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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-11749
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SCIOS INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 95-3701481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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820 WEST MAUDE AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 616-8200
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
Contingent Payment Rights
Common Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant as of January 11, 2000 was $224,803,100.
As of January 11, 2000, 38,468,652 shares of the registrant's Common Stock
were outstanding (net of Treasury Shares).
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS FORM 10-K PART
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Definitive Proxy Statement with respect to the 2000 Annual
Meeting of Stockholders................................... III
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THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS ABOUT PLANS,
OBJECTIVES AND FUTURE RESULTS OF SCIOS INC. ("SCIOS" OR 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 IN THIS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
PART I
ITEM 1. BUSINESS
OVERVIEW
Scios Inc. is a biopharmaceutical company engaged in the discovery,
development, and commercialization of novel human therapeutics based upon its
capabilities in both protein-based and small-molecule drug discovery and
development. The Company currently focuses its proprietary research and
development efforts primarily in the areas of cardiorenal and inflammatory
disorders, and Alzheimer's disease. The Company has research and development
collaborations with Chiron Corporation, DuPont Pharmaceuticals Company, Eli
Lilly and Company, GenVec, Inc., Kaken Pharmaceutical Co., Ltd. and Novo Nordisk
A/S. More detail regarding the Company's research and development program and
its relationships with partner companies is provided below in
"Business--Products in Development." The Company also operates a Psychiatric
Sales and Marketing Division ("PSMD") which provides operating cash that funds
the other activities of the Company, principally research and development
efforts. More detail is provided below in "Business--Marketing and Sales." Scios
is well funded, with approximately $100.7 million in cash and marketable
securities as of December 31, 1999.
1999 was the first full year of the Company's operation under the leadership
of Richard Brewer, who became President and Chief Executive Officer of the
Company in September 1998. During 1999 the Company's Board of Directors and
management revised the Company's business plan and created and implemented a
significant restructuring plan (the "Restructuring Plan"). The Restructuring
Plan included a 30% employee reduction following the closing of Scios' protein
manufacturing facility, the sale of the Company's Mountain View campus and a
building in Baltimore yielding net proceeds of more than $21.0 million, and
consolidation of the Company's operations into less expensive facilities leased
by the Company in Sunnyvale, California. In 1999, the Company recorded a
one-time restructuring charge of approximately $6.4 million for the disposition
of certain assets and severance costs under the Restructuring Plan. Elimination
of the manufacturing operation in Mountain View was due mainly to the facility's
low capacity and high operating expense and the Company's belief that
recombinant protein manufacturing is available from third parties. Scios will
maintain process science personnel and pilot scale manufacturing capability in
order to support its research programs.
Scios' revised business plan includes two primary elements: (1) focusing the
Company's research and development efforts on Natrecor-Registered Trademark-
(nesiritide), the p38 kinase inhibitor program, and the Alzheimer's disease
program; and (2) expanding the business of the Company's PSMD. The decision to
focus on certain research and development efforts led to a determination to
outlicense the Company's growth factor programs, which include work on VEGF(121)
and Fiblast-Registered Trademark-(trafermin) which is the human form of
fibroblast growth factor ("FGF"). See "Business--Products in Development" below.
Scios is seeking to reach profitability in the next several years through the
launch of Natrecor(-Registered Trademark-), the cost reductions under the
Restructuring Plan, funding from collaborations with corporate partners on other
products and the acquisition of late stage products that the Company's PSMD can
market.
OVERVIEW OF STATUS OF LEAD DEVELOPMENT PROGRAMS
Natrecor-Registered Trademark- (nesiritide) is the Company's product for the
short-term management of acute decompensated congestive heart failure ("CHF"),
Natrecor-Registered Trademark- is currently being evaluated in a Phase III
clinical trial across the
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United States in a study that the Company has named the "VMAC Trial"
(Vasodilation in the Management of Acute Congestive Heart Failure). The VMAC
Trial was initiated following the April 1999 decision by the U.S. Food and Drug
Administration ("FDA") to require that the Company conduct a further clinical
trial before the FDA would consider approving Natrecor-Registered Trademark- for
marketing in the United States. In January 29, 1999, the Cardiovascular and
Renal Drugs Advisory Committee of the FDA had recommended approval of
Natrecor-Registered Trademark- for sale in the United States. Scios and a
steering committee made up of clinical researchers expert in the cardiovascular
field recruited by the Company designed the VMAC trial to provide the further
information on the pharmacodynamic profile of Natrecor-Registered Trademark-
requested by the FDA. From enrollment of the first patient on October 27, 1999
through February 2, 2000, the Company has enrolled 131 of the approximately 500
patients expected to be enrolled in the VMAC trial.
Scios' p38 kinase inhibitor program is developing new pharmaceutical agents
to treat inflammatory disorders. Scios has developed promising lead compounds
that inhibit p38 kinase, a key factor in the intracellular pathway that
stimulates the synthesis of tumor necrosis factor ("TNF"). The Company is
developing small molecule agents that can be taken orally, which is expected to
give them advantages over certain currently marketed therapies, which are
administered by injection. The Company has selected rheumatoid arthritis as its
initial target indication. The Arthritis Foundation estimates that currently
2.1 million people in the United States suffer from rheumatoid arthritis. Scios'
goal is to begin human clinical trials of a p38 kinase inhibitor in rheumatoid
arthritis in 2000.
Certain of the Company's product candidates, for example,
Fiblast-Registered Trademark-, VEGF(121) gene therapy, and GLP-1, have been
licensed to corporate partners who are now responsible for product development.
Under its arrangements with corporate partners, Scios typically receives signing
and/or milestone payments upon the partners' achievement of 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 some
cases, Scios may receive all or part of its compensation in the form of payments
for the supply of the product.
Until the FDA's non-approval decision on Natrecor-Registered Trademark- in
1999, the Company had expected to achieve profitability in 2000 based on
development milestone and supply payments which the Company expected to receive
from its former partner for Natrecor-Registered Trademark-, Bayer AG. 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 at the time the
statement is made. These forward-looking statements are 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 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
secure and retain third party manufacturers to produce the Company's products in
commercial quantities at reasonable cost and in a manner acceptable to various
regulatory authorities; (6) the Company's ability to identify and then acquire
products that will contribute to the profitable growth of the Company; and
(7) 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", "Outlook and Risks For Liquidity and
Capital Resources" and "Financial Risk Management" 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
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Nova Inc. in September 1992 following acquisition of Nova
Pharmaceuticals, Inc., and returned to using the name Scios Inc. in March 1996.
Since September 1999, the principal executive offices of the Company have been
located at 820 West Maude Avenue, Sunnyvale, California 94086. The Company's
telephone number is (408) 616-8200.
PRODUCT DEVELOPMENT ACTIVITY TABLE
The following table summarizes certain information concerning Scios'
principal product development programs and product partnerships with other
pharmaceutical companies. 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:
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POTENTIAL APPLICATIONS/ DEVELOPER/
PRODUCT STATUS (TERRITORY) INDICATIONS CORPORATE PARTNER
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PARTNERED
Fiblast-Registered Trademark- NDA filed (Japan) Recalcitrant dermal wounds Kaken Pharmaceutical Co., Ltd.
(trafermin)
Fiblast-Registered Trademark- Phase II Coronary artery disease Chiron Corporation
(trafermin)
Fiblast-Registered Trademark- Phase II Peripheral vascular disease Chiron Corporation
(trafermin)
VEGF(121) Phase II Cardiovascular disease: gene therapy GenVec, Inc.
GLP-1 Phase I Type 2 diabetes Novo Nordisk A/S
(insulinotropin)
Beta-amyloid Research Alzheimer's disease Eli Lilly and Company
modulators
Beta-amyloid Research Alzheimer's disease DuPont Pharmaceuticals Company
modulators
BNP diagnostic assay Marketed (Japan & Diagnosis/monitoring of heart failure Shionogi & Co., Ltd.
Europe)
BNP diagnostic assay PMA filed (United Diagnosis/monitoring of heart failure Biosite Diagnostics Inc.
States)
BNP diagnostic assay Development Diagnosis/monitoring of heart failure Abbott Laboratories
UNPARTNERED
Natrecor-Registered Trademark- Phase III Acute congestive heart failure Seeking partner
(nesiritide)
VEGF(121) Preclinical Cardiovascular disease: protein therapy Seeking licensee
p38 kinase inhibitors Preclinical Inflammatory disease --
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* "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. "PMA filed" means a pre-market approval application in the
indicated country seeking approval to market the diagnostic product in that
country.
PRODUCT DEVELOPMENT ACTIVITIES AND RISKS
Scios currently focuses its product research and development efforts on
proprietary novel therapeutics, principally in the areas of cardiorenal and
inflammatory disorders, and Alzheimer's disease. The Company's
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success will depend on its ability to achieve scientific and technological
advances and to translate such advances into 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 REPEATS THE CAUTION GIVEN TO
ITS INVESTORS IN EARLIER ANNUAL REPORTS ON FORM 10-K THAT THE DEVELOPMENT OF
PHARMACEUTICALS 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, such as 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 the factors affecting development of the
Company's products 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, proved
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 and development 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 several companies are often simultaneously trying to apply
their resources and insights to the same targets and challenges. The Company
attempts to address these challenges by incorporating new techniques as they
become available in the industry. Greater use of genomics, bioinformatics,
microarray-based gene expression analysis and high throughput screening are
examples of new technologies adopted by the Company in the last several years to
improve its pharmaceutical research and development discovery process. 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 better
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, as
well as every other company in the biopharmaceutical and pharmaceutical
industries, 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
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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-Registered Trademark-
(anaritide) for the treatment of acute renal failure and with the clinical
trials of Fiblast-Registered Trademark- for the treatment of stroke. See
"Business--Products in Development" 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 or its advisors 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, thereby directly affecting 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.
The intellectual property rights of third parties can also affect the
Company's development of its products. For instance, patent rights of other
companies may need to be licensed in order for the Company to commercialize a
product. These third party patent rights may not be available for license by the
Company or may be available only at a high cost to the Company. See
"Business--Patents and Proprietary Rights" for a discussion of the patent
positions that the Company is endeavoring to establish for its products and
information on some of the competing patent positions of third parties.
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 Pharmaceuticals Company in the Alzheimer's
field, with Novo Nordisk A/S on GLP-1 and with Kaken Pharmaceuticals Co., Ltd.
and Chiron Corporation on Fiblast-Registered Trademark- are examples. The
Company is also seeking a partner with whom to co-promote
Natrecor-Registered Trademark- in the United States. Continued funding and
participation by the Company's corporate partners under joint marketing, 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
established 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
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stockholders and personnel 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-REGISTERED TRADEMARK- (NESIRITIDE). Episodes of acute
decompensated CHF require hospitalization of approximately one million people
annually in the United States. In the Company's clinical studies,
Natrecor-Registered Trademark- has produced improvements in important measures
of heart function: pulmonary capillary wedge pressure ("PCWP") and cardiac
index. The Company filed a new drug application ("NDA") for
Natrecor-Registered Trademark- with the FDA in April 1998. In January 1999, the
Cardiovascular and Renal Advisory Committee to the FDA recommended by a 5 to 3
vote that Natrecor-Registered Trademark- be approved by the FDA for sale in the
United States for the short-term management of CHF. However, in April 1999 the
FDA advised the Company that it was not approving Natrecor-Registered Trademark-
and requested that the Company conduct an additional study to define the
consequences of the pharmacodynamic profile of Natrecor-Registered Trademark-,
specifically as it relates to the onset of effect and the recovery from
hypotension if it occurs. Following the FDA's action, the Company met several
times with the FDA to discuss the FDA's concerns and the design of the VMAC
Trial, an additional Phase III clinical trial being conducted in approximately
500 patients. The first patient was enrolled in the study in late October and
131 patients had been enrolled in the study as of February 2, 2000. The trial
design includes the evaluation of Natrecor-Registered Trademark- and
nitroglycerin, an existing therapy, compared to placebo. In hemodynamically
monitored patients, the principal endpoint of the study is the change from
baseline in PCWP. In patients not hemodynamically monitored, the principal
endpoint is improvement in shortness of breath in Natrecor-Registered Trademark-
patients compared with those treated with placebo, after three hours of
treatment. Secondary endpoints of the VMAC Trial include speed of improvement in
hemodynamics and symptoms, duration and adequacy of effect, and adverse effects
in the Natrecor-Registered Trademark- and nitroglycerin groups respectively over
the course of treatment.
Not including patients in the VMAC Trial, over 650 patients have previously
received Natrecor-Registered Trademark- as part of Scios' clinical program to
study this drug. The pivotal efficacy study in the Company's 1998 NDA
application was a randomized, double blind, placebo-controlled Phase III study
that studied 127 patients with acutely decompensated CHF requiring
hospitalization. Patients received an infusion of either
Natrecor-Registered Trademark- (0.015 or 0.03mg/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-Registered Trademark- reduced PCWP by 20%
(p=0.003) and 31% (pgreater than0.001) in the 0.015 and 0.03mg/kg/min dose
groups, respectively, compared to placebo. Symptom scores and cardiac index also
improved compared to placebo at a statistically significant level.
In May 1998, the Company entered into an agreement with Bayer establishing a
collaboration for the worldwide development and commercialization of
Natrecor-Registered Trademark-. On signing the contract, the Company received a
payment of $20.0 million. In May 1999, Bayer terminated the agreement following
the FDA non-approval letter and all rights in Natrecor-Registered Trademark-
reverted to Scios without any payment being due from Scios. Scios is now seeking
a co-promotion partner with which to commercialize
Natrecor-Registered Trademark- in the United States and partner(s) to license
Natrecor-Registered Trademark- for sale in other countries. A number of low cost
pharmaceutical products are already being used by physicians to treat acute
episodes of CHF. Hence, the Company and its Natrecor-Registered Trademark-
partner will need to demonstrate positive clinical benefits of
Natrecor-Registered Trademark- in order to successfully introduce
Natrecor-Registered Trademark- into this competitive market.
This discussion of Natrecor-Registered Trademark- includes forward-looking
statements within the meaning of the PSLRA-95, which are based on current
information. Many factors could influence the commercial success of
Natrecor-Registered Trademark-, principally including the reaction of various
regulatory agencies, including the FDA, to the additional data Scios will
develop concerning the degree of efficacy and safety of
Natrecor-Registered Trademark-, the scope of any approval such agencies may
grant for the product, and the ability of Scios and a commercial 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-Registered Trademark-.
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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
cardiorenal research program in natural human peptides. BNP is made in the heart
and is part of the body's natural response to a failing heart. 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 of
several years due to time taken up in the regulatory approval process. The
Company also has the exclusive right to develop therapeutic products using BNP
under certain patents and applications on BNP originally filed by Daiichi
Pharmaceutical Co., Ltd. which were subsequently acquired by Shionogi &
Co., Ltd. ("Shionogi"). 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."
P38 KINASE INHIBITORS. The goal of Scios' p38 kinase inhibitor program is
to establish and develop a potent, orally available treatment for rheumatoid
arthritis and other inflammatory disorders. p38 kinases stimulate tumor necrosis
factor (TNF) production and biosynthesis of the proinflammatory enzyme
cyclooxygenase-2 (COX-2), leading to inflammation. Inhibitors of p38 kinases
could be useful to treat certain inflammatory and cardiovascular conditions.
Current development plans anticipate the nomination of a development candidate
shortly and the initiation of preclinical development to support an IND filing
allowing the start of clinical tials in the second half of 2000. The treatment
of rheumatoid arthritis has recently made striking advances with the discovery
that proteins that antagonize the inflammatory cytokine TNF markedly relieve the
symptoms and retard the progression of rheumatoid arthritis. These existing
protein-based products, either neutralizing antibodies or soluble receptors,
have to be given by injection on a repeated basis. A potent inhibitor of TNF in
tablet form should permit the effective treatment of rheumatoid arthritis with a
much more convenient and tolerable form of administration. An additional benefit
of inhibiting p38 kinase is the inhibition of COX-2 in white blood cells. Since
COX-1 is not regulated by p38 kinase, inhibitors of p38 kinase provide a
selective inhibition of COX-2, which has already been demonstrated by selective
COX-2 inhibitors to be highly effective in relieving the symptoms of many forms
of arthritis. Thus, patients being treated with a p38 kinase inhibitor could
experience a reduction in both the symptoms of rheumatoid arthritis and the
progression of the disease. The clinical plan for Scios' p38 kinase inhibitor is
to treat moderate to severe rheumatoid arthritis to initially reduce signs and
symptoms and, secondarily, to retard joint structural damage in patients who are
not responding to current treatment.
FIBLAST-REGISTERED TRADEMARK- (TRAFERMIN). Fiblast-Registered Trademark-
(trafermin) is Scios' form of human basic fibroblast growth factor (FGF), 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 has licensed Fiblast-Registered Trademark-
to two key partners for the development in a variety of indications.
Since 1988, Scios has worked with Kaken Pharmaceutical Co., Ltd. ("Kaken"),
the Company's corporate partner for Fiblast-Registered Trademark- in Japan.
Pursuant to a 1988 agreement, Kaken has exclusive rights to develop and market
Fiblast-Registered Trademark- for all indications in Japan, Korea, Taiwan, Hong
Kong and the People's Republic of China. Scios has received 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-Registered Trademark- products by Kaken. Under a series of agreements
between Scios and Kaken entered into in 1994, Scios has manufactured a specified
quantity of Fiblast-Registered Trademark- for Kaken, following which Kaken will
arrange its own supply. The agreements also established a collaboration on
manufacturing process development between the companies and provided Kaken with
a license to Scios' manufacturing technology for Fiblast-Registered Trademark-.
