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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO.1 TO 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
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GENSIA SICOR INC.
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(Exact name of registrant as
specified in its charter)
Delaware 33-0176647
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Hughes
Irvine, California 92618
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(Address of principal executive offices and zip code)
(949) 455-4700
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(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
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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
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Class Outstanding at September 30, 1998
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GENSIA SICOR INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial
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Condition and Results of Operations
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Results of Operations - for the three and nine
months ended September 30, 1998 and 1997 3
Liquidity and Capital Resources 5
Impact of Year 2000 7
SIGNATURES 9
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GENSIA SICOR INC.
PART I - FINANCIAL INFORMATION
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
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GENSIA SICOR INC.
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 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
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GENSIA SICOR INC.
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.
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
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GENSIA SICOR INC.
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 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
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GENSIA SICOR INC.
("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.
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. Upgrades
and conversions are scheduled for completion by the end of the second quarter of
1999 in Italy and by the end of the fourth quarter of 1999 in Mexico. A failure
by the Company to convert its international systems in a timely fashion could
have a material adverse effect on the Company.
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. The Company has received such assurances
from its domestic material customers and vendors; however, this is an on-going
process. The Company anticipates that this process will be completed by mid-
1999 for its international operations. The Company believes that one
international customer, the national health program in Mexico, which accounted
for approximately $19.8 million of the Company's product sales in the first nine
months of 1998 (which represented approximately 15.5% of such sales), may not
be Year 2000 compliant by December 31, 1999. No other international customer
accounted for more than 5% of the Company's sales in the nine months ended
September 30, 1998. The Company's total sales to international customers in
the first nine months of 1998 were approximately $72.8 million, which
represented approximately 57% of the Company's total sales in such period. 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 or require the Company to incur unanticipated expenses.
If by mid-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, if possible. 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 Company has not completed a formal contingency plan for non-compliance,
but it is developing
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a plan based on the information obtained from third parties and an on-going
evaluation of the Company's own systems. The Company anticipates having a
contingency plan in place by mid-1999 which will include development of backup
procedures, identification of alternate suppliers and possible increases in
inventory levels. The Company has not identified its most reasonably likely
worst case scenario with respect to possible losses in connection with Year
2000 related problems. The Company plans on completing this analysis in mid-
1999.
There are many factors outside the Company's control that could cause the
Year 2000 problem to seriously disrupt its operations. There are risks,
however, for which the Company is preparing and, in so doing, seeking to reduce
its exposure. The most critical of these risks are listed below. The scope of
the Company's efforts regarding each risk is limited to the Company's key
products, key compounds, subsidiaries, critical suppliers, and major customers:
- - a disruption in the supply of product with particular emphasis on failures of
raw material suppliers, commercial partners, and external distribution channels
internal infrastructure failures such as utilities, communications, internal
information technology services and integrated information technology systems
non-U.S. government failures, especially as they impact import and export
activity interruption of the product regulatory filing process a major
customer failure or interruption.
The cost incurred through September 30, 1998, for the Year 2000 transition
was approximately $0.7 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, barring
critical failures arising from factors beyond the Company's direct control, 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.
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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: January 26, 1999 By: /s/ John W. Sayward
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John W. Sayward, Executive Vice
President, Finance, Chief Financial
Officer and Treasurer
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