<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 number 0-19410
Sepracor Inc.
-------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2536587
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
111 Locke Drive, Marlborough, Massachusetts 01752
- ------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 481-6700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of class)
<PAGE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of voting Common Stock held by nonaffiliates of the
registrant was approximately $4,061,988,000 based on the last reported sale
price of the Common Stock on the Nasdaq consolidated transaction reporting
system on March 15, 1999.
Number of shares outstanding of the registrant's class of Common Stock as of
March 15, 1999: 32,739,935 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Stockholders - Part II
Proxy Statement for the 1999 Annual Meeting of Stockholders - Part III
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are included or incorporated by reference
from the 1998 Annual Report.
1. The following financial statements (and related notes) of the Company
are incorporated by reference from the 1998 Annual Report:
<TABLE>
<CAPTION>
Page*
-----
<S> <C>
Report of Independent Accountants 30*
Consolidated Balance Sheets at December 31, 1998 and 1997 31*
-1-
<PAGE>
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 32*
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996 33*
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 34*
Notes to the Consolidated Financial Statements 35*
</TABLE>
-----------
* Refers to page number of the 1998 Annual Report. The financial
statements (and related notes) are incorporated by reference from the
1998 Annual Report.
2. The schedule listed below and the Report of Independent Accountants
on financial statement schedule are filed as part of this Annual
Report on Form 10-K:
<TABLE>
<S> <C>
Report of Independent Accountants on Financial
Statement Schedule S-1
Report of Independent Accountants on Financial
Statement Schedule S-2
Schedule II -- Valuation and Qualifying Accounts S-3
</TABLE>
All other schedules are omitted as the information required
is inapplicable or the information is presented in the consolidated
financial statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the
Exhibits filed as a part of this Annual Report on Form 10-K.
(b) The following current reports on Form 8-K were filed by the
Company during the last quarter of the year ended December 31, 1998.
(1) Current Report on Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on November 5, 1998 relating to the call for
redemption of the Company's 7% Convertible Subordinated Debentures
due 2002.
-2-
<PAGE>
(2) Current Report on Form 8-K filed with the SEC on December 10,
1998, relating to the signing of a licensing agreement with Eli Lilly
and Company.
(3) Current Report on Form 8-K filed with the SEC on December 17,
1998, relating to the pricing of the Company's 7% Convertible
Subordinated Debentures due 2005.
The following trademarks are mentioned in this Annual Report on Form
10-K:
Sepracor, ICE and Xopenex are trademarks of Sepracor. BioSepra,
HyperD, HyperDiffusion and UpScale Process are trademarks of BioSepra. HemaSure
and LeukoNet are trademarks of HemaSure. This Annual Report on Form 10-K also
contains trademarks of other companies.
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SEPRACOR INC.
By: /s/ Timothy J. Barberich
-------------------------------------
Timothy J. Barberich
President and Chief Executive Officer
Date: July 23, 1999
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1(7) -- Restated Certificate of Incorporation of the
Registrant, as amended.
3.2(1) -- Amended and Restated By-Laws of the Registrant.
4.1(1) -- Specimen Certificate for shares of Common
Stock, $.10 par value, of the Registrant.
4.2(5) -- Form of 6 1/4% Convertible Subordinated
Debenture due 2005.
4.3(5) -- Global 6 1/4% Convertible Subordinated Debenture
payable to Cede & Co. due 2005.
4.4** -- Global 7% Convertible Subordinated Debenture
payable to Cede & Co. due 2005.
10.1(1) -- Second Amended and Restated Registration
Rights Agreement dated as of June 28, 1991, by
and among the Registrant and the persons
listed on Schedule I thereto.
(*)10.2** -- The Registrant's 1991 Restated Stock Option Plan,
as amended and restated.
(*)10.3** -- The Registrant's 1991 Director Stock Option Plan,
as amended and restated.
(*)10.4(4) -- The Registrant's 1996 Employee Stock Purchase
Plan, as amended and restated.
(*)10.5(5) -- The Registrant's 1997 Stock Option Plan.
(*)10.6** -- The Registrant's 1998 Employee Stock Purchase
Plan.
<PAGE>
Exhibit No. Description
----------- -----------
10.7(3) -- Lease as to Marlboro Industrial Park, dated
December 12, 1995, between Valerie A. Colbert,
Trustee of Second Marlboro Development Trust
under Declaration of Trust dated September 15,
1972, and the Registrant (the "Marlboro
Lease").
10.8(5) -- First Amendment to Marlboro Lease, dated
February 1, 1997, and Second Amendment to
Marlboro Lease, dated July 1, 1997.
10.9** -- Stock Purchase Agreement dated June 1,
1993, between the Registrant and Marion
Merrill Dow.
10.10** -- Technology Transfer and License Agreement
dated as of January 1, 1994, between the
Registrant and BioSepra Inc.
10.11** -- Technology Transfer and License Agreement
dated as of January 1, 1994, between the
Registrant and HemaSure Inc.
10.12** -- Technology Transfer and License Agreement,
effective January 1, 1995, between the
Registrant and SepraChem Inc.
10.13** -- Series A Convertible Preferred Stock
Purchase Agreement, dated September 30, 1994,
by and among the Registrant and OFD Partners,
L.P.
(*)10.14(2) -- Letter Agreement, dated September 30, 1993,
between the Company and David S. Barlow.
(*)10.15(2) -- Letter Agreement, dated June 10, 1994, between
the Registrant and David Southwell.
(*)10.16(4) -- Letter Agreement, dated February 23, 1996,
between the Registrant and Paul D. Rubin.
<PAGE>
Exhibit No. Description
----------- -----------
(*)10.17(4) -- Letter Agreement, dated February 23, 1995,
between the Registrant and Robert F. Scumaci.
(*)10.18(4) -- Consulting Agreement between the Registrant and
Mr. Steigrod, dated September 1, 1996.
(*)10.19(5) -- Consulting Agreement Amendment, dated as
of January 1, 1997, between the Registrant and
Alan A. Steigrod.
(*)10.20(5) -- Consulting Agreement between the Registrant and
Digby W. Barrios, dated October 1, 1995.
10.21(5) -- Promissory Note from David Barlow to the
Registrant, dated July 1, 1997 to December 31,
1997, and Letter Extension from the Registrant
dated December 18, 1997.
10.22(5) -- Promissory Note from Paul D. Rubin to the
Registrant, dated January 22, 1998.
10.23(2) -- Series B Preferred Stock Purchase Agreement
dated March 14, 1995, between the Registrant
and Beckman Instruments, Inc.
10.24(2) -- Intellectual Property Security Agreement by
and between Fleet Bank of Massachusetts, N.A.
and the Registrant, dated December 28, 1994.
10.25(4) -- Confirmation of and Amendment to Intellectual
Property Security Agreement between Fleet
National Bank and the Registrant, dated February
1997.
10.26(4) -- Deposit Pledge Agreement, dated December 31, 1996,
between the Registrant and Fleet National Bank.
<PAGE>
Exhibit No. Description
----------- -----------
10.27(5) -- Put Agreement, dated as of December 30, 1997,
between the Registrant and Fleet National Bank.
10.28(4) -- Amended and Restated Revolving Credit and
Security Agreement among Fleet National Bank,
the Registrant and Sepracor Securities
Corporation, dated December 31, 1996.
10.29(4) -- Amended and Restated Promissory Note, dated
December 31, 1996, between the Registrant,
Sepracor Securities Corporation and Fleet
National Bank.
10.30(4) -- Guaranty Agreement, dated December 31,
1996, between the Registrant and Fleet
National Bank for BioSepra Inc.
10.31(5)+ -- Agreement, dated as of December 5, 1997, by
and between the Registrant and Schering-Plough
Ltd.
10.32(5)+ -- License Agreement, dated January 30, 1998,
by and between the Registrant and Janssen
Pharmaceutica N.V.
10.33(6)+ -- Norcisapride Development and License
Agreement, dated as of July 20, 1998, between
Janssen Pharmaceutica N.V. and the Registrant.
10.34+** -- Exclusive License Agreement by and between Eli
Lilly and Company and the Registrant
10.35(5) -- Indenture, dated as of February 10, 1998,
between the Registrant and The Chase Manhattan
Bank, as trustee, relating to the 6 1/4%
Convertible Subordinated Debentures due 2005.
<PAGE>
Exhibit No. Description
----------- -----------
10.36(5) -- Registration Rights Agreement, dated as of
February 5, 1998, by and among the Registrant,
Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc., Smith Barney Inc. and Vector
Securities International, Inc.
10.37** -- Indenture, dated as of December 15, 1998,
between the Registrant and The Chase Manhattan
Bank, as trustee, relating to the 7%
Convertible Subordinated Debentures due 2005
10.38** -- Registration Rights Agreement, dated as of
December 10, 1998, by and among the Registrant,
Morgan Stanley & Co. Incorporated and Salomon
Smith Barney, Inc.
13 -- 1998 Annual Report to Stockholders (which
shall be deemed filed only with respect to
those portions specifically incorporated by
reference herein).
21** -- Subsidiaries of the Company.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of Arthur Andersen LLP.
27** -- Financial Data Schedule.
99** -- Report of Arthur Andersen LLP.
</TABLE>
- ----------
(*) Management contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Item 14(c) of Form 10-K.
(**) Previously filed.
(+) Confidential treatment as to certain portions.
(1) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (File No. 33-41653).
<PAGE>
(2) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(3) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(4) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
(6) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference from the Registrant's Registration
Statement on Form S-8, filed on July 6, 1998, relating to the 1991
Director Stock Option Plan.
<PAGE>
Ex. 13
Sepracor 1998 Annual Report
[FRONT COVER]
(SEPRACOR LOGO)
(PHOTO MONTAGE USING PHOTOS FROM INTERIOR OF BOOK)
Liberating the Power of Pure Medicine
1998 Annual Report
<PAGE>
[INSIDE FRONT COVER]
(CHART SHOWING SEPRACOR DRUGS/PARENT DRUGS/CURRENT APPROVAL STATUS)
<TABLE>
<CAPTION>
ICE Pharmaceutical Parent Drug Preclinical Phase I Phase II Phase III NDA Filed Launch
[Picture Caption -- Respiratory-Allergy/Asthma]
<S> <C> <C>
Fexofenadine ALLEGRA(TM) Seldane(R) ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||1996
Levalbuterol XOPENEX(TM) Ventolin(R)/Proventil(R) |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Norastemizole Hismanal(R) ||||||||||||||||||||||||||||||||||||||||||||
Desloratadine Claritin(R) |||||||||||||||||||||||||||||||||||||||||
(R,R)-formoterol Foradil(R)/Atock(R) ||||||||||||||||||||||||||||||||
(-)-cetirizine Zyrtec(R) |||||||
(S)-salmeterol Serevent(R) |||||||
[Picture Caption -- Urology/Gastroenterology]
(S)-oxybutynin Ditropan(R) ||||||||||||||||||||||||||||||||
(+)-norcisapride Propulsid(R) ||||||||||||||||||||||
(S)-doxazosin Cardura(R) |||||||||
(S)-lansoprazole Prevacid(R) ||||||
(-)-pantoprazole Pantozol(TM) ||||||
[Picture Caption -- Central Nervous System]
(R)-ketoprofen Orudis(R)/Actron(R) ||||||||||||||||||||||||||||||
(R)-fluoxetine Prozac(R) ||||||||||||||||||||||||||
Desmethylsibutramine Meridia(R) ||||||||
(+)-zopiclone Imovane(R) ||||||||
Hydroxy bupropion Zyban(TM) |||||
Desmethylvenlafaxine Effexor(R) |||||
Nefazodone metabolite Serzone(R) |||||
[Picture Caption -- Other]
(S)-amlodipine Norvasc(R) |||||
Hydroxy itraconazole Sporanox(TM) |||||
</TABLE>
<PAGE>
Sepracor
Sepracor is developing an extensive portfolio of ICE(TM) Pharmaceutical
candidates for the therapeutic areas of respiratory care, urology,
gastroenterology, psychiatry and neurology. These products will be
commercialized through out-licensing agreements, co-promotion partnerships and
Sepracor's sales force.
Sepracor is a specialty pharmaceutical company that develops and commercializes
potentially improved versions of widely-prescribed drugs. Improved Chemical
Entities ("ICEs") are proprietary, single-isomer or active-metabolite drugs
offering meaningful improvements in patient care over existing therapies. ICE
Pharmaceuticals are designed to offer reduced side effects, increased efficacy,
improved dosage, and the opportunity for additional indications.
Sepracor's pharmaceutical company partners include: Eli Lilly for the single
isomer of Prozac(R), Schering-Plough for the active metabolite of Claritin(R),
Johnson & Johnson for the active metabolites of Propulsid(R) and Hismanal(R),
and Hoechst Marion Roussel for Allegra(TM).
ICE(TM) Pharmaceuticals
one
<PAGE>
To Our Shareholders:
Nineteen ninety-eight was a remarkable year for Sepracor. The Company added
significant shareholder value by achieving several important milestones;
Sepracor signed three corporate partnerships, made considerable progress in the
clinic, and announced new ICE Pharmaceutical patents. Our annual report
describes Sepracor's continued progress in developing and commercializing its
ICE Pharmaceuticals.
Sepracor expands its commercialization strategy. As Sepracor continues to
expand its pipeline of ICE Pharmaceuticals, it will decide which candidates the
Company will seek to develop and market internally and which compounds could be
outlicensed to strategic corporate partners. The Company's three-tiered approach
to commercialize its ICE Pharmaceuticals includes direct sales, co-promotion and
out-licensing agreements.
Direct Sales In creating a strong presence in the respiratory market,
Sepracor plans to continue to expand its own respiratory sales force for the
marketing and sales of Xopenex (levalbuterol HCl), the first single-isomer,
short-acting bronchodilator. Sepracor is developing (R,R)-formoterol currently
in Phase II trials, as a long-acting, single-isomer bronchodilator that will
complement Xopenex as part of Sepracor's respiratory franchise.
Co-promotion Sepracor expects that Norastemizole, an active metabolite of
Hismanal, marketed by Janssen Pharmaceutica N.V., a wholly-owned subsidiary of
Johnson & Johnson, will be a co-promoted product with Sepracor's respiratory
sales force. Sepracor and Janssen intend to jointly market and sell the drug and
the companies will each receive fifty percent of the norastemizole profits.
Over the next several years, Sepracor's sales force will expand, as
necessary, to support as many as ten new product launches in the therapeutic
areas of respiratory, urology and central nervous system (CNS). Several
candidates under internal development have the potential to be co-promoted with
strategic pharmaceutical partners.
Outlicensing The Company believes that certain compounds are more
appropriate for partnerships as a therapeutic franchise management strategy.
Sepracor signed two licensing agreements in 1998; the first with Eli Lilly and
Company for (R)-fluoxetine, a modified form of an active ingredient found in
Prozac(R), and the second with Janssen for (+)-norcisapride, the metabolite of
Propulsid(R). Both are examples of how an ICE Pharmaceutical can potentially
improve the parent compound and also expand the product franchise through new
indications not achieved by the parent drug. Sepracor has chosen several other
compounds as candidates for out-licensing arrangements, including ICE versions
of Johnson & Johnson's Sporanox, Pfizer's Norvasc and UCB/Pfizer's Zyrtec, and
American Home Products/Byk's Pantozol.
[BEGIN CHART]
10 Product Launches Support Sepracor Sales Force Build Out
(TIMELINE 1998 TO 2004 / SALES FORCE 65 TO 2000)
<TABLE>
<CAPTION>
Respiratory Urology CNS
<S> <C> <C>
Xopenex[TM] (S)-oxybutynin (+)-zopiclone
(R,R)-formoterol (S)-doxazosin Hydroxy bupropion
Norastemizole Desmethylsibutramine Desmethylsibutramine
Nefazodone metabolite
(R)-ketoprofen
</TABLE>
[END CHART]
two
<PAGE>
This year five ICE Pharmaceutical compounds advanced in the clinic.
Sepracor's Phase II trials of (S)-oxybutynin, the single isomer of racemic
oxybutynin, demonstrated efficacy and good tolerability for the treatment of
urinary incontinence. A high priority clinical program for Sepracor,
(S)-oxybutynin is entering into a Phase IIB/III clinical trial involving over
900 patients. The Company is continuing progress with Phase II trials of
(R,R)-formoterol, Sepracor's long-acting bronchodilator. To date, Sepracor has
completed three large-scale, controlled clinical trials of norastemizole, one of
its antihistamine drug candidates and will conduct additional trials this year.
The Company also completed Phase I clinical trials for (R)-fluoxetine.