However, the timing for Kaken to assume this responsibility has not been
determined. Under the 1994 agreements, Kaken made a series of payments to Scios
from 1994 through 1998 for the supply of material, the process development
collaboration, and the license to Fiblast-Registered Trademark- know-how,
patents and manufacturing technology. As of December 31, 1999 the total of these
payments (not previously applied to Kaken's purchases from the Company) has been
recorded
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as deferred revenue in the amount of $15,908,000. Prior to closing its Mountain
View manufacturing facility in May 1999, Scios produced the amount of material
due to Kaken and Scios now holds it for delivery to Kaken upon regulatory
approval in Japan. Once the supply of material produced by Scios has been used
to produce commercial products, Kaken will arrange for the manufacture of
Fiblast-Registered Trademark- for its future needs.
Kaken conducted two Phase III trials in Japan for evaluation of
Fiblast-Registered Trademark- 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-Registered Trademark- in Japan, Kaken must
obtain approvals from the Japanese authorities with respect to the NDA for
Fiblast-Registered Trademark- in the target indication and also for importation
of Fiblast-Registered Trademark- in bulk form from Scios into Japan and 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-Registered Trademark-
is safe and effective in the treatment of recalcitrant wounds, and that the
processes and facilities used by Scios for manufacturing the bulk drug substance
used in Fiblast-Registered Trademark- were satisfactory. Although Japanese
regulators will apply Japanese standards and practices in reviewing Kaken's NDA,
Kaken faces many of the same challenges and factors that are discussed in
"Business--Product Development Activities and Risks."
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-Registered Trademark- in the treatment of stroke and cardiovascular
disorders. In extensive preclinical studies, Fiblast-Registered Trademark- had
been shown to protect neurons from damaging effects associated with stroke,
including oxygen and glucose deprivation, and glutamate release.
Fiblast-Registered Trademark- also 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-Registered Trademark- for the
treatment of stroke. This study was concluded in 1997, ultimately enrolling 66
patients and further demonstrating the safety of Fiblast-Registered Trademark-
after systemic administration. In 1997, Wyeth-Ayerst assumed the responsibility
of lead development party for Fiblast-Registered Trademark- in stroke and the
Company and Wyeth-Ayerst announced the initiation of two 900-patient
Phase II/III clinical trials of Fiblast-Registered Trademark- in stroke. In July
1998, Wyeth-Ayerst and Scios announced termination of the stroke clinical trial
in the United States for safety reasons. The stroke clinical trial in Europe,
which used a different dosing regimen, was continued into mid-1999 after
Wyeth-Ayerst conducted an interim analysis of the data from the European trial.
While the data from the European trial did not repeat the safety issues that led
to the halting of the North American stroke trial, Wyeth-Ayerst elected to
terminate its agreement with Scios in the second half of 1999 based on its
assessment of the expense of additional trials and likelihood of success. All
rights in Fiblast-Registered Trademark- reverted to Scios. As of
December 31,1999 the Company has recorded $300,000 in connection with the share
of clinical trial expenses that the Company is to reimburse Wyeth-Ayerst under
the agreement.
In November 1999, Scios announced the granting of a license to Chiron
Corporation ("Chiron") covering rights in Fiblast-Registered Trademark- not
previously licensed by the Company, including the rights returned by
Wyeth-Ayerst. Chiron has had a long-term interest in FGF research, particularly
in FGF's potential use to treat coronary artery disease. This proposed use is
based on FGF's ability to induce angiogenesis, the growth of new blood vessels.
Chiron has held since the 1980's, a license from the Salk Institute under a
patent covering the bovine form of FGF. See "Business--Patents and Proprietary
Rights--Fiblast-Registered Trademark-" for a discussion of a U.S. patent
interference that the Company had with Salk. In 1999, under the Agreement with
Chiron, Scios received $12.5 million in licensing fees in the form of cash and a
forgivable loan to Scios. In addition, milestone payments totaling
$12.0 million will also be made by Chiron to Scios upon completion of certain
development objectives. Scios will receive royalties based on sales of FGF
products (human or bovine) in countries where Scios holds patents. Under the
agreement, Chiron has assumed full responsibility for product development.
Scios has also granted licenses under its Fiblast-Registered Trademark-
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 treatment of bone fractures, and a license to Selective
Genetics Incorporated (formerly Prizm Pharmaceuticals, Inc.), a company using
bFGF for the targeted delivery of other pharmaceutical agents. Scios is
supplying Orquest with Fiblast-Registered Trademark- for incorporation into
Orquest's product.
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Scios is obligated to make payments to Organon International ("Organon")
based on amounts received by Scios upon commercialization of
Fiblast-Registered Trademark-. Approximately $218,000 remains to be paid under
the obligation, which stems from the Company's 1989 reacquisition of certain
Fiblast-Registered Trademark- rights previously licensed to Organon. The basic
research on Fiblast-Registered Trademark- was funded by Biotechnology Research
Partners, Ltd. See Note 12 of Notes to Consolidated Financial Statements. See
also "Business--Patents and Proprietary Rights" for a discussion of
Fiblast-Registered Trademark- patent issues.
VASCULAR ENDOTHELIAL GROWTH FACTOR (VEGF(121)). Scios conducted
pre-clinical studies of its proprietary 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, including intravenous and
subcutaneous administration. The Company has granted a license to GenVec, Inc.
for the use of the gene encoding VEGF(121) in gene therapy paradigms. GenVec is
conducting clinical testing of VEGF(121) gene therapy in the U.S. in
collaboration with its partner, Parke-Davis. Scios has been awarded U.S. and
European patents covering VEGF(121). Other companies hold patents on competing
forms of VEGF. See "Business--Patents and Proprietary Rights--VEGF(121)" for a
discussion of patent issues. As part of the Restructuring Plan, the Company has
decided to seek a licensee for its VEGF(121) protein technology.
ALZHEIMER'S DISEASE. For many years, the Company has conducted a basic
research program to develop new therapies for Alzheimer's disease primarily
based on the investigation of the beta-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 ("Lilly") and with DuPont Pharmaceuticals 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. In 1998, Lilly expanded the scope and funding of the primary
programs in the collaboration and extended it through April 2001.
Previously, Scios had a research alliance on Alzheimer's disease with Marion
Merrell Dow, Inc. 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. 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.
GLP-1(INSULINOTROPIN). In 1996, Scios granted Novo Nordisk A/S of Denmark
("Novo Nordisk"), a world leader in insulin and diabetes care products, an
exclusive license to the Company's GLP-1 technology. The Company formerly
referred to the GLP-1 technology as its "insulinotropin project". Under the
agreement Scios has received payments totaling $10.0 million, of which the final
$4.0 million milestone payment was received in 1999. Novo Nordisk is responsible
for development activities for GLP-1 and is currently conducting Phase I human
clinical trials. GLP-1 is a potent peptide that stimulates insulin release when
blood sugar levels are above normal. Type 2 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. GLP-1 controls blood
glucose levels in Type 2 diabetics by stimulating insulin release and perhaps by
overcoming insulin resistance. Present therapies for Type 2
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diabetics include insulin injections and oral hypoglycemic agents, which can
induce dangerously low blood sugar levels. Since GLP-1 appears to stimulate
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 royalty
bearing license to patent applications covering GLP-1 and certain analogs held
by Massachusetts General Hospital, which rights were licensed to Novo Nordisk.
Scios will receive royalties on product sales made by Novo Nordisk.
BNP DIAGNOSTICS. Independent researchers have determined that the level of
circulating BNP may be a good basis for a diagnostic to identify and track
patients suffering from congestive heart failure. Scios has granted Abbott
Laboratories and Biosite Diagnostics Incorporated ("Biosite") non-exclusive
rights under the Company's BNP patents to develop BNP diagnostics. In
December 1999, Biosite filed its pre-market approval application with the FDA
seeking approval to market Biosite's Triage(-Registered Trademark-) BNP Test.
The test measures BNP as an aid in the basis of diagnosis of patients with
congestive heart failure. In 1998, Scios and Shionogi entered into a
cross-license of their respective BNP patent rights for the diagnostic field.
The diagnostic cross-license is royalty free. Shionogi also granted Scios a
royalty-bearing, exclusive license under its BNP patents to develop therapeutic
products. Shionogi has begun marketing a radioimmunoassay (RIA)-BNP diagnostic
in Japan and Europe.
CNS DISORDERS. In 1993, Scios founded Guilford Pharmaceuticals Inc.
("Guilford") to develop pharmaceutical products for the treatment of diseases of
the central nervous system ("CNS"). In its initial years, Guilford operated as a
majority-owned subsidiary of Scios. Following various equity offerings by
Guilford, including its initial public offering and Scios' subsequent sale of a
portion of its holdings, Scios' ownership interest in Guilford was reduced to
approximately 7% as of December 31, 1998. In 1999, Scios sold all of its
position in Guilford. Scios had previously transferred to Guilford certain
neuroscience technology, and had licensed to Guilford the Gliadel(-Registered
Trademark-) implant project and related drug delivery technology described below
for application in the treatment of tumors of the central nervous system and
cerebral edema.
DRUG DELIVERY SYSTEMS. Prior to Scios' acquisition of Nova in 1992, Nova
had been developing certain drug delivery systems, including the
Gliadel(-Registered Trademark-) implant to treat primary brain cancer and the
Septacin(-Registered Trademark-) 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(-Registered Trademark-) drug delivery technology. As noted above,
the Company licensed a portion of the drug delivery technology, including
Gliadel(-Registered Trademark-), to Guilford in 1992. Gliadel(-Registered
Trademark-) was approved for marketing in the United States in 1996. In 1994,
the Company licensed to another third party the drug delivery technology,
including Septacin(-Registered Trademark-), for all uses outside the area
licensed to Guilford. Scios thereafter assigned its Biodel(-Registered
Trademark-) license rights back to MIT, which will administer these licenses.
The Company and MIT are receiving royalty and milestone payments under the
license agreements with Guilford and other licensees as products are developed.
The licensees are also obligated to meet certain diligence standards in pursuing
development of their respective product candidates. The Gliadel(-Registered
Trademark-) and Septacin(-Registered Trademark-) 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 4 of Notes to Consolidated Financial Statements for a description of the
Company's payment obligations to former limited partners.
MARKETING AND SALES
PROPRIETARY PRODUCTS. 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(s) for any such product. As discussed above, the Company has decided to
seek a co-promotion partner in the United States for Natrecor(-Registered
Trademark-) and a partner(s) to commercialize Natrecor(-Registered Trademark-)
in other countries.
Scios believes that its experience in marketing certain psychiatric products
under arrangements such as those described below in "Psychiatric Sales and
Marketing Division" will prove useful as it prepares to participate in marketing
its own products. However, to date, Scios' marketing experience has been limited
to
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psychiatric products, and the Company does not currently have in place all of
the resources to market the products it is seeking to develop or that it may
acquire. 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 has determined
to seek established pharmaceutical companies as commercialization partner(s).
There can be no assurance that the Company will be able to enter into such
partnerships on favorable terms or to 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.
When entering into agreements with partners for the purpose of obtaining sales
and marketing expertise and services, the Company incurs the additional risk
that the partner's level of effort or marketing approach may differ from that
which the Company might choose if operating solely on its own behalf. The
Company tries to structure its agreements to provide for Scios' participation in
the planning of sales and marketing strategies and to align the interests of
both parties to product success. However, changes in priorities or other
circumstances at the partner company could have an adverse effect on achieving
potential levels of product sales. 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.
PSYCHIATRIC SALES AND MARKETING DIVISION. In 1999 the Company's Psychiatric
and Sales Marketing Division generated approximately $10.0 million in operating
profit (calculated with no allocation of corporate overhead) by marketing
products that were developed by others. In this division, the Company has a
field sales force of approximately 90 representatives who are employed on a
part-time basis marketing psychiatric products. The Company currently markets in
the United States five psychiatric products discussed below under license from
SmithKline Beecham Corporation ("SB") and in mid-1998 began co-promoting two
additional products: Risperdal(-Registered Trademark-) (risperidone), the most
frequently prescribed antipsychotic under a co-promotion agreement with Janssen
Pharmaceutica and Paxil(-Registered Trademark-) (paroxetine HCL), which
participates in both the selective serotonin reuptake inhibitor (SSRI)
antidepressant and antianxiety markets, under a co-promotion agreement with SB.
Prior to entering into the co-promotion agreements on Risperdal(-Registered
Trademark-) and Paxil(-Registered Trademark-), the Company had agreements to
co-promote Haldol(-Registered Trademark-) Decanoate (haloperidol), a depot
injection product to treat schizophrenia that was distributed by Ortho-McNeil
Pharmaceutical, and Effexor(-Registered Trademark-) (venlafaxine HCl), an
antidepressant that is marketed by Wyeth-Ayerst. The Haldol(-Registered
Trademark-) agreement was terminated by mutual agreement in April 1998 when
generic competition entered the market. The Effexor(-Registered Trademark-)
agreement was also terminated by mutual agreement in April 1998.
Generally, the various companies with whom Scios enters into co-promotion
agreements for psychiatric products remain responsible for the manufacture and
distribution of the product and these companies generally indemnify Scios
against product liability claims. In its current co-promotion arrangements,
Scios is compensated at a fixed level for performing detailing activity for the
product to selected groups of psychiatrists and other prescribers, with Scios
having the opportunity to earn additional incentive compensation based on
increasing sales of the product over targets established for the prescribers to
whom Scios details the product.
The Company has exclusive rights to market the following SB products in the
United States: Eskalith(-Registered Trademark-) and Eskalith CR(-Registered
Trademark-) (lithium) for the treatment of manic depressive illness,
Thorazine(-Registered Trademark-) (chlorpromazine) and Stelazine(-Registered
Trademark-) (trifluoperazine) for the treatment of schizophrenia, and
Parnate(-Registered Trademark-) (tranylcypromine) for the treatment of
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depression (collectively, the "SB Products"). Eskalith CR(-Registered
Trademark-) 450 is the largest selling of the SB Products. SB currently
manufactures and distributes the SB Products. In 1999, SB changed its site of
manufacture of the two Eskalith(-Registered Trademark-) products. In
December 1999 Scios announced that it had been advised by SB that a product
outage could develop in 2000 for Eskalith CR(-Registered Trademark-) 450 mg
while SB responds to questions raised by the FDA concerning the change of
manufacturing location. Since December, the Company and SB have reached an
agreement with the FDA allowing product shipments from the new manufacturing
facility beginning in February 2000. The initial shipments will have six month
expiration dating, which will be extended as additional stability data is
developed. As a result, while the Company may experience some reduction in
revenues on this product in 2000, it is not expected to be material. In February
1999, the FDA approved the change of manufacturing site for Eskalith(-Registered
Trademark-) (lithium carbonate) immediate release capsules after a brief
shortage. 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 NDAs 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.
Risperdal(-Registered Trademark-), Paxil(-Registered Trademark-) and the SB
Products all face competition which is likely to become greater over time. For
several of the SB Products, unit volume for certain products have been eroding
and can be expected to continue to erode due to competition from generic
products sold at substantially lower prices. 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, the continued
availability of product from SB, 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(-Registered Trademark-) (a controlled release
formulation), where generic equivalents are less available.
From time to time, the Company may seek to acquire the right to market
additional or replacement 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 sales and marketing assistance similar
to that offered by the Company.
MANUFACTURING
Prior to March 1999, the Company produced only the bulk active ingredient in
Fiblast(-Registered Trademark-) in its own facility and relied on third parties
for the manufacture of other products, including Natrecor(-Registered
Trademark-) and the final product form of Fiblast(-Registered Trademark-). In
March 1999, the Company announced its Restructuring Plan that included closure
in 1999 of the manufacturing facility where Scios had manufactured
Fiblast(-Registered Trademark-). The Company's commercial partners for
Fiblast(-Registered Trademark-), principally Kaken, Chiron and Orquest are now
responsible for supplying their long-term need for this product. Similarly, Novo
Nordisk is responsible for manufacturing the GLP-1 product and GenVec and its
commercial partner, Warner Lambert, are responsible for manufacturing any
products based on the VEGF(121) gene.
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The decision to close Scios' own protein manufacturing facility was based on
a combination of factors including the low capacity and high operating cost of
the facility compared to third-party manufacturing facilities and the
availability of third-party recombinant protein manufacturing capacity. The
Company is now dependent on third parties to manufacture its products. The
strategy of utilizing third-party facilities carries with it certain risks, as
there can be no assurance that such facilities can be arranged on commercially
acceptable terms or that Scios will be able to meet manufacturing quantity and
quality requirements through the use of such arrangements. Scios has in place an
agreement providing for manufacture of Natrecor(-Registered Trademark-) by
Biochemie Gesellschaft M.B.H. of Austria through 2006. Having a low-cost
manufacturing capability for Natrecor(-Registered Trademark-) and smoothly
managing third-party manufacturers are expected to be keys to commercializing
this and other products successfully and on a timely basis. Failure to do so
could adversely impact the commercial success of the product. See
"Business--Competition."
Janssen manufactures Risperdal(-Registered Trademark-) and SB manufactures
Paxil(-Registered Trademark-) and 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 assume management of the manufacturing
contracts currently managed by SB. The risk of reliance on a third party to
manufacture is demonstrated by SB's recent notice to the Company of a possible
out-of-stock situation in 2000 on Eskalith CR(-Registered Trademark-) following
changes by SB in the site of manufacturing. See "Business--Marketing and Sales."
PATENTS AND PROPRIETARY RIGHTS
Scios is seeking patent protection for proprietary technology and products
in the United States and abroad to prevent others from unfairly capitalizing on
its investment in research. Other companies engaged in research and development
of new health care products based on biotechnology also are actively pursuing
patents for their technologies, which they consider to be novel and patentable.
Scios also relies and will continue to rely upon trade secrets and know-how to
develop and maintain its competitive position. There can be no assurance,
however, that others will not develop similar technology or that confidentiality
agreements on which the Company relies to protect trade secrets will be honored.
The Company currently owns or holds exclusive rights to approximately 63
issued United States patents and 49 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(-Registered Trademark-),
Fiblast(-Registered Trademark-), VEGF(121) 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 that 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
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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(-REGISTERED TRADEMARK-). Scios has been issued United States,
Canadian, European and Japanese patents covering the endogenous form of
Natrecor(-Registered Trademark-), human BNP. An opposition proceeding has been
filed against Scios' Japanese patent and the matter is presently before the
Japanese courts. Scios has also obtained from Shionogi a worldwide license for
therapeutic uses to certain issued BNP patents that are based on work by Daiichi
Pharmaceutical Co., Ltd., Tokyo, including a patent issued to Daiichi by the
European Patent Office.
