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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - --- Act of 1934
For the Quarterly period ended: March 31, 1996
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- - --- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-19410
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SEPRACOR INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2536587
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(State or Other Jurisdiction of (I.R.S Employer Identification number)
Organization or Incorporation)
33 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
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(Address of Principal Executive Offices) (Zip Code)
(508) 481-6700
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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, par value $.10 per share 26,950,071
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Class Outstanding at May 9, 1996
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<TABLE>
SEPRACOR INC.
INDEX
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1996 and 1995 5
Notes to Consolidated Condensed Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II - OTHER INFORMATION 12
SIGNATURES 14
</TABLE>
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<TABLE>
SEPRACOR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 85,274 $ 135,818
Marketable securities 51,313 7,432
Cash in escrow 1,572 1,614
Accounts receivable 4,011 5,508
Receivable from equity investees 2,000
Inventories 3,089 3,412
Other current assets 1,059 524
--------- ---------
Total current assets 148,318 154,308
Property, plant and equipment, net 11,763 12,497
Investment in affiliates (Note 3) 17,012 17,949
Excess of investments over net assets acquired 10,400 10,633
Other assets 5,906 7,326
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Total Assets $ 193,399 $ 202,713
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,264 $ 3,325
Accrued expenses 7,108 5,900
Notes payable and current portion
of capital lease obligation and
long-term debt 3,326 3,152
Acquisition payable 1,572 1,614
Deferred revenue 4,534 3,500
--------- ---------
Total current liabilities 19,804 17,491
Convertible subordinated debentures 80,880 80,880
Long-term debt and capital lease obligation 4,771 4,938
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Total liabilities 105,455 103,309
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Minority interest 4,228 4,677
Convertible redeemable preferred stock 5,650 5,500
Stockholders' equity:
Common stock 2,686 2,682
Additional paid-in capital 212,830 212,814
Accumulated deficit (137,875) (126,795)
Equity adjustments 425 526
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Total stockholders' equity 78,066 89,227
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Total liabilities and stockholders' equity $ 193,399 $ 202,713
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
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SEPRACOR INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31,1996 and 1995
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
--------------------------
1996 1995
---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Product sales $ 2,957 $ 3,159
Collaborative research and development 25 200
License fees and royalties 131 141
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Total revenues 3,113 3,500
Costs and expenses:
Cost of products sold 1,262 3,136
Research and development 6,279 4,648
Sales and marketing 1,032 1,777
Administration 2,914 3,205
Legal expense related to patents 220 188
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Total period expenses 11,707 12,954
Loss from operations (8,594) (9,454)
Equity in investee losses (Note 3) (3,280)
Other income, net 285 92
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Net loss before minority interests (11,589) (9,362)
Minority interests in subsidiaries 509 2,038
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Net loss $(11,080) $(7,324)
======== =======
Net loss per share $ (0.41) $ (0.39)
Weighted average number of common
and common equivalent shares outstanding 26,832 18,681
</TABLE>
The accompanying notes are an integral part
of the financial statements
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SEPRACOR INC.
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE-MONTH PERIODS ENDED
MARCH 31,
-------------------------
1996 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,080) $(7,324)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interests in subsidiaries (509) (2,038)
Depreciation and amortization 888 929
Provision for doubtful accounts 107 42
Equity investee losses 3,280
Loss on disposal of property and equipment 10
Changes in operating assets and liabilities:
Accounts receivable 1,209 6,008
Receivable from equity investees (1,885)
Inventories 274 (204)
Other current assets (535) 9
Accounts payable 84 (2,702)
Accrued expenses 1,086 (1,314)
Deferred revenue 1,034 3,074
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Net cash used in operating activities (6,037) (3,520)
Cash flows from investing activities:
Purchases of marketable securities (51,381)
Sales of marketable securities 7,500 1,373
Additions to property and equipment (2,004) (1,178)
Proceeds from sale of equipment 69
Increase in other assets 1,257 (468)
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Net cash used in investing activities (44,559) (273)
Cash flows from financing activities:
Net proceeds from issuances of stock 25 5,003
Borrowings of long term debt 1,436
Repayments of long term debt (168) (74)
Repayments of capital lease obligations (27) (35)
Borrowings under line of credit agreements 199 748
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Net cash provided by financing activities 29 7,078
Effect of exchange rates on cash and cash equivalents 23 10
Net (decrease) increase in cash and cash equivalents (50,544) 3,295
Cash and cash equivalents at beginning of period 135,818 25,397
-------- -------
Cash and cash equivalents at end of period $ 85,274 $28,692
======== =======
</TABLE>
The accompanying notes are an integral part
of the financial statements
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SEPRACOR INC.