Sepracor's partner Schering-Plough advanced desloratadine, the active
metabolite of Claritin(R) into Phase III clinical trials and Janssen began Phase
I clinical studies on Propulsid(R).
In addition, Sepracor received an approvable letter for Xopenex(TM)
(levalbuterol HCl) from the U.S. Food and Drug Administration and is currently
awaiting final approval.
Sepracor expects to continue its clinical programs by filing five new
Investigational New Drug Applications in 1999 for the following ICE candidates:
(+)-zopiclone, (S)-doxazosin, desmethylsibutramine, hydroxy itraconazole, and
(-)-cetirizine. Sepracor will also explore (R)-ketoprofen in the clinic for new
indications.
ICE Patent Announcements During 1998, Sepracor announced the issuance of
three important patents relating to single-isomer drugs. The Company was issued
a patent for the use of a single isomer of fluoxetine, (R)-fluoxetine, to treat
depression. The Company also received a patent covering the use of
(-)-cetirizine, a single isomer of cetirizine, to treat allergies. Cetirizine,
marketed as Zyrtec(R) by both Pfizer and UCB S.A., is a leading treatment for
allergies. Sepracor was also granted a patent on (+)-zopiclone, a single isomer
form of a drug marketed in Europe for the treatment of sleep disorders by
Rhone-Poulenc Rorer sold under the brand name of Imovane(R). Sepracor continued
to expand its patent platform by filing 28 additional ICE Pharmaceutical patent
applications in 1998.
Sepracor's drug discovery efforts continue to generate lead compounds,
which complement the Company's ICE Pharmaceutical pipeline. In an effort to
become a fully integrated pharmaceutical company, Sepracor is continuing to
focus its discovery program on the areas of infectious disease and CNS,
particularly pain and anxiety.
Sepracor ended the year with a strong cash position. For the year ended
December 31, 1998, the Company had approximately $500 million in consolidated
cash and marketable securities. In February 1998, Sepracor completed a $189
million offering of 6-1/4% Convertible Subordinated Debentures due 2005. In
December 1998, the Company completed a $300 million offering of 7% Convertible
Subordinated Debentures also due 2005.
The Company leaves 1998 with the strongest balance sheet in its history and
is well positioned to continue advancing its ongoing clinical programs and
expanding its research of new drug candidates.
I would like to thank Sepracor's shareholders, partners, and employees for
their contributions toward our accomplishments this past year, and I look
forward to reporting on Sepracor's clinical and commercial progress to you
throughout the coming year.
Sincerely,
/s/ Timothy J. Barberich
- -------------------------------------
Timothy J. Barberich
President and Chief Executive Officer
[PHOTO OF TIMOTHY J. BARBERICH IN TOP RIGHT CORNER OF PAGE]
three
<PAGE>
ICE(TM) Strategy
Sepracor's ICE(TM) Pharmaceutical Strategy is the Core of Our Success
Single-Isomer Drugs
Over 150 years ago, Louis Pasteur discovered that man-made drugs differed
significantly from those found in nature. These synthetic drugs contain a 50:50
mixture of two isomers, while naturally occurring drugs such as adrenaline, are
always single isomers. Often only one isomer of the pair in a racemic mixture is
therapeutically active, while the other isomer is inactive and may even cause
detrimental side effects.
Racemic mixtures are commonly the result of chemical synthesis of
molecules. Over 500 racemic drugs are on the market today. Chemically identical,
isomers differ in their three-dimensional structures. As a result, different
isomers often interact separately with chemical processes in the body.
The United States Food and Drug Administration's 1992 policy statement on
stereo-isomers encourages the development of optically pure, single-isomer drugs
as New Chemical Entities (NCEs). The FDA now considers the non-therapeutic half
of a racemic pharmaceutical an impurity, unless it is proven harmless. Sepracor
and the pharmaceutical industry have responded with intensified development in
this area.
Sepracor's ICE(TM) Pharmaceuticals have the potential to be purer, safer or
more efficacious versions of their parent drug compounds. Since the parent drugs
have well-known efficacy and safety profiles, ICE Pharmaceuticals generally can
be developed with less technical, financial, and regulatory risk than new
chemical entities. Sepracor has assembled a portfolio of patents and is
currently developing proprietary, single-isomer versions of 16 best-selling
drugs marketed today as racemic mixtures.
Single Isomers
Many drugs exist in mirror-image forms called isomers. Often only one isomer of
the pair in a racemic mixture is therapeutically active, while the other isomer
is inactive or may even cause detrimental side effects.
To the right of this page is the molecular model for Sepracor's single-isomer
drug Xopenex(TM) (levalbuterol HCl). The drug's mirror image and inactive
isomer, (S)-albuterol, is to the left. Xopenex(TM) (levalbuterol HCl), in
nebulizer form, will be sold in the U.S. by Sepracor's respiratory sales force
after receiving final U.S. FDA marketing approval.
[PHOTO: molecule with 2 mirror molecules screened behind type]
four
<PAGE>
PAGE 5
Active-Metabolite Drugs
An active metabolite is a therapeutically-active compound produced when the body
metabolizes a drug. Drugs are usually transformed within the body into a variety
of related chemical forms (metabolites), some of which may have therapeutic
activity (an active metabolite). Interference with the metabolic conversion of a
drug into its medicinal metabolites and the increase in concentration of the
drug in the body, can result in potentially serious side effects. Sepracor has
demonstrated that for certain drugs, superior efficacy or safety can be obtained
by switching from the parent drug to the active metabolite.
For example, Sepracor's ICE(TM) Pharmaceutical, (+)-norcisapride, is an
isomer of the active metabolite of Propulsid, marketed by Johnson & Johnson for
gastroesophageal reflux disease (GERD). Propulsid is known to have the potential
for cardiac side effects and drug-drug interactions. We believe (+)-norcisapride
will eliminate the risk of these serious side effects and has the potential to
increase the efficacy and improve dosing for GERD. In addition, (+)-norcisapride
creates an opportunity for additional indications such as emesis, irritable
bowel syndrome, and bulimia.
Sepracor is currently developing six improved active-metabolite
alternatives of widely-prescribed compounds.
Active Metabolites
Active metabolites are therapeutically active compounds produced when a drug is
transformed (metabolized) within the body. Sepracor has shown that some active
metabolites may have superior safety and efficacy profiles to that of their
parent drug and in some instances offer the opportunity for additional
indications.
For example, desloratadine (right) is an active metabolite form of
Schering-Plough's market-leading, nonsedating antihistamine, Claritin(R)
(loratadine), which may have the potential for greater potency. Schering-Plough,
who licensed a use patent from Sepracor, is developing and will commercialize
desloratadine, which is currently in worldwide Phase III clinical trials.
[PHOTO: molecule with larger molecule screened behind type]
five
<PAGE>
[PHOTO OF 2 PEOPLE IN SILHOUETTE CLIMBING A MOUNTAIN-FULL BLEED PICTURE]
six
<PAGE>
Partnerships Enhancing Drug Effectiveness...Extending Proprietary Life
Eli Lilly and Company, Schering-Plough, Johnson & Johnson, and Hoechst Marion
Roussel have formed drug development and commercialization collaborations with
Sepracor. These pharmaceutical companies have licensed Sepracor's proprietary
ICE(TM) Pharmaceutical products in order to develop potentially safer and more
efficacious, single-isomer or active-metabolite versions of blockbuster drugs.
In exchange for patent rights and other rights, these agreements include a
combination of initial licensing fees, funding of drug-development expenses,
milestone payments, royalty and co-marketing payments from its partners. The
parent compounds of Sepracor's four licensed ICE(TM) Pharmaceuticals, and
Allegra (currently on the market), had combined sales revenue, exceeding $6
billion in 1998.
(R)-fluoxetine - a next-generation antidepressant In December 1998,
Sepracor announced an exclusive licensing agreement with Eli Lilly and Company
(NYSE: LLY) for the development and commercialization of (R)-fluoxetine, a new
chemical entity patented by Sepracor. (R)-fluoxetine is a modified form of an
active ingredient found in Prozac(R). Prozac was the first selective serotonin
reuptake inhibitor (SSRI) to enter the U.S. market more than 10 years ago.
Prozac is the world's most widely used brand-name antidepressant, having been
prescribed to more than 35 million people in over 100 countries. Worldwide,
Prozac sales reached $2.8 billion in 1998.
Sepracor has shown in its own preclinical studies that (R)-fluoxetine has
the potential to offer greater flexibility in treating depression compared to
currently marketed antidepressants. In addition, preclinical data suggests that
(R)-fluoxetine has the potential to provide treatment benefits in a broader
range of patients and for a broader range of indications than most currently
available antidepressants, including Prozac.
Under the terms of Sepracor's agreement with Lilly, Sepracor will receive
an up-front milestone
[Eli Lilly Logo]
<TABLE>
<CAPTION>
ICE(TM) Pharmaceutical Collaborations]
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sepracor ICE(TM) Pharmaceutical Candidate Parent Drug Company Expected Indication Parent Drug Development Status
Potential Benefits of Drug Candidate 1998 Estimated
Worldwide Sales
($millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Allegra Seldane(R) Allergy $500 Launched 1996
nonsedating antihistamine with Hoechst Marion Roussel
improved dosing
- ----------------------------------------------------------------------------------------------------------------------------------
Desloratadine Claritin(R) Allergy $2300 Phase III
nonsedating antihistamine with Schering-Plough
improved potency
- ----------------------------------------------------------------------------------------------------------------------------------
Norastemizole Hismanal(R) Allergy $150 Phase III
antihistamine with improved potency, Johnson & Johnson
rapid onset, longer duration and
reduced cardio-vascular side effects
without sedation
- ----------------------------------------------------------------------------------------------------------------------------------
(+) - norcisapride Propulsid(R) GERD $1000 Phase I
reduced cardiotoxicity, increased Johnson & Johnson
efficacy, additional indications,
less frequent dosing
- --------------------------------------------------------------------------------------------------------------------------------
(R) - fluoxetine Prozac(R) Depression other $2800 Phase I/II
improved efficacy and new indications Eli Lilly and Company CNS indications
</TABLE>
seven
<PAGE>
payment and a license fee of $20 million and will also receive up to $70 million
in milestone payments based on the progression of (R)-fluoxetine through
development. Sepracor will receive royalties on worldwide (R)-fluoxetine sales
beginning on product launch. Lilly will be responsible for all development work
on (R)-fluoxetine, including regulatory submissions. Based on current regulatory
guidelines, Lilly hopes to complete the clinical studies of (R)-fluoxetine by
2001 with regulatory submissions taking place at that time.
Under the Hart Scott Rodino Act, the Company has received a request from
the Federal Trade Commission for additional information in connection with its
license agreement with Eli Lilly and Company for (R)-fluoxetine. The Company
plans to fully respond to the request and expects the license agreement with Eli
Lilly and Company to become effective as soon as the Federal Trade Commission
completes its review.
Norcisapride - a potentially safe active metabolite of Janssen's GERD drug,
Propulsid(R) In July 1998, Sepracor and Janssen announced a licensing agreement
to develop and market (+)-norcisapride. Propulsid(R) (cisapride) is indicated in
the U.S. for the treatment of patients with nocturnal heartburn due to
gastroesophageal reflux disease (GERD). Janssen's worldwide sales of
Propulsid(R) in 1998 exceeded $1 billion. Sepracor's preclinical data indicates
that the Propulsid(R) active metabolite, (+)-norcisapride, has the potential of
being a safe and active product for GERD, with additional potential for other
indications.
[Johnson & Johnson logo]
Under the terms of the agreement, Sepracor has exclusively licensed to
Janssen all of Sepracor's worldwide rights to develop and market
(+)-norcisapride enantiomers. Janssen will pay Sepracor royalties on product
sales beginning at launch and royalties will escalate upon achievement of sales
milestones.
<TABLE>
<CAPTION>
Sepracor ICE(TM) Pharmaceutical Candidates for Therapeutic Franchise Management
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ICE(TM) Pharmaceutical Parent drug Sepracor Development Patent Drug 1998 Innovator
Partnership Candidate Estimated Worldwide Patent
Drug Indication Company Commercialization Partner Sales in millions Expiration
- ------------------------------------------------------------------------------------------------------------------------------
Allegra(R) Seldane(R) $500 2001
allergy Hoechst Marion Roussel Hoechst Marion Roussel
desloratadine Claritin(R) $2300 2004
allergy Schering-Plough Schering-Plough
norastemizole Hismanal(R) $100 2007
allergy Johnson & Johnson Johnson & Johnson
(+)-norcisapride Propulsid(R) $1000 2009
GERD Johnson & Johnson Johnson & Johnson
(R)-fluoxetine Prozac(R) $2800 2003
depression Eli Lilly and Co. Eli Lilly and Co.
- ------------------------------------------------------------------------------------------------------------------------------
(R)-bupropion Zyban(TM) $150 1997
depression, ADD Glaxo-Wellcome
(-)-cetirizine Zyrtec(R) $700 2002
allergy Pfizer
(-)-pantoprazole Pantozol(TM) $300 2005
GERD American Home Products
(-)-amlodipine Norvasc(R) $2600 2007
hypertension Pfizer
hydroxy itraconazole Sporanox(R) $500 2007
anti-fungal Johnson & Johnson
desmethylvenlafaxine Effexor(R) $500 2007
CNS American Home Products
(S)-lansoprazole Prevacid(R) $1200 2007
GI TAP Pharmaceuticals
(R)-ondansetron Zofran(R) $600 2007
nausea Glaxo-Wellcome
(S)-salmeterol Serevent(R) $800 2008
asthma Glaxo-Wellcome
- ------------------------------------------------------------------------------------------------------------------------------
Total: $14.5 billion
</TABLE>
eight
<PAGE>
[Logo's in Text: Johnson & Johnson / Schering-Plough / Hoechst Marion Roussel]
Norastemizole - a potential non-sedating antihistamine, an active
metabolite of Janssen's Hismanal(R) In February 1998, Sepracor announced a
co-development and co-promotion arrangement for norastemizole with Janssen
Pharmaceutica, N.V., a wholly-owned subsidiary of Johnson & Johnson (NYSE: JNJ).
Norastemizole may combine the benefits of safety, potency, rapid onset of action
and long duration of action for the treatment of allergies.
Under the terms of the agreement, the companies will jointly fund the
development of norastemizole, and Janssen has an option to acquire certain
rights regarding the product in the United States and abroad. When this option
is exercised, Janssen and Sepracor will equally share the costs and profits
associated with the further development, marketing and sale of norastemizole in
the U.S. Janssen will market norastemizole overseas, paying Sepracor royalties
on sales. Sepracor retains the right to co-promote norastemizole in the U.S.
through its respiratory sales force.
Three large-scale controlled human clinical trials of norastemizole have
been completed by Sepracor and additional studies are underway.
Desloratadine - an active metabolite of Schering-Plough's market-leading
nonsedating antihistamine, Claritin(R), with the potential for greater potency
In December 1997, Sepracor and Schering-Plough Corporation (NYSE: SGP) announced
a licensing agreement giving Schering-Plough exclusive worldwide rights to
Sepracor's use patent covering desloratadine, an active metabolite of
Claritin(R). 1998 worldwide sales of Claritin were approximately $2.3 billion.
Under the terms of the agreement, Sepracor has exclusively licensed its
desloratadine use patent rights to Schering-Plough, who will develop and market
a desloratadine product worldwide. Under the agreement, royalties will begin at
product launch and will escalate over time and upon the achievement of sales
volume and other milestones. Schering-Plough is currently conducting worldwide
Phase III trials.
Fexofenadine (Allegra(TM)) - a safer, active metabolite replaces HMRI's
Seldane(R) Seldane, marketed by Hoechst Marion Roussel (HMRI), was the leading
nonsedating antihistamine until the FDA mandated that Seldane carry a
"black-box" warning in its label alerting physicians to potential cardiovascular
side effects and adverse drug-drug interactions.
In 1993, Sepracor entered into a licensing agreement with HMRI giving it
the rights to Sepracor's U.S. patents on its ICE Pharmaceutical fexofenadine
(Allegra), an active metabolite of Seldane. In less than three years of
development, HMRI launched Allegra(TM) in 1996 as a nonsedating antihistamine
without the cardiotoxicity of the parent drug Seldane(R). After the introduction
of Allegra, and at the request of the FDA, HMRI removed Seldane(R) from the
market. Seldane offers no therapeutic benefits over its active metabolite,
Allegra, and has serious potential adverse side effects.
While Sepracor is entitled to receive U.S. royalty payments upon the
expected expiration in 2001 of HMRI's composition of matter patent covering
fexofenadine, the right to receive royalties is subject to successful resolution
of pending patent interference action. The interference is expected to be
decided in 1999. 1998 worldwide sales of Allegra were approximately $500
million.
