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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: September 30, 1997
------------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number 0-19410
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SEPRACOR INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2536587
-------- ----------
(State or Other Jurisdiction of (I.R.S Employer Identification number)
Organization or Incorporation)
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
-------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(508) 357-7300
--------------
(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, par value $.10 per share 27,817,341
- -------------------------------------- -------------------------------------
Class Outstanding at October 31, 1997
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SEPRACOR INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996 (Unaudited) 3
Consolidated Statements of Operations for the Three and Nine
Month Periods Ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated 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
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SEPRACOR INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 62,299 $ 83,344
Marketable securities 34,552 20,306
Accounts receivable, net 2,047 3,129
Inventories 3,619 3,481
Other current assets 2,082 1,588
--------- ---------
Total Current Assets 104,599 111,848
Property, plant and equipment, net 20,948 17,045
Excess of investments over net assets acquired,net 8,775 9,254
Investment in affiliates 607 3,100
Other assets 5,827 5,442
--------- ---------
Total Assets $ 140,756 $ 146,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,503 $ 4,300
Accrued expenses 19,443 12,174
Notes payable and current portion
of capital lease obligation and long-term debt 918 804
Deferred revenue 3,129 3,646
Other current liabilities 157 -
--------- ---------
Total Current Liabilities 26,150 20,924
Long-term debt and capital lease obligation 3,706 4,387
Convertible subordinated debentures 80,880 80,880
--------- ---------
Total Liabilities 110,736 106,191
--------- ---------
Minority interest 3,517 4,006
Convertible redeemable preferred stock 6,550 6,100
Stockholders' Equity:
Common stock 2,781 2,727
Additional paid-in capital 216,358 214,399
Unearned compensation, net (101) (234)
Accumulated deficit (198,991) (186,905)
Equity adjustments (94) 405
--------- ---------
Total Stockholders' Equity 19,953 30,392
--------- ---------
Total Liabilities and Stockholders' Equity $ 140,756 $ 146,689
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
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SEPRACOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three month periods ended Nine month periods ended,
September 30, September 30,
------------- -------------
(in thousands, except per share amounts)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Products $ 1,523 $ 3,619 $ 6,517 $ 10,445
R&D, license fees & royalties 1,982 77 2,812 906
-------- -------- -------- --------
Total Revenues 3,505 3,696 9,329 11,351
Cost of goods sold 1,280 1,805 4,206 5,138
-------- -------- -------- --------
Gross margin 2,225 1,891 5,123 6,213
Operating Expenses
Research and development 10,469 10,631 33,472 24,647
Sales and marketing 1,854 860 4,331 2,736
Administration 1,950 2,807 7,415 8,718
Patent costs 548 256 1,203 659
-------- -------- -------- --------
Total Operating Expenses 14,821 14,554 46,421 36,760
(Loss) from operations (12,596) (12,663) (41,298) (30,547)
Other income (expense)
Interest income 1,274 1,812 4,445 5,304
Interest expense (1,497) (1,651) (4,487) (4,638)
Other income (expense) 209 51 377 (22)
Equity in income (loss) of investees 134 (1,091) (1,937) (6,466)
Gain on sale of ChiRex Inc. - - 30,069 -
-------- -------- -------- --------
Total Other Income (Expense) 120 (879) 28,467 (5,822)
Net (loss) before minority interests (12,476) (13,542) (12,831) (36,369)
Minority interest in subsidiary 349 133 744 624
-------- -------- -------- --------
Net (loss) (12,127) (13,409) (12,087) (35,745)
======== ======= ======= =======
Dividends on preferred stock (150) - (450) -
-------- -------- -------- --------
Net (loss) applicable to
common shares $(12,277) $(13,409) $(12,537) $(35,745)
======== ======== ======== ========
Net (loss) per common and common
equivalent share:
Primary $ (0.44) $ (0.49) $ (0.46) $ (1.33)
======== ======== ======== ========
Shares used in computing net (loss) per
common and common equivalent share:
Primary 27,662 27,093 27,529 26,953
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
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Sepracor Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine month periods ended
