<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter ended September 30, 1998.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-18549
-------
GENSIA SICOR INC.
----------------
(Exact name of registrant as
specified in its charter)
Delaware 33-0176647
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Hughes
Irvine, California 92618
-----------------------------------
(Address of principal executive offices and zip code)
(949) 455-4700
------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock $.01 par value 79,644,987
- --------------------------- ---------------------------------
Class Outstanding at September 30, 1998
<PAGE>
GENSIA SICOR INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements PAGE
--------------------
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations and Comprehensive
Loss for the three and nine months ended September 30,
1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations - for the three and nine months
ended September 30, 1998 and 1997 10
Liquidity and Capital Resources 12
Impact of Year 2000 14
PART II OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
GENSIA SICOR INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $25,138 $41,624
Accounts receivable 47,392 45,532
Inventories 47,639 43,952
Other current assets 9,092 8,373
-------- --------
Total current assets 129,261 139,481
Property and equipment, net 103,014 95,243
Other noncurrent assets 11,360 10,759
Intangibles, net 47,471 49,825
Goodwill, net 69,075 67,897
-------- --------
$360,181 $363,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $41,778 $38,152
Accrued payroll and related expenses 4,142 4,094
Other accrued liabilities 17,509 18,454
Short-term borrowings 38,793 35,581
Current portion of long-term debt 4,802 3,487
Current portion of capital lease obligations 867 600
-------- --------
Total current liabilities 107,891 100,368
Other long-term liabilities 6,176 6,547
Long-term debt, less current portion 41,913 42,668
Long-term capital lease obligations, less current portion 1,100 525
Deferred taxes 20,580 22,228
Minority interest -- 3,326
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
1,600 issued and outstanding, liquidation preference of
$80,000 16 16
Common stock, $.01 par value, 125,000 shares authorized,
79,645 and 78,649 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 796 786
Additional paid-in capital 529,504 529,448
Accumulated deficit (348,039) (341,831)
Foreign currency translation adjustment 244 (876)
-------- --------
Total stockholders' equity 182,521 187,543
-------- --------
$360,181 $363,205
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
GENSIA SICOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $41,677 $39,222 $127,463 $98,428
Contract research and license fees 1,803 2,232 7,613 6,642
-------- -------- -------- --------
Total revenues 43,480 41,454 135,076 105,070
Cost of sales 29,007 26,097 87,330 70,644
Research and development 5,822 6,471 16,311 19,052
Selling, general and administrative 3,420 12,016 22,860 32,006
Amortization expense 1,556 1,349 4,442 2,994
Interest and other, net 2,495 692 5,436 1,165
Write-down of investment -- -- 1,130 --
Restructuring charge -- 3,184 -- 3,184
Acquisition of in-process research and development -- -- -- 29,200
-------- -------- -------- --------
Total costs and expenses 42,300 49,809 137,509 158,245
-------- -------- -------- --------
Net income (loss) before income taxes 1,180 (8,355) (2,433) (53,175)
Provision for income taxes (3,026) (207) (4,570) (3,000)
-------- -------- -------- --------
Net loss before minority interest (1,846) (8,562) (7,003) (56,175)
Minority interest 36 -- 795 --
-------- -------- -------- --------
Net loss before dividends (1,810) (8,562) (6,208) (56,175)
Dividends on preferred stock (1,504) (1,504) (4,496) (4,496)
-------- -------- -------- --------
Net loss applicable to common shares (3,314) (10,066) (10,704) (60,671)
Other comprehensive income (loss):
Foreign currency translation 1,230 (226) 1,119 (407)
-------- -------- -------- --------
Comprehensive net loss $(2,084) $(10,292) $ (9,585) $(61,078)
======== ======== ======== ========
Basic and diluted net loss per common share $ (.04) $ (.13) $ (.13) $ (.86)
======== ======== ======= ========
Basic and diluted comprehensive net loss per common share $ (.03) $ (.14) $ (.12) $ (.87)
======== ======== ======= ========
Shares used in computing basic and diluted net loss and
comprehensive net loss per common share 79,606 74,567 79,415 70,167
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
GENSIA SICOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,208) $(56,175)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 13,794 10,479
Loss on disposal of property and equipment -- (19)
Minority interest (795) --
Net deferred income taxes (1,649) (1,136)
