 and
333-35201) and on Form S-3 (File No. 33-18958) of our report dated January 30,
1998, on our audits of the consolidated financial statements of Scios Inc. as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, which report is incorporated by reference in this Annual Report on Form
10-K.
Coopers & Lybrand L.L.P.
March 27, 1998
EXHIBIT 23.1
<PAGE>
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
FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED 12-31-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000726512
<NAME> SCIOS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,197
<SECURITIES> 54,503
<RECEIVABLES> 5,215
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,334
<PP&E> 68,708
<DEPRECIATION> (35,125)
<TOTAL-ASSETS> 116,871
<CURRENT-LIABILITIES> 24,810
<BONDS> 31,919
0
0
<COMMON> 38
<OTHER-SE> 60,104
<TOTAL-LIABILITY-AND-EQUITY> 116,871
<SALES> 35,193
<TOTAL-REVENUES> 47,429
<CGS> 20,179
<TOTAL-COSTS> 87,166
<OTHER-EXPENSES> 1,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,229
<INCOME-PRETAX> (38,667)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,667)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