September 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(12,087) $(35,745)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interests in subsidiary (744) (624)
Gain on sale of equity investee (30,069) -
Depreciation and amortization 3,452 2,868
Provision for doubtful accounts 276 256
Equity in investee losses 1,937 6,466
Loss on disposal of property and equipment 4 10
Changes in operating assets and liabilities:
Accounts receivable 938 2,051
Inventories (439) 373
Other current assets (779) (1,697)
Accounts payable (1,669) (376)
Accrued expenses 7,510 5,158
Deferred revenue (509) 569
-------- --------
Net cash used in operating activities: (32,179) (20,691)
Cash flows from investing activities:
Purchases of marketable securities (49,544) (88,348)
Sales of marketable securities 35,298 54,500
Additions to property and equipment (6,675) (8,594)
Proceeds from sale of equipment 18 99
Net proceeds from sale of equity investee 30,625 -
Other assets (475) 980
-------- --------
Net cash provided by (used in)
investing activities 9,247 (41,363)
Cash flows from financing activities:
Net proceeds from issuances of common stock 2,587 1,482
Borrowings of long term debt 110 -
Repayments of long term debt (706) (405)
(Repayments) borrowings under line of credit agreements 35 (2,300)
-------- --------
Net cash provided by (used in) financing activities 2,026 (1,223)
Effect of exchange rates on cash and cash equivalents (139) 5
-------- --------
Net decrease in cash and cash equivalents (21,045) (63,272)
Cash and cash equivalents at beginning of period 83,344 135,818
-------- --------
Cash and cash equivalents at end of period $ 62,299 $ 72,546
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
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SEPRACOR INC.
NOTES TO CONSOLIDATED 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
year-end consolidated condensed balance sheet data was derived from unaudited
financial statements but does not include all disclosures required by generally
accepted accounting principles. The consolidated 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 September 30, 1997 and 1996.
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, 1996, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
2. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------ ------
<S> <C> <C>
Raw materials $1,112 $1,155
Work in progress 354 310
Finished goods 2,153 2,016
------ ------
$3,619 $3,481
====== ======
</TABLE>
3. Net (loss) per common share:
For the three and nine months ended September 30, 1996, net (loss) per common
and common equivalent share is computed based on net (loss) per share and the
weighted average number of common shares outstanding during the period. For the
three and nine months ended September 30, 1997, primary net (loss) per share is
calculated based on the net (loss) per share adjusted for preferred stock
dividend requirements and the weighted average number of common shares
outstanding during the period. Common stock equivalent shares are not included
in the per share calculations as the effect of their inclusion would be
antidilutive.
4. Other
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share", which modifies
the way in which earnings per share ("EPS") is calculated and disclosed. Upon
adoption of this standard for the fiscal period ending December 31, 1997,
Sepracor will disclose basic EPS. Basic EPS excludes dilution and is computed by
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dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. The adoption of FAS 128 will not
change the way EPS is presently calculated by Sepracor.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income." This Statement
requires that changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements. The
Statement will become effective for fiscal years beginning in the first quarter
of the fiscal year ending December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information (SFAS No. 131)". SFAS No. 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. Sepracor is in the process of evaluating the impact
of the new standard on the presentation of the financial statements and the
disclosure therein. The Statement will become effective for fiscal years
beginning after December 31, 1998.
5. ChiRex:
The Securities and Exchange Commission declared effective on March 24, 1997 a
registration statement for the offering to the public of the 3,489,301 shares of
ChiRex common stock held by Sepracor. On March 31, 1997 Sepracor received net
proceeds of approximately $31,125,000 after payment of the underwriting
discounts and commissions but before payment of the other expenses associated
with the offering. As a result of this transaction, Sepracor recognized a gain
of $30,069,000 which was recorded as other income.