[Chart centered in top column]
------------------------------------
The Value of ICE(TM) Strategy
------------------------------------
New
Indications
Market
Growth
Innovator's NCE
Product
Improvement
[Vertical] Sales
[Horizontal] Time [arrow] 2005 2015
nine
<PAGE>
Breathing Easier ICE(TM) Pharmaceuticals...Improving Patient Outcomes
A comprehensive product platform for the Company's respiratory sales force is
expected to include the direct sales of Sepracor's two complementary asthma
drugs, Xopenex(TM) (levalbuterol HCl), a short-acting bronchodilator, and
(R,R)-formoterol, a long-acting bronchodilator. The Company also intends to
co-promote norastemizole, under development for the treatment of allergies.
Asthma
Fifteen million Americans, including 5 million children, suffer from asthma, an
increase of 78 percent since 1980. It is the most prevalent chronic disorder in
children and annually accounts for 10 million lost school days. Approximately
5,000 deaths occur as a result of asthma in the U.S. each year, a 91 percent
increase in the past decade.
Asthma is a chronic disorder of the bronchial airways. During an asthma
attack, the bronchial airways become narrowed as the bronchial muscles tighten.
Bronchodilators, such as racemic albuterol and Xopenex, are classified as
beta-agonists. Beta- agonists are used as primary treatment for acute and
chronic asthma attacks because of their immediate onset of action. In order to
treat asthma effectively, beta agonists should be used in conjunction with the
long-term therapy of either steroids or leukotriene antagonists.
Short-acting and long-acting bronchodilators prescribed for the treatment
of asthma had worldwide sales of over $2.6 billion in 1998. Sepracor's Xopenex
is the single-isomer version of the world's leading bronchodilator, racemic
albuterol. In 1998, racemic albuterol estimated worldwide sales exceeded $1.2
billion. Racemic albuterol has been the front line therapy despite its side
effects. Xopenex is the first improvement over racemic albuterol in over 20
years.
Xopenex(TM) (levalbuterol HCl) - the improved single-isomer form of
Glaxo-Wellcome's Ventolin(R) and Schering-Plough's Proventil(R) Sepracor is
awaiting final approval from the FDA to begin marketing Xopenex(TM)
(levalbuterol HCl), a bronchodilator for the treatment and prevention of acute
bronchospasm. The drug will first be available in solution formulation for use
in a nebulizer device, which is an electric air compressor with a mouthpiece
through which the patient breathes vaporized asthma medication.
The active ingredient of Xopenex is the therapeutically active (R)-isomer
of racemic albuterol. Racemic albuterol, an equal mixture of (R) and (S)
isomers, is the world's leading bronchodilator for asthma. In racemic albuterol,
the (R)-isomer is exclusively responsible for the therapeutic effect and
perfectly matches the human body's receptor. The (S)-isomer has been found to
have no therapeutic benefit and poorly matches the body's receptor. Scientific
data suggest the (S)-isomer may cause detrimental airway hyperactivity. Xopenex
is potentially safer and more efficacious than racemic albuterol.
In addition to formulating a nebulizer solution, Sepracor is developing
Xopenex for use in several delivery systems, including syrup, tablet, a
dry-powder inhaler and metered-dose inhaler. Sepracor plans
[PHOTO OF XOPENEX BOX]
[Caption next to Photo] Xopenex will be the first commercially
available isomerically pure beta-agonist
to treat asthma symptoms.
ten
<PAGE>
[PHOTO: LARGE PHOTO OF CHILDREN IN SILHOUETTE AT SUNSET JUMPING INTO A LAKE]
eleven
<PAGE>
[PHOTO: FULL BLEED PHOTO OF TWO PEOPLE JOGGING IN A PARK]
[PIE CHART]
1998 Estimated Worldwide Sales for Antihistamine Products
Claritin(R) Zyrtec(R)
$2.3 Billion $700 Million
Hismanal(R) Allegra(R)/
$100 Million Seldane(R)
$500 Million
twelve
<PAGE>
to market Xopenex directly through the Company's 65 person respiratory sales
force. The sales force plans to sell directly to pulmonologists, allergists,
pediatricians, and primary care physicians in hospitals and clinics in the U.S.
(R,R)-formoterol - an improved single-isomer form of Novartis' Foradil(R)
and Yamanouchi's Atock(R) Sepracor is developing a single-isomer form of
formoterol, (R,R)-formoterol, as a superior bronchodilator with a long-duration
of action coupled with a rapid onset of action. This combination of properties
should make (R,R)-formoterol an attractive entry in the long-acting
bronchodilator market, which is currently lead by Glaxo-Wellcome's Serevent(R).
1998 worldwide sales of Serevent were approximately $700 million.
(R,R)-Formoterol has the potential to be the first once-a-day long acting
bronchodilator.
Sepracor's (R,R)-formoterol is currently in Phase II clinical trials. The
Company plans to market (R,R)-formoterol through its respiratory direct sales
force.
Allergy
Over forty million Americans suffer from seasonal allergic rhinitis (hay fever),
an allergic reaction to airborne pollens. Symptoms include runny nose, watery
eyes, and scratchy throat. Worldwide sales of antihistamines were approximately
$4 billion in 1998. Industry analysts have forecasted antihistamine sales could
double to approximately $6 billion by 2003.
[PIE CHART]
1998 Worldwide Estimated Sales
for Bronchodilators Products
Short-Acting Bronchodilators (Ventolin(R)/Proventil(R))
$1.2 Billion
Long-Acting Bronchodilators (Serevent(R)/Foradil(R)/Atock(R))
$.9 Billion
Norastemizole - an active metabolite of Janssen's Hismanal(R) Sepracor is
aggressively developing norastemizole, which the Company believes has the
potential to be the most potent, most rapid, nonsedating antihistamine drug in
the class which includes Allegra and Claritin. In addition, norastemizole has
the potential to be free of the "black-box" warning in Hismanal's label which
alerts physicians to serious side effects and drug-drug interactions.
Sepracor has completed three large-scale controlled clinical trials of
norastemizole and will be conducting additional studies throughout 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ICE Pharmaceuticals for Respiratory Therapy
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ICE(TM) Pharmaceutical Candidate Parent Drug Expected Parent Drug 1998 Development Earliest
Potential Benefits of Sepracor Company Indication Estimated Worldwide Status Potential
Drug Candidate Sales ($millions) Launch
- --------------------------------------------------------------------------------------------------------------------------------
Xopenex(TM) (levalbuterol HCI) Ventolin(/Proventil* Asthma - $1200 NDA Complete 1999
improved safety and efficacy Glaxo-Wellcome, short-acting
Schering-Plough bronchodilator
- --------------------------------------------------------------------------------------------------------------------------------
Norastemizole Hismanal* Allergy $150 Phase III 2001
antihistamine with improved Johnson & Johnson
potency, rapid onset, longer
duration and reduced cardio-
vascular side effects without
sedation
- --------------------------------------------------------------------------------------------------------------------------------
(R,R) - formoterol Foradil(R)/Atock(R) Asthma - $100 Phase II 2002
rapid onset of action and Novartis/Yamanouchi long-acting
longer duration bronchodilator
</TABLE>
thirteen
<PAGE>
Active Lifestyles A Retiring Generation Demands More Effective Medicines
Urinary incontinence affects a large population, in the U.S., approximately 17
million people. Drug therapy to treat urinary incontinence, however, has been
limited due to the unpleasant side effects of existing drugs, including dry
mouth, nausea, restlessness and heart palpitations. The majority of the patients
for both urge and stress incontinence rely on adult diapers or incontinence
devices. Worldwide sales of these alternatives were approximately $2 billion in
1998, while drug therapy accounted for approximately $200 million.
(S)-oxybutynin - a single-isomer form of Alza's Ditropan(R) Sepracor's
(S)-oxybutynin is a potential treatment for urinary (urge) incontinence with
significantly reduced side effects that limit the sales of Ditropan(R). Urge
incontinence is an urgent desire to urinate accompanied by an inability to
control the bladder. Sepracor's recently completed Phase II clinical trial
indicated (S)-oxybutynin's effectiveness for the treatment of urge incontinence.
The trial also statistically demonstrated the drug's ability to reduce both
urinary frequency and the episodes of involuntary urination (incontinence) in a
dose-dependent manner with low incidence of unpleasant side effects. Sepracor
will begin a 900 patient, twelve-week, Phase IIB dose ranging clinical trial in
early 1999.
(+)-desmethylsibutramine - a single isomer of the active metabolite of
Knoll Pharmaceutical's Meridia(R) In addition to its potential use to treat
various central nervous system indications (see CNS page 17), Sepracor is
developing (+)-desmethylsibutramine as a pharmacological treatment for stress
incontinence. Different from "urge incontinence" (see (S)-oxybutynin above),
stress incontinence is the involuntary escape of a small amount of urine when a
person coughs, laughs, or lifts heavy objects. Stress incontinence is common in
women, particularly after childbirth.
(S)-doxazosin - a single-isomer form of Pfizer's Cardura(R) Sepracor's
(S)-doxazosin has the potential to treat benign prostatic hypertrophy (BPH),
which is enlargement of the prostate, a condition common among men over 50 years
of age. (S)-doxazosin has the potential to decrease the side effect of
orthostatic hypotension, which lowers the blood pressure and can cause severe
dizziness and fainting. This side effect often requires titration, which leads
to multiple visits to the physician's office. If successfully developed,
Sepracor's single-isomer version could reduce the number of office visits needed
to titrate this medication, as well as increase its efficacy. In the second half
of 1999, Sepracor plans to begin Phase I human clinical trials of (S)-doxazosin.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ICE Pharmaceuticals for Urological Disorders
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ICE(TM) Pharmaceutical Candidate Parent Drug Expected Indication Parent Drug 1998 Current Earliest
Potential Benefits of Sepracor Company Estimated Worldwide Development Potential
Drug Candidate Sales ($millions) Status Launch
- -------------------------------------------------------------------------------------------------------------------------
(S)-oxybutynin Ditropan(R) Urge Incontinence $150 Phase II 2002
reduced anticholinergic side Alza
effects including dry mouth,
nausea, dizziness and palpitations
- -------------------------------------------------------------------------------------------------------------------------
(S)-doxazosin Cardura(R) Benign Prostatic $600 preclinical 2002
reduced orthostatic hypotension Pfizer Hypertrophy (BPH)
and improved potency
- -------------------------------------------------------------------------------------------------------------------------
(+)-desmethylsibutramine Meridia(R) Stress Incontinence new indication preclinical 2002
reduced anticholinergic side Knoll Labs
effects and new indication
</TABLE>
fourteen
<PAGE>
[FULL BLEED PHOTO OF OLD COUPLE]
[PIE CHART]
1998 Estimated Worldwide Sales for
Urinary Incontinence Products
Diapers & Devices BPH
$2 Billion $1 Billion
Stress and Urge
Incontinence
$200 Million
fifteen
<PAGE>
[FULL BLEED PHOTO OF MOTHER AND BABY IN FIELD]
[PIE CHART]
1998 Estimated Worldwide Sales for
Central Nervous System Products
<TABLE>
<S> <C>
Depression $9 Billion
Anxiety $2.6 Billion
ADHD $50 Million
Obesity $500 Million
</TABLE>
sixteen
<PAGE>
Feeling Better Lower Side Effects and New Indications Yield a Healthy Outlook
Sepracor's portfolio of drug candidates will address a portion of a central
nervous system (CNS) worldwide market which had sales over $12.6 billion in
1998. Many of the Company's ICE Pharmaceuticals have the potential to treat
indications such as depression, obesity and attention deficit disorder, among
others.
(+)-desmethylsibutramine - a single-isomer form of the metabolite of Knoll
Pharmaceutical's Meridia(R) Preliminary Sepracor preclinical studies indicate
that (+)-desmethylsibutramine may be a potent selective serotonin reuptake
inhibitor (SSRI), norepinephrine and dopamine reuptake inhibitor. This unique
triple mechanism of action may offer benefits in the treatment of obesity as
well as the opportunity to treat additional indications including chronic pain
syndromes, attention deficit disorder (ADHD) and depression. Sepracor plans to
submit an investigational new drug application (IND) and initiate Phase I human
clinical trials with (+)-desmethylsibutramine in 1999.
(+)-zopiclone - a single-isomer form of Rhone-Poulenc Rorer's Imovane(R) If
successfully developed, this drug could represent the second non-benzodiazepine
treatment for sleep disorders in the U.S. Zopiclone, available only outside the
U.S., reduces sleep latency, increases the duration of sleep, and decreases the
number of nocturnal awakenings in sleep studies conducted in man. Currently, the
market is served primarily by zolpidem tartrate, marketed as Ambien(R) by
Searle.
Sepracor has shown in preclinical studies that the activity responsible for
efficacy predominantly resides in the (+) isomer of zopiclone and the single
isomer version exhibits lower anticholinergic side effects than those seen with
the parent drug, Imovane(R). Sepracor plans to submit an IND and initiate Phase
I clinical trials with (+)-zopiclone in the first half of 1999.
(R)-ketoprofen - a single-isomer form of American Home Product's Orudis(R)
Preclinical studies have indicated that Sepracor's (R)-ketoprofen is a
potentially highly potent analgesic treatment for neuropathic pain, with reduced
gastrointestinal side effects. The Company plans to begin human clinical trials
of (R)-ketoprofen for this indication during the first half of 1999.
Hydroxy bupropion - a single-isomer form of Glaxo-Wellcome's Zyban(R)
Sepracor's preclinical studies indicate that hydroxy bupropion offers the
possibility of a lower incidence of seizures than the parent drug Zyban(R),
coupled with potential new indications including depression and ADHD.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ICE Pharmaceuticals for Central Nervous System Indications
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ICE(TM) Pharmaceutical Candidate Parent Drug Expected Parent Drug 1998 Current Earliest
Potential Benefits of Sepracor Company Indication Estimated Worldwide Development Potential
Drug Candidate Sales ($millions) Status Launch
- ----------------------------------------------------------------------------------------------------------------------------------
(R)-ketoprofen Orudis(R)/Actron(R) neuropathic pain $150 Phase I/II 2002
reduced gastrointestinal side American Home Products
effects, improved potency
- ----------------------------------------------------------------------------------------------------------------------------------
(+)-desmethylsibutramine Meridia(R) depression, anxiety, new to market Preclinical 2002
reduced anticholinergic side Knoll Labs obesity, attention
effects including dry mouth deficit disorder (ADHD)
and constipation
- ----------------------------------------------------------------------------------------------------------------------------------
(+)-zopiclone Imovane(R) sleep disorders $140 Preclinical 2003
reduced anticholinergic side Phone-Poulenc Rorer
effects including dry mouth
- ----------------------------------------------------------------------------------------------------------------------------------
Hydroxy bupropion Zyban(R) ADHD new to market Preclinical 2003
reduced incidence of seizures, Glaxo-Wellcome
dry mouth and insomnia
- ----------------------------------------------------------------------------------------------------------------------------------
Nefazodone metabolite Serzone(R) depression $230 Preclinical 2004
reduced anticholinergic Bristol-Meyers Squibb
side effects
</TABLE>
seventeen
<PAGE>
Drug Discovery Backward Integration...Sepracor's New Chemical Entities
As the Company continues towards its vision of becoming a fully integrated
pharmaceutical company, Sepracor is broadening its development focus to include
discovery and development of New Chemical Entities (NCEs).
Sepracor's strong ICE Pharmaceutical product portfolio will carry the
Company into the next millennium. However, future growth can be further
augmented through discovery and development of new chemical compounds. These
NCEs are expected to complement Sepracor's current ICE Pharmaceutical pipeline.
The ability for a company the size of Sepracor to make a significant
contribution to drug discovery has increased with the use of new technologies in
combinatorial chemistry and high throughput screening. In the past, only large
pharmaceutical companies participated in the discovery of novel, drug-like
molecules which are suitable for the treatment of diseases with unmet medical
needs. However, the accessibility and widespread use of the new technologies of
combinatorial chemistry and ultra high throughput screening provide an
opportunity for Sepracor to compete with larger pharmaceutical companies in the
area of NCE discovery.
Combinatorial chemistry techniques - with robotics and computer directed
synthesis - are used to quickly produce libraries of compounds, which are then
suitable for biological evaluation in relevant high throughput screening assays.
These compound libraries are rapidly assessed for drug-like properties, which
include specific disease-associated receptor binding or enzyme inhibition, as
well as absorption, metabolism and toxicological profiles. These techniques have
significantly increased the productivity of the medicinal chemist and
dramatically increased the frequency at which compounds with more drug-like
properties are identified and chosen for further investigation.