Inventory purchase price allocation adjustment 286 4,244
Write-down of investment 1,130 --
Restructuring charge -- 3,184
Charge for acquired in-process research and development -- 29,200
Change in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (806) (7,315)
Inventories (2,520) 1,528
Prepaid expenses and other assets (2,131) 5,069
Accounts payable and accrued expenses 3,529 1,685
-------- --------
Net cash used in operating activities 4,630 (9,256)
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (6,898) (9,129)
Investment in other business (697) --
Proceeds from short-term investments 2,000 16,750
Purchases of short-term investments (2,000) (13,651)
Purchase of property and equipment (12,974) (17,274)
Acquisition of intangible asset -- (5,602)
Other -- 318
-------- --------
Net cash used in investing activities (20,569) (28,588)
Cash flows from financing activities:
Payments of preferred stock dividends (4,496) (4,496)
Issuance of common stock and warrants, net 1,010 25,082
Funding from minority shareholder 972 --
Change in short-term borrowings 1,188 4,124
Issuance of long-term debt and capital lease obligations, net 2,716 22,392
Principal payments on long-term debt and capital lease obligations (3,199) (2,126)
-------- --------
Net cash provided by (used in) financing activities (1,809) 44,976
-------- --------
Effect of exchange rate changes on cash 1,262 (111)
-------- --------
Increase (decrease) in cash and cash equivalents (16,486) 7,021
Cash and cash equivalents at beginning of period 41,624 16,271
-------- --------
Cash and cash equivalents at end of period $ 25,138 $ 23,292
======== ========
Supplemental schedule of noncash investing and financing activities:
Common stock issued to settle accrued liabilities $ 3,553 $ --
Common stock issued to acquire net assets of business:
Fair value of assets acquired, other than cash -- 207,578
Liabilities assumed -- 81,034
</TABLE>
See accompanying notes.
5
<PAGE>
GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Organization
------------
Gensia Sicor Inc. ("Gensia Sicor" or the "Company"), a Delaware corporation,
was incorporated November 17, 1986. On February 28, 1997, Gensia Sicor
completed the acquisition of Rakepoll Holding B.V. ("Rakepoll Holding") from
Rakepoll Finance N.V. ("Rakepoll Finance"). Rakepoll Holding is the parent
company of three specialty pharmaceutical businesses: SICOR-Societa Italiana
Corticosteroidi S.p.A. ("Sicor") of Milan, Italy, and two companies located in
Mexico: Lemery, S.A. de C.V. ("Lemery") and Sicor de Mexico, S.A de C.V.
("Sicor de Mexico"). In addition, in December 1997, Sicor purchased a 50%
equity interest in Diaspa S.p.A. ("Diaspa"), an Italian company engaged in the
manufacture of certain raw materials used in Sicor's business. In June 1998,
Sicor purchased the remaining 50% of Diaspa. Also in December 1997, as part of
a restructuring, the Company completed the transfer of its licensed and
proprietary medical products into Gensia Automedics, Inc. ("Automedics") in
exchange for certain milestone and other contingent payments. Subsequently,
Automedics sold an equity interest representing approximately 81% of Automedics
to private investors. Gensia Sicor is a specialty pharmaceutical company
focused on the development, manufacture and marketing of products for worldwide
oncology and injectable pharmaceutical markets. The Company is headquartered in
Irvine, California.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiary companies, all of which are wholly owned, except for Metabasis
Therapeutics, Inc ("Metabasis"), which is 92% owned. The five wholly-owned
subsidiaries are: Rakepoll Holding B.V., Gensia Sicor Pharmaceuticals, Inc.
(formerly Gensia Laboratories, Ltd. and herein referred to as "Gensia Sicor
Pharmaceuticals"), Aramed, Inc., Gensia Development Corporation and Genchem
Pharma Ltd. All significant intercompany accounts and transactions have been
eliminated. The accompanying consolidated balance sheets at September 30, 1998
and December 31, 1997 include the assets, liabilities and stockholders' equity
of the combined companies. The consolidated statement of operations and
statement of cash flows for the nine months ended September 30, 1997 include the
results for Rakepoll Holding from February 28, 1997 (the date of acquisition).
Minority interest at December 31, 1997 represents minority stockholders'
proportionate share of the equity in the Company's consolidated subsidiaries,
Diaspa and Metabasis. Minority interest at September 30, 1998 represents
minority stockholders' proportionate share of the equity in Metabasis only which
is included in other noncurrent assets. As noted above, the remaining 50% of
Diaspa was acquired during the second quarter of 1998, so that Diaspa is now a
wholly-owned subsidiary.