6. Litigation
Sepracor and BioSepra are defendants in three lawsuits brought by PerSeptive
BioSystems, Inc. ("PerSeptive") in the United States District Court for the
District of Massachusetts. In actions commenced in October 1993 and January
1995, PerSeptive alleged that Sepracor's and BioSepra's manufacture and sale of
HyperD chromatography media infringe four of PerSeptive's United States patents.
PerSeptive sought unspecified monetary damages as well as injunctive relief. In
a separate action, PerSeptive 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. Two additional perfusion chromatography patents
have been issued by PerSeptive. The new perfusion chromatography patents, which
have not yet been asserted against Sepracor or BioSepra in the litigation,
contain claims similar to the other patents Sepracor and BioSepra are alleged to
have infringed.
BioSepra has received an opinion of its patent counsel 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 relating to "perfusion
chromatography", which PerSeptive has asserted against Sepracor and BioSepra.
PerSeptive also alleges 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.
Sepracor and BioSepra have asserted a counterclaim charging PerSeptive with
unfair competition.
In January 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 Court ruled that the named inventors in the three
"perfusion" patents were not all of the inventors of the alleged inventions
claimed in those patents. PerSeptive moved to correct the inventorship of the
patents to include the unnamed inventors. The Court ruled in April 1997 that
PerSeptives's patents could not be corrected because of deceptive conduct by the
named inventors, and ordered entry of judgment in favor of the defendants. In
response, Sepracor and BioSepra requested that, in addition to dismissing
PerSeptive's infringement claims because the named inventor's deceptive conduct
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prevented the patents from being corrected, the Court should also dismiss those
claims on the grounds that the patents were obtained as a result of inequitable
conduct. In that event, two theories would have been presented to the Appeals
Court upon appeal by PerSeptive.
Before the Court ruled on Sepracor and BioSepra's request for entry of judgment
against PerSeptive on both theories, the United States Court of Appeal for the
Federal Circuit ruled in an unrelated case that the deceptive intentions of
named inventors are not relevant to the question whether a patent should be
corrected, but are relevant to the question of inequitable conduct. In response
to the new Appeals Court decision, the Court is likely to modify its earlier
ruling that PerSeptive's patents could not be corrected because of the named
inventors' deceptive intent. Sepracor and BioSepra have requested that any
modification occur simultaneously with any decision by the District Court
concerning inequitable conduct. If the perfusion patents were obtained by
inequitable conduct, they would be invalid and unenforceable.
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 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.
7. Summarized income statement information:
The following is the summarized income statement information for HemaSure Inc.
for the three and nine month periods ended September 30, 1997:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
HEMASURE (in thousands)
<S> <C> <C> <C> <C>
Net sales $ 1,590 $ 6,242 $ 522 $ 4,172
Gross profit (915) 464 (104) 1,076
(Loss) from operations (8,185) (11,580) (1,879) (3,943)
Net income (loss) $(6,271) $(10,203) $ 363 $(3,534)
</TABLE>
Chirex results are not presented as Sepracor sold its shares on March 31, 1997
and therefore has not consolidated any results since that time.
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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 operating subsidiaries, including BioSepra,
Versicor and Sepracor Canada Limited.
The Securities and Exchange Commission declared effective on March 24, 1997 a
registration statement for the offering to the public of the 3,489,301 shares of
ChiRex common stock held by Sepracor. On March 31, 1997 Sepracor received net
proceeds of approximately $31,125,000 after payment of the underwriting
discounts and commissions but before payment of the other expenses associated
with the offering. As a result of this transaction, Sepracor recognized a gain
of $30,069,000, which was recorded as other income.
Three and nine months ended September 30, 1997 and 1996
Product sales were $1,523,000 for the three months ended September 30, 1997
compared to $3,619,000 for the same period in 1996. Product sales for the nine
months ended September 30, 1997 were $6,517,000 compared to $10,445,000 for the
same period in 1996.