Sepracor's approach to the discovery of NCE's is identifying novel
compounds, which are of strategic interest to Sepracor, with in vitro and in
vivo biological activity in the anti-infective, anti-inflammatory, pain and
behavioral disease therapeutic areas.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Sepracor's New Chemical Entities
- --------------------------------------------------------------------------------
<S> <C> <C>
Sepracor Lead Compound Indication Receptor/Enzyme
SEP-97, 148 Pain, Anxiety Adenosine
SEP-154, 601 Asthma A2A
A3
SEP-109, 235 Anxiety Serotonin
SEP-89, 406 Anxiety 5HT1a
5HT2a
SEP-98, 035 Fungal Infection Fungicidal versus
Aspergillas and Candida
SEP-132, 617 Bacterial Infection Narrow spectrum, resistant
gram-positive infections
</TABLE>
[CHART] Sepracor's Drug Discovery
Combinatorial Functional
Chemistry Genomics
Many Compounds Disease Targets
High-Throughput
Screening
"Hits" BIOINFORMATICS
Computer Control
Lead Compounds
Preclinical and
Clinical Trials
eighteen
<PAGE>
[FULL BLEED PHOTO OF SCIENTIST LOOKING AT TEST TUBE]
nineteen
<PAGE>
Sepracor Inc. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 6,996 $ 9,636 $ 13,784 $ 14,271 $ 12,382
Collaborative research and development 5,044 58 25 1,036 303
License fees and royalties 5,366 5,643 1,232 900 5,425
-----------------------------------------------------------------------
Total revenues 17,406 15,337 15,041 16,207 18,110
-----------------------------------------------------------------------
Costs and expenses:
Cost of revenue 4,604 5,992 6,784 10,410 6,919
Research and development 63,062 43,055 35,828 21,707 17,723
Purchase of in-process research and development (1) - - - - 3,500
Selling, general, administrative and patent costs 32,891 17,254 16,312 20,411 16,212
Restructuring and impairment charges (2) (351) 4,179 - 4,144 -
-----------------------------------------------------------------------
Total costs and expenses 100,206 70,480 58,924 56,672 44,354
-----------------------------------------------------------------------
Loss from operations (82,800) (55,143) (43,883) (40,465) (26,244)
-----------------------------------------------------------------------
Other income (expense):
Equity in investee losses (3) (7,482) (2,755) (17,539) (808) -
Interest income 13,191 5,766 6,713 3,228 1,390
Interest expense (16,969) (5,976) (6,140) (2,077) (832)
Gain on sale of ChiRex Inc. - 30,069 - - -
Other (4) 124 547 (107) (1,171) (213)
-----------------------------------------------------------------------
Net loss before minority interests (93,936) (27,492) (60,956) (41,293) (25,899)
Minority interests in subsidiaries 653 1,369 846 7,881 5,556
-----------------------------------------------------------------------
Net loss $ (93,283) $ (26,123) $ (60,110) $ (33,412) $ (20,343)
-----------------------------------------------------------------------
Net loss applicable to common shares (5) $ (93,433) $ (26,723) $ (60,710) $ (33,412) $ (20,343)
-----------------------------------------------------------------------
Basic and diluted net loss per common share $ (3.23) $ (0.97) $ (2.25) $ (1.54) $ (1.09)
Basic and diluted weighted-average number of
common shares outstanding 28,913 27,599 27,032 21,637 18,644
Balance Sheet Data (in thousands):
Cash and marketable securities $499,597 $ 92,560 $103,650 $143,250 $ 27,590
Total assets 551,313 128,507 146,689 202,713 73,419
Long-term debt 492,104 84,268 85,267 85,818 5,929
Stockholders' equity 4,389 12,032 30,392 89,227 30,485
</TABLE>
(1) Represents a charge in connection with an acquisition by BioSepra Inc.
(2) Represents a recovery of restructuring charges in 1998 and restructuring and
impairment charges taken by BioSepra in December 1997 and June 1995. See
Footnote J - Notes to Consolidated Financial Statements.
(3) 1998 includes a write-off of a guarantee of a HemaSure line of credit and
1996 includes one-time charges from ChiRex's initial public offering and
HemaSure's loss from discontinued operations. See Footnote D - Notes to
Consolidated Financial Statements.
(4) Includes a write-off of approximately $800,000 relating to certain deferred
finance charges taken in September 1995.
(5) Includes $150,000, $600,000 and $600,000 in preferred stock dividends in
1998, 1997 and 1996, respectively. See Footnote B - Notes to Consolidated
Financial Statements.
twenty
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Sepracor is a specialty pharmaceutical company focused on the cost-effective
development of safer, purer and more effective drugs that are improved versions
of widely-prescribed pharmaceutical compounds. The Company develops drugs by
leveraging its broad patent position, expertise in chiral chemistry and
pharmacology, and experience in conducting clinical trials and seeking
regulatory approvals for new drugs. Sepracor's Improved Chemical Entities
("ICEs") pharmaceutical development program has yielded an extensive portfolio
of drug candidates intended to treat a broad range of indications in respiratory
care, urology, gastroenterology, psychiatry and neurology. The Company is also
broadening its development focus to include discovery and development of new
chemical entities.
The consolidated financial statements include the accounts of Sepracor Inc.
("Sepracor" or the "Company") and its majority and wholly-owned subsidiaries,
including BioSepra Inc. ("BioSepra"), Sepracor Canada Limited, New England
Pharmaceuticals, Inc. (from June 1995 to June 1996 at which time it was merged
into Sepracor) and SepraChem Inc. (from January 1996 to March 1996). The
consolidated financial statements also include Sepracor's affiliates, HemaSure
Inc. ("HemaSure") (a subsidiary from January 1994 to September 1995), and
Versicor Inc. ("Versicor") (a subsidiary from May 1995 to December 1997).
BioSepra develops, manufactures and sells chromatographic media for use by
biopharmaceutical companies in the purification and production of
biopharmaceuticals. In 1996, Sepracor loaned BioSepra $5,500,000. Interest on
the loan was prime plus 3/4%. The loan, including any interest thereon, was
convertible into shares of BioSepra stock at the option of Sepracor at any time
prior to payment. In June 1996, Sepracor converted the outstanding principal
amount of $5,500,000 plus accrued interest of $47,639 into 1,369,788 shares of
BioSepra common stock. As a result of the conversion of the outstanding
principal and interest Sepracor owns approximately 64% of BioSepra.
At December 31, 1998, the Company owned 33% of the outstanding shares of common
stock of HemaSure, a company applying its proprietary filtration technology to
develop products to increase the safety of blood collection and transfusion. The
Company accounts for its investment in HemaSure using the equity method. At
December 31, 1997, the Company's investment in HemaSure was recorded at zero. In
September 1998, Sepracor guaranteed a $5,000,000 HemaSure line of credit and as
a result began to record its portion (33%) of HemaSure losses. Losses of
$1,188,000 were recorded for the remainder of 1998 and at December 31, 1998 the
Company recorded the balance of the guarantee, or $3,812,000, as a loss, for a
total 1998 HemaSure equity loss of $5,000,000. (See Notes to Consolidated
Financial Statements - Note W - Subsequent Event for HemaSure ownership change
to 42%).
In May 1995, Versicor was formed to develop novel drug candidates principally
for the treatment of infectious diseases. In 1995 and 1997, Versicor entered
into Convertible Subordinated Note Agreements ("the Note Agreements") with
Sepracor. On December 10, 1997, Versicor completed a private equity financing
for approximately $22,000,000 and issued Series C Preferred Stock. As part of
the transaction, Sepracor exercised its conversion option on the Versicor
Convertible Subordinated Notes ("the Versicor Notes") in the amount of
$9,530,000. The remaining $6,034,000, which was outstanding under the Versicor
Notes at the time, was repaid to Sepracor before the end of 1997. Sepracor
recognized a gain of approximately $5,688,000 on the transaction, which was
recorded as an increase to additional paid-in capital. At December 31, 1997,
Sepracor had an investment in Versicor of $3,971,000 and there were no amounts
outstanding under the Versicor Notes. Sepracor's ownership as of December 31,
1997 was approximately 22%, thereby making Versicor an affiliate and reportable
under the equity method. Sepracor recorded $75,000 as its share of Versicor
losses for the period December 10 through December 31, 1997. For the year ended
December 31, 1998, Sepracor recorded $2,482,000 as its 22% share of Versicor
losses and at December 31, 1998, its investment in Versicor was $1,490,000.
In 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that was a
combination of Sterling Organics Limited, a United Kingdom 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 6,675,000 shares of its common stock at $13 per share. In
exchange for the contribution of SepraChem, Sepracor received shares of ChiRex
common stock representing 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. From March 11, 1996 until
March 31, 1997, Sepracor carried its investment in ChiRex using the equity
method of accounting and, accordingly, recorded $2,518,000 as its share of
ChiRex's losses for the year ended December 31, 1996 and $383,000 as its share
of ChiRex's income for the quarter ended March 31, 1997. On March 31, 1997,
Sepracor received net proceeds of approximately $31,125,000 from the public sale
of all of its shares of ChiRex common stock. As a result of this transaction,
Sepracor recognized a gain of $30,069,000, which was recorded as other income.
The likelihood of future issuances of common stock by subsidiaries of the
Company cannot be determined because Sepracor is not directly involved in the
management of its subsidiaries. In the event of future issuances the Company
will record the transaction consistent with its policy of offsetting any
gains or losses against additional paid-in capital for early development
stage subsidiaries and for later stage subsidiaries recording any gains and
losses as other income or expense.
Results of Operations
Years Ended December 31, 1998, 1997 and 1996
Product sales were $6,996,000, $9,636,000 and $13,423,000 in 1998, 1997 and
1996, respectively. Product sales attributable to BioSepra were $6,996,000,
$9,636,000 and $13,423,000 in 1998, 1997 and 1996, respectively. Product
sales are primarily attributable to BioSepra's sales of bioprocessing media,
supplies and equipment. The decrease in revenue from 1997 to 1998 is
primarily attributable to decreased media sales and the discontinuance by
BioSepra of its instrument product line. The decrease in revenue from 1996 to
1997 is attributable to fluctuations experienced by BioSepra in the timing of
large production scale media orders and to the absence of one-time stocking
orders from a major distributor of research instruments, which occurred in
1996. In addition, the Company believes that the sales of HyperD media have
historically been adversely affected by the now settled patent litigation
with PerSeptive Biosystems Inc. BioSepra's future success is dependent, in
part, on its ability to generate increased sales of its HyperD media products
and research devices.
Collaborative research and development revenues were $5,044,000, $58,000 and
$25,000, in 1998, 1997 and 1996, respectively. The increase from 1997 to 1998 is
primarily due to revenue recognized by Sepracor under its collaboration and
license agreement dated as of January 1998 (the "Norastemizole Agreement"), with
Janssen Pharmaceutica N.V. ("Janssen") for the development of norastemizole.
License fees and royalties were $5,366,000, $5,643,000 and $1,232,000 in 1998,
1997 and 1996, respectively. Included in the 1998 license revenue is $5,000,000
received from Schering-Plough Corporation ("Schering"), under a license
agreement dated December 1997 (the "DCL Agreement") for descarboethoxyloratadine
("DCL"). License revenue in 1997 included $3,600,000 recognized by BioSepra
under an agreement (the "Beckman Agreement") with Beckman Instruments, Inc.
("Beckman") and the Hoechst Marion Roussel Inc. ("HMRI") milestone payment of
$1,875,000 to
twenty-one
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sepracor under the license agreement for terfenadine carboxylate, marketed by
HMRI as Allegra. License revenue in 1996 included $900,000 recognized by
BioSepra under the Beckman Agreement and $168,000 in royalties received from
Tanabe Seiyake Co. Ltd. ("Tanabe") relating to Tanabe's licensing and use of
Sepracor's technology in the manufacture of the chiral intermediate of
diltiazem. As of March 1996, Sepracor shares the royalty revenue from Tanabe
equally with ChiRex.
In December 1997, under the DCL Agreement, Sepracor licensed to Schering
exclusive worldwide rights to Sepracor's patents covering DCL, an active
metabolite of loratadine that in pre-clinical studies has shown the potential
for greater potency. In the first quarter of 1998, Schering paid Sepracor an
initial license fee of $5,000,000. Under the terms of the DCL Agreement,
Sepracor is entitled to receive royalties on DCL sales, if any, beginning at
product launch. Royalties paid to Sepracor will escalate over time and upon the
achievement of sales volume and other milestones.
Effective January 1998, Sepracor and Janssen, a wholly-owned subsidiary of
Johnson & Johnson, entered into the Norastemizole Agreement, relating to the
development and marketing of norastemizole, a third generation nonsedating
antihistamine. Under the terms of the Norastemizole Agreement, the companies
will jointly fund the development of norastemizole, and Janssen has an option to
acquire certain rights regarding the product in the U.S. and abroad. When
exercised, Janssen and Sepracor will equally share the costs and profits
associated with the further development, marketing and sales of norastemizole in
the U.S. Sepracor will also retain the right to co-promote the product in the
U.S. Alternatively, Sepracor can elect to receive royalties on Janssen sales, if
any, of norastemizole in the U.S. in the event it decides not to co-promote the
product. Outside of the U.S., Janssen has the right to develop and market
norastemizole, and Sepracor will earn royalties on product sales, if any. In
addition, Janssen has worldwide over-the-counter rights to norastemizole.
On July 2, 1998, Sepracor received an approvable letter for Xopenex(TM),
inhalation solution, in multidose strengths, from the U.S. Food and Drug
Administration ("FDA"). Xopenex(TM) is the therapeutically active isomer of
racemic albuterol. Final approval by the FDA of the Xopenex(TM) New Drug
Application ("NDA") is subject to satisfactory completion of product labeling
discussions and certain other conditions. Sepracor is planning to introduce
Xopenex(TM) upon FDA approval.
On July 20, 1998, Sepracor entered into a second license agreement with Janssen
(the "Norcisapride Agreement") giving Janssen exclusive worldwide rights to
Sepracor's patents covering norcisapride, an isomer of the active metabolite of
Propulsid(TM). Under the terms of the Norcisapride Agreement, Sepracor has
exclusively licensed to Janssen rights to develop and market the norcisapride
product worldwide. Under the Norcisapride Agreement, Janssen would pay Sepracor
royalties on norcisapride sales, if any, beginning at product launch. The
royalty rate to be paid to Sepracor will escalate upon the achievement of sales
volume milestones.
In December 1998, Sepracor entered into a license agreement (the "Lilly
(R)-fluoxetine Agreement") with Eli Lilly and Company ("Lilly") under which
Sepracor grants to Lilly exclusive worldwide rights to Sepracor's patents
covering (R)-fluoxetine. (R)-fluoxetine is a new chemical entity patented by
Sepracor, which is a modified form of an active ingredient found in Prozac(R),
marketed by Lilly. Under the terms of the Lilly (R)-fluoxetine Agreement, and
subject to clearance under the Hart Scott Rodino Antitrust Improvements Act of
1976 as amended (the "HSR Act"), Sepracor will receive an initial milestone
payment and license fee of $20,000,000 and up to $70,000,000 in additional
milestone payments, based on the progression of (R)-fluoxetine through
development. In addition, Sepracor will receive royalties on (R)-fluoxetine
worldwide sales, if any, beginning upon first commercial sale. Under the HSR
Act, Sepracor has received a request from the Federal Trade Commission for
additional information in connection with the Lilly (R)-fluoxetine Agreement.
Sepracor plans to fully respond to the request and expects the Lilly
(R)-fluoxetine Agreement to become effective as soon as the Federal Trade
Commission completes its review.
The material component of cost of revenue, cost of products sold, as a
percentage of product sales, was 59%, 57% and 49% in 1998, 1997 and 1996
respectively. The increase in 1998 from 1997 is due to an unfavorable product
mix on current media products and a decline in absorption of manufacturing costs
due to lower product sales at BioSepra. The increase in 1997 from 1996 is
primarily due to product mix changes and fluctuations in timing of
production-scale customer orders of BioSepra. In addition, the increase is
attributable to the transition of BioSepra resources from product development to
production support, in association with the commercialization of new media and
instrument products. In 1997 a payment of $469,000 was made to a third party in
connection with the HMRI milestone payment and is included in cost of revenue.