In March 1998, Genchem Pharma Ltd. acquired a research and development branch
("Genchem Vacallo") in Vacallo, Switzerland for $1.9 million. For financial
reporting purposes, the acquisition was accounted for using the purchase method
and the excess of the purchase price over the fair value of identified assets
and liabilities of $1.2 million was recorded as goodwill. The financial
position and results of operations of the acquired company are not material.
Pro forma information has been omitted as the amounts are not significant.
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results for the
three and nine-month periods ended September 30, 1998 and 1997 have been made.
The results of operations for the three and nine-month periods ended September
30, 1998 are not necessarily indicative of the results to be expected for the
full fiscal year.
The accompanying consolidated financial statements should be read in
conjunction with the audited financial
6
<PAGE>
GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
statements and notes thereto included in the Company's 1997 Form 10-K filed with
the Securities and Exchange Commission.
Foreign currency translation
----------------------------
The financial statements of subsidiaries outside the United States, except
those subsidiaries located in highly inflationary economies, are generally
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange at the
balance sheet date. The resulting translation adjustments are included in the
cumulative translation adjustment, a separate component of stockholders' equity.
Income and expense items are translated at average monthly rates of exchange.
The functional currency of Lemery has been the Mexican peso. In accordance with
SFAS 52, the net assets of Lemery were remeasured to the U.S. dollar during the
second quarter of 1997 as a result of a hyper-inflationary economy in Mexico
and, accordingly, gains and losses from balance sheet translation adjustments
are included in net earnings. The functional currency of Sicor de Mexico is the
U.S. dollar.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the
classifications used in 1998. These reclassifications are not considered
material to the financial statements presented, either as individual adjustments
or the combined effect of all classifications made.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128"). The new Standard is effective for
financial statements for periods ending after December 15, 1997, and must be
applied retroactively. SFAS 128 simplifies the standards for computing earnings
per share and requires presentation of two new amounts, basic and diluted
earnings per share. The Company adopted SFAS 128 in the fourth quarter of 1997
and such adoption has had no effect on the previously reported earnings per
share. Diluted loss per share, including shares issuable upon exercise of
outstanding stock options and warrants, has not been presented since the effects
of such conversions and exercises would be anti-dilutive due to the Company's
net loss position.
3. COMPREHENSIVE NET INCOME
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The new
Standard established new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Company's net income or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of SFAS 130.
7
<PAGE>
GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
4. INVENTORIES
Inventories at September 30, 1998 and December 31, 1997 consisted of (in
thousands):
September 30, December 31,
1998 1997
------- -------
Raw materials $15,211 $16,332
Work-in-process 12,077 6,182
Finished goods 21,734 23,363
------- -------
49,022 45,877
Less reserves (1,383) (1,925)
------- -------
$47,639 $43,952
======= =======
Inventories are presented using a first in first out reporting basis (FIFO),
with the exception of inventories held at Sicor, where the last in first out
(LIFO) method is used. The difference in restating Sicor's inventory using FIFO
basis is immaterial, as is the excess of replacement or current cost over stated
LIFO value.
5. WRITE-DOWN OF INVESTMENT
In December 1997, Gensia Sicor completed the transfer of its medical
products business, including the GenESA(R) System, to Automedics. As part of
the Automedics divestiture, obligations under the Gensia Clinical Partners, L.P.
(the "Partnership") agreements and the Protocol Systems, Inc. ("Protocol
Systems") supply agreement (the "Supply Agreement") were assigned to Automedics
as part of this transaction; however, Gensia Sicor remains liable for these
obligations and has agreed to indemnify Automedics under certain circumstances.
In April 1998, Gensia Sicor and Automedics announced that they had determined
not to exercise an option granted by the Partnership to repurchase the
technology associated with the GenESA System (the "Partnership Purchase Option")
and had informed Gensia Development Corporation, the general partner of the
Partnership, of this decision. The decision was based on, among other things,
the lack of market acceptance of the GenESA System since its U.S. market
introduction in October 1997 and its European market introduction in the second
quarter of 1995. Automedics has discontinued the promotion of the GenESA System
in the U.S. and Europe.
Gensia Sicor and Automedics also informed Protocol Systems that no
additional GenESA System devices would be purchased under the Supply
Agreement. As noted above, pursuant to the Automedics divestiture, the Company
assigned its rights and obligations under the Supply Agreement to Automedics.
This assignment resulted in transferring the Company's obligation to purchase
a minimum number of GenESA System devices from Protocol Systems totaling
approximately $3.4 million in 1998, and $4.3 million every year for the years
1999 to 2002. The Company remained liable for these obligations. In July 1998,
the Company was named as a defendant in a complaint filed by Protocol Systems.