Product sales are primarily attributable to BioSepra's sales of bioprocessing
media, supplies and equipment. The decrease in revenue is attributable to
fluctuations in the timing of large production scale media orders and to the
absence of stocking orders from a major distributor of research instruments. 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 research devices.
R&D, license fees & royalties were $1,982,000 for the three months ended
September 30, 1997 compared to $77,000 for the same period in 1996. R&D,
license fees & royalties were $2,812,000 for the nine months ended September
30, 1997 compared to $906,000 for the same period in 1996. The increase for
both periods is due to a $1,875,000 milestone payment from Hoescht Marion
Roussel (HMR) related to the Allegra patent. A payment of $469,000 was made to
a third party related to the HMR milestone and is included in cost of products
sold.
Cost of products sold, as a percentage of product sales, was 53% for the three
months ended September 30, 1997 compared to 50% for the same period in 1996.
Cost of products sold, as a percentage of product sales, was 57% for the nine
months ended September 30, 1997 compared to 49% in the same period in 1996. The
increase in cost as a percentage of product sales is primarily due to product
mix changes and fluctuations in timing of production-scale customer orders. In
addition, the increase is also attributable to the transition of resources from
the product development phase to production support associated with the
commercialization of new media and instrument products.
Research and development expenses were $10,469,000 in the three months ended
September 30, 1997 compared to $10,631,000 in the same period last year.
Research and development expenses were $33,472,000 for the nine months ended
September 30, 1997 compared to $24,647,000 in the same period last year.
Research and development spending was primarily focused on preclinical and
clinical trials in the Company's pharmaceutical program. The increase for both
periods is primarily due to the costs associated with Sepracor's Phase III
clinical trials for LevAlbuterol and Norastemizole.
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Sales and marketing expenses were $1,854,000 for the three months ended
September 30, 1997 compared to $860,000 for the same period last year. Sales and
marketing expenses were $4,331,000 for the nine months ended September 30, 1997
compared to $2,736,000 for the same period last year. The increase for the
periods is due to an increase in market research costs to determine positioning
Sepracor's LevAlbuterol product in the market and costs related to infrastucture
development for a specialty sales force, offset by savings from personnel
reductions at BioSepra. Sepracor is currently planning to introduce LevAlbuterol
in late 1998.
General and administrative expenses were $1,950,000 for the three months ended
September 30, 1997 compared to $2,807,000 for the same period last year. General
and administrative expenses were $7,415,000 for the nine months ended September
30, 1997 compared to $8,718,000 for the same period last year. The decrease for
the periods is due to personnel reductions and related costs at BioSepra.
Legal expenses related to patents were $548,000 for the three months ended
September 30, 1997 compared to $256,000 for the same period last year. Legal
expenses related to patents were $1,203,000 for the nine months ended September
30, 1997 compared to $659,000 for the same period last year. The increase for
the periods is due to costs incurred in defending patent infringement claims
made against the Company in 1997, as well as maintenance fees and reserves
associated with the increased volume of patent filings.
Equity in income of investees was $134,000 for the three months ended September
30, 1997 compared to a loss of $1,091,000 in the same period last year. Equity
in loss of investees was $1,937,000 for the nine months ended September 30, 1997
and $6,466,000 for the same period last year. The equity in loss consists of the
Company's portion of HemaSure's and ChiRex's results (through March 31,1997).
The decrease in the three-month period relates to HemaSure recording net income
for the period as a result of receiving a $2,499,000 settlement payment from a
dispute with Pharmacia & Upjohn, Inc. The decrease in the nine-month period in
1997 as compared to 1996 primarily relates to ChiRex's one-time write-offs of
$11,076,000 (Sepracor's portion of this was $3,544,000) from ChiRex's initial
public offering and resulting transactions in March 1996.