Research and development expenses were $63,062,000, $43,055,000 and $35,828,000
in 1998, 1997 and 1996, respectively. The increase in 1998 from 1997 is
primarily due to an increase in research and development spending on preclinical
and clinical trials in Sepracor's pharmaceutical programs including two major
Phase III norastemizole trials, a fall seasonal allergic rhinitis study and a
controlled allergen challenge study; a Phase II pediatric study for the syrup
formulation of Xopenex(TM); a Phase II study for (R,R)-formoterol; and a Phase I
clinical trial for (R)-fluoxetine. These increases were partially offset by the
fact that Sepracor no longer consolidates Versicor results in 1998, while 1997
results included approximately $5,073,000 of research and development costs
attributable to Versicor. Costs increased in 1997 as compared to 1996 as
levalbuterol Phase III clinical trials were completed; an NDA was submitted for
levalbuterol to the FDA, Phase III clinical trials began for norastemizole; and
Phase I clinical trials were initiated for (R,R)-formoterol. Sepracor expects
the trend of increasing research and development expenditures to continue in
1999 through continued investments in numerous clinical and pre-clinical
programs.
Selling, general and administrative expenses were $30,883,000, $15,594,000
and $15,245,000, in 1998, 1997 and 1996, respectively. Included in selling,
general and administrative expenses are $0, $626,000 and $1,414,000 of
Versicor expenses for the year ended December 31, 1998, 1997 and 1996,
respectively. The increase in 1998 from 1997 is primarily the result of
Sepracor's development of its infrastructure, including operations and a
specialty sales force, to support Xopenex(TM). The increase in 1997 from 1996
resulted primarily from market research costs incurred by Sepracor in
determining the positioning of Sepracor's levalbuterol product in the market
and costs related to infrastructure development for a direct sales force,
offset by savings from personnel reductions at BioSepra.
In December 1997, BioSepra implemented a cost-reduction program that included
the discontinuance of a product line and a reduction in the number of employees.
The purpose of the program was to enable BioSepra to focus on the process
segments of the biopharmaceutical market. In conjunction with the cost reduction
program, BioSepra also wrote down intangible assets to their net realizable
value. In total, BioSepra recorded restructuring and impairment charges totaling
$4,179,000 in the fourth quarter of 1997. Of this amount, $3,328,000 represents
the write down of goodwill to its net realizable value, $690,000 represents the
write down of inventory and fixed assets associated with the discontinued
product line and $161,000 represents severance and benefits related to the
reduction in
twenty-two
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
workforce in the U.S. operation. BioSepra terminated seven employees consisting
of marketing, sales, finance and administrative personnel. The $161,000 of
severance and benefits was fully paid out in 1998. In 1998, BioSepra recognized
a gain of $351,000 related to the sale of its instrument inventory to Beckman,
which was previously written off as part of the 1997 restructuring charges
described above.
In 1996, as a result of the sale by BioSepra in July 1995 of Biopass, BioSepra
wrote-off the remaining unamortized portion of certain purchased technology of
approximately $741,000.
Legal expenses related to patents were $2,008,000, $1,660,000 and $1,067,000 for
1998, 1997 and 1996, respectively. The increase in 1998 from 1997 is due
primarily to costs associated with an increased volume of patent filings and
costs associated with the HMRI patent interference. The increase in 1997
compared with 1996 was due to maintenance fees associated with the increased
volume of patent filings and costs incurred in defending patent interference
claims initiated in 1997.
Equity in loss of investees was $7,482,000, $2,755,000 and $17,539,000 for
1998, 1997 and 1996, respectively. The equity in loss of investees consists of
the Company's portion of the net loss of HemaSure, ChiRex (through March 31,
1997) and Versicor (beginning December 10, 1997). The increase in loss in 1998
from 1997 is primarily due to a $5,000,000 accrual of a HemaSure line of credit
guarantee and the recording of Versicor losses for a full year in 1998. Although
Sepracor's investment in HemaSure had been reduced to zero in November of 1997,
Sepracor's guarantee of the HemaSure line of credit in September 1998 resulted
in the continued recording of its portion of HemaSure losses. Sepracor recorded
$1,188,000 as its portion of losses through December 1998 and determined that
the full guarantee amount of $5,000,000 should be written-off at December 31,
1998. The decrease in 1997 compared to 1996 is primarily related to the absence
of any one-time write-offs, such as those in 1996 for ChiRex and HemaSure
(Sepracor's combined portion of these one-time write-offs was $12,701,000),
ChiRex having net income for the period in 1997 during which Sepracor maintained
an interest and recording of HemaSure losses for only eleven months of 1997 as
the investment was written down to zero.
Interest income was $13,191,000, $5,766,000 and $6,713,000 for 1998, 1997, and
1996, respectively. The increase in 1998 from 1997 is due to the larger average
cash balance available for investment primarily resulting from the February 1998
convertible subordinated debenture financing of $189,475,000, while the decrease
in 1997 from 1996 is principally the result of a lower average cash balance
available for investment.
Interest expense was $16,969,000, $5,976,000 and $6,140,000 in 1998, 1997 and
1996, respectively. The increase in 1998 from 1997 is due primarily to interest
on the February 1998 convertible subordinated debenture financing of
$189,475,000 at 6-1/4%. The decrease in 1997 from 1996 was a result of reduced
borrowings by BioSepra and more favorable interest rates on the remaining
borrowings.
Net other income (expense) was $124,000, $547,000 and $(107,000) for 1998, 1997
and 1996, respectively. Income in 1997 related to the receipt of a Canadian tax
refund and favorable foreign exchange transactions associated with BioSepra.
Minority interests in subsidiaries resulted in a reduction of consolidated net
loss of $653,000, $1,369,000 and $846,000 for 1998, 1997 and 1996, respectively.
The decrease in 1998 from 1997 is due to a reduction in BioSepra's loss. The
increase in 1997 from 1996 related to larger losses at BioSepra, offset by a
reduction in the percentage of minority interest, as Sepracor's ownership
increased to 64% in June 1996.
Other
Effective for the year ended December 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This approach designates
the Company's internal organization as used by management for making
operating decisions and assessing performance as the source of business
segments. Sepracor assesses performance and makes operating decisions
primarily based on the results of Sepracor. Sepracor represents the primary
pharmaceutical business, which excludes BioSepra and equity investments in
HemaSure Inc., Versicor Inc. and ChiRex Inc. BioSepra represents the results
of BioSepra Inc. without any adjustments for minority interests or
intercompany adjustments and eliminations. Segment results, as well as
geographic data, are presented on this new basis in 1998, as well as
retroactively to 1997 and 1996. The Company also adopted SFAS No.130,
"Reporting Comprehensive Income", in the first quarter of 1998, which
requires disclosure of comprehensive income, i.e., net income plus direct
adjustments to stockholders' equity.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives"), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for fiscal years beginning after June 15, 1999. The
Company expects no immediate impact from SFAS No. 133 because it currently has
no derivatives.
Liquidity and Capital Resources
Cash and cash equivalents plus marketable securities of Sepracor and its
subsidiaries, including BioSepra, totaled $499,597,000 at December 31, 1998,
compared to $92,560,000 at December 31, 1997. Cash and cash equivalents plus
marketable securities of Sepracor, excluding BioSepra, at December 31, 1998 were
$497,362,000, compared to $90,044,000 at December 31, 1997.
The net cash used in operating activities for the year ended December 31, 1998
was $59,891,000. The net cash used in operating activities includes a net loss
of $93,283,000 adjusted by non-cash charges of $13,245,000. These charges were
offset by the minority interest in subsidiary portion of the net loss of
$653,000 and $263,000 for the reduction in the provision for doubtful accounts.
Non-cash charges include $5,000,000 relating to the accrual of Sepracor's
guarantee of a HemaSure line of credit. The accounts payable and accrued expense
amounts increased a total of $20,547,000, primarily due to increased research
and development and interest accruals at Sepracor. Deferred revenue increased in
1998 compared to 1997 a total of $1,891,000 primarily due to Sepracor's deferral
of the recognition of revenue from HMRI, pending an unsettled patent
interference.
Sepracor used $201,013,000 in investing activities for the year ended December
31, 1998. The cash was used in investing activities primarily for net purchases
of marketable securities of $194,293,000 and for $7,288,000 of property and
equipment purchases. Sepracor expects purchases of property and equipment to be
in the $12,000,000 to $17,000,000 range in 1999 with depreciation for 1999
expected to be in the $6,000,000 to $8,000,000 range.
twenty-three
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net cash of $474,091,000 was provided by financing activities for the year ended
December 31, 1998. The cash resulted primarily from proceeds of $489,475,000
from two convertible subordinated debenture financings, offset by $15,615,000 of
costs associated with these financings.
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 December 31, 1998, there was $320,000
outstanding under this credit facility relating to Sepracor, BioSepra and
HemaSure of which $63,000 represented Sepracor's portion.
At December 31, 1998, Sepracor had guaranteed $402,000 of outstanding bank
borrowings of BioSepra S.A., 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 December 31, 1998, Sepracor Canada Limited had received approximately
$2,960,000 of such term debt, of which $1,754,000 was outstanding.
In 1995 and in 1997, Versicor entered into Convertible Subordinated Note
Agreements with Sepracor. Under these note agreements, Sepracor agreed to loan
to Versicor amounts as required for operating purposes. The amounts outstanding
under the 1995 note accrued interest at the prime rate plus 1/2% not to exceed
9.5%. The amounts outstanding under the 1997 note accrued interest equal to the
prime rate minus 1/4%, adjusted under certain circumstances. The note agreements
were convertible, at the option of Sepracor, into Versicor preferred stock by
dividing the amount outstanding, including principal and interest, by $0.7833.
On December 9, 1997, Sepracor converted an aggregate of $9,530,000 of the note
agreements into 12,166,667 shares of Versicor preferred stock. On December 31,
1997, Versicor repaid Sepracor the remaining $6,034,000 due under the note
agreements.
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 (the "Revolving Credit Agreement"), pursuant to which
BioSepra and Versicor could borrow up to $3,000,000 each. All borrowings are
collateralized by certain assets of the companies. On December 30, 1997, the
Revolving Credit Agreement was amended to remove Versicor as a party. The
revolving credit agreement contains covenants relating to minimum tangible
capital base, minimum cash or cash equivalents, minimum liquidity ratio and
maximum leverage for Sepracor. Sepracor is a guarantor of all outstanding
borrowings. At December 31, 1998, BioSepra had $2,000,000 outstanding under this
agreement. The annual interest rate on such borrowings is at the lower of the
prime rate or LIBOR plus 1.75%.
On December 30, 1997, Sepracor entered into a put agreement with a commercial
bank pursuant to which Sepracor agreed to purchase $2,000,000 of indebtedness of
Versicor, a former wholly owned subsidiary, in the event of a default by
Versicor under its loan agreement with the bank. In the event that the put right
is exercised by the bank, the bank will assign its security interest in the
fixed assets of Versicor to Sepracor. As of December 31, 1998, the put agreement
remained outstanding.
On February 10, 1998, Sepracor issued $189,475,000 of 6-1/4% Convertible
Subordinated Debentures due 2005 (the "6-1/4% Debentures"). The 6-1/4%
Debentures are convertible into Sepracor Common Stock, at the option of the
holder, at a price of $47.369 per share. The 6-1/4% Debentures bear interest at
6-1/4% payable semi-annually, commencing on August 15, 1998. The 6-1/4%
Debentures are not redeemable by the Company prior to February 18, 2001. The
Company may be required to repurchase the 6-1/4% Debentures at the option of the
holders in certain circumstances. As part of the sale of the 6-1/4% Debentures,
Sepracor incurred approximately $6,105,000 of offering costs, which were
recorded as other assets and are being amortized over seven years, the term of
the 6-1/4% Debentures. The net proceeds to the Company after offering costs were
$183,370,000.
On March 26, 1998, Sepracor, and Beckman terminated their Stock Purchase
Agreement under which Beckman acquired 312,500 shares of Sepracor Series B
Redeemable Exchangeable Preferred Stock. Sepracor paid Beckman the original
purchase price of the stock plus accrued dividends, totaling $6,850,000. In
addition, BioSepra and Beckman amended their distribution agreement whereby
BioSepra granted a non-exclusive right to manufacture instruments to Beckman,
removed its obligation to manufacture instruments for Beckman, and sold the
discontinued instrument product inventory to Beckman for $250,000.
On October 30, 1998 Sepracor called for the redemption of its 7% Convertible
Subordinated Debentures due 2002, (the "7% Debentures due 2002"), aggregating
$80,880,000. The 7% debentures due 2002 were convertible, at the holder's
option, into shares of Sepracor Common Stock at a conversion price of $19.68 per
share. On December 1, 1998, immediately prior to the redemption, the entire
principal amount of 7% Debentures due 2002, was converted into 4,109,756 shares
of Sepracor Common Stock. As a result of the conversion, Sepracor wrote off
$1,582,000 of deferred financing costs against stockholders' equity.
On December 10, 1998, Sepracor issued $300,000,000 of 7% Convertible
Subordinated Debentures due 2005 (the "7% Debentures due 2005"). The 7%
Debentures due 2005 are convertible into Sepracor Common Stock, at the option of
the holder, at a price of $124.875 per share. The 7% Debentures due 2005 bear
interest at 7% payable semi-annually, commencing on June 15, 1999. The 7%
Debentures due 2005 are not redeemable by the Company prior to December 20,
2001. The Company may be required to repurchase the 7% Debentures due 2005 at
the option of the holders in certain circumstances. As part of the sale of the
7% Debentures due 2005, Sepracor incurred approximately $9,919,000 of offering
costs, which were recorded as other assets and are being amortized over seven
years, the term of the 7% Debentures due 2005. The net proceeds to the Company
after offering costs were $290,081,000.
Market Risk
The Company is exposed to market risk from changes in interest rates and equity
prices, which could affect its future results of operations and financial
condition. The Company manages its exposure to these risks through its regular
operating and financing activities.
The Company generally views as long term its investment in foreign
subsidiaries with a functional currency other than the Company's reporting
currency. The principal functional currency of the Company's subsidiaries is
denominated in Canadian dollars and French francs. The Company considers its
risk relative to foreign currency exchange fluctuations to be low due to the
immaterial amounts transacted from the French and Canadian subsidiaries and
the relative stability of the Canadian dollar in the past year. However, a
10% unfavorable change in foreign exchange rates would result in a reduction
in earnings of approximately $164,000.
Interest Rates: The Company's available for sale investments and subordinated
convertible debentures are sensitive to changes in interest rates. Interest rate
changes would result in a change in the fair value of these financial
instruments due to the difference between the market interest rate and the rate
at the date of purchase of the financial instrument. A 10% decrease in year-end
1998 market interest
twenty-four
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
rates would result in no material impact on the net fair value of the Company's
interest-sensitive financial instruments.
Equity Prices: The Company's convertible subordinated debentures are sensitive
to fluctuations in the price of the Company's common stock into which the
debentures are convertible. Changes in equity prices would result in changes in
the fair value of the Company's convertible subordinated debentures due to the
difference between the current market price and the market price at the date of
issuance of debentures. A 10% increase in the year-end 1998 market equity prices
would result in an increase of $38,600,000 on the net fair value of the
Company's convertible subordinated debentures. Additionally, if an increase
in equity prices caused the holders to convert their outstanding convertible
subordinated debentures, the Company's annual interest expense would be
reduced by approximately $32,800,000. While a holder of convertible
subordinated debentures can convert the debentures at any time, the Company
does not believe that it is likely that all or substantially all of the
debentures will be converted, if at all, prior to such time that the
debentures are redeemed or mature.
Sales of subsidiary stock at equity prices above current market value would
generally result in a gain for the Company, which would be included in
additional paid-in capital for early development stage subsidiaries and
included in the Statement of Operations for later stage subsidiaries. As an
example, a $1,000,000 equity investment in Versicor, an early development
stage subsidiary, at a 10% premium to its current market price would result
in an increase to the Company's additional paid-in capital of $127,000.
Subsequent Events
On February 25, 1999, Sepracor entered into an agreement with HemaSure pursuant
to which Sepracor invested $2,000,000 in HemaSure in exchange for 1,333,334
shares of HemaSure common stock and for warrants to purchase 667,000 of
additional shares of HemaSure common stock. This has resulted in Sepracor's
ownership of HemaSure increasing from 33% to 42% as of February 25, 1999.
On February 25, 1999, BioSepra acquired 51% of the outstanding common stock of
Biosphere Medical, S.A. ("Biosphere"), a French societe anonyme. BioSepra
acquired the 51% ownership by granting an exclusive license pertaining to
certain patents and technology and the transfer of certain other technology to
Biosphere. BioSepra has the option to acquire the remaining 49% of the
outstanding common stock of Biosphere through December 31, 2004, as defined.