The complaint alleges breach of the Supply Agreement, and damages estimated at
approximately $10.8 million, plus any amounts which Protocol Systems may owe
to a third-party vendor. Gensia Sicor believes that this claim fails to take
into consideration a number of matters, including Protocol Systems'
contractual obligations, the risks inherent in the introduction of a new
medical device into the marketplace and the five-year time period over which
the devices were to be delivered, among others. Gensia Sicor intends to
vigorously defend this litigation. The ultimate outcome with respect to the
lawsuit could have a material adverse effect on the Company's financial
position, results of operations or cash flows. Management is unable to
reasonably estimate the financial impact of its dispute with Protocol Systems
at this time, and has not recorded any liabilities pertaining to this matter.
In accordance
8
<PAGE>
GENSIA SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
with FAS 5, a contingent liability will be recorded for the Protocol Systems
matter when a reasonable range of possible liability has been established.
As a result of the lack of market acceptance of the GenESA System, Gensia
Sicor management reevaluated the carrying value of the Company's investment in
Automedics and recorded a write-down during the first quarter of 1998 of $1.1
million.
6. CONTINGENCIES
During 1995, Sicor received claims from certain of its customers in
connection with shipments of a contaminated product. While to the best of
Sicor's knowledge no customer lawsuits have been filed against Sicor with
respect to this matter, Sicor has a reserve of approximately $2.6 million at
September 30, 1998, which represents management's best estimate of attorneys'
costs and other settlement costs still outstanding.
In September 1998, the Company reached a settlement with Great Lakes
Chemical Corporation ("Great Lakes") regarding liabilities related to the
purchase by Sicor of certain contaminated products from Great Lakes in 1994 -
1995. The settlement resulted in a dismissal of certain litigation between
Sicor, Great Lakes and Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"). Under
the terms of the settlement, Sicor received a cash payment that is expected to
cover substantially all of the related customer claims against it. The
settlement also resulted in the dismissal with prejudice of Sicor's action
against Great Lakes filed in the United States District Court in Arkansas.
In another lawsuit related to the contaminated product, entitled Pharmacia
& Upjohn Company v. Great Lakes Chemical Corporation and Sicor S.p.A. in the
State of Michigan, Kalamazoo County Circuit Court, No. E96-188 NZ, Pharmacia &
Upjohn, which supplied Sicor with certain of the contaminated materials and
agreed to indemnify Sicor under certain conditions, sued Sicor for declaratory
relief regarding their respective duties and rights. In light of the above
settlement, this lawsuit has been dismissed without prejudice.
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
the Company has meritorious defenses and intends to vigorously defend against
all allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, liabilities arising from the matters described in this paragraph, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
9
<PAGE>
GENSIA SICOR INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Gensia Sicor has been unprofitable on an annual basis since its inception
in 1986. For the period from its inception to September 30, 1998, the Company
has incurred a cumulative net loss of $348.0 million.
When used in this Form 10-Q, the words "expects", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements involve risks and uncertainties, including the
timely development, regulatory approval, and successful marketing of new
products and acceptance of new products, the impact of competitive products,
product costs and pricing, changing market conditions and other risks described
in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. Actual results may differ materially from those
projected. These forward-looking statements represent the Company's judgment
only as of the date of the filing of this Form 10-Q. The Company disclaims,
however, any intent or obligation to update these forward-looking statements.
Results of Operations
The Company reported a net loss of $3.3 million, or $.04 per common share
(after dividends on preferred stock of $1.5 million), in the third quarter ended
September 30, 1998 compared to a net loss of $10.1 million, or $.13 per common
share (after dividends on preferred stock of $1.5 million), in the third quarter
of 1997. The Company reported a net loss of $10.7 million, or $.13 per common
share (after dividends of preferred stock of $4.5 million), for the nine months
ended September 30, 1998 compared to a net loss of $60.7 million, or $.86 per
common share (after dividends of preferred stock of $4.5 million), for the nine
months ended September 30, 1997. The results for the first nine months of 1997
include the results of operations for Rakepoll Holding from February 28, 1997,
the date of its acquisition, a $29.2 million write-off of in-process research
and development associated with the acquisition of Rakepoll Holding, and a $4.4
million charge to cost of sales for the write-up of purchased inventory and
property, plant and equipment.