Interest income, interest expense and other income (expense) was ($14,000) for
the three months ended September 30, 1997 compared to $212,000 for the same
period in 1996. Interest income, interest expense and other income (expense) was
$335,000 for the nine months ended September 30, 1997 compared to $644,000 for
the same period for 1996. The decrease for the periods is principally the result
of reduced interest income caused by a lower average cash balance for the 1997
period.
Minority interest in subsidiary resulted in a decrease of consolidated net loss
of $349,000 for the three months ended September 30, 1997 compared $133,000 for
the same period last year. Minority interest in subsidiary resulted in a
decrease of consolidated net loss of $744,000 for the nine months ended
September 30, 1997 compared to $624,000 for the same period last year. The
increase for the periods is a result of increased BioSepra losses over last
year, offset by a reduction in the percentage of minority interest.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents plus marketable securities of Sepracor and its
subsidiaries, including BioSepra, totaled $96,851,000 at September 30, 1997,
compared to $103,650,000 at December 31, 1996. Cash and cash equivalents plus
marketable securities of Sepracor, excluding BioSepra, at September 30, 1997
were $94,222,000.
The net cash used in operating activities for the nine months ended September
30,1997 was $32,179,000. The net cash used in operating activities includes a
net loss of $12,087,000 adjusted by non-cash charges of $5,669,000. This was
offset by the gain on sale of ChiRex of $30,069,000 and the minority interest in
subsidiary portion of the net loss of $744,000. The accounts payable and accrued
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expense balances increased a total of $5,841,000 from the December 31, 1996
balances primarily due to increased research and development accruals.
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 September 30, 1997, there was $995,000
outstanding under this credit facility, of this $270,000 represented Sepracor's
portion.
At September 30, 1997, Sepracor had guaranteed $743,000 of outstanding bank
borrowings of BioSepra SA; BioSepra's wholly owned French subsidiary.
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 September 30, 1997, Sepracor Canada Limited had received approximately
$2,960,000 of such term debt, of which $2,359,000 was outstanding. Sepracor
Canada Limited also received a grant of approximately $740,000.
In 1995, Versicor entered into a Convertible Subordinated Note Agreement ("the
Note Agreement") with Sepracor. Under this Note Agreement, Sepracor agrees to
loan to Versicor until October 2, 1998, such sums as Versicor may from time to
time request but may not exceed $4,700,000. The Note Agreement shall accrue
interest at the prime rate plus 1/2% (9% at September 30, 1997) not to exceed
9.5%. The Note Agreement is convertible, at the option of Sepracor, into
Versicor Series B Convertible Preferred Stock by dividing the amount
outstanding, including principal and interest, by $0.7833. The amount
outstanding at September 30, 1997 under the Note Agreement was $5,382,000.
In 1996, Versicor entered into a loan agreement with Sepracor. Under this
agreement, Sepracor agrees to loan to Versicor, such amounts as Versicor from
time to time requests but which may not exceed, in the aggregate principal
amount at any one time $7,500,000. As of June 23, 1997, this agreement was
amended to a Convertible Subordinated Note, with no principal maximum, providing
that accumulated principal and interest payments due to Sepracor, shall be
convertible, at the option of Sepracor, into Versicor Series B Convertible
Preferred Stock, by dividing the amount outstanding, including principal and
interest, by $0.7833. The loan accrues interest equal to the prime rate minus
1/4% (8.25% at September 30, 1997). This rate is subject to change under certain
circumstances. The total amount outstanding under this agreement was $9,495,000
at September 30, 1997.
In 1996, Sepracor, BioSepra and Versicor entered into a revolving credit
agreement with a commercial bank that provides for borrowing of up to an
aggregate of $10,000,000. BioSepra and Versicor can borrow up to $3,000,000
each. 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, minimum liquidity ratio and maximum leverage
for Sepracor and BioSepra. Sepracor is a guarantor of all outstanding
borrowings. At September 30, 1997, there were no amounts outstanding under this
agreement. The annual interest rate on such borrowings is at the lower of the
prime rate or LIBOR plus 1.75%.