P38 KINASE INHIBITORS. Scios has filed a series of patent applications in
the United States covering the classes of p38 kinase inhibitors that the Company
has identified. While the classes of small molecule compounds identified by
Scios researchers appear to be unique, the Company is aware that other companies
are also working to develop p38 kinase inhibitor compounds, have filed patent
applications on and received patents covering certain classes of compounds that
these competing companies have identified, and on various aspects of identifying
such compounds. Among the companies competing to develop p38 kinase inhibitors
are SmithKline Beecham Corporation, G.D. Searle Pharmaceuticals, a division of
Monsanto Company, Johnson & Johnson Company and Merck, Inc., each of whom has
substantial resources.
FIBLAST(-Registered Trademark-). In February 1991, a United States patent
with one claim covering a form of 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. On January 12, 1999, Scios received a
United States patent covering a cysteine mutant of human basic FGF.
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 Scios' form of recombinant basic FGF known by the product name
Fiblast(-Registered Trademark-). An opposition proceeding was 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 1997,
the Opposition Division revoked the patent; however, Salk has filed an appeal
against this ruling. As part of the November license agreement with the Company,
Chiron has withdrawn its opposition to Scios' European Patent and Scios has
withdrawn from the appeal proceedings involving Salk's European patent.
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<PAGE>
In March 1994, the Company obtained a non-exclusive license to make, use and
sell Fiblast(-Registered Trademark-) 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. Sublicense
Rights under this patent are included in the rights granted by the Company to
its Fiblast(-Registered Trademark-) licensees, Kaken and Chiron.
VEGF(121). VEGF is a highly specific mitogen for vascular endothelial
cells. Seven isoforms of human VEGF ("hVEGF") are known, having 121, 145, 148,
165, 183, 189 and 206 amino acids, respectively. Scios believes it was the first
to identify, clone and produce by recombinant DNA technology the 121 amino acid
form of hVEGF (hVEGF(121)). hVEGF(121) is the only human VEGF isoform known not
to bind to heparin. Scios owns two U.S. patents issued in 1993 covering
hVEGF(121), and in 1996 received a European patent covering this VEGF isoform.
Patent applications are pending in Canada and Japan. Other companies and
institutions, including Genentech, Monsanto, and the Regents of the University
of California, hold patents and pending patent applications claiming various
isoforms of hVEGF and certain VEGF variants.
TRADEMARKS. Natrecor(-Registered Trademark-), Fiblast(-Registered
Trademark-) and Auriculin(-Registered Trademark-) are registered trademarks of
Scios. Paxil(-Registered Trademark-), Eskalith(-Registered Trademark-), Eskalith
CR(-Registered Trademark-), Thorazine(-Registered Trademark-),
Stelazine(-Registered Trademark- ) and Parnate(-Registered Trademark-) are
registered trademarks of SB. Risperdal(-Registered Trademark-) is the registered
trademark of Janssen. Haldol(-Registered Trademark-) is a registered trademark
of Ortho-McNeil Pharmaceutical, Inc. Effexor(-Registered Trademark-) is a
registered trademark of American Home Products Inc. Gliadel(-Registered
Trademark-) is the registered trademark of Guilford. Triage(-Registered
Trademark- ) is a registered trademark of Biosite Diagnostics Incorporated.
COMPETITION
Competition is intense in the development of pharmaceutical products. 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(-Registered Trademark-), a number of products are already clinically
accepted for the short-term management of CHF. Hence, the Company will need to
demonstrate positive low cost clinical benefits compared to the existing
products and an ability to continue to produce Natrecor(-Registered Trademark-)
cost-effectively in order to successfully introduce Natrecor(-Registered
Trademark-) into this competitive market.
There can be no assurance that technological developments or superior
marketing capabilities possessed by competitors will not materially adversely
affect the commercial potential of the Company's products. In addition, if the
Company commences significant commercial sales of products, manufacturing
efficiency and marketing capability are likely to be significant competitive
factors. With respect to products no longer covered by patents, such as the SB
Products, 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.
15
<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 expend substantial resources 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
receive 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 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 current Good Manufacturing Practices ("cGMPs"). The
cGMPs set certain minimum requirements for procedures, record-keeping and the
physical characteristics of the facilities used in the production of these
drugs. In addition, various foreign and United States 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 and
manufacturing 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, the Resource Conservation and
Recovery Act, national restrictions on technology transfer, import, export and
customs regulations, and other present and possible future foreign, 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
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<PAGE>
with environmental regulations if the Company develops additional manufacturing
capacity or otherwise changes its operations. 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, but it cannot ensure
their compliance. 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 11 of Notes to
Consolidated Financial Statements.
EMPLOYEES
The Company had 180 full-time employees as of December 31, 1999 (of which
132 were engaged in research, product and clinical development) and 90 field
sales representatives.
ITEM 2. PROPERTIES
In September 1999, the Company consolidated all of its operations in
Sunnyvale, California. The Company has leased a 52,000 square foot building in
Sunnyvale, California since 1995 in which the Company's discovery research group
is located. In 1999, the Company built out the remaining space in the Sunnyvale
facility to consolidate all of its research and development laboratories and
headquarter offices in one building. In 1999, the Company also leased a
neighboring 33,400 square foot office building to house certain of its
employees. The Company's annual lease payments for the Sunnyvale facilities are
approximately $1,543,000. The Company expended approximately $5.0 million in
capital expenditures in 1999 and anticipates spending approximately $1.0 million
in capital expenditures in 2000.
In August 1999, the Company completed the sale of the buildings the Company
had occupied in Mountain View, California for net proceeds of approximately
$19.2 million. The sale of the Mountain View facility was part of the
Restructuring Plan announced by the Company in March 1999. The Company leased
these facilities back for approximately 6 months as it phased into its Sunnyvale
locations.
In May, 1999, the Company also sold the administrative and laboratory
building in Baltimore, Maryland originally owned by Nova Pharmaceutical
Corporation.
ITEM 3. LEGAL PROCEEDINGS
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 has accepted
a settlement agreement proposed by the EPA under which the Company has agreed to
contribute $90,000 to clean-up costs. This amount has been accrued at December
31, 1999 and is expected to be paid in 2000.
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.
17
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at January 11, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- -----------------------------------------------
<S> <C> <C>
Richard B. Brewer.............................. 48 President and Chief Executive Officer
Elliott B. Grossbard, M.D...................... 52 Senior Vice President, Development
John H. Newman................................. 49 Senior Vice President, General Counsel and
Secretary
Lauretta C. Cesario............................ 53 Vice President, Human Resources
Jack Cohen, Ph.D............................... 62 Vice President, Quality and Product Development
Barbara Cordell, Ph.D.......................... 53 Vice President, Alzheimer's Research
Thomas L. Feldman.............................. 49 Vice President, Sales and Marketing
David W. Gryska................................ 43 Vice President, Finance and Chief Financial
Officer
John A. Lewicki, Ph.D.......................... 48 Vice President, Research
George F. Schreiner, M.D., Ph.D................ 50 Vice President, Cardiorenal Research
</TABLE>
Mr. Brewer is President and Chief Executive Officer of Scios Inc. He joined
Scios in September 1998 and has served as a Director since that time. From early
1996 to 1998, he was with Heartport Inc., first as Executive Vice President of
Operations and then, Chief Operating Officer. Prior to that, Mr. Brewer served
in various capacities with Genentech, Inc. from 1984 to 1995, most recently as
Senior Vice President, U.S. Sales and Marketing, Genentech Europe Ltd., and
Genentech Canada, Inc. Mr. Brewer earned a B.S. from Virginia Polytechnic
Institute and a M.B.A. from Northwestern University.
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, Inc., in charge of the clinical
development of Alteplase(-Registered Trademark-) (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.
Ms. Cesario joined Scios in 1997 as Director, Human Resources. She became
Vice President, Human Resources in 1998. Prior to joining the Company,
Ms. Cesario was Director, Human Resources at Silicon Graphics, Inc. from 1995 to
1997, Director, Human Resources at National Semiconductor from 1994 to 1995 and
Group Director, Human Resources at Syntex Corporation from 1983 to 1994.
Dr. Cohen joined Scios in 1992, as Vice President, Quality, and became Vice
President, Quality & Regulatory in 1997, and Vice President, Quality and Product
Development in 1999. He was with Syntex Corporation from 1965 to 1992, starting
in Research in the Institute of Pharmaceutical Sciences. During the latter half
of his career at Syntex, he was Vice President, Quality Assurance, for Syntex
Laboratories. His
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<PAGE>
education includes a B.S. in Pharmacy from Columbia University, and a M.S. and
Ph.D. in Pharmaceutics and Analytical Chemistry from the University of Iowa.
Dr. Cordell joined Scios in 1983 as a Founding Senior Scientist. She was
promoted to a Vice President, Research position in 1985. Dr. Cordell has headed
Scios' Alzheimer's research program for the past twelve years and was promoted
to Vice President, Alzheimer's Research in 1996. Prior to joining Scios,
Dr. Cordell served on the faculty of Harvard Medical School. Dr. Cordell
received her Ph.D. from Indiana University in 1973.
Mr. Feldman joined Scios in January 1995 as Vice President of Commercial
Operations and in 1999 his title was changed to Vice President, Sales and
Marketing. 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.
Mr. Gryska joined Scios in December 1998 as Vice President of Finance and
Chief Financial Officer. Prior to joining Scios, Mr. Gryska was Vice President,
Finance and Chief Financial Officer of Cardiac Pathways Corporation since 1993.
Mr. Gryska was with Ernst & Young LLP from 1982 to September 1993 and as a
partner since 1989.
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. Schreiner joined Scios in 1997 as Vice President, Cardiorenal Research.
Dr. Schreiner is responsible for directing the disease-based research program
focusing on congestive heart failure and progressive renal failure. Prior to
joining Scios, Dr. Schreiner served on the faculties of Harvard Medical School
and Washington University School of Medicine and then joined CV Therapeutics,
Inc. as Vice President, Medical Science and Preclinical Research. Dr. Schreiner
obtained a M.D. from Harvard Medical School and a Ph.D. in immunology from
Harvard University in 1977.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol SCIO. The table below sets forth the high and low sales prices
as reported by Nasdaq for the Common Stock 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
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<PAGE>
of December 31, 1999, there were approximately 4,663 stockholders of record of
the Company's Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
FY 1999 FY 1998
----------------------- ------------------------
HIGH LOW HIGH LOW
----------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Q1........................................................ 12- 1/2 8- 1/8 13- 5/8 8- 1/8
Q2........................................................ 9- 5/16 2- 7/8 13- 1/4 8
Q3........................................................ 5- 1/4 3- 1/4 9- 1/8 4- 1/8
Q4........................................................ 5- 5/32 3- 3/8 10- 13/16 3- 1/2
Year...................................................... 12- 1/2 2- 7/8 13- 5/8 3- 1/2
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 60,787 $ 73,715 $ 47,429 $ 64,223 $ 49,187
Loss from operations.............................. (24,333) (11,911) (39,737) (22,020) (28,175)
Other income...................................... 4,283 11,122 2,254 4,497 5,049
Net loss.......................................... (20,064) (2,363) (38,667) (18,403) (26,382)
Net loss per common share and per common share
assuming dilution............................... (0.53) (0.06) (1.07) (0.51) (0.74)
Cash and securities............................... 100,712 97,311 64,700 62,170 87,069
Working capital................................... 1,706 8,083 4,524 (5,838) 11,642
Total assets...................................... 118,272 138,829 116,871 113,961 131,550
Long-term obligations............................. 42,866 34,573 31,919 426 1,082
Stockholders' equity.............................. 42,787 74,926 60,142 93,628 109,394
Employees at year end............................. 180 279 258 256 216
Field sales representatives....................... 90 98 92 79 85
</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 AND FUTURE RESULTS 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 IN THIS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
OPERATING RESULTS (1999, 1998 AND 1997)
Total revenues for the Company were $60.8 million in 1999, $73.7 million in
1998 and $47.4 million in 1997. The revenue decline from 1998 to 1999 and
increase from 1997 to 1998 was principally due to changes in the level of
research and development contract revenues.
Revenue from product sales of certain psychiatric products ("SB Products")
under license from SmithKline Beecham Corporation ("SB") was $33.8 million,
$29.1 million and $35.2 million in 1999, 1998 and 1997, respectively. The
product sales increase of 16% from 1998 to 1999 was mainly attributed to
improved customer targeting and new marketing programs. Product sales declined
17% from 1997 to 1998 due to competition from generic drugs and new competing
products.
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<PAGE>
Co-promotion commissions were $8.6 million, $6.5 million, and $5.8 million
in 1999, 1998 and 1997, respectively. In 1999 and 1998, the Company received
co-promotion commissions under agreements with SB for the co-promotion of its
drug Paxil(-Registered Trademark-) (paroxetine HCl) ("Paxil(-Registered
Trademark-)") for the treatment of depression, panic disorder, social anxiety
disorder and obsessive-compulsive disorder and with Janssen Pharmaceutica Inc.
("Janssen") for the co-promotion of its anti-psychotic drug
Risperdal(-Registered Trademark-) (risperidone) ("Risperdal(-Registered
Trademark-)"). In 1998 and 1997 the Company received co-promotion commissions
under agreements with Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate
of Johnson & Johnson, for the co-promotion of the psychiatric product
Haldol(-Registered Trademark-) Decanoate ("Haldol(-Registered Trademark-)"), and
with Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), a division of American Home
Products Corporation, for the co-promotion of its psychiatric product
Effexor(-Registered Trademark-) (venlafaxine HCl) ("Effexor(-Registered
Trademark-)"). In April 1998, the respective agreements with Ortho-McNeil and
Wyeth-Ayerst to co-promote Haldol(-Registered Trademark-) and
Effexor(-Registered Trademark-) were terminated by mutual agreement.
Co-promotion commissions increased from 1998 to 1999 and from 1997 to 1998 due
to the changes in the product lines promoted by the Company and to better terms
under the new agreements.
Revenue from research and development contracts was $18.4 million in 1999,
$38.1 million in 1998, and $6.4 million in 1997. The decrease in revenue from
1998 to 1999 was mainly due to $20.0 million received from Bayer AG ("Bayer") in
1998 for commercialization of Natrecor(-Registered Trademark-) (nesiritide). The
agreement was dissolved in May 1999 after non-approval of the drug by the FDA.
The increase in revenue from 1997 to 1998 was primarily due to: receipt of the
Bayer $20.0 million payment and $4.5 million from Bayer in additional
development funding; milestone payments of $5.0 million from Novo Nordisk A/S
for development of GLP-1; and additional contract funding from Eli Lilly and
Company ("Lilly") and DuPont Pharmaceuticals Company ("DuPont") for the
Company's Alzheimer's research program. Revenues from Chiron Corporation
("Chiron") for rights to Fiblast(-Registered Trademark-) accounted for 27% of
contract revenues in 1999. Revenue from Bayer accounted for 11% of contract
revenue in 1999 and 64% in 1998. Novo Nordisk accounted for 22% and 13% of
contract revenues in 1999 and 1998, respectively. Revenues from Lilly for the
Company's Alzheimer's research program comprised 20% of 1999, 8% of 1998 and 28%
of 1997 contract revenue. Revenues from the collaboration with Hoechst Marion
Roussel to study Alzheimer's disease comprised approximately 3% and 16% of
contract revenue in 1998 and 1997, respectively; this collaboration was
terminated by mutual agreement in 1997. Revenues under the collaboration with
Kaken Pharmaceutical Co., Ltd. ("Kaken") to develop Fiblast(-Registered
Trademark-) in Japan for the treatment of dermal ulcers, were less than 1% in
1999, 2% and 3% of contract revenue in 1998 and 1997, respectively.
Cost of goods sold for the SB Products was $18.5 million, $16.6 million and
$20.2 million in 1999, 1998 and 1997, respectively. The 1999 increase in cost of
goods is due to the increase in product sales. The decline from 1997 to 1998 was
principally the result of lower unit sales. Gross margins were 45% in 1999
compared to 43% in 1998 and 1997. Future changes in gross margins will be
principally dependent upon the effects of price increases, competition in the
marketplace and changes in the product lines.
Research and development expenses were $34.3 million in 1999, $46.6 million
in 1998 and $41.9 million in 1997. The decrease in spending in 1999 was
primarily due to the corporate restructuring that included layoff of personnel
and closure of the manufacturing facility. The increase from 1997 to 1998 was
the result of higher staffing levels, greater expenses for the purchase of drug
supply to support further development of the Company's lead products, and
increased clinical trials expenses.
Marketing, general and administrative expenses were $21.0 million in 1999,
$19.4 million in 1998 and $20.7 million in 1997. The increase from 1998 to 1999
is mainly the result of increased outside consulting fees related to marketing
of Natrecor(-Registered Trademark-), the corporate reorganization and product
licensing. The decreased spending from 1997 to 1998 was mainly due to lower
depreciation expenses.
The profit distribution to third parties of $4.9 million, $3.1 million and
$4.4 million in 1999, 1998 and 1997, respectively, represents SB's share of the
net profits from sales of the SB Products. The increase in 1999 and the decrease
from 1997 to 1998 were principally due to changing product sales levels.
21
<PAGE>
On March 1, 1999, the Company announced a $6.4 million restructuring plan
that included reduction of the Company's full-time workforce by approximately
30% or 80 employees and the consolidation of its headquarters, development and
research staff into leased facilities in Sunnyvale, California. After the
manufacture of the amount of Fiblast(-Registered Trademark-) required for
delivery under its contract with Kaken, the Company discontinued using its
manufacturing facility due to its low capacity and high operating expenses and
the ready availability of third party recombinant protein manufacturing
capacity. In the second half of 1999, the Company sold the Mountain View
facility. A portion of the Mountain View facility will continue to be leased
back through April 2000 to fulfill the Company's obligation to Kaken associated
with their drug approval application for Fiblast(-Registered Trademark-) in
Japan. The restructuring and consolidation is expected to create improved
management and operational synergies and save approximately $14.0 million
annually.