Product sales in the third quarter of 1998 increased to $41.7 million from
$39.2 million in the third quarter of 1997. Product sales in the first nine
months of 1998 increased to $127.5 million from $98.4 million in the same period
of 1997. The increase in product sales for the three months ended September 30,
1998 is primarily due to increased sales at Lemery, Sicor de Mexico, and Genchem
Pharma of certain newer multisource injectable products and as a result of the
acquisition of Diaspa in December 1997. Partially offsetting these increases
was the termination of the Company's distribution agreement for the Laryngeal
Mask Airway ("LMA") effective January 1, 1998. In the quarter ended September
30, 1997, the LMA accounted for approximately $3.0 million in product sales.
The increase in product sales for the nine months ended September 30, 1998 is
primarily due to the inclusion of operating results for Rakepoll Holding for the
full nine months in 1998 as opposed to only from February 28, 1997, the date of
its acquisition, for the nine month period ended September 30, 1997, the
acquisition of Diaspa in December 1997 and increased sales at Gensia Sicor
Pharmaceuticals, offset by termination of LMA sales. In the first nine months
of 1997, the LMA accounted for approximately $8.8 million in product sales.
Cost of sales for the third quarter of 1998 was $29.0 million, which
yielded a gross margin of 30%, compared to a cost of sales of $26.1 million for
the third quarter of 1997 which yielded a gross margin of 34%. The decrease in
gross margin is primarily due to a combination of higher cost of sales at the
foreign locations from increasing production of the new product cyclosporine,
along with higher unit product costs in the U.S. resulting from price
competition and contract manufacturing business that had lower margins than
previous quarter's business. Cost of sales for the first nine months of 1998
was $87.3 million, which yielded a gross margin of 31%, compared to a cost of
sales of $70.6 million in the same period of 1997 which yielded a gross margin
of 28%. The gross margin for the nine months ended September 30, 1998 increased
compared to the same period of 1997 primarily due to the inclusion of a purchase
accounting charge to 1997 cost of sales for Rakepoll Holding products resulting
from the write-up of
10
<PAGE>
GENSIA SICOR INC.
inventory and property, plant and equipment associated with the acquisition as
well as improved margins at Lemery, Sicor de Mexico and Gensia Sicor
Pharmaceuticals.
Contract research and license fees in the third quarter of 1998 decreased
to $1.8 million from $2.2 million in the third quarter of 1997 as a result of
the deferred license revenue from Pfizer Inc. being fully amortized at the end
of April 1998. Contract research and license fees for the first nine months of
1998 were $7.6 million compared to $6.6 million in the same period of 1997. The
increase is primarily due to an up-front non-refundable license fee received in
June 1998 from a major U.S. pharmaceutical company involving bulk drug
substance. The Company continued to receive contract research revenues through
its research collaborations with Pfizer Inc. in the areas of pain and
inflammation research and with Sankyo Co., Ltd. in the areas of diabetes.
Metabasis is engaged in discussions with other pharmaceutical companies
concerning collaborations under which these companies would fund additional
Metabasis' research and development efforts; however, these discussions are at
an early stage and there is no assurance that any such collaborations will be
completed.
Research and development expenses in the third quarter of 1998 decreased to
$5.8 million from $6.5 million in the 1997 third quarter primarily due to the
exclusion of Automedics' expenses as a result of the divestiture of an 81%
interest in Automedics in the fourth quarter of 1997 offset by a research
related milestone payment made in the third quarter of 1998. Research and
development expenses for the first nine months of 1998 decreased to $16.3
million from $19.1 million for the same period of 1997. The decrease is mainly
due to the divestiture of Automedics offset by increased expenses by the
Rakepoll Holding companies as a result of the inclusion of operating results for
Rakepoll Holding for the full nine month period ended September 30, 1998. The
Company is continuing to pursue plans to establish Metabasis as an independent
company, which if accomplished would eliminate ongoing expenses and contract
research revenues from its Metabasis research operation, causing both future
research and development expenses and contract research revenues to decrease
from current levels. Gensia Sicor may not be able to establish Metabasis as an
independent company.
Selling, general and administrative expenses in the third quarter of 1998
decreased to $3.4 million from $12.0 million in the third quarter of 1997
primarily due to the settlement of the contamination lawsuit with Great Lakes
Chemical Corporation (see Note 6) and the divestiture of Automedics. Selling,
general and administrative expenses for the first nine months of 1998 decreased
to $22.9 million from $32.0 million in the same period of 1997. The decrease is
mainly due to the divestiture of Automedics and the settlement of the
contamination lawsuit offset by increased expenses by the Rakepoll Holding
companies as a result of the inclusion of operating results for Rakepoll Holding
for the full nine month period ended September 30, 1998. Selling, general and
administrative expenses are expected to revert to levels consistent with prior
quarters as the contamination lawsuit settlement in the third quarter of 1998
was a one-time non-recurring adjustment.