In 1996, Versicor entered into a term loan agreement with a commercial bank that
provides for borrowing of up to $3,000,000 for the purpose of financing capital
equipment purchases. No individual term loan can be less than $500,000 and shall
be payable in sixteen equal quarterly installments commencing on January 1, 1998
with the final payment of the balance on December 31, 2001 or such earlier date
that the balance shall have been reduced to zero. There were no amounts
outstanding under this term loan agreement at September 30, 1997. The annual
interest rate on such borrowings is at the bank's Fixed Quoted Rate plus 1/2% or
the prime rate.
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FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the status of development, timing of
commercialization and the safety and efficacy of the Company's ICE
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 include the results of clinical trials, the success
of protection of proprietary rights and other factors described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
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
through 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 it expects that its
results of operations may continue to fluctuate from period to period in the
future.
PART II
OTHER INFORMATION
Item 1. Legal proceedings
Sepracor and BioSepra are defendants in three lawsuits brought by PerSeptive
BioSystems, Inc. ("PerSeptive") in the United States District Court for the
District of Massachusetts. In actions commenced in October 1993 and January
1995, PerSeptive alleged that Sepracor's and BioSepra's manufacture and sale of
HyperD chromatography media infringe four of PerSeptive's United States patents.
PerSeptive sought unspecified monetary damages as well as injunctive relief. In
a separate action, PerSeptive 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. Two additional perfusion chromatography patents
have been issued by PerSeptive. The new perfusion chromatography patents, which
have not yet been asserted against Sepracor or BioSepra in the litigation,
contain claims similar to the other patents Sepracor and BioSepra are alleged to
have infringed.
BioSepra has received an opinion of its patent counsel 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 relating to "perfusion
chromatography", which PerSeptive has asserted against Sepracor and BioSepra.
PerSeptive also alleges that another United States patent, which relates to the
chemistry of certain coatings applied during the manufacture of HyperD
12
<PAGE> 13
(the "coatings patent"), is infringed by the manufacture, sale or use of HyperD.
Sepracor and BioSepra have asserted a counterclaim charging PerSeptive with
unfair competition.
In January 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 Court ruled that the named inventors in the three
"perfusion" patents were not all of the inventors of the alleged inventions
claimed in those patents. PerSeptive moved to correct the inventorship of the
patents to include the unnamed inventors. The Court ruled in April 1997 that
PerSeptives's patents could not be corrected because of deceptive conduct by the
named inventors, and ordered entry of judgment in favor of the defendants. In
response, Sepracor and BioSepra requested that, in addition to dismissing
PerSeptive's infringement claims because the named inventor's deceptive conduct
prevented the patents from being corrected, the Court should also dismiss those
claims on the grounds that the patents were obtained as a result of inequitable
conduct. In that event, two theories would have been presented to the Appeals
Court upon appeal by PerSeptive.
Before the Court ruled on Sepracor and BioSepra's request for entry of judgment
against PerSeptive on both theories, the United States Court of Appeal for the
Federal Circuit ruled in an unrelated case that the deceptive intentions of
named inventors are not relevant to the question whether a patent should be
corrected, but are relevant to the question of inequitable conduct. In response
to the new Appeals Court decision, the Court is likely to modify its earlier
ruling that PerSeptive's patents could not be corrected because of the named
inventors' deceptive intent. Sepracor and BioSepra have requested that any
modification occur simultaneously with any decision by the District Court
concerning inequitable conduct. If the perfusion patents were obtained by
inequitable conduct, they would be invalid and unenforceable.
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 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 - 5 None
- -----------
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Exhibit listed in the Exhibit Index which immediately precedes the exhibits
attached thereto.
a) Exhibits:
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
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: November 13, 1997 /s/ Timothy J. Barberich
-----------------------------
Timothy J. Barberich
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 1997 /s/ Robert F. Scumaci
-----------------------------
Robert F. Scumaci
Senior Vice President
of finance and Administration
(Principal Financial and
Accounting Officer)
14
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