Additionally, the holder of the remaining 49% of the outstanding common stock of
Biosphere has an option to require BioSepra to purchase its shares from December
31, 2003 until December 31, 2004 at a price of not less than FF6,000,000
($1,072,000 December 31, 1998). The results of operations for Biosphere will be
included in BioSepra's operations from the date of acquisition. The historical
results of operations of Biosphere are not material to BioSepra's financial
statements.
Legal Proceedings
In July 1997, the United States Patent and Trademark Office (the "PTO") informed
Sepracor that it had declared an interference between Sepracor's previously
issued method-of-use patent on fexofenadine to treat allergic rhinitis and
another similar patent application of Sepracor, and HMRI's method-of-use patent
application on the anti-histaminic effects of fexofenadine on hepatically
impaired patents. The primary objective of a patent interference, which can only
be declared by the PTO, is to determine the first to invent any overlapping
subject matter claimed by more than one party. In the course of an interference,
the parties typically present evidence relating to their inventive activities as
to the overlapping subject matter. The PTO then reviews the evidence to
determine which party has the earliest legally sufficient inventive date, and,
therefore, is entitled to a patent claiming the overlapping subject matter.
If Sepracor prevails in the interference, Sepracor will retain all of its claims
in its issued patent. If, however, Sepracor loses the interference, HMRI will be
issued a U.S. patent containing its claims involved in the interference and may
not be obligated to pay Sepracor milestone or royalty payments pursuant to the
terms of the license agreement whereby Sepracor licensed its U.S. patent rights
covering fexofenadine to HMRI in 1993. In May 1998, HMRI filed an action in
Belgium alleging that Sepracor's European patent relating to fexofenadine is
invalid in Belgium, or is not infringed by HMRI's sales of fexofenadine in
Belgium and Germany. In September 1998, Sepracor commenced infringement
proceedings in the United Kingdom against HMRI and related companies for
infringement of Sepracor's European patent relating to fexofenadine. Sepracor
and HMRI have agreed to resolve the interference by arbitration. The arbitrator
has been selected and a decision, once rendered, must be submitted to the PTO
for final approval. The proceedings are ongoing and the Company is unable to
predict its outcome.
HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In
complaints filed in February 1996 and November 1996, Pall alleged that
HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon
three patents held by Pall.
On October 14, 1996, in connection with the first action concerning U.S. Patent
No. 5,451,321 (the "'321 Patent"), HemaSure filed a motion for summary judgment
of noninfringement. Pall filed a cross motion for summary judgment of
infringement at the same time.
In October 1997, the Eastern District of New York granted in part Pall's summary
judgment motion and held that the LeukoNet product infringes a single claim from
the '321 patent. HemaSure has terminated the manufacture, use, sale and offer
for sale of the filter subject to the court's order. HemaSure appealed the
October 1997 decision to the Court of Appeals for the Federal Circuit. Oral
arguments were heard in February 1999. HemaSure now awaits a decision from the
Federal Circuit. Remaining discovery relating to the damages phase of the first
action has been completed.
With respect to the second action concerning U.S. Patent No. 4,952,572 (the
"'572 patent"), HemaSure has answered the complaint stating that it does not
infringe any claim of the asserted patents. Further, HemaSure has counterclaimed
for declaratory judgment of invalidity, noninfringement and unenforceability of
the '572 patent. Pall has amended its Complaint to add Lydall, Inc., whose
subsidiary supplied filter media for the LeukoNet product, as a co-defendant.
HemaSure has filed for summary judgment of noninfringement, and Pall has
cross-filed for summary judgment of infringement at the same time. Lydall
supported HemaSure's motion for summary judgment of noninfringement, and has
served a motion for summary judgment that the asserted claims of the '572 patent
are invalid as a matter of law. Discovery has been completed in the action.
HemaSure believes, based on advice of its patent counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the LeukoNet product does not infringe any valid enforceable
claim of the two asserted Pall patents. However, there can be no assurance that
HemaSure will prevail in the pending litigations, and an adverse outcome in a
patent infringement action would have a material adverse effect on HemaSure's
financial condition and future business and operations.
Factors Affecting Future Operating Results
Certain of the information contained in this Annual Report, including
information with respect to the safety, efficacy and potential benefits of the
Company's ICEs under development and the scope of patent protection with respect
to these products and information with respect to the other plans and strategy
for the Company's business and the business of the subsidiaries and certain
affiliates of the Company, consists of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements include the following:
twenty-five
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sepracor Has Operating Losses: Sepracor has not been profitable since inception,
and it is possible that it will not achieve profitability. Sepracor incurred net
losses applicable to common shares on a consolidated basis of approximately
$93,433,000 for the year ended December 31, 1998 and $26,723,000 for the year
ended December 31, 1997. These net losses include dividends paid on Sepracor's
Series B Preferred Stock totaling $150,000 for the year ended December 31, 1998
and $600,000 for the year ended December 31, 1997. Sepracor expects to continue
to incur losses in future periods.
Many of Sepracor's Products are in the Early Stage of Product Development and
May Not Be Developed Successfully: Sepracor is focused on the development of
ICEs. Most of Sepracor's ICEs are still undergoing clinical trials or are at the
early stages of development. Sepracor's drugs may not provide greater benefits
or fewer side effects than the original versions of these drugs and its research
efforts may not lead to the discovery of new drugs with improved
characteristics. All of Sepracor's drugs under development will require
significant additional research, development, preclinical and/or clinical
testing, regulatory approval and a commitment of significant additional
resources prior to their commercialization. Sepracor's potential products may
not:
- - be developed successfully;
- - be proven safe and efficacious in clinical trials;
- - offer therapeutic or other improvements over comparable drugs;
- - meet applicable regulatory standards;
- - be capable of being produced in commercial quantities at acceptable costs; or
- - be successfully marketed.
There Are Uncertainties Involved with Patents: Sepracor's success depends in
part on its ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. Sepracor has
filed various patent applications covering the composition of, and the methods
of using, single-isomer or active-metabolite forms of various compounds for
specific applications.
Sepracor may not be issued patents in respect of the patent applications already
filed or that it may file in the future. Moreover, the patent position of
companies in the pharmaceutical industry generally involves complex legal and
factual questions, and recently has been the subject of much litigation. No
consistent policy has emerged from the PTO or the courts regarding the breadth
of claims allowed or the degree of protection afforded under patents and other
proprietary rights. Therefore, any patents Sepracor has obtained, or obtains in
the future, may be challenged, invalidated or circumvented.
Sepracor's ability to commercialize successfully any ICE will largely depend
upon its ability to obtain and maintain use patents of sufficient scope to
prevent third parties from developing similar or competitive products. Third
parties, typically drug companies, hold patents or patent applications covering
the composition of matter for most of the ICEs for which Sepracor has use
patents or patent applications. In each such case, unless Sepracor has or
obtains a license agreement, Sepracor generally may not commercialize the ICE
until the expiration of these third-party patents. Licenses may not be available
to Sepracor on acceptable terms, if at all. In addition, it would be costly to
contest the validity of a third-party patent or defend any claim that Sepracor
infringes a third-party patent. Moreover, litigation involving third-party
patents may not be resolved in Sepracor's favor.
Developing new products and processes is expensive and time consuming.
Therefore, it is important for Sepracor to obtain patent and trade secret
protection for significant new technologies, products and processes. Protection
of Sepracor's proprietary rights from unauthorized third-party use requires that
the rights either be covered by valid and enforceable patents or be maintained
in confidence as trade secrets. Some of the technology that Sepracor uses in its
products is not covered by any patents or patent applications. In the absence of
patent protection, competitors may adversely affect Sepracor's business by
developing independently substantially equivalent technology. This independent
development may circumvent any trade secret protection applicable to Sepracor's
products.
Sepracor is Involved In a Patent Interference: In July 1997, the PTO informed
Sepracor that it had declared an interference between Sepracor's use patent on
fexofenadine to treat allergic rhinitis and another similar use patent
application filed by it, and HMRI's use patent application on the
anti-histaminic effects of fexofenadine on hepatically impaired patients. The
primary objective of a patent interference, which only the PTO can declare, is
to determine which party first invented the overlapping subject matter claimed
by more than one party. In the course of an interference, the parties typically
present evidence relating to their invention of the overlapping subject matter.
The PTO then reviews the evidence and issues a patent in the overlapping subject
matter to the party it believes has the earliest legally sufficient date of
invention.
The process to resolve an interference can take many years and the outcome of
interferences varies considerably. If Sepracor loses the interference, HMRI will
be issued a U.S. patent for the overlapping subject matter. Further, HMRI may
not be obligated to pay the milestone or royalty payments called for in the
existing agreement in which Sepracor licenses its U.S. patent rights covering
fexofenadine to HMRI. If Sepracor prevails in the interference, it will retain
all of its claims in Sepracor's issued patent. A favorable decision, however,
does not ensure meaningful protection of Sepracor's proprietary rights.
Sepracor is using arbitration to resolve the interference, and the arbitration
proceeding is ongoing. The arbitrator may or may not render a decision during
the first half of 1999. Once rendered, the arbitrator's decision must be
submitted to the PTO for final approval.
There is No Certainty that Sepracor will Obtain Government Approvals; The
Approval Process is Costly and Lengthy: The FDA and similar foreign agencies
must approve the marketing and sale of pharmaceutical products developed by
Sepracor or its development partners. The regulatory process to obtain marketing
approval requires clinical trials of a product to establish its safety and
efficacy. Problems that may arise during clinical trials include:
- - results of clinical trials may not be consistent with pre-clinical study
results;
- - results from later phases of clinical trials may not be consistent with the
results from earlier phases; and
- - products may not be shown to be safe and efficacious.
The clinical trial and regulatory approval process can take many years and
require substantial expenditures. Sepracor may not obtain regulatory approval
for products on a timely basis, if at all. With respect to certain of Sepracor's
ICEs, Sepracor has been able to shorten the regulatory approval process by
relying on the parent drug's preclinical and clinical toxicology data already on
file with the FDA. However, it is possible that the FDA will not permit Sepracor
to use this strategy in the future. Accordingly, Sepracor may be required to
expend significant resources to complete preclinical and clinical studies for
its other ICEs which would significantly delay the regulatory approval process.
twenty-six
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sepracor's failure to obtain regulatory approval on a timely basis and any
unanticipated significant expenditures on preclinical and clinical studies could
adversely affect Sepracor's financial condition. Even if the FDA grants Sepracor
regulatory approval of a product, such approval may be subject to limitations on
the indicated uses for which the product may be marketed or contain requirements
for costly post-marketing follow-up studies.
Sepracor's NDA for Xopenex(TM) is currently in the regulatory approval process.
While Sepracor expects final FDA approval of this application in 1999, the FDA
may not approve the NDA in 1999 or at all.
If Sepracor fails to comply with applicable regulatory requirements, it may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
Risks Due to Sepracor's Limited Sales and Marketing Experience: Sepracor
currently has very limited sales and marketing experience. If Sepracor
successfully develops and obtains regulatory approval for the products it is
currently developing, Sepracor expects to license some of them to large
pharmaceutical companies and market and sell others through its direct specialty
sales forces or through other arrangements, including co-promotion arrangements.
Sepracor has established a direct sales force to market its single isomer form
of albuterol, Xopenex, in anticipation of expected FDA approval and commercial
introduction of this drug in 1999. Further, as Sepracor begins to enter into
co-promotion arrangements or market and sell additional products directly,
Sepracor will need to significantly expand its sales force. Sepracor expects to
incur significant expense in expanding its direct sales force.
Sepracor's ability to realize significant revenues from direct marketing and
sales activities depends on its ability to attract and retain qualified sales
personnel in the pharmaceutical industry. If Sepracor is unable to attract and
retain qualified sales personnel, Sepracor will not be able to successfully
expand its marketing and direct sales force on a timely or cost effective basis.
Further, Sepracor's sales and marketing efforts may not be successful, and the
need to comply with FDA limits on drug product marketing, including limits on
claims of comparative safety or efficacy, may inhibit the effectiveness of such
marketing. In addition, Sepracor will need to enter into co-promotion
arrangements with third parties where its direct sales force is neither well
situated nor large enough to achieve maximum penetration in the market. Sepracor
may not be successful in entering into any such arrangements, and the terms of
any such arrangements may not be favorable to it.
Manufacturing Uncertainties: Sepracor currently operates a manufacturing plant
that is cGMP compliant and that it believes can produce commercial quantities of
Xopenex and support the production of its other possible products in amounts
needed for its clinical trials. Sepracor believes it has the capability, without
additional expansion, to scale up its manufacturing processes and manufacture
sufficient amounts of the products which may be approved for sale. However,
Sepracor will not have the capability to manufacture in sufficient quantities
all of the products which may be approved for sale. Accordingly, Sepracor may be
required to spend money to expand its current manufacturing facility, build an
additional manufacturing facility or contract the production of these drugs to
third-party manufacturers.
Sepracor currently has a supply contract with ChiRex that commits Sepracor to
purchase through December 31, 2001 all of its annual requirements of those drugs
that it will market directly through its specialty sales force, provided ChiRex
meets certain pricing, supply and quality control conditions. Under this supply
agreement, however, Sepracor retains the right to manufacture commercial
quantities of its drugs in its Nova Scotia manufacturing plant.
Sepracor may not successfully scale up its manufacturing processes or maintain
cGMP compliance. Failure in either respect can lead to refusal by the FDA to
approve marketing applications. Failure to maintain cGMP compliance may also be
the basis for action by the FDA to withdraw approvals previously granted and for
other regulatory action.
Sepracor Will Be Exposed to Product Liability Claims and Maintain Product
Liability Insurance: Sepracor's business exposes it to the risk of product
liability claims that are inherent in the testing, manufacturing, marketing and
sale of human health care products. Sepracor maintains limited product liability
insurance coverage for both the clinical trials and commercialization of its
products. It is possible that Sepracor will not be able to obtain further
product liability insurance on acceptable terms, if at all, and that insurance
subsequently obtained will not provide adequate coverage against all potential
claims. If Sepracor is unable to obtain insurance at acceptable cost or
otherwise protect against potential product liability claims, Sepracor could be
exposed to significant liabilities. These liabilities could prevent or interfere
with Sepracor's product commercialization efforts.
Sepracor Depends on Collaborative Partners: Sepracor's ability to commercialize
certain drugs that Sepracor develops is likely to depend significantly on its
continued ability to enter into collaborative agreements with pharmaceutical
companies to fund all or part of the costs to complete the development of such
drugs and to manufacture and/or market such drugs. To date, Sepracor has entered
into five such collaborative agreements. Sepracor has licensed to HMRI its U.S.
patent rights to fexofenadine, which is marketed by HMRI as Allegra, and is
entitled to receive royalties on all U.S. sales of Allegra when the patent on
the parent drug expires. Sepracor, however, is currently party to an
interference involving Allegra which, if decided against Sepracor, could result
in the loss of all or substantially all of the royalties to which it is entitled
under the license agreement on future sales of Allegra. See " - Sepracor is
Involved in a Patent Interference." Sepracor has also licensed its worldwide
patent rights in desloratadine to Schering-Plough, pursuant to which it is
entitled to receive royalties from Schering-Plough upon the initial sale of the
product. Sepracor has entered into an agreement with Janssen with respect to the
joint development and co-promotion of norastemizole. Sepracor has exclusively
licensed its norcisapride rights to Janssen, and is entitled to receive
royalties on product sales beginning upon the first commercial sale. These
royalties will escalate upon achievement of sales volume milestones. Sepracor
has exclusively licensed its (R)-fluoxetine rights to Lilly, and, in addition to
initial license and development milestone payments, is entitled to receive
royalties on product sales beginning upon the first commercial sale. This
agreement will be effective on the next business day following the expiration or
earlier termination of the notice and waiting period under the HSR Act. Under
the HSR Act, Sepracor has received a request from the Federal Trade Commission
for additional information in connection with the Lilly (R)-fluoxetine Agreement
and plans to fully respond to the request.
In each of these collaborative arrangements and, to the extent that Sepracor
enters into additional collaborative arrangements, Sepracor depends upon the
efforts of its collaboration partners, and these efforts may not be successful.