NOTES TO CONSOLIDATED CONDENSED INTERIM FINANCIAL STATEMENTS
1. Basis of presentation:
The accompanying consolidated financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted. The
consolidated condensed interim financial statements, in the opinion of
management, reflect all adjustments (including normal recurring accruals)
necessary for a fair presentation of the results for the interim periods ended
March 31, 1996 and 1995.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These
consolidated interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.
2. Inventories:
<TABLE>
Inventories consist of the following:
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 906 $1,104
Work in progress 427 279
Finished goods 1,756 2,029
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$3,089 $3,412
====== ======
</TABLE>
3. ChiRex:
In March 1996, ChiRex, a newly formed corporation that is a combination of
Sterling Organics Limited, a fine chemical manufacturer, and the chiral
chemistry business of Sepracor, which was conducted through its subsidiary
SepraChem, completed an initial public offering of common stock. ChiRex sold
6,700,000 shares at $13 per share. In exchange for the contribution of
SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a
result Sepracor owns approximately 32% of ChiRex. Sepracor accounted for this
transaction as a non-monetary exchange of assets and, therefore, no gain or loss
was recorded as a result of this transaction. Since March 11, 1996 Sepracor
carries its investment in ChiRex using the equity method of accounting and,
accordingly, recorded $2,344,000 as its share of ChiRex's first quarter losses.
4. BioSepra loans:
In January 1996, Biosepra signed a Promissory Note for $350,000, or so much of
such sum as shall have been advanced by Sepracor. This amount is payable over
sixty installments and does not bear interest. BioSepra used the funds for
leasehold improvements in its new office space. As of March 31, 1996 BioSepra
had received $309,943 under the Promissory Note.
In March 1996 Sepracor agreed to loan to BioSepra $3,500,000. In addition,
Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997
(the "loans"). The loans bear interest at prime plus 3/4% and are repayable in
March 2000. The loans, including any interest thereon, are convertible into the
shares of BioSepra stock, at the option of Sepracor at any time prior to
payment. There was $3,500,000 outstanding under this loan as of March 31, 1996.
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5. Litigation
Sepracor and BioSepra are defendants in three lawsuits brought by PerSeptive in
the United States District Court for the District of Massachusetts. In actions
commenced in October 1993 and January 1995, PerSeptive has alleged that
Sepracor's and BioSepra's manufacture and sale of HyperD chromatography media
infringe four of PerSeptive's United States patents. PerSeptive is seeking
unspecified monetary damages as well as injunctive relief. In a separate action,
PerSeptive has alleged that certain statements made by Sepracor and BioSepra
with respect to the performance of HyperD media, performance of PerSeptive's
POROS media, and the internal structures of POROS and HyperD media, including
statements made in BioSepra's prospectus dated March 24, 1994, constitute false
advertising.
BioSepra has received an opinion of its patent counsel, Pennie & Edmonds, to
the effect that a properly informed court should conclude the manufacture, use
and/or sale by BioSepra or its customers of the present HyperD products do not
infringe any valid claims of the three United States patents held by PerSeptive
relating to "perfusion chromatography". Allegations have also been made that
another United States patent, which relates to the chemistry of certain
coatings applied during the manufacture of HyperD (the "coatings patent"), is
infringed by the manufacture, sale or use of HyperD. BioSepra and Sepracor have
asserted a counterclaim charging PerSeptive with unfair competition.