The Company had amortization expense of $1.6 million in the third quarter
of 1998 compared to $1.3 million in the same period of 1997. Amortization
expense for the first nine months of 1998 was $4.4 million compared to $3.0
million in the same period of 1997. The increases are due to the amortization
of goodwill resulting from the acquisition of 50% of Diaspa in December 1997
and Genchem Vacallo in March 1998. The increase in expenses for the first nine
months of 1998 is also due to the inclusion of expenses related to the
identified intangibles and goodwill resulting from the acquisition of Rakepoll
Holding for the full nine months compared to seven months in the same period
of 1997.
The Company had interest and other expenses of $2.5 million in the third
quarter of 1998 compared to $0.7 million in the third quarter of 1997. Interest
and other expenses for the first nine months of 1998 increased to $5.4 million
from $1.2 million in the same period of 1997. The increases are primarily due
to higher interest expense, exchange and translation loss, and other expenses
from donated products.
As discussed in Note 5, due to, among other things, the lack of market
acceptance of the GenESA System, Gensia Sicor elected to write-down the
investment value of its 19% interest in Automedics from $1.8 million to $0.7
million in the first quarter of 1998.
11
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GENSIA SICOR INC.
The Company recorded a restructuring charge of $3.2 million in the third
quarter of 1997. The charge included expected costs related to the
consolidation of the Company's corporate headquarters in San Diego, California
to Irvine, California where Gensia Sicor Pharmaceuticals is located.
In connection with the Rakepoll Holding acquisition in 1997, the assets and
liabilities of Rakepoll Holding were adjusted to their estimated fair values,
and the Company incurred a one-time $29.2 million write-off related to the value
assigned to the acquired in-process research and development. This charge is
not deductible for income tax purposes. The determination of acquired in-
process research and development took under consideration both the costs and
internal resources necessary to advance the in-process technology to clinical
development and eventual approval by regulatory agencies. Management also
considered the risks of possible negative outcomes during clinical development,
as well as changes in the market place with respect to competing technologies.
The Company currently estimates that it will need to expend over $5 million to
develop this in-process technology. The in-process technology may never be
successfully developed.
Income tax expense in the third quarter of 1998 increased to $3.0 million
from $0.2 million for the same period of 1997. Income tax expense for the
first nine months of 1998 increased to $4.6 million from $3.0 million for the
same period of 1997. The increase in income tax expense for the three and nine
months of 1998 is attributable to increased earnings in the foreign operations
compared to the same period of 1997. Although the Company has a net loss for
the nine months of 1998 on a consolidated basis, the taxable losses generated by
U.S. entities cannot be utilized to offset taxable income from foreign entities.
The Company had minority interest income of $36,000 for the three months
ended September 30, 1998 which represents minority stockholders' proportionate
share of the loss in the Company's consolidated subsidiary, Metabasis. Minority
interest income of $795,000 for the nine months ended September 30, 1998
represents minority stockholders' proportionate share of the loss in the
Company's consolidated subsidiaries, Diaspa and Metabasis. In June 1998, Sicor
purchased the remaining 50% interest in Diaspa.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of $25.1
million.
The Company anticipates that its efforts to reduce overall costs and
expenses and working capital requirements, combined with its current cash and
cash equivalents on hand at September 30, 1998 of $25.1 million, and commitments
from third parties, will enable it to maintain its current and planned
operations through at least 1998. In connection with its plans for expanding
its business, to accomplish its core strategy of being a leading fully-
integrated provider of injectable pharmaceutical products and services, the
Company's management and Board of Directors are evaluating plans to raise
required additional capital. The Company will continue to pursue equity, debt
and lease financing, or a combination of these, for its capital needs. In
addition, the Company may seek equity funds to finance Metabasis. Such
financings may not be available on acceptable terms, or at all. If financing is
not available, the Company may have to reduce planned expenditures, discontinue
certain operations, or otherwise restructure to continue operations.
Significant changes in operating assets and liabilities during the first
nine months of 1998, excluding the net assets acquired from the Genchem Vacallo
acquisition (see Note 1), included a $3.5 million increase in accounts payable
and accrued expenses, a $2.5 million increase in inventories and a $2.1 million
increase in prepaid expenses and other assets. Other significant cash flows in
the first nine months of 1998 included $6.9 million in payments for the
remaining 50% interest in Diaspa and acquisition of Genchem Vacallo, and $13.0
million expended on property and equipment.