If any of Sepracor's collaboration partners were to breach or terminate their
agreements with Sepracor or fail to perform their obligations to Sepracor in a
timely manner, the development and commercialization of the products could be
delayed or terminated. Any delay or termination of this type could have a
material, adverse effect on Sepracor's financial condition and results of
operations. Any failure or inability by Sepracor to perform certain of its
obligations under a collaborative agreement could reduce or extinguish the
benefits to which Sepracor is otherwise entitled under the agreement. Sepracor
may not be able to enter into collaborative agreements for ICEs in the future
and the terms of the collaborative agreements, if any, may not be favorable to
Sepracor.
twenty-seven
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sepracor is Highly Leveraged: As of December 31, 1998, Sepracor's total
long-term debt was approximately $492,100,000 and its stockholders' equity was
approximately $4,400,000. Neither the 6-1/4% convertible subordinated debentures
due 2005 nor the 7% convertible subordinated debentures due 2005 restrict
Sepracor's ability or its subsidiaries' ability to incur additional
indebtedness, including debt that ranks senior to the 6-1/4% debentures or the
7% debentures. Additional indebtedness of Sepracor may rank senior to or pari
passu with the 6-1/4% debentures or the 7% debentures in certain circumstances.
Sepracor's ability to satisfy its obligations will depend upon Sepracor's future
performance, which is subject to many factors, including factors beyond its
control. It is possible that Sepracor will be unable to meet its debt service
requirements on the 6-1/4% debentures or the 7% debentures. Moreover, Sepracor
may be unable to repay the 6-1/4% debentures or 7% debentures at maturity or
otherwise in accordance with the debt instruments.
Sepracor May Need Additional Funds: Sepracor may require additional funds for
its research and product development programs, operating expenses, the pursuit
of regulatory approvals and the expansion of Sepracor's production, sales and
marketing capabilities. Historically Sepracor has satisfied its funding needs
through collaborative arrangements with corporate partners or equity or debt
financings. Sepracor cannot assure you that these funding sources will be
available to it when needed in the future, or, if available, will be on terms
acceptable to Sepracor. Insufficient funds could require Sepracor to delay,
scale back or eliminate certain of its research and product development programs
or to license third parties to commercialize products or technologies that
Sepracor would otherwise develop or commercialize itself. Sepracor's cash
requirements may vary materially from those now planned because of factors
including:
- - increased research and development expenses;
- - patent developments;
- - relationships with collaborative partners;
- - the FDA regulatory process; and
- - Sepracor's capital requirements.
Sepracor Faces Intense Competition: Sepracor expects to encounter intense
competition in the sale of its future products. Sepracor's competitors include
pharmaceutical companies, biotechnology firms, universities and other research
institutions. The fields in which Sepracor competes are subject to rapid and
substantial technological change. Developments by others may render Sepracor's
products or technologies obsolete or noncompetitive. Many of Sepracor's
competitors and potential competitors have substantially greater resources,
manufacturing and marketing capabilities, research and development staff and
production facilities than Sepracor has.
Fluctuation of Sepracor's Quarterly Operating Results: Sepracor's quarterly
operating results are likely to fluctuate significantly. These fluctuations will
depend on factors which include:
- - the timing of collaborative agreements for Sepracor's pharmaceutical
development candidates and development costs for those pharmaceuticals;
- - the timing of product sales and market penetration;
- - the timing of operating expenses, including marketing expenses and the costs
of expanding and maintaining a direct sales force;
- - the timing of significant orders for the products of BioSepra; and
- - the losses of HemaSure and Versicor, to the extent Sepracor is required to
recognize these losses.
Sepracor's operating results may be affected by the future operating results of
its subsidiaries: Factors that may affect the future operating results of
Sepracor include the ability of BioSepra to obtain additional financing, the
dependence on BioSepra sales of HyperD media, which was introduced in 1993, and
BioSepra's ability to sell its products to customers at the early stage of their
product development cycles.
Additional factors that may affect the future operating results of Sepracor
include the ability of HemaSure to obtain additional financing and HemaSure's
ability to develop commercially viable products.
Because of the foregoing factors, past financial results should not be relied
upon as an indication of future performance. Sepracor believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and it expects that its results of operations may fluctuate from
period to period in the future.
Year 2000 Issue: The year 2000 issue is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculation or system failures. In 1996, Sepracor began a comprehensive
project, fully supported by senior management, to determine the risks and
impacts of the Year 2000 ("Y2K") computer problem on the Company's ability to
operate into the next century. This plan took into account Sepracor's status as
a pharmaceutical research and development company, and its transition to a
fully-developed pharmaceutical company, with research and development,
manufacturing, distribution, and sales functions. The project relates to the
following areas: (i) The Company's internal systems (including information
technology systems, such as financial systems, and non-information technology
systems, such as telephones and facilities); and (ii) the readiness of the
Company's vendors. As an emerging pharmaceutical company, direct customers are
not expected to play a critical role in the Company's Y2K analysis. In addition,
the Company's products under development will not require Y2K compliance.
Department managers in every business area participate in the project, under the
leadership of a Y2K Project Manager. Sepracor began this project in 1996 so as
to incorporate Y2K readiness into its business strategy, and to identify and
replace non-compliant systems and procedures as part of its normal operating
plan and budget.
twenty-eight
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sepracor's goal is to be fully Y2K ready, in respect to both its own systems and
those of its key vendors and strategic alliance partners, no later than July
1999.
To date, Sepracor has spent $145,000 to retrofit or replace computer-based
systems, which were identified as lacking compliance. This included the
migration of all of Sepracor's desktop computers to an operating status Sepracor
considers to be Y2K certified, through software upgrades or full system
replacements. Sepracor's key telecommunications systems were also upgraded
and/or replaced. These costs have been minimal due to the fact that Y2K
compliance has been a prerequisite to all new systems acquisitions and
maintenance upgrades.
The Company estimates approximately $400,000 in additional direct costs to
complete its Y2K certification efforts. This funding will be used to contract
with an independent testing firm to perform a platform and system review of the
Company's IT-based systems. At this time, the Company also plans to contract
with an independent auditor to perform a full review of its compliance efforts,
including contingency planning. This funding will also be used to address any
system or process replacement requirements that may be identified as these
reviews progress.
Areas that need further attention include vendor compliance certification, which
is in progress at this time, and contingency planning. Completion of the vendor
compliance certification is impacted by vendors' respective Y2K efforts. The
Company expects to have initial vendor responses completed by April 1999, and
will determine what follow-up is required at that time. The Company relies on
third party suppliers and service providers. If these or other third parties
experience Year 2000 failures or malfunctions, there could be an adverse impact
on the Company's ability to conduct operations, including conducting continued
pharmaceutical development efforts and manufacturing pharmaceutical products.
The Company has minimal Year 2000 related contingency plans because there are
virtually no legacy systems at Sepracor and because very few potential issues
have surfaced to date. A review of these plans will be held once vendor
certification is completed.
Sepracor's focus for the coming months will be to determine the exact level of
exposure with outside vendors/customers, and to complete independent
verification of internal compliance efforts. Based on the activities described
above, the Company does not believe that the Year 2000 problem will have a
material adverse effect on the Company's business or results of operations.
Supplemental Stockholder Information
Price Range of Common Stock
The Common Stock of Sepracor is traded on the Nasdaq National Market under the
symbol SEPR. On March 15, 1999, the closing price of the Company's Common Stock,
as reported on the Nasdaq National Market, was $134 per share. The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First Quarter 43 5/16 35 1/8
Second Quarter 46 3/4 36 3/4
Third Quarter 70 1/2 41 1/2
Fourth Quarter 88 5/8 53
<CAPTION>
1997 High Low
<S> <C> <C>
First Quarter 27 1/8 16
Second Quarter 27 1/8 18
Third Quarter 42 3/4 19
Fourth Quarter 42 3/4 28 3/8
</TABLE>
On March 15, 1999, Sepracor had approximately 527 stockholders of record.
Dividend Policy
Sepracor has never paid cash dividends on its Common Stock. The Company
currently intends to reinvest its future earnings, if any, for use in the
business and does not expect to pay cash dividends in the foreseeable future.
Form 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1998 is available without charge upon written request to:
Investor Relations
Sepracor Inc.
111 Locke Drive
Marlborough, MA 01752
twenty-nine
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Sepracor Inc.:
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity and comprehensive income, and cash flows
present fairly, in all material respects, the financial position of Sepracor
Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of BioSepra Inc., a majority-owned subsidiary, which statements
reflect total assets of 3% and 12% of total consolidated assets at December 31,
1998 and 1997, respectively, and 43%, 87% and 95% of total consolidated revenues
for each of the three years in the period ended December 31, 1998. Those
statements were audited by other auditors whose report thereon includes an
explanatory paragraph regarding BioSepra's ability to continue as a going
concern and has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for BioSepra, Inc., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999, except as to the information in
Note W for which the date is February 25, 1999
thirty
<PAGE>
Sepracor Inc. Consolidated Balance Sheets
<TABLE>
<CAPTION>
Year Ended December 31 (in thousands, except par value amounts) 1998 1997
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents (Notes B and E) $ 295,323 $ 82,579
Marketable securities (Notes B and E) 204,274 9,981
Accounts receivable (Note G) 3,162 2,415
Inventories (Note H) 3,572 2,722
Other assets 2,258 1,543
--------------------------
Total current assets 508,589 99,240
--------------------------
Property and equipment, net (Note I) 17,882 15,126
Investment in affiliates (Notes C and D) 1,490 3,971
Excess of investment over net assets acquired, net (Notes B and J) 4,896 5,288
Other assets (Note N) 18,456 4,882
--------------------------
Total assets $ 551,313 $ 128,507
--------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,132 $ 4,018
Accrued expenses (Note K) 31,915 17,366
Deferred revenue and other current liabilities (Notes B and L) 2,542 325
Notes payable and current portion of capital lease obligation
and long-term debt (Notes M and O) 2,786 861
Convertible redeemable preferred stock (Note Q) - 6,700
--------------------------
Total current liabilities 47,375 29,270
--------------------------
Loan guarantee of affiliate (Note D) 5,000 -
Long-term debt and capital lease obligation (Notes M and O) 2,629 3,388
Convertible subordinated debentures (Notes F and N) 489,475 80,880
--------------------------
Total liabilities 544,479 113,538
--------------------------
Minority interest (Note C) 2,445 2,937
Commitments and contingencies (Notes O and P)
Stockholders' equity (Notes N, Q, and R)
Preferred stock, $1.00 par value, 1,000 shares authorized,
none outstanding in 1998 and 1997
Common stock, $.10 par value, authorized 80,000 in 1998, 40,000 in 1997,
issued and outstanding 32,657 in 1998 and 27,853 in 1997 3,266 2,785
Additional paid-in capital 307,668 222,504
Unearned compensation, net (Note Q) (144) (94)
Accumulated deficit (306,311) (213,028)
Accumulated other comprehensive income (loss) (90) (135)
--------------------------
Total stockholders' equity 4,389 12,032
--------------------------
Total liabilities and stockholders' equity $ 551,313 $ 128,507
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
thirty-one
<PAGE>
Sepracor Inc. Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands, except loss per common share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Product sales $ 6,996 $ 9,636 $ 13,784
Collaborative research and development (Note T) 5,044 58 25
License fees and royalties (Note T) 5,366 5,643 1,232
---------------------------------------
Total revenues 17,406 15,337 15,041
---------------------------------------
Costs and expenses:
Cost of revenue 4,604 5,992 6,784
Research and development 63,062 43,055 35,828
Selling, general and administrative 30,883 15,594 15,245
Legal expense related to patents 2,008 1,660 1,067
Restructuring and impairment charges (Note J) (351) 4,179 -
---------------------------------------
Total costs and expenses 100,206 70,480 58,924
---------------------------------------
Loss from operations (82,800) (55,143) (43,883)
---------------------------------------
Other income (expense):
Equity in investee losses (Note D) (7,482) (2,755) (17,539)
Interest income 13,191 5,766 6,713
Interest expense (16,969) (5,976) (6,140)
Gain on sale of ChiRex Inc. (Note D) - 30,069 -
Other income (expense) 124 547 (107)
---------------------------------------
Net loss before minority interests (93,936) (27,492) (60,956)
Minority interests in subsidiaries (Note C) 653 1,369 846
---------------------------------------
Net loss $(93,283) $(26,123) $(60,110)
=======================================
Net loss applicable to common shares (Note B) $(93,433) $(26,723) $(60,710)
=======================================
Basic and diluted net loss per common share (Note B) $ (3.23) $ (0.97) $ (2.25)
Basic and diluted weighted-average number of common shares outstanding (Note B) 28,913 27,599 27,032
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
thirty-two
<PAGE>
Sepracor Inc. Consolidated Statements of Stockholders' Equity and
Comprehensive Income
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Year ended December 31, 1998, 1997 Common Stock Paid-In Unearned Accumulated Comprehensive Stockholders'
and 1996 (in thousands) Shares Amount Capital Compensation Deficit Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 26,816 $2,682 $212,814 $(126,795) $ 526 $ 89,227
--------------------------------------------------------------------------------
Comprehensive income (loss):
Net Loss (60,110) (60,110)
Foreign currency translation (121) (121)
----------
Total comprehensive income (loss) (60,231)
----------
Issuance of common stock to employees
under stock plans 455 45 2,185 2,230
Accrued dividends from preferred stock (600) (600)
Unearned compensation, net $(234) (234)
--------------------------------------------------------------------------------
Balance at December 31, 1996 27,271 2,727 214,399 (234) (186,905) 405 30,392
================================================================================
Comprehensive income (loss):
Net Loss (26,123) (26,123)
Foreign currency translation (540) (540)
----------
Total comprehensive income (loss) (26,663)
----------
Issuance of common stock to employees
under stock plans 582 58 3,017 3,075
Accrued dividends from preferred stock (600) (600)
Unearned compensation, net 140 140
Gain on issuance of subsidiary's stock 5,688 5,688
--------------------------------------------------------------------------------
Balance at December 31, 1997 27,853 2,785 222,504 (94) (213,028) (135) 12,032
================================================================================
Comprehensive income (loss):
Net Loss (93,283) (93,283)
Foreign currency translation 45 45
----------
Total comprehensive income (loss) (93,238)
----------
Issuance of common stock to employees
under stock plans 639 64 6,026 6,090
Issuance of common stock from conversion
of warrants 55 6 401 407
Unearned compensation, net (50) (50)
Accrued dividends from preferred stock (150) (150)
Issuance of common stock from conversion
of subordinated convertible notes 4,110 411 80,469 80,880
Deferred finance costs related to the
conversion of subordinated
convertible notes (1,582) (1,582)
--------------------------------------------------------------------------------
Balance at December 31, 1998 32,657 $3,266 $307,668 $(144) $(306,311) $ (90) $ 4,389
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
thirty-three
<PAGE>
Sepracor Inc. Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, (in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (93,283) $(26,123) $ (60,110)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interests in subsidiaries (653) (1,369) (846)
Depreciation and amortization 5,246 4,614 4,400
Provision for doubtful accounts (263) 150 142
Equity in investee losses 7,482 2,755 17,539
Loss on disposal of property and equipment 517 24 125
Restructuring and impairment charges - 4,018 -
Gain on sale of equity investee - (30,069) -
Changes in operating assets and liabilities:
Accounts receivable (374) 383 2,069
Inventories (625) (46) (72)
Other current assets and liabilities (376) 50 (796)
Accounts payable 6,040 (136) 1,115
Accrued expenses 14,507 5,606 6,176
Deferred revenue 1,891 (3,620) 147
----------------------------------------
Net cash used in operating activities (59,891) (43,763) (30,111)
----------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (366,953) (60,961) (93,328)
Sales and maturities of marketable securities 172,660 71,285 80,454
Additions to property and equipment (7,288) (2,653) (10,121)
Proceeds from sale of equipment 51 7 147
Investment in affiliate 75 (4,046) -
Net proceeds from sale of equity investee - 30,625 -
Proceeds from affiliate's repayment of long-term note - 6,034 -
Decrease in other assets 442 449 1,560
----------------------------------------
Net cash provided by (used in) investing activities (201,013) 40,740 (21,288)
----------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of stock 5,955 3,203 2,047
Proceeds from sale of convertible subordinated debentures 489,475 - -
Costs associated with sale of convertible subordinated debentures (15,615) - -
Repurchase of redeemable preferred stock (6,850) - -
Borrowings under long-term debt, capital lease and line of credit agreements 2,074 174 -
Repayments of long-term debt and line of credit agreements (948) (973) (3,125)
----------------------------------------
Net cash provided by (used in) financing activities 474,091 2,404 (1,078)
----------------------------------------
Effect of exchange rate changes on cash and cash equivalents (443) (146) 3
----------------------------------------
Net increase (decrease) in cash and cash equivalents 212,744 (765) (52,474)
Cash and cash equivalents at beginning of year 82,579 83,344 135,818
----------------------------------------
Cash and cash equivalents at end of year $ 295,323 $ 82,579 $ 83,344
========================================
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 12,070 $ 5,980 $ 6,337
Non cash activities:
Capital lease obligations incurred $ 270 $ - $ 61
Conversion of Convertible Subordinated Debt (Note N) $ 79,298 $ - $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
thirty-four
<PAGE>
Notes to Consolidated Financial Statements
A - Nature of the Business
Sepracor Inc. ("Sepracor", or the "Company") was incorporated in 1984 to
research, develop and commercialize products for the synthesis, separation and
purification of pharmaceutical and biopharmaceutical compounds. Specifically,
Sepracor is developing improved versions of top-selling drugs called ICE(TM)
(Improved Chemical Entities) Pharmaceuticals. Sepracor is focusing on advancing
its pharmaceutical programs and strengthening its patent positions for these ICE
pharmaceuticals. Sepracor's 100% owned subsidiary, Sepracor Canada Ltd.,
supplies clinical material to Sepracor through its manufacturing facility in
Windsor, Nova Scotia which commenced operations in February 1995. Sepracor's 64%
owned subsidiary, BioSepra Inc., with operations in France and the U.S., is
committed to supplying high-quality, reliable chromatographic media to
biopharmaceutical companies. Sepracor's 33% owned subsidiary, HemaSure Inc., is
dedicated to making blood safer through blood filtration devices (See Note W -
Subsequent Event for HemaSure ownership change to 42%). Sepracor's 22% owned
subsidiary, Versicor Inc., has initiated a program in combinatorial chemistry.