On January 9, 1996, the United States District Court for the District of
Massachusetts in part granted Sepracor and BioSepra's request for summary
judgment with respect to three of PerSeptive's patents concerning "Perfusion
Chromatography" (the "January 9 Order"). The Court ruled that persons in
addition to those named in the three "perfusion" patents were inventors of the
alleged inventions claimed in those patents. This ruling may ultimately dispose
of PerSeptive's claims concerning the "perfusion" patents, depending on the
Court's resolution of PerSeptive's effort to correct the patents, and the
outcome on appeal by PerSeptive of the January 9 Order or appeal by any party
of any ruling regarding correction of inventorship.
In its January 9 Order, the Court ruled that PerSeptive's claims related
to the three "perfusion" patents would be dismissed on January 19, 1996, if
PerSeptive had not requested correction of inventorship by that date. The Court
postponed this deadline pending its ruling on PerSeptive's request for
certification of an immediate appeal of the January 9 Order to the United
States Court of Appeals for the Federal Circuit. On March 12, 1996, the Court
denied PerSeptive's motion for immediate appeal and scheduled a hearing on
deceptive intent on the part of PerSeptive, if PerSeptive moved to correct
inventorship (the "March 12 Order"). The Court required PerSeptive to make any
motion to correct by March 31, 1996. In response, PerSeptive requested that the
Court vacate its January 9 and March 12 Orders, or in the alternative, correct
the patents in such a way that the presently unnamed inventors obtained no
rights to license the patents. The court denied PerSeptive's motion to vacate,
and scheduled a hearing on PerSeptive's motion to correct the patents for 1996.
According to the January 9 and March 12 Orders, PerSeptive could correct
inventorship if it bears the burden of proving that its initial designation of
inventors was done without deceptive intent. PerSeptive has asserted that no
motion to correct need be filed, and that Sepracor and BioSepra bear the burden
of proving deceptive intent. PerSeptive also asserts that the unnamed inventors
should not be added to the patents or given any right to license the patents,
and that as a matter of law they did not err in not naming the two unnamed
inventors, and did not name inventors with deceptive intent. Sepracor and
BioSepra contend that if PerSeptive is able to correct inventorship, the
presently unnamed inventors would have independent rights to license the
"perfusion" patents unless the Court ruled that the unnamed inventors are not
entitled to such rights. If inventorship could not be corrected, the "perfusion"
patents would be held invalid, subject to appeal by PerSeptive. A decision by
the District Court to correct inventorship or preventing the unnamed inventors
from licensing the "perfusion" patents, would be subject to appeal by any party.
PerSeptive could appeal any decision invalidating the patents for willful
misdesignation of inventors.
There can be no assurance that Sepracor will prevail in the pending litigation,
and an adverse outcome in any of the patent infringement actions on any of the
chromatography patents would have a material adverse effect on Sepracor's future
business and operations. BioSepra has entered into a joint development and
distribution agreement with Beckman Instruments, Inc. BioSepra is required to
repay to Beckman all
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or part of certain payments if Sepracor terminates Beckman's right to use and
sell HyperD media because a court finds HyperD media infringes any third party
patents.
Substantial funds have been and continue to be expended in connection with
the defense of the litigation. Sepracor has agreed to control the defense of
the litigation, and Sepracor and BioSepra share equally in expenses, net of
insurance payments. In addition, in the event of any settlement or judgment
adverse to BioSepra, Sepracor has agreed to indemnify BioSepra from and against
any damages that BioSepra is required to pay with respect to its manufacture,
use or sale of HyperD media products occurring prior to March 24, 1994.