Other income was $4.3 million in 1999, $11.1 million in 1998 and $2.3
million in 1997. The decrease from 1998 to 1999 was mainly due to a reduction in
realized gains on the sale of securities in Guilford Pharmaceuticals Inc.
("Guilford") and increase in royalty expense to the Biotechnology Research
Partners on licensing of FGF to Chiron. The increase from 1997 to 1998 was due
to the gain on the sale of the Company's entire interest in its subsidiary Karo
Bio AB, 70,000 shares of the common stock of Guilford, and other marketable
securities in the Company's portfolio.
The Company had $1.3 million in equity in net loss of affiliate in both 1998
and 1997 which was the result of Guilford's losses in those respective years.
The Company's ownership in Guilford declined from 62% in May 1994 to 7% at
December 31, 1998 as a result of Guilford's public stock offerings and the sales
of Guilford stock by the Company. In the fourth quarter of 1998, the Company
reclassified the Company's investment in Guilford's stock to marketable
securities. In 1999 the Company sold its entire holdings of Guilford stock. From
June of 1994, the date of Guilford's initial public stock offering, until the
fourth quarter of 1998, the Company used the equity method of accounting for its
investment in Guilford. Prior to the public stock offering, the financial
results of Guilford were consolidated with those of the Company.
OUTLOOK AND RISKS
The Company is striving to achieve profitability in the next several years.
The ability of the Company to achieve sustainable profitability depends
principally upon the success of the Company in achieving regulatory approvals
and generating sales from Natrecor(-Registered Trademark-). Profitability will
also depend on the Company's ability to generate additional revenues through the
development and commercialization of its products such as Natrecor(-Registered
Trademark-) and p38 kinase inhibitor either through its own efforts or in
collaboration with partners. The Company expects to continue to generate revenue
from the sale and co-promotion of the psychiatric drugs it currently sells, or
of other third party product rights which it may acquire as additions to or
replacements for existing products. In addition, the Company expects to continue
to rely on outside partners to fund certain research activities such as its
ongoing Alzheimer's research program. Such funding will depend, in part, upon
priorities set by the sponsors in relation to the sponsor's other product
opportunities and their assessment of the continued benefit of sponsoring a
particular program at the Company.
As a result of closing its manufacturing facility, the Company is wholly
dependent upon third party suppliers for the manufacture of drugs for sale and
is evaluating additional supply sources for its other products in development.
Before closing its manufacturing facility, the Company produced all of the
Fiblast(-Registered Trademark-) drug supply necessary to fulfill its contractual
agreement with Kaken. 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.
Profitability may also be affected by any merger or acquisition activity
undertaken by the Company to expand its portfolio of drugs in development.
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
22
<PAGE>
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.
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 Risperdal(-Registered Trademark-) and Paxil(-Registered Trademark-) that are
currently being co-promoted. Factors influencing the availability of 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.
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 marketable securities (both current and
non-current) totaled $100.7 million at December 31, 1999, an increase of $3.4
million from December 31, 1998. The increase was mainly attributable to
favorable investing activities that included the sale of the Mountain View
facilities and the sale of Guilford stock. The Company also received $12.5
million in licensing fees and a forgivable loan from Chiron in 1999. The
increases were partially offset by $5.0 million used for property and equipment
purchases and $1.0 million used in repurchases of the Company's stock in the
public market. In addition, in 1999 the Company entered into a $4.0 million
equipment operating lease line that expires December 31, 2001. At December 31,
1999 approximately $612,000 had been drawn against the line.
In November 1995, the Company authorized the expenditure of up to $6.0
million for the repurchase of shares of the Company's common stock. In October
1998 the Company increased the amount by an additional $5.0 million. As of
December 31, 1999, the Company had purchased 1,563,000 shares at an aggregate
price of $7.3 million since the inception of the repurchase program. The Company
purchased 206,500 treasury stock shares for $1.0 million in 1999 and 327,000
shares for $1.5 million in 1998.
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, equipment lease financing 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 FOR LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities of
approximately $100.7 million at December 31, 1999, together with revenues from
product sales, royalties, collaborative agreements, equipment lease financing
and interest income, will be used to fund new and continuing research and
development programs, expand clinical trials for its products under development
and for other general purposes. The Company believes its cash resources will be
sufficient to meet its capital requirements for the next several years. Key
factors that will affect future cash use and the timing of the Company's need to
seek additional financing include the Company's decision concerning the degree
to which it will incur expenses to launch its products following the necessary
regulatory approvals, the results of the Company's partnering
23
<PAGE>
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
Psychiatric Sales and Marketing 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.
IMPACT OF YEAR 2000
The Year 2000 Issue was the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
In 1999 the Company formulated a plan to resolve the Year 2000 Issue that
included the following four phases: assessment, remediation, testing and
implementation. The Company's assessment indicated that most of the Company's
significant information technology systems were Year 2000 compliant. The
assessment indicated, however, that certain systems were at risk. Affected
systems included chromatography, clinical case report forms tracking and
statistical analysis software. The Company remediated or replaced the equipment
at risk, tested and then implemented the equipment. The Company queried its
important suppliers and contractors (external agents) regarding their year 2000
remediation activities and developed a contingency plan for both external and
internal sources of non-compliance. The Company incurred approximately $85,000
in expenses for all phases of the Year 2000 project.
As of February 3, 2000, the Company has had no significant Year 2000 issues
from either internal or external sources. However, not all external vendors or
all systems have been used at this date and future problems could develop.
FINANCIAL RISK MANAGEMENT
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments, interest expense on notes and
foreign currency fluctuations. In the normal course of business, the Company
employs established policies and procedures to manage its exposures to
fluctuations in interest rates and foreign currency values.
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio and its long-term debt
instruments. The Company places its investments with high quality issuers and,
by policy, limits the amount of credit exposure to any one issuer and does not
use derivative financial instruments in its investment portfolio. The Company
maintains an investment portfolio of various issuers, types and maturities,
which consist of both fixed and variable rate financial instruments. These
securities are classified as available-for-sale, and consequently, are recorded
on the balance sheet at fair value with unrealized gains or losses reported as a
separate component in stockholders' equity, net of applicable taxes. At any
time, sharp changes in interest rates can affect the fair value of the
investment portfolio and its interest earnings. Currently the Company does not
hedge these interest rate exposures. In addition, the interest rates on the
Company's long term debt instruments are tied to the prime rate and therefore
subject to fluctuations.
24
<PAGE>
The Company's exposure to foreign currency fluctuations is currently limited
to its supply contract for Natrecor(-Registered Trademark-), which is
denominated in German marks. Changes in the exchange rate between German marks
and the U.S. dollar could adversely affect the Company's manufacturing costs.
All of the Company's other contracts are denominated in U.S. dollars. Exposure
to foreign currency exchange rate risk may change over time as the business
evolves and the Company's products are introduced into international markets.
Currently, the Company does not hedge against any foreign currencies and, as a
result, could incur unanticipated gains or losses.
RECENT PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 will be effective for
fiscal years beginning in 2000. The Company does not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 requires that license and other upfront fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. The Company has not yet
determined the impact of its implementation on the reporting of the Company's
contract revenue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements appearing on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS. The information required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information contained in the section captioned "Election of Directors" of
the Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders.
IDENTIFICATION OF EXECUTIVE OFFICERS. See page 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 2000 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 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Transactions" of the Company's definitive Proxy Statement for
the 2000 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 at page F-1
of this Form 10-K.
(2) 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.
(3) EXHIBITS. See Exhibit Index at page 27 of this Form 10-K.
(b) REPORTS ON FORM 8-K. None.
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER REFERENCE
- --------------------- ---------
<C> <S> <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
10.5* 1986 Supplemental Stock Option Plan, as amended, and form of
Stock Option Agreement, Promissory Note and Pledge
Agreement................................................... E
10.6 Rights Exercise Agreement between the Registrant and
American Home Products Corporation dated February 28, 1986
and Letter of March 26 and May 16, 1986..................... B
10.9 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
10.27 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
10.32 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 Q
Registrant and Genentech, Inc.
(See Exhibit Number 10.41 below amending the Note
Agreement)..................................................
10.35 Assignment of Lease dated March 22, 1995 for premises
located at 820 West Maude Avenue, Sunnyvale, California..... R
10.38* Employment Letter dated September 8, 1998 between the
Registrant and Richard B. Brewer............................ T
10.39 Purchase and Sale Agreement and Joint Escrow Instructions
(Mountain View Real Estate Sale) dated May 24, 1999 between
Alexandria Real Estate Equities, Inc. and Registrant's
wholly owned Subsidiary Bio-Shore Holdings, Ltd. Portions of
the exhibit have been omitted pursuant to a request for
confidential treatment...................................... U
10.40 Biotech Equipment Schedule No. 003 dated September 17, 1999
to Master Lease Agreement dated as of July 16, 1993 between
the Registrant and General Electric Capital Corporation..... V
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER REFERENCE
- --------------------- ---------
<C> <S> <C>
10.41 First Amendment to Note Agreement and Preferred Stock dated
November 3, 1999 between the Registrant and Genentech, Inc.
(See Exhibit 10.34 above)................................... V
10.42 Promissory Note dated December 27, 1999 by the Registrant to
Chiron Corporation.......................................... V
10.43* Change of Control Severance Plans with Employees, Officers
and Chief Executive Officer................................. W
21.2 Subsidiaries of the Registrant.............................. V
23.1 Consent of PricewaterhouseCoopers LLP....................... V
24.1 Powers of Attorney. Reference is made to page 25.
</TABLE>
- ------------------------
* 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.
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.
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.
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.
T Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1998 and
incorporated herein by reference.
U Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.
V Filed as exhibits herewith.
W Filed as exhibits to Report on Form 8-K dated January 24, 2000 and
incorporated herein by reference.
28
<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.
<TABLE>
<S> <C> <C>
SCIOS INC.
Date: February 7, 2000 By: /s/ RICHARD B. BREWER
---------------------------------------------------
Richard B. Brewer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard B. Brewer his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Annual 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
--------- ----- ----
<C> <S> <C>
/s/ RICHARD B. BREWER President and Chief Executive Officer
- --------------------------------------- (Principal Executive Officer)
Richard B. Brewer February 7, 2000
/s/ DAVID W. GRYSKA Chief Financial Officer
- --------------------------------------- (Principal Accounting Officer)
David W. Gryska February 7, 2000
/s/ DONALD B. RICE Chairman of the Board
- ---------------------------------------
Donald B. Rice, Ph.D. February 7, 2000
/s/ SAMUEL H. ARMACOST Director
- ---------------------------------------
Samuel H. Armacost February 7, 2000
/s/ MYRON DU BAIN Director
- ---------------------------------------
Myron Du Bain February 7, 2000
/s/ CHARLES A. SANDERS, M.D. Director
- ---------------------------------------
Charles A. Sanders, M.D. February 7, 2000
/s/ SOLOMON H. SNYDER, M.D. Director
- ---------------------------------------
Solomon H. Snyder, M.D. February 7, 2000
/s/ BURTON E. SOBEL, M.D. Director
- ---------------------------------------
Burton E. Sobel, M.D. February 7, 2000
/s/ EUGENE L. STEP Director
- ---------------------------------------
Eugene L. Step February 7, 2000
</TABLE>
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets at December 31, 1999 and
December 31, 1998......................................... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended December 31, 1999, 1998
and 1997.................................................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997............. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the information
is included in the consolidated financials statements or notes thereto.)
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Scios Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss) and
statements of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Scios Inc. and it
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and comprehensive income (loss) and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 31, 2000
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,582 $ 6,683
Marketable securities..................................... 18,776 23,394
Accounts receivable....................................... 3,068 6,768
Prepaid expenses.......................................... 899 568
--------- ---------
Total current assets.................................... 34,325 37,413
Marketable securities, non-current.......................... 70,354 67,234
Property and equipment, net................................. 11,534 32,214
Other assets................................................ 2,059 1,968
--------- ---------
TOTAL ASSETS................................................ $ 118,272 $ 138,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,572 $ 2,327
Other accrued liabilities................................. 11,157 10,107
Deferred contract revenue................................. 17,890 16,896
Current portion of long term debt......................... 2,000 --
--------- ---------
Total current liabilities............................... 32,619 29,330
Long-term debt.............................................. 42,866 34,573
--------- ---------
Total liabilities....................................... 75,485 63,903
--------- ---------
Commitments and contingencies (Notes 10, 11 and 12)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock; $.001 par value; 150,000,000 shares
authorized; issued and outstanding 38,468,652 and
38,468,652 shares, respectively......................... 38 38
Additional paid-in capital................................ 416,600 416,428
Treasury stock; 735,036 and 754,199 shares,
respectively............................................ (3,458) (3,481)
Notes receivable from stockholders........................ (108) (145)
Deferred compensation, net................................ (340) (505)
Accumulated other comprehensive income (loss)............. (1,060) 11,412
Accumulated deficit....................................... (368,885) (348,821)
--------- ---------
Total stockholders' equity.............................. 42,787 74,926
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 118,272 $ 138,829
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<S> <C> <C> <C>
Revenues:
Product sales............................................. $ 33,824 $ 29,101 $ 35,193
Co-promotion commissions.................................. 8,561 6,513 5,822
Research & development contracts.......................... 18,402 38,101 6,414
----------- ----------- -----------
60,787 73,715 47,429
----------- ----------- -----------
Costs and expenses:
Cost of goods sold........................................ 18,470 16,606 20,179
Research and development.................................. 34,305 46,637 41,907
Marketing, general and administration..................... 21,044 19,407 20,720
Profit distribution to third parties...................... 4,901 3,056 4,360
Restructuring charges..................................... 6,400 -- --
----------- ----------- -----------
85,120 85,706 87,166
----------- ----------- -----------
Loss from operations........................................ (24,333) (11,991) (39,737)
Other income (expense):
Investment income......................................... 4,828 4,154 3,966
Interest expense.......................................... (2,793) (2,685) (2,229)
Realized gains on securities.............................. 4,933 9,003 --
Other income (expense).................................... (2,685) 630 594
----------- ----------- -----------
4,283 11,102 2,331
Equity in net loss of affiliate............................. -- (1,343) (1,261)
----------- ----------- -----------
Loss before provision for income taxes...................... (20,050) (2,232) (38,667)
Provision for income taxes.................................. (14) (131) --
----------- ----------- -----------
Net Loss.................................................. (20,064) (2,363) (38,667)
----------- ----------- -----------
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities......... (12,472) 11,124 358
----------- ----------- -----------
Comprehensive income (loss)................................. $ (32,536) $ 8,761 $ (38,309)
----------- ----------- -----------
Loss per common share:
Basic and diluted......................................... $ (0.53) $ (0.06) $ (1.07)
=========== =========== ===========
Weighted average number of common shares outstanding used in
calculation of:
Basic and diluted......................................... 37,730,048 37,694,358 36,105,797
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (20,064) $ (2,363) $ (38,667)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 3,473 3,845 5,740
Accrued interest payable................................ 2,793 2,577 1,919
Loss on disposal of property and equipment.............. 429 -- --
Equity in net loss of affiliate......................... -- 1,343 1,261
Amortization of deferred compensation................... 317 92 --
Change in assets and liabilities:
Accounts receivable................................... 3,700 (1,553) (407)
Accounts payable...................................... (754) 642 (822)
Other accrued liabilities............................. (2) (950) 1,046
Deferred contract revenue............................. 994 5,244 7,986
Restructuring charges................................. 1,052 -- --
Other................................................. (422) 168 370
--------- --------- ---------
Net cash provided by (used in) operating
activities........................................ (8,484) 9,045 (21,574)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,975) (2,476) (2,490)
Proceeds from sale of investment in affiliate............. -- 459 90
Proceeds from sale of facilities.......................... 21,754 -- 6
Sales/maturities of marketable securities................. 105,240 260,388 264,745
Purchases of marketable securities........................ (116,368) (276,654) (258,307)
--------- --------- ---------
Net cash provided by (used in) investing
activities........................................ 5,651 (18,283) 4,044
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock and collection of notes
receivable from stockholders, net....................... 1,280 7,572 1,641
Purchase of treasury stock................................ (1,048) (1,509) (1,767)
Payment of notes payable.................................. -- (339) (3,734)
Proceeds from notes payable............................... 7,500 -- 30,000
--------- --------- ---------
Net cash provided by financing activities........... 7,732 5,724 26,140
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,899 (3,514) 8,610
Cash and cash equivalents at beginning of year.............. 6,683 10,197 1,587
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 11,582 $ 6,683 $ 10,197
--------- --------- ---------
Supplemental cash flow data:
Cash paid during the year for interest.................... $ -- $ 21 $ 309
Supplemental disclosure of non-cash investing and financing:
Change in net unrealized gains(losses) on securities...... $ (12,472) $ 11,124 $ 358
Investment in affiliate................................... -- $ 1,343 $ 4,949
Write off of fully depreciated assets..................... $ 13,407 $ 143 $ 39
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON COMMON ADDITIONAL RECEIVABLE
PREFERRED STOCK STOCK PAID-IN TREASURY FROM
SHARES SHARES PAR VALUE CAPITAL STOCK STOCKHOLDERS
--------- ---------- ---------- ---------- --------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997.......... 12,632 36,506,297 $37 $404,456 $(2,991) $ (13)
------- ---------- --- -------- ------- -----
Conversion of preferred.............. (12,632) 1,263,200 1 (1)
Purchase of treasury stock........... (1,767)
Options exercised.................... 262,621 1,641
Stock issued for services............ 2
Changes in unrealized gains on
available-for-sale securities......
Investment in Guilford............... 4,949
Net loss.............................