As discussed in Note 5, the Company has an obligation to Protocol Systems
under the Supply Agreement to
12
<PAGE>
GENSIA SICOR INC.
purchase GenESA System devices, which the Company assigned to Automedics
pursuant to the Automedics divestiture in December 1997. This assignment
resulted in transferring the Company's obligation to purchase a minimum number
of GenESA System devices from Protocol Systems totaling approximately $3.4
million in 1998, and $4.3 million every year for the years 1999 to 2002. The
Company remained liable for these obligations. In July 1998, the Company was
named as a defendant in a complaint filed by Protocol Systems. The complaint
alleges breach of the Supply Agreement, and damages estimated at approximately
$10.8 million, plus any amounts which Protocol Systems may owe to a third-party
vendor. Gensia Sicor believes that this claim fails to take into consideration a
number of important matters (as discussed in Note 5), and thus Gensia Sicor
intends to vigorously defend this litigation. In addition, the Company assigned
certain agreements with Gensia Clinical Partners, L.P. to Automedics during the
divestiture. If Automedics fails to comply with its obligations, under these
agreements (which include, inter alia, obligations to use its best efforts to
market the GenESA System and to pay royalties on sales of the GenESA System to
Gensia Clinical Partners, L.P.), the Company remains liable for such
obligations. The Company's obligation with respect to Gensia Clinical Partners,
L.P. cannot be readily quantified as they relate to royalties on future sales,
and to potential damages should Automedics be held not to have fulfilled its
best efforts obligation, both of which are unknown.
The Company's foreign subsidiaries use foreign exchange currency contracts
to reduce the negative financial impact of currency fluctuations. In March
1998, the Company's Italian subsidiary, Sicor, entered into ten monthly U.S. $1
million put options at a strike price of Lira 1,750 per U.S. $1. As of
September 30, 1998, three contracts have been exercised.
In May 1998, the Company's Sicor subsidiary received notification from the
Italian Ministry of University, Scientific & Technological Research that it has
been awarded approximately $8.8 million in a grant and subsidized loan package
for a research program in process development with anthracyclines. The receipt
of funding for the research program is contingent upon presentation of a
statement of progress at established "Checkpoints", the first of which is
expected in early 1999.
As discussed in Note 6, the Company reached a settlement with Great Lakes
Chemical Corporation ("Great Lakes") regarding liabilities related to the
purchase by Sicor of certain contaminated products from Great Lakes in 1994 -
1995. The settlement resulted in a dismissal of certain litigation between
Sicor, Great Lakes and Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"). Under
the terms of the settlement, Sicor received a cash payment that is expected to
cover substantially all of the related customer claims against it. The
settlement also resulted in the dismissal with prejudice of Sicor's action
against Great Lakes filed in the United States District Court in Arkansas.
In November 1998, the Company received notification from SangStat Medical
Corporation ("SangStat") that it has been granted marketing clearance by the
U.S. Food and Drug Administration ("FDA") for SangCya(TM), SangStat's patented
formulation of cyclosporine. With this approval, the Company's subsidiary,
Sicor, expects to provide a majority of cyclosporine bulk material for
SangCya(TM). Sicor will be the primary manufacturer of the cyclosporine bulk
drug substance used in the production of SangCya(TM) for subsequent commercial
sale and distribution worldwide by SangStat.
The Company made quarterly cash dividend payments of approximately $1.5
million per quarter on its outstanding preferred stock from June 1, 1993 through
March 1, 1995. Subsequent to March 1995, as a measure to reduce cash outflows,
the Company's Board of Directors suspended quarterly cash dividend payments on
its outstanding preferred stock. The Company resumed quarterly payment of the
Preferred Stock dividend in September 1996. At September 30, 1998, the Company
had approximately $7.5 million in undeclared cumulative preferred dividends. If
the Company chooses to not declare dividends for six cumulative quarters, the
holders of this preferred stock, voting separately as a class, will be entitled
to elect two additional directors until the dividend in arrears has been paid.
13
<PAGE>
GENSIA SICOR INC.
Impact of Year 2000
The Company has taken actions to understand the nature and extent of the
work required to make its systems and infrastructure Year 2000 compliant.