6. Summarized income statement information:
<TABLE>
The following is the summarized income statement information for HemaSure Inc.
and ChiRex for the three month period ended March 31, 1996:
<CAPTION>
HEMASURE CHIREX
-------- ------
(in thousands)
<S> <C> <C>
Net sales $ 81 $ 7,599
Gross profit (472) 1,568
Income (loss) from continuing
operations (3,114) (10,096)
Net income (loss) $(2,530) $(10,597)
</TABLE>
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The consolidated financial statements include the accounts of Sepracor Inc. and
its majority and wholly owned subsidiaries, including BioSepra,SepraChem( from
January 1,1996 to March 11, 1996), NEP and Versicor.
In March 1996, ChiRex, a newly formed corporation that is a combination of
Sterling Organics Limited, a fine chemical manufacturer, and the chiral
chemistry business of Sepracor, which was conducted through its subsidiary
SepraChem, completed an initial public offering of common stock. ChiRex sold
6,700,000 shares at $13 per share. In exchange for the contribution of
SepraChem, Sepracor received 3,489,301 shares of ChiRex common stock and as a
result Sepracor owns approximately 32% of ChiRex. Sepracor accounted for this
transaction as a non-monetary exchange of assets and, therefore, no gain or
loss was recorded as a result of this transaction. Since March 11, 1996
Sepracor carries its investment in ChiRex using the equity method of accounting
and, accordingly, recorded $2,344,000 as its share of ChiRex's first quarter
losses.
Three months ended March 31, 1996 and 1995
Revenues were $3,113,000 in the three months ended March 31, 1996 compared to
$3,500,000 in the same period in 1995.
Product sales are primarily attributable to BioSepra's sales of bioprocessing
media, supplies and equipment. The decrease in sales for the first quarter of
1996 as compared to the first quarter of 1995 was primarily related to the sales
of production-scale systems, a product line that was discontinued as part of the
cost reduction program implemented in June 1995. The Company believes that sales
of BioSepra's HyperD media products, which were introduced in 1993, have been
adversely affected by, and may continue to be adversely affected by, the pending
patent litigation with PerSeptive BioSystems, Inc. ("PerSeptive").- see "Legal
Proceedings". BioSepra's future success will depend, in part, on its ability to
generate increased sales of its HyperD media products and ProSys Workstation.
Collaborative research and development revenues decreased to $25,000 in the
first quarter of 1996 from $200,000 in the first quarter of 1995. The decrease
was due to the Company receiving funds from a corporate sponsor for certain
research and development activities in the first quarter of 1995 that did not
recur in the first quarter of 1996.
Cost of products sold as a percentage of product sales was 43% for the three
months ended March 31, 1996 compared to 99% for the same period in 1995. Higher
costs in 1995 were the result of sales of Biopass products, a subsidiary of
BioSepra which was sold in July 1995 and to a lesser extent, reduced overall
manufacturing costs at BioSepra in the first quarter of 1996 as a result of the
cost-reduction program implemented in June 1995. Management expects
fluctuations in cost of products sold as a percentage of product sales as
product mix changes occur period to period.
Research and development expenses increased to $6,279,000 in the first quarter
of 1996 from $4,648,000 in the first quarter of 1995. Increased spending was
primarily focused on preclinical and clinical trials in the Company's
pharmaceutical program.
Selling, general and administrative expenses decreased to $4,166,000 in the
three months ended March 31, 1996 from $5,170,000 in the three months ended
March 31, 1995. The decrease was primarily due to the impact of HemaSure no
longer being consolidated in the results of Sepracor in 1996 and the cost
reduction program entered into at BioSepra beginning in June, 1995.
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In the first quarter of 1996, equity in loss of investees was $3,280,000. There
was no similar amount in 1995. The equity in loss consists of the Company's
portion of HemaSure's and ChiRex's net loss in the first quarter of 1996.
Included in ChiRex's results were one-time write-offs of $11,076,000 from
ChiRex's initial public offering and resulting transactions. Net other income
was $285,000 for the first three months of 1996 compared to net other income of
$92,000 in 1995. The increase in net other income is due to higher interest
income as a result of increased cash balances. Interest and other expenses
reflect the amounts borrowed and the prevailing interest rates, and gains or
losses on foreign exchange transactions.