------- ---------- --- -------- ------- -----
Balances at December 31, 1997........ -- 38,032,120 38 411,045 (4,758) (13)
------- ---------- --- -------- ------- -----
Common stock issued.................. 262,283 3,048
Purchase of treasury stock........... (1,509)
Options exercised.................... 677,249 4,524
Treasury stock reissued.............. (603,000) (2,786) 2,786
Notes receivable from stockholders... (132)
Deferred Compensation................ 100,000 597
Amortization of deferred
compensation.......................
Changes in unrealized gains (losses)
on available-for-sale securities...
Net loss.............................
------- ---------- --- -------- ------- -----
Balances at December 31, 1998........ -- 38,468,652 38 416,428 (3,481) (145)
------- ---------- --- -------- ------- -----
Purchase of treasury stock........... (1,048)
Options exercised.................... 185,163 1,243
Treasury stock reissued.............. (225,163) (1,223) 1,071
Notes receivable from stockholders... 37
Deferred Compensation................ 40,000 152
Amortization of deferred
compensation.......................
Changes in unrealized gains (losses)
on available-for-sale securities...
Net loss.............................
------- ---------- --- -------- ------- -----
Balances at December 31, 1999........ -- 38,468,652 $38 $416,600 $(3,458) $(108)
------- ---------- --- -------- ------- -----
<CAPTION>
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE ACCUMULATED
COMPENSATION INCOME (LOSS) DEFICIT TOTAL
-------------- --------------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Balances at January 1, 1997.......... $ -- $ (70) $(307,791) $93,628
----- -------- --------- -------
Conversion of preferred.............. --
Purchase of treasury stock........... (1,767)
Options exercised.................... 1,641
Stock issued for services............ --
Changes in unrealized gains on
available-for-sale securities...... 358 358
Investment in Guilford............... 4,949
Net loss............................. (38,667) (38,667)
----- -------- --------- -------
Balances at December 31, 1997........ -- 288 (346,458) 60,142
----- -------- --------- -------
Common stock issued.................. 3,048
Purchase of treasury stock........... (1,509)
Options exercised.................... 4,524
Treasury stock reissued.............. --
Notes receivable from stockholders... (132)
Deferred Compensation................ (597) --
Amortization of deferred
compensation....................... 92 92
Changes in unrealized gains (losses)
on available-for-sale securities... 11,124 11,124
Net loss............................. (2,363) (2,363)
----- -------- --------- -------
Balances at December 31, 1998........ (505) 11,412 (348,821) 74,926
----- -------- --------- -------
Purchase of treasury stock........... (1,048)
Options exercised.................... 1,243
Treasury stock reissued.............. (152)
Notes receivable from stockholders... 37
Deferred Compensation................ (152) --
Amortization of deferred
compensation....................... 317 317
Changes in unrealized gains (losses)
on available-for-sale securities... (12,472) (12,472)
Net loss............................. (20,064) (20,064)
----- -------- --------- -------
Balances at December 31, 1999........ $(340) $ (1,060) $(368,885) $42,787
----- -------- --------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Scios Inc. (the "Company") is a biopharmaceutical company engaged in the
discovery, development and commercialization of novel human therapeutics. The
Company's research and development efforts are primarily focused on cardiorenal
disorders, inflammatory 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. The Company's psychiatric
sales and marketing division also markets seven 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 fiscal 2000.
2. RESTRUCTURING CHARGES AND EXPENSES
In March 1999, the Company announced a restructuring plan that included
reduction of the Company's full-time workforce by approximately 30% and the
consolidation of its headquarters, development and research staff into leased
facilities in Sunnyvale, California. In the first quarter of 1999, the Company
recorded a restructuring charge of approximately $6.7 million for the disposal
of certain excess assets and severance costs. In the fourth quarter the
restructuring expense was reduced to $6.4 million primarily due to the decrease
in estimated loss on asset disposals.
Selected information related to the restructuring plan follows:
<TABLE>
<CAPTION>
WORKFORCE ASSET LEASE CONTRACTUAL
1999 RESTRUCTURING CHARGES REDUCTIONS DISPOSALS EXIT COSTS COMMITMENTS FACILITIES TOTAL
- -------------------------- ---------- --------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Restructuring provisions at March 1,........... $ 2,819 $ 1,800 $ 581 $ 1,110 $ 360 $ 6,670
First quarter activity....................... (781) (144) (925)
Second quarter activity...................... (1,024) (1,273) (309) (137) (256) (2,999)
Third quarter activity....................... (395) 1,347 31 (31) (48) 904
Fourth quarter activity...................... (93) (474) (1,517) (243) (1) (2,328)
------- ------- ------- ------- ----- -------
Charges to restructure in 1999................. (2,293) (400) (1,795) (555) (305) (5,348)
Fourth quarter changes in estimate........... 233 (1,400) 1,507 (555) (55) (270)
------- ------- ------- ------- ----- -------
Restructuring liability at December 31, 1999... $ 759 $ -- $ 293 $ -- $ -- $ 1,052
======= ======= ======= ======= ===== =======
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Other affiliates, more
than 20% but less than 50% owned, are accounted for on the equity basis.
Intercompany transactions and balances are eliminated on consolidation. The
Company accounted for its 7% ownership in Guilford Pharmaceuticals Inc.
("Guilford") under the equity method through September 1998 because it had
representation on Guilford's Board of Directors. In October 1998, the Company
reclassified its Guilford investment to marketable securities because of a
change in the Company's representation on Guilford's Board of Directors. As of
December 31, 1999, the Company had no ownership in Guilford.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 90 days, at the time acquired, to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
MARKETABLE SECURITIES
All marketable securities at December 31, 1999 and 1998 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
Approximately 56% of the Company's total revenues in 1999 were derived from
product sales, which consist entirely of sales in the U.S. under a license
agreement with SmithKline Beecham Corp. ("SB") (see Note 4). 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. In December 1999, the Company announced a
possible temporary shortage of Eskalith CR(-Registered Trademark-) (lithium
carbonate), one of five products developed and manufactured by SB that are sold
by the Company.
In 1999, license revenues from Chiron Corporation ("Chiron) accounted for
27%, milestone payments from Novo Nordisk A/S accounted for 22% and Alzheimer's
research reimbursement from Eli Lilly and Company ("Lilly") accounted for 21% of
total research and development contract revenue. Approximately 11% of 1999 and
64% of 1998 research and development contract revenues were from the agreement
with Bayer AG ("Bayer") for commercialization of Natrecor(-Registered
Trademark-)(nesiritide). The agreement with Bayer was terminated in May 1999
after non-approval of Natrecor(-Registered Trademark-) by the Food and Drug
Administration. In 1997, no individual customer or partner contributed more than
10% to total revenues.
At December 31, 1999, the $3.1 million in accounts receivable included $1.4
million from SB, $1.1 million from Janssen Pharmaceutica Inc. ("Janssen"), and
$0.3 million from the National Institutes of Health.
At December 31, 1998, the $6.8 million in accounts receivable included $3.3
million from Bayer, $1.0 million from Janssen and $2.1 million from SB.
The Company's excess cash is invested in a diversified portfolio of
securities consisting of U.S. Treasury Notes, deposits with five major banks and
financial institutions, and investment-grade interest-bearing corporate
securities issued by companies in a variety of industries. In addition, the
Company owned 1,367,500 shares of Guilford stock that was recorded on December
31, 1998 at fair value as an available-for-sale marketable security. All the
Guilford shares were sold in 1999.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain of the Company's products require approval from the Food and Drug
Administration and foreign regulatory agencies prior to commercialized sales and
are subject to continued regulations once approved. There can be no assurances
that the Company's new products will receive any of these required approvals. If
the Company were denied such approvals or such approvals were delayed, it could
have a materially adverse impact on the Company.
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.
Upon sale or retirement of assets, the cost and related accumulated depreciation
or amortization are removed from the balance sheet, and the resulting gain or
loss is reflected in operations.
In March 1999, the Company announced a restructuring plan that included
consolidation of its headquarters, development and research staff into leased
facilities in Sunnyvale, California. On a prospective basis the Company changed
its estimate for the amortization of the Sunnyvale leasehold improvements to
conform with the Company's intentions for future use of the leased premises. The
effect of this change in estimate on net loss for the year ended December 31,
1999 was to increase the net loss by approximately $956,000 or $0.02 per share.
PRODUCT SALES
Revenue from product sales 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 related to sales of the
SB Products.
CO-PROMOTION COMMISSIONS
Revenue from co-promotion commissions (see Note 4) is recognized based on
estimated sales levels of Janssen's psychiatric product Risperdal(-Registered
Trademark-)(risperidone) ("Risperdal(-Registered Trademark-)") and SB's
psychiatric product Paxil(-Registered Trademark-) (paroxetine HCl)
("Paxil(-Registered Trademark-)") 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 based on sales to third parties are recognized as revenues upon
receipt. Research and development expenses in 1999, 1998, and 1997 include
approximately $5.2 million, $4.9 million and $2.1 million, respectively,
incurred in connection with programs subject to cost reimbursement,
collaborative or other performance agreements.
TREASURY STOCK
Treasury stock is stated at cost and is considered issued and outstanding.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is calculated using the weighted average number of
common shares outstanding for the period. Diluted net loss is calculated using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. The outstanding options to purchase common stock
were excluded from diluted earnings calculations for 1999, 1998, and 1997
because inclusion of the options would have been anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
The Company's unrealized gains (losses) on marketable securities represent
the only component of comprehensive income, that is excluded from net loss for
1999 and prior years. The Company's comprehensive income (loss) has been
presented in the consolidated financial statements. As the Company is in a loss
position tax effects have not been allocated to the components of other
comprehensive income (loss).
Accumulated other comprehensive income (loss) balances are as follows for
the years ended (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED OTHER
GAINS (LOSSES) COMPREHENSIVE
ON SECURITIES INCOME (LOSS)
-------------- -------------
<S> <C> <C>
Balance, December 31, 1997............................... $ 288 $ 288
Current period change.................................... 11,124 11,124
Balance, December 31, 1998............................... 11,412 11,412
Current period change.................................... (12,472) (12,472)
Balance, December 31, 1999............................... $ (1,060) $ (1,060)
</TABLE>
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes," which prescribes the
use of the liability method whereby deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and
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.
RECLASSIFICATION
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. The reclassifications had no
impact on previously reported net loss.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 will be effective for
fiscal years beginning in 2000. The Company does not currently hold derivative
instruments or engage in hedging activities.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 requires that license and other upfront fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process. The Company has not yet
determined the impact of its implementation on the reporting of the Company's
contract revenue.
4. JOINT BUSINESS ARRANGEMENTS
A. AGREEMENT WITH CHIRON CORPORATION
In November 1999, the Company signed a license agreement with Chiron for the
rights to Fiblast(-Registered Trademark- ) (trafermin). Fiblast(-Registered
Trademark-) is a human basic fibroblast growth factor. The Company received
$5.0 million in license fees and $7.5 million from a Promissory Note due on
December 31, 2006. The note and related interest is forgiven if
Fiblast(-Registered Trademark-) is approved by the Food and Drug Administration
before December 31, 2006. The Company will also receive royalties based on sales
of Fiblast(-Registered Trademark-) products.
B. AGREEMENT WITH JANSSEN PHARMACEUTICA INC.
The Company entered into a three-year agreement, effective in April 1998,
with Janssen to jointly promote the anti-psychotic, Risperdal(-Registered
Trademark-), in the United States. Under the agreement, the Company receives
base payments plus incentive compensation on achieving specified sales levels
over a contract year beginning in April and ending in March. Janssen
manufactures and distributes the product. The agreement may be extended by
mutual agreement for additional periods of at least 12 months each.
C. 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 U.S. 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.
In September 1998, the Company entered into an agreement with SB to
co-promote Paxil(-Registered Trademark-) in the United States. Paxil(-Registered
Trademark-), which regulates the brain chemical serotonin, is currently approved
to treat depression, panic disorder, social anxiety and obsessive-compulsive
disorder. Under the agreement, the Company receives base payments plus incentive
compensation on achieving specified sales levels during a specified term. The
companies are currently in discussions on revising the incentive compensation
structure.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. JOINT BUSINESS ARRANGEMENTS (CONTINUED)
D. AGREEMENT WITH DUPONT PHARMACEUTICALS COMPANY
In December 1997, the Company entered into an agreement with DuPont
Pharmaceuticals Company ("DuPont") establishing a research collaboration in the
area of Alzheimer's disease with the goal of developing pharmaceuticals that
prevent or retard the disease. Under the terms of the agreement, DuPont will
fund research at the Company and will have responsibility to develop and
commercialize products from this collaboration. DuPont also purchased
$3.0 million of the Company's common stock in 1998 and will make milestone and
royalty payments to the Company as products advance through development.
E. AGREEMENT WITH ELI LILLY AND COMPANY
In May 1997, the Company entered into a research collaboration with 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 and will
have the first opportunity to develop products from the collaboration. The
Company may elect to develop other products from the collaboration. The
commercialization partner will make milestone and royalty payments to the other
partner. In 1998, the agreement was amended to increase the funding for
additional research staff to facilitate future product completions.
F. 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(-Registered Trademark-). Under the 1994 agreements, the
Company will collaborate with Kaken to further develop the Fiblast(-Registered
Trademark-) manufacturing process, provide Kaken a license to the Company's
Fiblast(-Registered Trademark-) manufacturing technology and supply a specified
amount of Fiblast(-Registered Trademark-) product. In return, the Company has
received milestone payments, which are contingent on Kaken's continuing
development of the product. On December 31, 1999, $15.9 million of the Company's
deferred revenue consisted of payments received for the supply of
Fiblast(-Registered Trademark-) material. Prior to closing its Mountain View
manufacturing facility in May 1999, the Company produced the amount of
Fiblast(-Registered Trademark-) due to Kaken and the Company now holds it for
delivery to Kaken upon regulatory approval of the product in Japan.
G. AGREEMENTS WITH WYETH-AYERST LABORATORIES
In October 1996, the Company entered into a collaboration agreement with
Wyeth-Ayerst, an affiliate of American Home Products Corp., for the joint
development and commercialization of Fiblast(-Registered Trademark-) for the
treatment of neurological and cardiovascular disorders. The two companies shared
development costs. Wyeth-Ayerst terminated its agreement with the Company in the
second half of 1999. All rights in Fiblast(-Registered Trademark-) reverted to
the Company.
In April 1996, the Company entered into an agreement with Wyeth-Ayerst to
promote the antidepressant Effexor(-Registered Trademark-) (venlafaxine
hydrochloride) to selected psychiatrists in the U.S. Under the agreement, the
Company received payments based on achieving specified increases in sales to the
selected psychiatrists over an adjusted base level during each contract year
beginning in June 1996. Wyeth-Ayerst manufactured and distributed the product.
The agreement was terminated by mutual agreement in April 1998.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. AGREEMENT WITH GENENTECH, INC.
In December 1994, the Company entered into a collaboration agreement with
Genentech, Inc. ("Genentech") for the development and commercialization of
Auriculin(-Registered Trademark-) (anaritide) for the treatment of acute renal
failure. Concurrent with the collaboration agreement, Genentech purchased
$20.0 million of the Company's 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 10), which the Company drew
down in March of 1997. As of December 31, 1997, Genentech had converted all
shares of preferred stock into common stock. In 1997, the Company and Genentech
discontinued development of Auriculin(-Registered Trademark-) based upon
negative results of a clinical study.
I. AGREEMENT WITH ORTHO-MCNEIL PHARMACEUTICAL
In July 1993, the Company entered into a five-year agreement with
Ortho-McNeil, an affiliate of Johnson & Johnson, to jointly promote the
injectable antipsychotic Haldol(-Registered Trademark-) Decanoate (haloperidol)
in the U.S. Under the agreement, the Company received payments based on
achieving specified sales levels over a contract year beginning in August and
ending in July. Ortho-McNeil manufactured and distributed the product. The
agreement was terminated by mutual agreement in April 1998.
J. AGREEMENT WITH BAYER AG
In May 1998, the Company entered into an agreement with Bayer for the
commercialization of Natrecor(-Registered Trademark-), a new drug for the
short-term management of congestive heart failure (CHF). Upon signing the
contract, the Company received a payment of $20.0 million. In May 1999, Bayer
terminated the agreement after the drug was not approved by the Food and Drug
Administration. All rights to Natrecor(-Registered Trademark-) reverted to the
Company without any payment being due from the Company.
5. AFFILIATE
In June 1994, Guilford, then a fully consolidated subsidiary of the Company,
completed an initial public offering, which decreased the Company's percentage
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, 12,500 shares in 1997, and 70,000 shares in 1998, the
Company's ownership in Guilford was reduced to 7%.