System hardware, software and microprocessor controlled equipment that support
the Company's infrastructure have been inventoried and assessed for Year 2000
compliance. To the extent necessary to address material Year 2000 issues, the
Company is in the process of obtaining and installing current releases or
upgrades from software vendors. All domestic business systems have been upgraded
and are believed to be compliant. Work continues on the Company's international
facilities systems and these conversions are scheduled for completion by the end
of the second quarter of 1999. Because third party failures could have a
material adverse impact on the Company's ability to conduct business, the
Company is attempting to obtain written assurances from all material customers
and vendors that their systems are or will be Year 2000 compliant. However, if
either the Company or any material customer or vendor experiences a failure of
any critical system, it could have a material adverse impact on the Company's
business operations or require the Company to incur unanticipated expenses. If
by April 1999, the Company has not obtained reasonable assurances from material
vendors as to Year 2000 compliance, the Company will consider alternatives,
including the replacement of material vendors. In addition, the business
interruption of any of the Company's significant customers, resulting from their
Year 2000 issues, could have a material adverse impact on the Company's revenues
and results of operations. The cost incurred to date for the Year 2000
transition is approximately $0.5 million, which includes software and hardware
upgrades that would have been purchased in the normal course of business to meet
the future growth and worldwide integration. The Company estimates that the
remaining costs to be incurred on upgrading systems, including the year 2000
transition, will be approximately an additional $1.0 million, and as such will
not have significant impact on the Company's financial position or operating
results. Based on available information, including assurances from software
vendors that their products are compliant, the Company believes that it will be
able to manage its total Year 2000 transition without any material adverse
effect on its business operations, products, operating results or financial
condition.
14
<PAGE>
GENSIA SICOR INC.
PART II--OTHER INFORMATION
ITEM 1: Legal Proceedings
In July 1998, the Company was named as a defendant in a complaint filed by
Protocol Systems, Inc ("Protocol Systems"). The complaint alleges breach of a
supply agreement (the "Supply Agreement"). Protocol Systems alleges damages
estimated at approximately $10.8 million, plus any amounts which it may owe to
a third-party vendor. Gensia Sicor believes that this claim fails to take into
consideration a number of matters, including Protocol Systems' contractual
obligations, the risks inherent in the introduction of a new medical device
into the marketplace and the five-year time period over which the devices were
to be delivered, among others. Gensia Sicor intends to vigorously defend this
litigation. The ultimate outcome with respect to the lawsuit could have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Management is unable to reasonably estimate the
financial impact of its dispute with Protocol Systems at this time, and has
not recorded any liabilities pertaining to this matter. In accordance with FAS
5, a contingent liability will be recorded for the Protocol Systems matter
when a reasonable range of possible liability has been established.
In September 1998, the Company reached a settlement with Great Lakes
Chemical Corporation ("Great Lakes") regarding liabilities related to the
purchase by Sicor of certain contaminated products from Great Lakes in 1994 -
1995. The settlement resulted in a dismissal of certain litigation between
Sicor, Great Lakes and Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"). Under
the terms of the settlement, Sicor received a cash payment that is expected to
cover substantially all of the related customer claims against it. The
settlement also resulted in the dismissal with prejudice of Sicor's action
against Great Lakes filed in the United States District Court in Arkansas.
In another lawsuit related to the contaminated product, entitled Pharmacia &
Upjohn Company v. Great Lakes Chemical Corporation and Sicor S.p.A. in the State
of Michigan, Kalamazoo County Circuit Court, No. E96-188 NZ, Pharmacia & Upjohn,
which supplied Sicor with certain of the contaminated materials and agreed to
indemnify Sicor under certain conditions, sued Sicor for declaratory relief
regarding their respective duties and rights. In light of the above settlement,
this lawsuit has been dismissed without prejudice.
ITEM 4: Submission of Matters to a Vote of Security Holders
If a stockholder wishes to have a stockholder proposal considered at the
Company's next annual meeting, the stockholder must have given timely notice
of the proposal in writing to the Secretary of the Company. To be timely, a
stockholder's notice of the proposal must be delivered to or mailed and
received at the executive offices of the Company no less than 50 days nor more
than 75 days prior to the date of the annual meeting; provided, however that
if less than 65 days' notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice of the proposal to be
timely must be received no later than the close of business on the 15th day
following the day on which such notice of the date of the annual meeting was
mailed or public disclosure of the meeting date was given.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
------ -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K during the third quarter
None
15
<PAGE>
GENSIA SICOR INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSIA SICOR INC.
Date: November 16, 1998 By: /s/ Carlo Salvi
-------------------------------
Carlo Salvi, President
and Chief Executive Officer
Date: November 16, 1998 By: /s/ John W. Sayward
-------------------------------
John W. Sayward, Executive Vice
President, Finance, Chief Financial
Officer and Treasurer
16
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