Minority interests in subsidiaries resulted in a reduction of consolidated net
loss of $509,000 in the three months ended March 31, 1996 and $2,038,000 for the
three months ended March 31, 1995. The decrease in the three month periods is
the result of decreased losses of BioSepra and the impact of no longer
consolidating HemaSure.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents plus marketable securities of Sepracor and its
subsidiaries, including BioSepra, totaled $136,587,000 at March 31, 1996,
compared to $143,250,000 at December 31, 1995. Cash and cash equivalents plus
marketable securities of Sepracor, excluding BioSepra, at March 31, 1996 were
$131,011,000.
The net cash used in operating activities for the three months ended March 31,
1996 was $6,037,000. The net cash used in operating activities includes the net
loss of $11,080,000 and the minority interest in subsidiary portion of the net
loss of $509,000. This was offset by non-cash charges of $4,285,000. The
Company's accounts receivable balance at March 31,1996 decreased by $1,209,000
from the December 31, 1995 balance primarily due to the collection of license
fee and trade receivables in the first quarter of 1996. The Company's inventory
balance decreased by $274,000 primarily due to no longer consolidating
SepraChem. The accounts payable and accrued expense balances increased a total
of $1,170,000 from the December 31, 1995 balances primarily due to the timing of
disbursements in the first three months of 1996. The deferred revenue balance
increased $1,034,000 from the December 31, 1995 balance due to BioSepra's
deferral of revenue in connection with the Beckman arrangement. Under the
Beckman arrangement, BioSepra may be required to return to Beckman all or part
of certain payments made by Beckman under the arrangement if BioSepra fails to
meet certain development milestones or if BioSepra terminates Beckman's right to
use and sell licensed products, including HyperD media, because a court finds
that any such licensed products infringe any third-party patents.
In 1994, Sepracor, BioSepra and HemaSure entered into a revolving credit
agreement with a commercial bank that provides for borrowing of up to $2,000,000
per company, not to exceed $5,000,000 in the aggregate. All borrowings are
collateralized by certain assets of the companies. The credit agreement contains
covenants relating to minimum tangible capital base, minimum cash or cash
equivalents and a minimum liquidity ratio for each company. Sepracor is a
guarantor of all outstanding borrowings. At March 31, 1996, $2,000,000 was
outstanding at BioSepra. There were no amounts outstanding at Sepracor or
HemaSure. The annual interest rate on such borrowings is prime plus 3/4%.
In 1994, Sepracor, BioSepra and HemaSure entered into an equipment leasing
arrangement that provides for a total of up to $2,000,000 of financing to
Sepracor and its subsidiaries for the purpose of financing capital equipment
in the U.S. All outstanding amounts are collateralized by the assets so financed
and are guaranteed by Sepracor. At March 31, 1996, there was $1,101,000
outstanding under this credit facility.
At March 31, 1996, Sepracor guaranteed $1,818,000 of outstanding bank borrowings
of BioSepra SA, BioSepra's wholly owned French subsidiary.
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In 1994, Sepracor's wholly-owned subsidiary, Sepracor Canada Limited, entered
into two credit agreements with two Canadian provincial and federal business
development agencies for approximately $2,960,000 in term debt, of which
$2,590,000 is at an annual interest rate of 9.25% and $370,000 is interest free.
As of March 31, 1996, approximately $2,745,000 of such term debt was
outstanding. Sepracor guarantees $ 2,375,000 of this debt.
In January 1996, BioSepra signed a promissory note for $350,000, or so much of
such sum as shall have been advanced by Sepracor. This amount is payable over
sixty installments and does not bear interest. BioSepra is using the funds for
leasehold improvements in its new office space. As of March 31, 1996, BioSepra
had received $310,000 under the Promissory Note.