The Company continued to use the equity method of accounting for its
investment in Guilford through September 1998 because it had representation on
Guilford's Board of Directors. In October 1998, the Company reclassified its
Guilford investment to marketable securities because of a change in the
Company's representation on Guilford's Board of Directors. At December 31, 1999,
the Company had no ownership in Guilford.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. MARKETABLE SECURITIES
Unrealized gains and losses on marketable securities at December 31, 1999 by
classification were as follows:
<TABLE>
<CAPTION>
ACCRUED UNREALIZED UNREALIZED
COST BASIS INTEREST GAINS LOSSES FAIR VALUE
---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government & Government
Agency Securities.............. $46,083 $457 $-- $ (688) $45,852
Corporate Bonds.................... 43,142 508 5 (377) 43,278
------- ---- --- ------- -------
Total............................ $89,225 $965 $ 5 $(1,065) $89,130
======= ==== === ======= =======
</TABLE>
Unrealized gains and losses on marketable securities at December 31, 1998 by
classification were as follows:
<TABLE>
<CAPTION>
ACCRUED UNREALIZED UNREALIZED
COST BASIS INTEREST GAINS LOSSES FAIR VALUE
---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government & Government
Agency Securities.............. $32,722 $286 $ 346 $ (7) $33,347
Corporate Bonds.................... 37,117 355 260 (21) 37,711
Equity Investments................. 8,736 -- 10,834 -- 19,570
------- ---- ------- ---- -------
Total............................ $78,575 $641 $11,440 $(28) $90,628
======= ==== ======= ==== =======
</TABLE>
The scheduled maturities for marketable securities at December 31, 1999 by
classification were as follows:
<TABLE>
<CAPTION>
MATURITY MATURITY
1 YEAR OR LESS GREATER THAN 1 YEAR
-------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Debt securities:
U.S. Government & Government Agency Securities....... $ 4,741 $41,111
Corporate Bonds........................................ 14,035 29,243
------- -------
Total................................................ $18,776 $70,354
======= =======
</TABLE>
The Company realized gains of $5,192,055 and losses of $259,402 on the
disposal of marketable securities during 1999 and gains of $9,099,000 and losses
of $96,000 on the disposal of marketable securities during 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Laboratory equipment........................................ $ 7,197 $ 12,802
Computer and related equipment.............................. 2,260 4,780
Furniture and other......................................... 1,202 2,519
Buildings and building improvements......................... 8,334 49,878
------- --------
18,993 69,979
Accumulated depreciation and amortization................... (8,938) (38,827)
------- --------
10,055 31,152
Construction in progress.................................... 1,479 1,062
------- --------
Total....................................................... $11,534 $ 32,214
======= ========
</TABLE>
8. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deposits.................................................... $ 354 $ 229
Other assets................................................ 1171 304
Equity investments.......................................... -- 1,067
Employee notes receivable................................... 534 368
------ ------
Total....................................................... $2,059 $1,968
====== ======
</TABLE>
9. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accrued contract payable.................................... $ -- $ 1,220
Accrued Medicaid rebates.................................... 1,688 781
Accrued payroll............................................. 2,619 3,566
Profit distribution to third parties........................ 723 1,212
Accrued clinical trial expenses............................. 608 1,231
Restructure reserve......................................... 1,052 --
Accrued Biotechnology Research Partners, Ltd. royalties..... 1,657 --
Other....................................................... 2,810 2,097
------- -------
Total....................................................... $11,157 $10,107
======= =======
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LEASE AND DEBT COMMITMENTS
A. OPERATING LEASES
The Company leases two facilities in Sunnyvale, California; these facilities
leases expire in 2001 and 2002 with an option to extend. In addition, the
Company has entered into operating leases covering certain laboratory and
computer equipment.
Future minimum payments under these leases are as follows:
<TABLE>
<CAPTION>
FACILITIES EQUIPMENT
OPERATING OPERATING
LEASES LEASES
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000........................................................ $1,534 $452
2001........................................................ 1,646 201
2002........................................................ 139 151
------ ----
Total....................................................... $3,319 $804
====== ====
</TABLE>
Rent expenses for all facilities operating leases were approximately
$2,170,000, $963,000, and $1,112,000 in 1999, 1998 and 1997, respectively.
In 1999, the Company entered into a $4.0 million equipment operating lease
line that expires December 2001. At December 31, 1999, approximately $612,000
had been drawn against the line of credit.
B. BORROWING ARRANGEMENTS
As part of the Auriculin(-Registered Trademark-) agreement, Genentech
committed to loan the Company up to $30.0 million. The $30.0 million was drawn
down in March of 1997, and bears interest at the prime rate (8.5% at December
31, 1999). In 1999 the terms of the loan were amended. The loan is repayable in
the Company's preferred stock up to a maximum of $25.0 million at the Company's
option at any time through December 31, 2002. In the event the Company converts
the loan to preferred stock, the stock cannot be sold or registered by Genentech
until December 30, 2002. In addition, if the Company should decide to convert
the loan to preferred stock, a portion of the loan that is not convertible will
become due and payable before December 31, 2002. The amount of the loan that is
due before the maturity date is based on a formula that considers the amount of
loan converted to stock and the outstanding loan balance. In addition, as part
of the amendment $2.0 million of the loan was classified as current at December
31, 1999.
As part of the Fiblast(-Registered Trademark-) agreement, Chiron loaned the
Company $7.5 million in December 1999. The loan bears interest at the prime rate
(8.5% at December 31, 1999) and is due December 31, 2006. The note and related
interest are forgiven if Fiblast(-Registered Trademark-) is approved by the Food
and Drug Administration before December 31, 2006.
In 1998, the Company's paid off two five-year notes that were secured by
equipment.
C. NATRECOR(-REGISTERED TRADEMARK-) SUPPLY CONTRACT
In November 1995, the Company has entered into a long-term supply agreement
with a manufacturer for the supply of bulk Natrecor(-Registered Trademark-). The
contract provides for the purchase of at least 25 kg of bulk solution over an
eight-year period after the first delivery of commercialized quantities at a
price of approximately 48.0 million German marks (U.S. equivalent at December
31, 1999, $24.6 million).
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION
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 had discussions with the EPA and finalized the
amount of potential liability. The Company has accrued $90,000 at December 31,
1999 as provision for the settlement thereof.
12. RESEARCH AND DEVELOPMENT COMMITMENTS
A. RESEARCH COMMITMENTS
The Company's commitments for payments to research consultants and
institutions are $75,000 in 2000, $75,000 in 2001, and $58,000 in 2002.
B. COMMITMENTS TO RESEARCH PARTNERSHIPS
Under the Company's collaboration agreement with Wyeth-Ayerst for the
development and commercialization of Fiblast(-Registered Trademark-), the
Company was obligated to pay 30% of the joint development expenses, with
Wyeth-Ayerst responsible for the remaining 70%. The collaboration was dissolved
in the second half of 1999. At December 31,1999, $300,000 was accrued for the
final payment of joint development expenses to Wyeth-Ayerst.
In 1988, the Company purchased 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 September 30,
2008 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 Fiblast(-Registered Trademark-). The Company has accrued $1.7 million at
December 31, 1999 as the partnership's share of license fees received from
Fiblast(-Registered Trademark-) in 1999.
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, 1999, $190,444 was accrued in 2000
primarily as a result of royalties associated with the commercialization of
Guilford's Gliadel(-Registered Trademark-) wafer.
13. STOCKHOLDERS' EQUITY
Warrants to purchase approximately 789,000 shares of the Company's common
stock at $26.74 per share expired unexercised in June 1998. At December 31,
1999, there were no warrants outstanding.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCKHOLDERS' EQUITY (CONTINUED)
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,
1999.
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.
C. DEFERRED COMPENSATION
In August 1999, the Company granted shares of restricted stock to an
officer. The shares vest over a three-year period provided that the recipient is
still employed by the Company. The market value of the shares awarded was
$152,480 and has been recorded as a separate component of stockholders' equity.
In September 1998, the Company granted shares of restricted stock to an officer
and director. The shares vest over a two-year period provided that the recipient
is still employed by the Company. The market value of the shares awarded was
$597,000 and has been recorded as a separate component of stockholders' equity.
Deferred compensation for both of these share grants is being amortized over the
applicable period of the vesting. The restricted stock was granted under the
1992 Incentive Stock Plan.
14. EMPLOYEE 401(k) BENEFIT PLAN
The Company has a qualified profit sharing plan and trust under Internal
Revenue Service Code sections 401(a) and 401(k). Employees are eligible to
participate in the plan the first day of the month after hire and can elect to
contribute to the plan up to 15% of their salary subject to current statutory
limits. The Company contribution is 100% vested at the end of an employee's
third year of employment. Company contributions to the plan totaled
approximately $779,000 in 1999, $838,000 in 1998 and $664,000 in 1997.
15. STOCK OPTION PLANS
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 ("FMV") at date of grant for incentive stock options or 85% of FMV for
nonstatutory options). The options are exercisable at times and in increments as
specified by the Board of Directors,
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLANS (CONTINUED)
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, 1999:
<TABLE>
<CAPTION>
PLAN SHARES OPTIONS AVAILABLE
TITLE AUTHORIZED OUTSTANDING FOR GRANT OPTION PRICE
- --------------------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C>
1983/86 2,200,000 401,615 -- Not less than
85% of FMV*
1989 170,000 10,000 -- FMV
1992 5,000,000 2,959,510 768,786 Not less than
85% of FMV
1996 2,475,000 2,200,736 221,878 Not less than
85% of FMV
NQ 443,161 -- -- Not less than
85% of FMV
</TABLE>
- ------------------------
* FMV = fair market value
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, 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
Granted........................................ 1,515,475 $5.19-$12.75 13,245
Exercised...................................... (677,249) $ 3.50-$9.13 (4,524)
Canceled....................................... (318,533) $3.50-$20.54 (2,502)
--------- ------------ -------
Balances at December 31, 1998.................. 4,505,835 $3.69-$21.13 $35,563
Granted........................................ 2,119,200 $ 3.81-$8.75 12,638
Exercised...................................... (185,163) $ 5.13-$9.63 (1,243)
Canceled....................................... (868,011) $3.81-$15.06 (6,592)
--------- ------------ -------
Balances at December 31, 1999.................. 5,571,861 $3.69-$21.13 $40,366
========= ============ =======
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLANS (CONTINUED)
In 1998 and 1999, two officers were granted a total of 140,000 shares of
restricted stock under the 1992 Incentive Stock Plan (see Note 13-c).
The options outstanding by range of exercise price at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED
OPTIONS CONTRACTUAL LIFE AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE
- -------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3.69-$3.81...................................... 801,050 9.58 $ 3.81
$3.88-$5.44...................................... 743,796 7.58 $ 4.42
$5.56-$6.12...................................... 663,109 7.63 $ 6.00
$6.25 -$6.81..................................... 156,499 6.37 $ 6.42
$7.73-$7.13...................................... 613,527 2.26 $ 7.13
$7.21-$7.75...................................... 595,502 5.08 $ 7.54
$7.88-$8.90...................................... 707,982 8.60 $ 8.75
$9.00-$9.19...................................... 234,166 3.14 $ 9.07
$9.63-$21.13..................................... 1,056,230 5.83 $10.65
--------- ---- ------
$3.69-$21.13..................................... 5,571,861 6.62 $ 7.12
========= ==== ======
</TABLE>
The options currently exercisable by range of exercise price at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS AVERAGE
EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- --------------
<S> <C> <C>
$3.69-$3.81................................................. 5,708 $ 3.70
$3.88-$5.44................................................. 212,486 $ 4.57
$5.56-$6.12................................................. 467,162 $ 6.00
$6.25 -$6.81................................................ 115,371 $ 6.47
$7.73-$7.13................................................. 608,027 $ 7.13
$7.21-$7.75................................................. 505,707 $ 7.52
$7.88-$8.90................................................. 224,137 $ 8.60
$9.00-$9.19................................................. 227,832 $ 9.07
$9.63-$21.13................................................ 728,179 $11.09
--------- ------
$3.69-$21.13................................................ 3,094,609 $ 8.00
========= ======
</TABLE>
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" ("SFAS 123").
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION PLANS (CONTINUED)
The following pro forma information has been prepared following the
provisions of SFAS No. 123:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss--as reported................................... $(20,064) $(2,363) $(38,667)
Net loss--pro forma..................................... (25,449) (6,331) (40,163)
Net loss per common share and per common share--
assuming dilution--as reported........................ $ (0.53) $ (0.06) $ (1.07)
Net loss per common share--pro forma and per common
share--assuming dilution--pro forma................... $ (0.67) $ (0.17) $ (1.10)
</TABLE>
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate..................................... 5.5% 5.29% 5.87%
Expected life (years)....................................... 5.4 4.8 5.0
Volatility.................................................. 0.9121 0.7916 0.792
Dividend yield.............................................. -- -- --
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $4.11, $5.71 and $4.33, 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.
16. 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, 1999 for tax purposes available as
follows:
<TABLE>
<S> <C>
Federal NOL................................................. $295,416,000
State NOL................................................... 11,754,000
Federal Research Credit..................................... 8,788,000
State Research Credit....................................... 7,628,000
</TABLE>
These federal and state NOL carryforwards expire in the years 2000 through
2019 and 2000 through 2004, respectively. The federal research credit
carryforwards expire in the years 2000 through 2014.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES (CONTINUED)
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>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
IN THOUSANDS
<S> <C> <C>
Net operating loss carryforwards............................ $ 100,440 $ 94,000
State (net of federal benefit).............................. 15,250 13,800
Credits..................................................... 15,240 15,200
Assets subject to depreciation and amortization............. 4,520 9,100
Deferred Revenue............................................ 6,080
Other accrued liabilities................................... 6,140 1,300
--------- ---------
Total deferred tax assets................................. 147,670 133,400
Valuation allowance......................................... (147,670) (133,400)
--------- ---------
Net deferred tax assets................................... $ -- $ --
</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.
17. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
Management uses one measurement of profitability for its business. The
Company receives revenue from product sales and from licensing and development
of products. The Company markets its products in the United States and Japan and
received licensing revenue from partners in the United States, Europe and Asia
Pacific and operates in one business segment.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Revenue and long-lived assets by geographic area as of and for the year
ended:
<TABLE>
<CAPTION>
LONG LIVED
REVENUES ASSETS
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
December 31, 1999:
U.S....................................................... $54,434 $11,534
International............................................. 6,353 --
------- -------
Total..................................................... $60,787 $11,534
December 31, 1998:
U.S....................................................... $42,243 $32,214
International............................................. 31,472 --
------- -------
Total..................................................... $73,715 $32,214
December 31, 1997:
U.S....................................................... $46,609 $33,583
International............................................. 820 --
------- -------
Total..................................................... $47,429 $33,583
</TABLE>
18. SUBSEQUENT EVENT
In December 1999 the Company received a notice that Randal J. Kirk and
certain investors were nominating a slate of directors for election at the 2000
Annual Stockholders Meeting of the Company in competition with the slate
proposed by the Board of Directors of the Company. In order to promptly resolve
this contest, the Company's Board moved the Year 2000 annual meeting date
forward to February 28, 2000 from its typical May time period. In January 2000
the Company and Mr. Kirk jointly announced a definitive agreement which ended
Mr. Kirk's proxy solicitation to elect a new slate of directors. Under the
agreement, Mr. Kirk has been added to the slate of candidates nominated by the
Company's Board for election as directors at the 2000 annual meeting of
stockholders. This raised the number of Board candidates to eight, including the
seven current Company Board members who are standing for re-election. If
elected, Mr. Kirk as well as all other directors will serve for a one-year term.
F-23
<PAGE>
EXHIBIT 10.40
SLB/CS(R062599)
BIOTECH EQUIPMENT SCHEDULE
SCHEDULE NO.003
DATED THIS 09-17-99
TO MASTER LEASE AGREEMENT
DATED AS OF July 16, 1993
Lessor & Mailing Address: Lessee & Mailing Address
Scios, Inc.
General Electric Capital Corporation 820 West Maude Avenue
65 Water Street Sunnyvale, CA 94086
South Norwalk, CT 06854
This Schedule is executed pursuant to, and incorporates by reference the terms
and conditions of, and capitalized terms not defined herein shall have the
meanings assigned to them in, the Master Lease Agreement identified above
("Agreement" said Agreement and this Schedule being collectively referred to as
"Lease"). This Schedule, incorporating by reference the Agreement, constitutes a
separate instrument of lease.
A. Equipment: Subject to the terms and conditions of the Lease, Lessor agrees
to Lease to Lessee the Equipment described below (the "Equipment").
B.
<TABLE>
<CAPTION>
Number Capitalized Manufacturer Serial Number Model & Type of Equipment
of Units Lessor's Cost
<S> <C> <C> <C> <C>
$611,579.20 Various Scientific
Laboratory Equipment
</TABLE>
Equipment immediately listed above is located at: 820 West Maude Avenue,
Sunnyvale, SANTA CLARA County, CA 94086
B. Financial Terms
<TABLE>
<S> <C> <C>
1. Advance Rent (if any): $16,754.26 5. Basic Term Commencement Date: October 1, 1999
2. Capitalized Lessor's Cost $611,579.20 6. Lessee Federal Tax ID No.: 953701481
3. Basic Term (No. of Months): 36 Months 7. Last Delivery Date: September 30, 1999
4. Basic Term Lease Rate Factor: 2.739508 8. Daily Lease Rate Factor: .09131933
</TABLE>
9. First Termination Date: Thirty-six (36) months after the Basic Term
Commencement Date.
10. Interim Rent: For the period from and including the Lease Commencement
Date to but not including the Basic Term Commencement Date ("Interim
Period"), Lessee shall pay as rent ("Interim Rent") for each unit of
Equipment, the product of the Daily Lease Rate Factor times the
Capitalized Lessor's Cost of such unit times the number of days in the
Interim Period. Interim Rent shall be due on September 30, 1999.
11. Basic Term Rent. Commencing on October 1, 1999 and on the same day of
each month thereafter (each, a "Rent Payment Date") during the Basic
Term, Lessee shall pay as rent ("Basic Term Rent") the product of the
Basic Term Lease Rate Factor times the Capitalized Lessor's Cost of
all Equipment on this Schedule.
12. Secondary Term Rent. Unless the Schedule has been earlier terminated
as provided therein, commencing on October 1, 2002 (the "Secondary
Term Commencement Date") and on the same day of each month thereafter
(each, a "Rent Payment Date") for 12 months (the "Secondary Term"),
Lessee shall pay as rent ("Secondary Term Rent") the product of
1.764763 0 (the "Secondary Term Lease Rate Factor") times the
Capitalized Lessor's Cost of all Equipment on this Schedule.
13. Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably
authorizes Lessor to adjust the Capitalized Lessor's Cost up or down
by no more than ten percent (10%) to account for equipment change
orders, equipment returns, invoicing errors and similar matters.
Lessee acknowledges and agrees that the Rent shall be adjusted as a
result of such change in the Capitalized Lessor's Cost. Lessor shall
send Lessee a written notice stating the final Capitalized Lessor's
Cost, if different from that disclosed on this Schedule.
<PAGE>
C. Tax Benefits Depreciation Deductions:
1. Depreciation method is the 200% declining balance method, switching
to straight line method for the 1st taxable year for which using the
straight line method with respect to the adjusted basis as of the
beginning of such year will yield a larger allowance.
2. Recovery Period: 5 years.
3. Basis: 100% of the Capitalized Lessor's Cost.
D. Property Tax
APPLICABLE TO EQUIPMENT LOCATED IN SUNNYVALE, CA 94086: Lessee agrees that it
will (a) list all such Equipment (b) report all property taxes assessed
against such Equipment and (c) pay all such taxes when due directly to the
appropriate taxing authority until Lessor shall otherwise direct in
writing. Upon request of Lessor, Lessee shall promptly provide proof of
filing and proof of payment to Lessor.
Lessor may notify Lessee (and Lessee agrees to follow such notification)
regarding any changes in property tax reporting and payment
responsibilities.
E. Insurance
1. Public Liability: At least $1,000,000 total liability per occurrence.
2. Casualty and Property Damage: An amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Equipment.
F. Article 2A Notice
IN ACCORDANCE WITH THE REQUIREMENTS OF ARTICLE 2A OF THE UNIFORM
COMMERCIAL CODE AS ADOPTED IN THE APPLICABLE STATE, LESSOR HEREBY MAKES
THE FOLLOWING DISCLOSURES TO LESSEE PRIOR TO EXECUTION OF THE LEASE, (A)
THE PERSON(S) SUPPLYING THE EQUIPMENT IS Various (THE "SUPPLIER(S)"), (B)
LESSEE IS ENTITLED TO THE PROMISES AND WARRANTIES, INCLUDING THOSE OF ANY
THIRD PARTY, PROVIDED TO THE LESSOR BY SUPPLIER(S), WHICH IS SUPPLYING THE
EQUIPMENT IN CONNECTION WITH OR AS PART OF THE CONTRACT BY WHICH LESSOR
ACQUIRED THE EQUIPMENT AND (C) WITH RESPECT TO SUCH EQUIPMENT, LESSEE MAY
COMMUNICATION WITH SUPPLIER(S) AND RECEIVE AN ACCURATE AND COMPLETE
STATEMENT OF SUCH PROMISES AND WARRANTIES, INCLUDING ANY DISCLAIMERS AND
LIMITATIONS OF THEM OR OF REMEDIES. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A
LESSEE IN ARTICLE 2A AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY LIMIT OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES
UNDER THE DEFAULT SECTION OF THE AGREEMENT.
G. Stipulated Loss and Termination Value Table*
<TABLE>
<CAPTION>
stipulated
termination loss
# of value value
payments % of cost % of cost
<S> <C> <C>
1 102.875 107.150
2 101.048 105.671
3 99.194 104.166
4 97.315 102.635
5 95.413 101.082
6 93.490 99.507
<PAGE>
7 91.544 97.910
8 89.577 96.291
9 87.587 94.650
10 85.575 92.986
11 83.541 91.300
12 81.484 89.592
13 79.404 87.861
14 77.302 86.106
15 75.176 84.329
16 73.028 82.530
17 70.856 80.706
18 68.661 78.859
19 66.448 76.995
20 64.217 75.112
21 61.968 73.212
22 59.701 71.293
23 57.410 69.350
24 55.100 67.389
25 52.772 65.409
26 50.423 63.409
27 48.070 61.404
28 45.694 59.377
29 43.297 57.328
30 40.877 55.257
31 38.436 53.164
32 35.972 51.048
33 33.485 48.910
34 30.976 46.749
35 28.443 44.565
36 25.887 42.357
37 23.316 40.135
38 21.706 38.873
39 20.081 37.596
40 18.441 36.305
41 16.786 34.998
42 15.115 33.676
43 13.429 32.339
44 11.728 30.986
45 10.011 29.617
46 8.278 28.233
47 6.530 26.833
48 4.765 25.416
</TABLE>
*The Stipulated Loss Value or Termination Value for any unit of Equipment shall
be the Capitalized Lessor's Cost of such unit multiplied by the appropriate
percentage derived from the above table. In the event that the Lease is for
any reason extended, then the last percentage figure shown above shall
control throughout any such extended term.
<PAGE>
H. Modifications and Additions for This Schedule Only
For purposes of this Schedule only, the Agreement is amended as follows:
1. The LEASING Section of the Lease is hereby deleted in its entirety and
the following substituted in its stead:
a) Subject to the terms and conditions set forth below, Lessor agrees
to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment
("Equipment") described in Annex A to any schedule hereto ("Schedule") or,
if applicable, to Section A of any Schedule. Terms defined in a Schedule
and not otherwise defined herein shall have the meanings ascribed to them
in such Schedule.
b) The obligation of Lessor to purchase the Equipment from Lessee and
to lease the same to Lessee shall be subject to receipt by Lessor, on or
prior to the earlier of the Lease Commencement Date or Last Delivery Date
therefor, of each of the following documents in form and substance
satisfactory to Lessor:
(i) a Schedule for the Equipment (ii) evidence of insurance which complies
with the requirements of the INSURANCE Section of the Lease, and (iii) such
other documents as Lessor may reasonably request. Once the Schedule is
signed, the Lessee may not cancel the Lease.
2. The DELIVERY, USE AND OPERATION Section subsection (a) of the Lease
shall be deleted and the following substituted in its stead:
The parties acknowledge that this is a sale/lease back transaction and
the Equipment is in Lessee's possession as of the Lease Commencement Date.
3. BILL OF SALE
Lessee, in consideration of the Lessor's payment of the amount set
forth in B 2. above, which includes any applicable sales taxes (which
payment Lessee acknowledges), hereby grants, sells, assigns, transfers and
delivers to Lessor the Equipment along with whatever claims and rights
Seller may have against the manufacturer and/or Supplier of the Equipment,
including but not limited to all warranties and representations. At Lessors
request Lessee will cause Supplier to deliver to Lessor a written statement
wherein the Supplier (i) consents to the assignment to Lessor of whatever
claims and rights Lessee may have against the Supplier, (ii) agrees not to
retain any security interest, lien or other encumbrance in or upon the
Equipment at any time, and to execute such documents as Lessor may request
to evidence the release of any such encumbrance, and (iii) represents and
warrants to Lessor (x) that Supplier has previously conveyed full title to
the Equipment to Lessee, (y) that the Equipment was delivered to Lessee and
installation completed, and (z) that the final purchase price of the
Equipment (or a specified portion of such purchase price) has been paid by
Lessee.
Lessor is purchasing the Equipment for leasing back to Lessee pursuant
to the Lease. Lessee represents and warrants to Lessor that (i) Lessor will
acquire by the terms of this Bill of Sale good title to the Equipment free
from all liens and encumbrances whatsoever; (ii) Lessee has the right to
sell the Equipment; and (iii) the Equipment has been delivered to Lessee in
good order and condition, and conforms to the specifications, requirements
and standards applicable thereto; and (iv) the equipment has been
accurately labeled, consistent with the requirements of 40 CFR part 82
Subpart E, with respect to products manufactured with a controlled
(ozone-depleting) substance.
Lessee agrees to save and hold harmless Lessor from and against any
and all federal, state, municipal and local license fees and taxes of any
kind or nature, including, without limiting the generality of the
foregoing, any and all excise, personal property, use and sales taxes, and
from and against any and all liabilities, obligations, losses, damages,
penalties, claims, actions and suits resulting therefrom and imposed upon,
incurred by or asserted against Lessor as a consequence of the sale of the
Equipment to Lessor.
4. ACCEPTANCE
Pursuant to the provisions of the Lease, as it relates to this
Schedule, Lessee hereby certifies and warrants that (i) all Equipment
listed above has been delivered and installed (if applicable); (ii) Lessee
has inspected the Equipment, and all such testing as it deems necessary has
been performed by Lessee, Supplier or the manufacturer; and (iii) Lessee
accepts the Equipment for all purposes of the Lease, the purchase documents
and all attendant documents.
Lessee does further certify, and Lessor hereby waives any requirement
of a separate Certificate of Acceptance, that as of the date hereof (i)
Lessee is not in default under the Lease; (ii) the representations and
warranties made by Lessee pursuant to or under the Lease are true and
correct on the date hereof and (iii) Lessee has reviewed and approves of
the purchase documents for the Equipment, if any.
5. EQUIPMENT SPECIFIC PROVISIONS
The SERVICE Section of the Lease is amended by adding the following as
the third sentence in subsection (a):
<PAGE>
Lessee agrees that upon return of the Equipment, it will comply with all
original manufacturer's performance specifications for new Equipment without
expense to Lessor. Lessee shall, if requested by Lessor, obtain a certificate or
service report from the manufacturer attesting to such condition.
Each reference contained in this Agreement to:
(a) "Adverse Environmental Condition" shall refer to (i) the existence or
the continuation of the existence, of an Environmental Emission (including,
without limitation, a sudden or non-sudden accidental or non-accidental
Environmental Emission), of, or exposure to, any substance, chemical, material,
pollutant, Contaminant, odor or audible noise or other release or emission in,
into or onto the environment (including, without limitation, the air, ground,
water or any surface) at, in, by, from or related to any Equipment, (ii) the
environmental aspect of the transportation, storage, treatment or disposal of
materials in connection with the operation of any Equipment or (iii) the
violation, or alleged violation of any statutes, ordinances, orders, rules
regulations, permits or licenses of, by or from any govemmental authority,
agency or court relating to environmental matters connected with any Equipment.
(b) "Affiliate" shall refer, with respect to any given Person, to any
Person that directly or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person.
(c) "Contaminant" shall refer to those substances which are regulated by or
form the basis of liability under any Environmental Law, including, without
limitation, asbestos, polychlorinated biphenyls ("PCB's"), and radioactive
substances, or other material or substance which has in the past or could in the
future constitute a health, safety or environmental hazard to any Person,
property or natural resources.
(d) "Environmental Claim" shall refer to any accusation, allegation, notice
of violation, claim, demand, abatement or other order on direction (conditional
or otherwise) by any govemmental authority or any Person for personal injury
(including sickness, disease or death), tangible or intangible property damage,
damage to the environment or other adverse effects on the environment, or for
fines, penalties or restrictions, resulting from or based upon any Adverse
Environmental Condition.
(e) "Environmental Emission" shall refer to any actual or threatened
release, spill, emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching or migration into the indoor or outdoor
environment, or into or out of any of the Equipment, including, without
limitation, the movement of any Contaminant or other substance through or in the
air, soil, surface water, groundwater or property.
(f) "Environmental Law" shall mean any federal, foreign, state or local
law, rule or regulation pertaining to the protection of the environment,
including, but not limited to, the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the
Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq .), the
Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq .), the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq .), the
Clean Air Act (42 U.S.C. Section 7401 et seq .), the Toxic Substances Control
Act (15 U.S.C. Section 2601 et seq .), the Federal Insecticide, Fungicide, and
Rodenticide Act (7 U.S.C. Section 1361 et seq .), and the Occupational Safety
and Health Act (19 U.S.C. Section 651 et seq .), as these laws have been amended
or supplemented, and any analogous foreign, federal, state or local statutes,
and the regulations promulgated pursuant thereto.
(g) "Environmental Loss" shall mean any loss, cost, damage, liability,
deficiency, fine, penalty or expense (including. without limitation, reasonable
attomeys' fees, engineering and other professional or expert fees),
investigation, removal, cleanup and remedial costs (voluntarily or involuntarily
incurred) and damages to, loss of the use of or decrease in value of the
Equipment arising out of or related to any Adverse Environmental Condition.
(h) "Person" shall include any individual, partnership, corporation, trust,
unincorporated organization, government or department or agency thereof and any
other entity.
Lessee shall fully and promptly pay, perform, discharge, defend, indemnify
and hold harmless Lessor and its Affiliates, successors and assigns, directors,
officers, employees and agents from and against any Environmental Claim or
Environmental Loss.
The provisions of this Schedule shall survive any expiration or termination
of the Lease and shall be enforceable by Lessor, its successors and assigns.
The SERVICE Section subsection (a) of the Lease shall be amended by adding
the following at the end thereof:
RETURN PROVISIONS: In addition to the provisions provided for in the RETURN OF
EQUIPMENT Section of the Lease, and provided that Lessee has elected not to
exercise its option to purchase the Equipment Lessee shall, at its expense:
<PAGE>
(a) at least one hundred eighty (180) days and not more than two hundred
seventy (270) days prior to expiration or earlier termination of the Lease,
provide to Lessor a detailed inventory of all components of the Equipment The
inventory should include, but not be limited to, a listing of model and serial
numbers for all components comprising the Equipment;
(b) at least one hundred eighty (180) days prior to expiration or earlier
termination of the Lease, with reference to computer based equipment comprising
the Equipment, provide to Lessor a detailed listing of all internal circuit
boards by both the model and serial number for all hardware comprising the
Equipment and a listing of all software features listed individually;
(c) at least one hundred eighty (180) days prior to expiration or earlier
termination of the Lease, upon receiving reasonable notice from Lessor, provide
or cause the vendor(s) or manufacturer(s) to provide to Lessor the following
documents: (i) one set of service manuals, and operating manuals including
replacements and/or additions thereto, such that all documentation is completely
up-to-date; (ii) one set of documents, detailing equipment configuration,
operating requirements, maintenance records, and other technical data concerning
the set-up and operation of the Equipment, including replacements and/or
additions thereto, such that all documentation is completely up-to-date;
(d) at least one hundred eighty (180) days prior to expiration or earlier
termination of the Lease, upon receiving reasonable notice from Lessor, make the
Equipment available for on-site operational inspections by potential purchasers,
under power, and provide personnel, power and other requirements necessary to
demonstrate electrical and mechanical systems for each item of the Equipment;
(e) at least one hundred eighty (180) days prior to expiration or earlier
termination of the Lease, cause manufacturer's representative or qualified
equipment maintenance provider, acceptable to Lessor, (the "Authorized
Inspector") to perform a comprehensive physical inspection, including testing
all material and workmanship of the Equipment and ensure all Equipment and
equipment operations conform to all applicable local, state, and federal laws,
health and safety guidelines including the then current FDA regulations; and if
during such inspection, examination and test, the Authorized Inspector finds any
of the material or workmanship to be defective or the Equipment not operating
within manufacturer's specifications and the then current FDA regulations, then
Lessee shall repair or replace such defective material and, after corrective
measures are completed, Lessee will provide for a follow-up inspection of the
Equipment by the Authorized Inspector as outlined in the preceding clause;
(f)have each item of Equipment returned with an in-depth field service
report detailing said inspection as outlined in Section (e) above. The report
shall certify that the Equipment has been properly inspected, examined and
tested and is operating within the manufacturer's specifications;
(g) provide that all Equipment will be cleaned and cosmetically acceptable,
and in such condition so that it may be immediately installed and placed into
use in a similar environment;
(h) properly remove or treat all rust or corrosion;
(i)ensure all items of Equipment will be completely sterilized,
steam-cleaned, and de-greased upon redelivery;
(j)properly remove all Lessee installed markings which are not necessary
for the operation, maintenance or repair of the Equipment,
(k) ensure the Equipment shall be mechanically and structurally sound,
capable of performing the functions for which the Equipment was originally
designed, in accordance with the manufacturer's published and recommended
specifications;
(l) provide for the deinstallation, packing, transporting, and certifying
of the Equipment to include, but not limited to, the following: (i) the
manufacturer's representative shall de-install all Equipment (including all
wire, cable and mounting hardware) in accordance with the specifications of the
manufacturer; (ii) each item of Equipment will be returned with a certificate
supplied by the manufacturer's representative qualifying the Equipment to be in
good condition and (where applicable) to be eligible for the manufacturer's
maintenance plan; the certificate of eligibility shall be transferable to
another operator of the Equipment; (iii) the Equipment shall be packed properly
and in accordance with the manufacturer's recommendations, free from all
contaminants; (iv) Lessee shall provide for transportation of the Equipment in a
manner consistent with the manufacturer's recommendations and practices to any
locations within the continental United States as Lessor shall direct; and shall
have the Equipment unloaded at such locations; (v) Lessee shall obtain and pay
for a policy of transit insurance for the redelivery period in an amount equal
to the replacement value of the Equipment and Lessor shall be named as the loss
payee on all such policies of insurance; and (vi) Lessee shall provide insurance
and safe, secure storage for the Equipment for ninety (90) days after expiration
or earlier termination of the Lease at accessible locations satisfactory to
Lessor.
6 LEASE TERM OPTIONS
<PAGE>
End or Basic Term Options
At the expiration of the Basic Term (the "Basic Term Expiration Date"), so
long as no default has occurred and is continuing hereunder and this Agreement
has not been earlier terminated, Lessee shall exercise one of the following
options.
(1) EXTENSION OPTION. Lessee may extend the Lease beyond the Basic Term
Expiration Date with respect to all (but not less than all) of the Equipment
covered by this Schedule through the Secondary Term set forth in this Schedule
and Lessee shall pay Secondary Term Rent as set forth in this Schedule.
(2) PURCHASE OPTION. Upon at least one hundred eighty (180) but not more
than two hundred seventy (270) days written notice to Lessor prior to the Basic
Term Expiration Date, Lessee may purchase all (but not less than all) of the
Equipment covered by this Schedule on an AS IS BASIS for cash equal to the
greater of (A) twenty percent (20%) of the Capitalized Lessor's Cost (plus all
applicable sales taxes) or (B) the then Fair Market Value of the Equipment (plus
all applicable sales taxes). On the Basic Term Expiration Date, Lessor shall
receive in cash the full purchase price plus all applicable sales taxes)
together with any rent or other sums then due under the Lease on such date.
Lessee shall be deemed to have waived its purchase option if it fails to (a)
timely provide Lessor with the required written notice of its election to
exercise the same or (b) provide Lessor with written notice of its irrevocable
election to exercise the same within fifteen (15) days after Fair Market Value
is determined (by agreement or appraisal).