In March 1996, Sepracor agreed to loan to BioSepra $3,500,000. In addition,
Sepracor agreed to loan BioSepra up to an additional $2,000,000 until March 1997
(the "loans"). The loans bear interest at prime plus 3/4% and are repayable in
March 2000. The loans, including any interest thereon, are convertible into the
shares of BioSepra stock, at the option of Sepracor at any time prior to
payment. There was $3,500,000 outstanding under this loan as of March 31, 1996.
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the safety and efficacy of the Company's
ICE[trademark] Pharmaceuticals under development and the scope of the patent
protection with respect to these products and information with respect to the
Company's other plans and strategy for business, consists of forward looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995. In addition,
the Company will require substantial additional funds for its research and
product development programs, operating expenses, the pursuit of regulatory
approvals and expansion of its production, sales and marketing capabilities.
Adequate funds for these purposes, whether through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds could require the Company to delay, scale back or eliminate
certain of its research and product development programs or to license to third
parties to commercialize products or technologies that the Company would
otherwise develop or commercialize itself. While the Company believes that its
available cash balances will be sufficient to meet its capital requirements
into 1998, the Company may need to raise additional funds to support its
long-term product development and commercialization programs. There can be no
assurance that such capital will be available on favorable terms, if at all. The
Company's cash requirements may vary materially from those now planned because
of results of research and development, results of product testing,
relationships with customers, changes in focus and direction of the Company's
research and development programs, competitive and technological advances,
patent developments, the FDA regulatory process, the capital requirements of
BioSepra and Versicor, and other factors.
Because of the factors, the Company believes that period-to-period comparisons
of its financial results are not necessarily meaningful and its expects that
its results of operations may continue to fluctuate from period to period in
the future.
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PART II
OTHER INFORMATION
Item 1. Legal proceedings
Sepracor and BioSepra are defendants in three lawsuits brought by PerSeptive in
the United States District Court for the District of Massachusetts. In actions
commenced in October 1993 and January 1995, PerSeptive has alleged that
Sepracor's and BioSepra's manufacture and sale of HyperD chromatography media
infringe four of PerSeptive's United States patents. PerSeptive is seeking
unspecified monetary damages as well as injunctive relief. In a separate action,
PerSeptive has alleged that certain statements made by Sepracor and BioSepra
with respect to the performance of HyperD media, performance of PerSeptive's
POROS media, and the internal structures of POROS and HyperD media, including
statements made in BioSepra's prospectus dated March 24, 1994, constitute false
advertising.
BioSepra has received an opinion of its patent counsel, Pennie & Edmonds, to the
effect that a properly informed court should conclude the manufacture, use
and/or sale by BioSepra or its customers of the present HyperD products do not
infringe any valid claims of the three United States patents held by PerSeptive
relating to "perfusion chromatography". Allegations have also been made that
another United States patent, which relates to the chemistry of certain coatings
applied during the manufacture of HyperD (the "coatings patent"), is infringed
by the manufacture, sale or use of HyperD. BioSepra and Sepracor have asserted a
counterclaim charging PerSeptive with unfair competition.
On January 9, 1996, the United States District Court for the District of
Massachusetts in part granted Sepracor and BioSepra's request for summary
judgment with respect to three of PerSeptive's patents concerning "Perfusion
Chromatography" (the "January 9 Order"). The Court ruled that persons in
addition to those named in the three "perfusion" patents were inventors of the
alleged inventions claimed in those patents. This ruling may ultimately dispose
of PerSeptive's claims concerning the "perfusion" patents, depending on the
Court's resolution of PerSeptive's effort to correct the patents, and the
outcome on appeal by PerSeptive of the January 9 Order or appeal by any party of
any ruling regarding correction of inventorship.
In its January 9 Order, the Court ruled that PerSeptive's claims related to the
three "perfusion" patents would be dismissed on January 19, 1996, if PerSeptive
had not requested correction of inventorship by that date. The Court postponed
this deadline pending its ruling on PerSeptive's request for certification of an
immediate appeal of the January 9 Order to the United States Court of Appeals
for the Federal Circuit. On March 12, 1996, the Court denied PerSeptive's motion
for immediate appeal and scheduled a hearing on deceptive intent on the part of
PerSeptive, if PerSeptive moved to correct inventorship (the "March 12 Order").