(3) CANCELLATION OPTION. Upon at least one hundred eighty (180) but not
more than two hundred seventy (270) days written notice to Lessor prior to the
Basic Term Expiration Date (the "Notice Date"), Lessee may cancel the Agreement
(the "Cancellation Option") with respect to all (but not less than all) of the
Equipment on this Schedule. If all of the terms and conditions of this Section
are not fulfilled, this Lease shall continue in fill force and effect and Lessee
shall continue to be liable for all obligations thereunder, including, without
limitation, the obligation to continue paying rent. Lessee shall be deemed to
have waived this option if it fails to timely provide Lessor with the required
written notice of its election to exercise the same.
(a) Prior to the Basic Term Expiration Date, Lessee shall
(i) pay to Lessor, as additional rent, twenty three and three hundred
sixteen hundredths percent (23.316%) of the Capitalized Lessor's Cost of the
Equipment, plus all rent and all other sums due and unpaid as of the Basic Term
Expiration Date (including, but not limited to, any rent payment due and payable
on the Basic Term Expiration Date and any sales taxes and property taxes); and
(ii) return the Equipment in full compliance with the RETURN OF
EQUIPMENT Section of the Lease, such compliance being independently verified by
an independent appraiser selected by Lessor (reasonably acceptable to Lessee) to
determine that the Equipment is in such compliance, which determination shall be
final, binding and conclusive. Lessee shall bear all costs associated with such
appraiser's determination and such costs, if any, to cause the Equipment to be
in full compliance with the RETURN OF EQUIPMENT Section of the Lease on or prior
to such Basic Term Expiration Date.
(b) From the applicable Notice Date through the Basic Term Expiration Date,
Lessee shall:
(i) continue to comply with all of the terms and conditions of the
Lease, including, but not limited to, Lessee's obligation to pay rent, and
(ii) make the Equipment available to Lessor in such a manner as to
allow Lessor to market and demonstrate the Equipment to potential purchasers or
lessees from such premises at no cost to Lessor; provided, however, that,
subject to Lessor's right to market and demonstrate the Equipment to potential
purchasers or lessees from time to time, Lessee may still use the Equipment
until the Basic Term Expiration Date.
(c) Lessee shall, from the Basic Term Expiration Date through the earlier
of the date the Equipment is sold by Lessor to a third party or thirty (30) days
following the Basic Term Expiration Date, comply with the following terms and
conditions:
(i) continue to provide insurance for the Equipment, at Lessee's own
expense, in compliance with the terms found in the INSURANCE Section of the
Lease, and
(ii) make the Equipment available to Lessor and/or allow Lessor to
store the Equipment at Lessee's premises, in such a manner as to allow Lessor to
market and demonstrate the Equipment to potential purchasers or lessees from
such premises at no cost to Lessor.
(d) The proceeds of any sale or re-lease of the Equipment after Lessee has
exercised its Cancellation Option shall be for the sole benefit of Lessor and
Lessee shall have no interest in nor any claim upon any of such proceeds.
<PAGE>
END OF SECONDARY TERM OPTIONS
The PURCHASE OPTION Section subsection (a) of the Lease is hereby
deleted in its entirety and the following is substituted therefor:
(a) So long as no default exists hereunder and the Lease has not
been earlier terminated, Lessee may at the expiration of the Secondary Term
upon at least one hundred eighty (180) days but not more than two hundred
seventy (270) days written notice to Lessor prior to the end of the Secondary
Term, purchase all (but not less than all) of the Equipment in this Schedule
on an AS IS, WHERE IS BASIS, without recourse to or warranty from Lessor,
express or implied ("AS IS BASIS") for cash equal to its then Fair Market
Value (plus all applicable sales taxes).
I. Payment Authorization
You are hereby irrevocably authorized and directed to deliver and apply the
proceeds due under this Schedule as follows:
<TABLE>
<CAPTION>
Company Name Address Amount
<S> <C> <C>
Scios, Inc. 820 West Maude Ave., Sunnyvale. CA 94086 $611,579.20
</TABLE>
This authorization and direction is given pursuant to the same authority
authorizing the above-mentioned financing.
Except as expressly modified hereby, all terms and provisions of the
Agreement shall remain in full force and effect. This Schedule is not binding or
effective with respect to the Agreement or Equipment until executed on behalf of
Lessor and Lessee by authorized representatives of Lessor and Lessee,
respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
(GENERAL ELECTRIC CAPITAL CORPORATION SCIOS, INC.
By: /s/ Teresa V. Grace By: /s/ David W. Gryska
---------------------------------- ------------------------------
Teresa V. Grace David W. Gryska
Name: Name:
-------------------------------- ----------------------------
Credit Manager Chief Financial Officer
Title: Title:
------------------------------- ---------------------------
<PAGE>
EXHIBIT 10.41
FIRST AMENDMENT TO NOTE AGREEMENT
AND PREFERRED STOCK PURCHASE AGREEMENT
This First Amendment to Note Agreement and Preferred Stock Purchase
Agreement (this "Amendment") is entered into as of November 3, 1999, by and
between Scios Inc., a Delaware corporation formerly known as "Scios Nova Inc."
(the "Company"), and Genentech, Inc., a Delaware corporation (the "Lender").
RECITALS
A. The Company and the Lender entered into a Note Agreement dated as of
December 30, 1994 (the "Note Agreement"), pursuant to which Lender has made an
interest-bearing loan of $30,000,000 to the Company (the "Loan"). The Loan is
due and payable in full on December 31, 2002.
B. The Note Agreement authorizes and permits the Company to repay the
principal balance of and all accrued and unpaid interest under the Note through
cash payments, the Company's issuance to the Lender of shares of the Company's
common stock ("Note Shares"), or a combination of both.
C. The Company and the Lender also entered into a Preferred Stock
Purchase Agreement dated as of December 30, 1994 (the "Stock Agreement"),
pursuant to which (among other things) the Company agreed to cause the Note
Shares to be registered under the circumstances described therein.
D. The parties wish to amend the Note Agreement and the Stock Agreement
as set forth herein.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. AMENDMENT OF SECTION 3 OF THE NOTE AGREEMENT
The first paragraph of Section 3 of the Note Agreement is hereby
amended and restated to read in its entirety as follows:
"3. Payment. The principal amount of and interest accrued on this Note
shall be payable, at the option of the Company, by either of the following means
or a combination thereof:
(a) in cash denominated in the currency of the United States of
America (a "Cash Payment"); or
(b) by the issuance from time to time of Series B Preferred
Stock of the Company with the rights and preferences as
described in Exhibit 1 hereto and, for
Page 1
<PAGE>
c) purposes of determining the amount paid against the Note,
valuing each share of Series B Preferred Stock as equal to
the product of multiplying (X) the average closing price of
the Company's Common Stock (as reported by NASDAQ, or as
traded on a securities exchange, as applicable) over the
thirty-day period ending on the day preceding the payment by
(Y) 100, (a "Stock Payment");
PROVIDED, HOWEVER, that: (i) in no event shall the Company
repay more than Twenty Five Million Dollars ($25,000,000) of
the Note by Stock Payments; (ii) in no event shall Company
have the right to apply more than eight (8) separate Stock
Payments toward repayment of the Note; (iii) not later than
the earlier of the date of the first Stock Payment or
January 30, 2000, Company will make a $2,000,000 Cash
Payment under the Note; and (iv) contemporaneously with each
Stock Payment, the Company will make a Cash Payment
determined under the following formula:
Amount of Cash Payment = C x (A-B)
-
B
Where:
A equals the aggregate amount (principal and interest)
outstanding under the Note, calculated immediately prior to
such Stock Payment;
B equals the amount of the remaining permitted Stock
Payments under the Note, calculated immediately prior to
such Stock Payment; and
C equals the amount of the current Stock Payment.
Payments of principal and accrued interest shall be made at the address of the
Lender, set forth in the Collaboration Agreement, or such other place as the
Lender shall have notified the Company in writing at least five days before such
payment is due. All payments in respect of this Note shall be applied first to
accrued and unpaid interest hereon, and thereafter to the unpaid principal
amount hereof. This Note may be prepaid by the Company without penalty, in whole
or in part by any of the means described above at any time."
2. UNDERSTANDINGS WITH RESPECT TO REGISTRATION AND RESALE OF NOTE SHARES
The parties agree that the Company's obligation to register any Note
Shares is governed by the Stock Agreement. The Lender hereby agrees that
notwithstanding any contrary provision of the Stock Agreement or the Note
Agreement: (A) none of the Note Shares shall be sold, assigned or transferred
prior to December 30, 2002 except with the prior written approval of the
Company, which the Company may grant or withhold in its sole discretion; and (B)
and the Company shall not be required to file any registration statement prior
to December 30, 2002 pursuant to the Stock Agreement to register any of the Note
Shares unless, following a written request by the Lender, the Company determines
in its sole discretion to effect such registration
Page 2
<PAGE>
because it believes that market conditions are then suitable for a sale of all
or a portion of the Note Shares. The Company agrees that: (A) if after December
30, 2002 and before January 20, 2003 Lender requests the filing of a
registration statement covering the Note Shares pursuant to the Stock Agreement,
Company will use reasonable efforts to cause such registration statement to
become effective not later than February 15, 2003; and (B) in connection with
any registration of Note Shares pursuant to the Stock Agreement, the Company
will use reasonable efforts (to the extent permitted by applicable securities
laws and other legal requirements) to support the sale of the Note Shares by the
Lender in the public market through interactions with potential investors and
analysts designed to educate them about the Company.
3. AMENDMENT OF SECTION 5 OF THE STOCK AGREEMENT
Section 5 of the Stock Agreement is hereby amended by adding the following new
subsection (f):
"(f) The Purchaser may sell, assign or transfer all or a
portion of the Securities and the Note Shares to a third party or
related party investor (each, an "Investor"); provided, that such
transfers shall not exceed four (4) in total and shall in the aggregate
across all transfers be to no more than six (6) separate Investors. In
the event of a transfer to one or more Investors under this Section
5(f), the rights granted to the Purchaser under Section 8 of this
Agreement to cause the Company to register the Securities and the Note
Shares may be transferred or assigned by Purchaser to the Investor(s);
provided, that the Company is given written notice of such transfer,
stating the name and address of the Investor(s) and identifying the
Securities and/or Note Shares with respect to which such registration
rights are being transferred or assigned, and provided further, that
the Investor(s) assumes the obligations of such Purchaser under Section
8 of this Agreement (in which case, the Investor(s) becomes a "Holder'"
as defined under Section 8(a) of this Agreement, for purposes of this
Agreement)." Notwithstanding the foregoing, this subsection in no way
limits the Purchaser's right to sell any Securities or Note Shares to
another party pursuant to the provisions of Rule 144 or an effective
registration statement under the Act.
4. MISCELLANEOUS
The parties agree and confirm that the Note Agreement and Stock
Agreement shall remain in full force and effect in accordance with their
original terms except as amended hereby. This Amendment shall be construed and
enforced in accordance with the laws of the State of California without regard
to principles of conflicts of laws. This Amendment may be executed in
counterparts.
Page 3
<PAGE>
IN WITNESS WHEREOF, this First Amendment to Note Agreement and
Preferred Stock Purchase Agreement has been executed and delivered as of the
date first above written by duly authorized representatives of the Company and
the Lender.
SCIOS INC.
/s/ Richard B. Brewer
By:
--------------------------------------------
Richard B. Brewer
President and Chief Executive Officer
GENENTECH, INC.
/s/Brad Goodwin
By:
--------------------------------------------
Name: Brad Goodwin
Its: VP - Finance
Doc. # 68727v2
Page 4
<PAGE>
EXHIBIT 10.42
PROMISSORY NOTE
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT COVERING THE TRANSFER OF THE SECURITIES OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
$7,500,000 Sunnyvale, California
December 27, 1999
FOR VALUE RECEIVED, the undersigned, Scios Inc., a Delaware corporation
(the "Borrower"), hereby promises to pay to the order of Chiron Corporation, a
Delaware corporation ("Chiron"), the principal sum of Seven Million Five Hundred
Thousand Dollars ($7,500,000), including interest as hereinafter provided. The
entire balance of outstanding principal and accrued and unpaid interest shall be
paid in full December 31, 2006, unless the loan has been earlier forgiven as
provided below.
Interest shall accrue on the unpaid balance of the principal amount at
the rate of 8.5% compounded annually on the anniversary date of this Note and
calculated on the basis of a 360-day year and the number of days actually
elapsed with respect to the outstanding balance from time to time. Interest may
be paid from time to time as Scios elects or deferred until the principal is
paid in full. Accrued interest, together with all outstanding principal shall be
due and payable as set forth in the preceding paragraph.
Principal, interest and all other amounts due under this Note shall be
payable by wire transfer in accordance with the wire transfer instructions
provided by Chiron, or by such other means as the holder of this Note may from
time to time designate in writing to the Borrower.
The Borrower shall have the right, at any time, to prepay all or any
part of the outstanding principal amount without premium or penalty; provided,
however, that all payments hereunder shall first be applied to accrued and
unpaid interest and thereafter to principal.
The Borrower hereby waives presentment, demand, notice, protest and
other demands and notices in connection with the delivery, acceptance or
enforcement of this Note.
No delay or omission on the part of the holder of this Note in
exercising any right hereunder shall operate as a waiver of such right or of any
other right under this Note, and a waiver, delay or omission on any one occasion
shall not be construed as a bar to or waiver of any such right on any future
occasion.
The Borrower hereby agrees to pay on demand all reasonable costs and
expenses, including, without limitation, attorneys' fees and legal expenses,
incurred or paid by the holder of this Note in enforcing this Note on default.
1.
<PAGE>
Upon receipt by the Borrower of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Note, and indemnity
satisfactory to the Borrower (in the case of loss, theft or destruction) or
cancellation of the Note (in the case of mutilation), the Borrower will make and
deliver to Chiron a new Note of like tenor and principal amount and dated as of
the date to which interest has been paid on the unpaid principal balance
hereunder.
The following events are the Events of Default under this Note:
(a) Scios shall (i) voluntarily commence any proceeding or file any
petition seeking relief under Title 11 of the United States Code
or any other federal, state or foreign bankruptcy, insolvency,
liquidation or similar law, (ii) consent to the institution of,
or fail to contravene in a timely and appropriate manner, any
such proceeding or the filing of any such petition, (ii) apply
for or consent to the appointment of a receiver, trustee,
custodian, or similar official for Scios or for a substantial
part of its property or assets, (iv) file an answer admitting the
material allegations of a petition filed against it in any such
proceeding, (v) make a general assignment for the benefit of
creditors, (vi) become unable, admit in writing its inability or
fail generally, to pay its debts as they become due, or (vii)
take corporate action for the purpose of effecting any of the
foregoing;
(b) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (i) relief in respect of Scios' or of a substantial part
of its property or assets under Title 11 of the United States
Code or any other federal, state or foreign bankruptcy,
insolvency, receivership or similar law, (ii) the appointment of
a receiver, trustee, custodian, or similar official for Scios or
for a substantial part of its property, or (iii) the winding-up
or liquidation of Scios; and such proceeding or petition shall
continue undismissed for sixty (60) days or an order or decree
approving or ordering any of the foregoing shall continue
unstayed and in effect for thirty (30) days; and
(c) this Note shall for any reason cease to be, or be asserted by
Scios not to be, a legal, valid and binding obligation
enforceable in accordance with its terms.
Upon the happening of an Event of Default described in paragraph (a) or
(b) above, this Note shall automatically become due and payable, both as to
principal and interest, without presentment, demand, protest or other notice of
any kind, all of which are hereby expressly waived by Scios. Upon the happening
of an Event of Default described in paragraph (c) above, and at any time
thereafter during the continuance of such event, the holder of this Note may, by
written or telegraphic notice to Scios, declare the Note to be forthwith due and
payable, whereupon the principal of this Note, together with accrued interest
thereon and other liabilities of Scios accrued hereunder, shall become due and
payable both as to principal and interest, without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived by
Scios.
The obligation of Scios represented by this Note shall be subordinate
to all other debt or obligations of Scios regardless of the date that such other
debt or obligation may be created. Chiron agrees to execute any document
reasonably requested by Scios or another creditor of Scios to evidence the
subordination of this Note to other obligations of Scios.
2.
<PAGE>
This Note shall be deemed to be under seal, and all rights and
obligations hereunder shall be governed by the laws of the State of California.
This Note, including all outstanding principal and accrued and unpaid
interest, shall automatically be forgiven and Scios shall have no further
obligation of any kind to Chiron under this Note upon the granting of a New Drug
Approval by the United States Food and Drug Administration ) prior to December
31, 2006 authorizing the marketing in the United States of any FGF Product (as
defined in the FGF License and Technology Transfer Agreement).
AGREED:
SCIOS INC. CHIRON CORPORATION
/s/ Richard B. Brewer /s/ James R. Sulat
By: By:
----------------------------- -----------------------------------
Richard B. Brewer Name: James R. Sulat
President and CEO Title: Chief Financial Officer
3.
<PAGE>
EXHIBIT 21.2
SUBSIDIARIES OF REGISTRANT
California Biotechnology Research Inc.,
a California corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Scios Inc., on Form S-8 (File No. 333-56269) of our report dated January 31,
2000 on our audits of the consolidated financial statements of Scios Inc. and
its subsidiaries as of December 31, 1999 and 1998, and the years ended December
31, 1999, 1998 and 1997, which report is included in the Company's Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
January 31, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS, AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE PERIOD ENDING DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,582
<SECURITIES> 89,130
<RECEIVABLES> 3,068
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,325
<PP&E> 20,472
<DEPRECIATION> 8,938
<TOTAL-ASSETS> 118,272
<CURRENT-LIABILITIES> 32,619
<BONDS> 42,866
0
0
<COMMON> 38
<OTHER-SE> 42,749
<TOTAL-LIABILITY-AND-EQUITY> 118,272
<SALES> 33,824
<TOTAL-REVENUES> 60,787
<CGS> 18,470
<TOTAL-COSTS> 85,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,793
<INCOME-PRETAX> (20,050)
<INCOME-TAX> 14
<INCOME-CONTINUING> (20,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,064)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