The Court required PerSeptive to make any motion to correct by March 31, 1996.
In response, PerSeptive requested that the Court vacate its January 9 and March
12 Orders, or in the alternative, correct the patents in such a way that the
presently unnamed inventors obtained no rights to license the patents. The
court denied PerSeptive's motion to vacate, and scheduled a hearing on
PerSeptive's motion to correct the patents for 1996.
According to the January 9 and March 12 Orders, PerSeptive could correct
inventorship if it bears the burden of proving that its initial designation of
inventors was done without deceptive intent. PerSeptive has asserted that no
motion to correct need be filed, and that Sepracor and BioSepra bear the burden
of proving deceptive intent. PerSeptive also asserts that the unnamed inventors
should not be added to the patents or given any right to license the patents,
and that as a matter of law they did not err in not naming the two unnamed
inventors, and did not name inventors with deceptive intent. Sepracor and
BioSepra contend that if PerSeptive is able to correct inventorship, the
presently unnamed inventors would have independent rights to license the
"perfusion" patents unless the Court ruled that the unnamed inventors are not
entitled to such rights. If inventorship could not be corrected, the "perfusion"
patents would be held invalid, subject to appeal by PerSeptive. A decision by
the District Cout to correct inventorship or preventing the unnamed inventors
from licensing the "perfusion" patents, would be subject to appeal by
12
<PAGE> 13
any party. PerSeptive could appeal any decision invalidating the patents for
willful misdesignation of inventors.
There can be no assurance that Sepracor will prevail in the pending litigation,
and an adverse outcome in any of the patent infringement actions on any of the
chromatography patents would have a material adverse affect on Sepracor's future
business and operations. BioSepra is required to repay to Beckman all or part of
certain payments if Sepracor terminates Beckman's right to use and sell HyperD
media because a court finds HyperD media infringes any third party patents.
Substantial funds have been and continue to be expended in connection with the
defense of the litigation. Sepracor has agreed to control the defense of the
litigation, and Sepracor and BioSepra share equally in expenses, net of
insurance payments. In addition, in the event of any settlement or judgment
adverse to BioSepra, Sepracor has agreed to indemnify BioSepra from and against
any damages that BioSepra is required to pay with respect to its manufacture,
use or sale of HyperD media products occurring prior to March 24, 1994.
Items 2 - 3. None
- - -----------
Item 4. Submission of Matters to Vote of Security Holder
- - ------- ------------------------------------------------
None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
- - -------- --------------------------------
a) Exhibits listed in the Exhibit Index which immediately
preceding the exhibits attached thereto.
b) On March 25, 1996, the Company filed a Current Report on
Form 8-K announcing the completion of the initial public offering of common
stock of ChiRex Inc. As a result of the public offering Sepracor owns
approximately 32% of ChiRex.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEPRACOR INC.
Date: May 14, 1996 /s/ Timothy J. Barberich
-----------------------------
Timothy J. Barberich
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 14, 1996 /s/ Robert F. Scumaci
-----------------------------
Robert F. Scumaci
Senior Vice President
of Finance and Administration
(Principal Financial and
Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 85,274,000
<SECURITIES> 51,313,000
<RECEIVABLES> 4,011,000
<ALLOWANCES> 0
<INVENTORY> 3,089,000
<CURRENT-ASSETS> 148,318,000
<PP&E> 18,074,000
<DEPRECIATION> 6,311,000
<TOTAL-ASSETS> 193,399,000
<CURRENT-LIABILITIES> 19,804,000
<BONDS> 0
<COMMON> 2,686,000
5,650,000
0
<OTHER-SE> 75,380,000
<TOTAL-LIABILITY-AND-EQUITY> 193,399,000
<SALES> 2,957,000
<TOTAL-REVENUES> 3,113,000
<CGS> 1,262,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,445,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,589,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,080,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,080,000)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> 0
</TABLE>