This emerging field involves the creation of diverse chemical libraries,
consisting of three-dimensional, space filling chiral molecules.
Sepracor and its subsidiaries are subject to risks common to companies in the
industry including, but not limited to the safety, efficacy and successful
development of product candidates, fluctuations in operating results, need for
additional funding, protection of proprietary technology, limited sales and
marketing experience, limited manufacturing capacity, risk of product liability,
compliance with government regulations and dependence on key personnel and
collaborative partners.
B - Summary of Significant Accounting Policies
Principles of Consolidation: Consolidated financial statements include the
accounts of Sepracor and all of its wholly and majority owned subsidiaries. All
material intercompany transactions have been eliminated. Investments in
affiliated companies which are 50% owned or less, and where Sepracor does not
exercise control, are accounted for using the equity method. Versicor had been a
consolidated entity until December 10, 1997 and since then has been accounted
for under the equity method. ( See Notes C and D for further discussion).
The Company accounts for the sale of subsidiary stock in different manners,
depending on the life cycle of the entity. The Company offsets any gains or
losses against additional paid-in capital for early development stage
subsidiaries. For later stage subsidiaries, the Company records gains and losses
as other income or expense.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the following:
(1) the reported amounts of assets and liabilities, (2) the disclosure of
contingent assets and liabilities at the dates of the financial statements and
(3) the reported amounts of the revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Reclassifications in the preparation of Financial Statements: Certain prior
amounts have been reclassified to conform with current year presentation.
Translation of Foreign Currencies: The assets and liabilities of Sepracor's
international subsidiaries are translated into U.S. dollars using current
exchange rates. Statement of operations amounts are translated at average
exchange rates prevailing during the period. The resulting translation
adjustment is recorded in accumulated other comprehensive income (loss). Foreign
exchange transaction gains and losses are included in other income (expense).
Cash and Cash Equivalents: Sepracor considers all highly liquid debt instruments
purchased with an initial maturity of three months or less to be cash
equivalents.
Marketable Securities: Sepracor has classified its marketable securities as
"available for sale". Marketable securities include government securities and
corporate commercial paper, maturing in primarily less than a year, which can be
readily purchased or sold using established markets. Marketable securities are
stated at fair value. Net realized gains and losses on security transactions are
determined on the specific identification cost basis. The market value of
Sepracor's marketable securities at December 31, 1998 and 1997, was not
materially different from cost.
Concentration of Credit Risk: The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with financial institutions. Financial instruments
that potentially subject the Company to concentrations of credit risk primarily
consist of the cash and cash equivalents, marketable securities and trade
accounts receivable. The Company places its cash, cash equivalents and
marketable securities with high credit quality financial institutions. Customers
with amounts due to the Company that represent greater than 10% of the accounts
receivable balance are as follows:
<TABLE>
<CAPTION>
Year Ended December 31: 1998 1997
- -----------------------------------------------------------
<S> <C> <C>
Customer A - 16%
Customer B 10% -
Customer C 7% 11%
Customer D - 24%
Revenues from significant customers are as follows:
<CAPTION>
Year Ended December 31: 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Customer A - 33% 24%
Customer B - - 12%
Customer C 9% 10% -
Customer D - 12% -
Customer E 27% - -
Customer F 29% - -
</TABLE>
For financial information by segment and geographic area see Note V.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market.
Property and Equipment: Property and equipment are stated at cost. Costs of
major additions and betterments are capitalized; maintenance and repairs which
do not improve or extend the life of the respective assets are charged to
operations. On disposal, the related cost and accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss is
included in the results
thirty-five
<PAGE>
Notes to Consolidated Financial Statements (continued)
of operations. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and office
equipment have estimated useful lives of three to ten years. The building has an
estimated useful life of thirty years. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements or the remaining
term of the lease.
Intangible and Other Assets: The excess of investment over net assets acquired
is amortized using the straight-line method over 20 years. Accumulated
amortization was $7,868,000 and $7,476,000 at December 31, 1998 and 1997,
respectively. Sepracor capitalizes all significant costs associated with the
successful filing of a patent application. Patent costs are amortized over their
estimated useful lives, not to exceed 17 years. Deferred finance costs relating
to expenses incurred to complete convertible subordinated debenture offerings
are amortized over seven years. Long-lived assets are reviewed for impairment by
comparing the fair value of the assets with their carrying amount. Any
write-downs are treated as permanent reductions in the carrying amount of the
assets. Accordingly, the Company evaluates the possible impairment of goodwill
and other long-lived assets at each reporting period based on the undiscounted
projected cash flows of the related asset.
Revenue Recognition: Revenues from product sales are recognized when goods
are shipped or installation is complete. Non-refundable license fees,
milestone payments and contract revenues are recognized when contract
obligations are met. Deferred revenues represent progress payments received
from customers pursuant to contract revenues not yet recorded.
Income Taxes: The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Basic and Fully Diluted Net Loss Per Common Share: Basic earnings (loss) per
share ("EPS") excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is based upon the weighted-average number of common
shares outstanding during the period plus the additional weighted average common
equivalent shares during the period. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive. Common equivalent shares result from the assumed conversion of
preferred stock and the assumed exercises of outstanding stock options, the
proceeds of which are then assumed to have been used to repurchase outstanding
stock options using the treasury stock method. For the years ended December 31,
1998, 1997 and 1996, basic and diluted net loss per common share is computed
based on the weighted-average number of common shares outstanding during the
period, because the effect of common stock equivalents would be anti-dilutive.
Included in the years ended December 31, 1998, 1997 and 1996, basic net loss
applicable to common shares is $150,000, $600,000 and $600,000 respectively, of
dividends relating to Series B Redeemable Exchangeable Preferred Stock. Certain
securities were not included in the computation of diluted earnings per share
for the years ended December 31, 1998, 1997 and 1996, because they would have an
anti-dilutive effect due to net losses for such periods. These securities
include (i) options to purchase 4,935,091, 3,485,000 and 3,277,000 shares, of
common stock with a purchase price of $1.50 to $84.75 per share, and $1.50 to
$41.00 and $1.00 to $17.12 per share for the years ended December 31, 1998, 1997
and 1996 respectively; (ii) 6,402,381, 4,109,756 and 4,109,756 shares of common
stock for issuance upon conversion of 6 1/4% subordinated convertible debentures
due 2005 and 7% subordinated convertible debentures due 2005 for the year ended
December 31, 1998, and 7% subordinated convertible debentures due 2002 for the
years ended December 31, 1997 and 1996 and (iii) 312,500 shares of common stock
for conversion of Series B Redeemable Exchangeable Preferred Stock for the years
ended December 31, 1997 and 1996.
Comprehensive Income: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No.130 "Reporting Comprehensive Income" in the first quarter
of 1998, which requires disclosure of comprehensive income, i.e., net income
plus direct adjustments to stockholders' equity.
Other: In June 1998, the Financial Accounting Standards Board issued SFAS No.133
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives"), and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The
statement is effective for fiscal years beginning after June 15, 1999. The
Company expects no immediate impact from SFAS No.133 as it currently has no
derivatives.
C - Sepracor Subsidiaries
In 1996, Sepracor loaned BioSepra $5,500,000. The loans, including any interest
thereon, were convertible into shares of BioSepra common stock, at the option of
Sepracor at any time prior to payment. In 1996, Sepracor converted the
outstanding principal amount of $5,500,000 plus accrued interest of $47,639 into
1,369,788 shares of BioSepra common stock. As a result of the conversion,
Sepracor's ownership of BioSepra became approximately 64%.
In 1996, BioSepra signed a promissory note for $350,000 with Sepracor. This
amount is payable over 60 installments and does not bear interest. BioSepra used
the funds for leasehold improvements in its new office space. As of December 31,
1998, $163,600 remained outstanding under the promissory note.
In 1995, Versicor was formed as a subsidiary of Sepracor. In October 1995,
Versicor sold 485,000 shares of common stock to certain stockholders, 1,600,000
shares of common stock to Sepracor and 400,000 shares of Series A Convertible
Preferred Stock to Sepracor. The Series A Convertible Preferred Stock was
convertible, at the option of Sepracor, into Versicor common stock on a
one-for-one basis.
In 1995 and 1997, Versicor entered into two loan agreements with Sepracor. The
loans were 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. Total interest expense charged to Versicor
under these agreements was $0, $180,000 and $417,000 in 1998, 1997 and 1996,
respectively.
In 1997, Versicor received private equity financing of approximately
$22,000,000. In exchange for the funding, Versicor issued Series C Preferred
Stock. As part of the transaction, Sepracor exercised its conversion option on
the loan agreements with Versicor with an outstanding amount of $9,530,000.
thirty-six
<PAGE>
Notes to Consolidated Financial Statements (continued)
Versicor repaid the remaining $6,034,000 outstanding under the loans to Sepracor
by the end of 1997. Sepracor recognized a gain of approximately $5,688,000 on
the transaction which was recorded as an increase to additional paid-in capital.
Sepracor's investment in Versicor was $1,490,000 and $3,971,000 at December 31,
1998 and 1997, respectively. Sepracor's ownership as of December 31, 1998 and
1997 was approximately 22%, thereby making Versicor an affiliate and reportable
under the equity method. (See Note D)
D - Sepracor Affiliates
In September 1995, HemaSure completed the sale of 2,500,000 shares of its common
stock pursuant to an underwritten public offering. As a result of the sale,
Sepracor's ownership of the outstanding shares of common stock of HemaSure was
reduced from approximately 55% to approximately 37%. Effective September 1995,
Sepracor no longer consolidates HemaSure's financial statements and accounts for
the investment in HemaSure using the equity method. The sale resulted in a gain
of approximately $15,235,000, which was recorded as an increase to additional
paid-in capital. Sepracor recorded $2,927,000 and $15,021,000 of equity investee
losses of HemaSure in 1997 and 1996, respectively. HemaSure's loss in 1996
included $24,748,000 relating to its one-time operating loss and loss on
disposal of its discontinued blood plasma business. (Sepracor's portion of this
was $9,157,000). At December 31, 1997, Sepracor's investment in HemaSure was
zero. In September 1998, Sepracor guaranteed a line of credit for HemaSure of
$5,000,000 and as a result began to record its portion (33%) of HemaSure losses.
Losses of $1,188,000 were recorded for the remainder of 1998 and at December 31,
1998 the Company recorded the balance of the guarantee, or $3,812,000 as a loss
in equity in investee, for a total 1998 equity loss from HemaSure of $5,000,000.
In March 1996, ChiRex Inc. ("ChiRex"), a newly formed corporation that was a
combination of Sterling Organics Limited and the chiral chemistry business of
Sepracor, completed an initial public offering of common stock. ChiRex sold
6,675,000 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 owned 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 carried its investment in ChiRex using the equity method of
accounting and, accordingly, recorded $383,000 as its share of ChiRex's gains
and $2,518,000 as its share of ChiRex's losses for the years ended December
31, 1997 (through March 31) and December 31, 1996, respectively. Included in
ChiRex's 1996 results were one-time write-offs of $11,076,000 (Sepracor's
portion of this was $3,544,000) for compensation expense related to the stock
and stock option grants incurred in connection with ChiRex's initial public
offering and the write off of in-process research and development resulting
from ChiRex's acquisition of Crossco Ltd.
In March 1997, the Securities and Exchange Commission declared effective 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. As a result of this transaction, Sepracor
recognized a gain of $30,069,000, which was recorded as other income.
In December 1997, upon the completion of the private equity financing, Versicor,
a former subsidiary, became an affiliate of Sepracor and accordingly, Sepracor
recorded $75,000 as its share of Versicor's losses for the year ended December
31, 1997. For 1998, Sepracor recorded losses of $2,482,000 as a result of its
22% ownership in Versicor.
The following is the summarized financial information for Versicor and HemaSure:
<TABLE>
<CAPTION>
1998 1997
(In thousands) Versicor HemaSure Versicor HemaSure
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets $ 9,631 $ 3,383 $19,610 $ 9,097
Non-current assets 6,454 2,272 7,300 1,510
Current liabilities 2,293 3,346 1,308 3,026
Non-current liabilities 6,034 5,141 6,034 9,048
Net sales - 25 - 2,357
Gross profit (loss) - (632) - (1,801)
Net income (loss) $(11,280) $(12,170) $ (6,203) $(9,884)
</TABLE>
E - Investments
Investments consist of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash & Cash Equivalents:
Cash & money market funds $ 14,279 $21,568
Corporate & Government commercial paper 281,044 61,011
-------------------------
Total cash & cash equivalents $295,323 $82,579
-------------------------
-------------------------
Marketable Securities:
U.S. Government securities
Due within 1 year $108,239 -
Corporate commercial paper
Due within 1 year 86,035 9,981
Due within 1 to 2 years 10,000 -
-------------------------
Total investments $204,274 $9,981
-------------------------
-------------------------
</TABLE>
There were no gross realized gains or losses on the sale of marketable
securities for the years ended December 1998, 1997 and 1996.
thirty-seven
<PAGE>
Notes to Consolidated Financial Statements (continued)
F - Financial Instruments
Financial instruments consist of the following at December 31:
<TABLE>
<CAPTION>
1998
Carrying Fair
(in thousands) Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Convertible Subordinated
Debentures - 6-1/4%, due 2005 $189,475 $368,766
Convertible Subordinated
Debentures - 7%, due 2005 $300,000 $300,000
</TABLE>
The fair value of the 6-1/4% Debentures due 2005 is from a quoted market source.
The carrying value of the 7% Debentures due 2005 issued December 10, 1998,
approximate fair value at December 31, 1998.
G - Accounts Receivable
Sepracor's trade receivables primarily represent amounts due to BioSepra from
companies and research institutions in the United States, Europe and Japan
engaged in the research, development, or production of pharmaceutical and
biopharmaceutical products. BioSepra performs ongoing credit evaluations of its
customers and generally does not require collateral. The allowance for doubtful
accounts was $106,000 and $369,000 at December 31, 1998 and 1997, respectively.
H - Inventories
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 956 $ 600
Work in progress 136 129
Finished goods 2,480 1,993
------------------
$3,572 $2,722
------------------
</TABLE>
I - Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 74 $ 74
Building 2,118 1,993
Laboratory and manufacturing equipment 12,051 10,407
Office equipment 7,134 4,450
Leasehold improvements 6,127 5,411
------------------
27,504 22,335
Accumulated depreciation and amortization (10,510) (7,761)
------------------
16,994 14,574
Construction in progress 888 552
------------------
$17,882 $15,126
==================
</TABLE>
Depreciation expense was $3,407,000, $3,129,000 and $2,189,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
J - Restructuring and Impairment Charges
In 1997, BioSepra recorded restructuring and impairment charges totaling
$4,179,000. The events leading to impairment resulted primarily from
BioSepra's decision to discontinue its instrument product line in order to
focus efforts on consumable products for the research and process segments of
the biopharmaceutical and genomics markets which were expected to have a
higher profit margin than the instrument product line. The impaired assets
include goodwill associated with product lines to be discontinued. The
calculation of goodwill impairment was based on a valuation model based on
the present value of discounted estimated expected future cash flows which
were adjusted for the change in product line focus. This resulted in a write
down of goodwill of $3,328,000.
Inventory at BioSepra associated with discontinued product lines totaling
$470,000 was written down to its expected net realizable value of zero.
Capital equipment, with a net book value of $220,000, associated with the
discontinued product lines was written down to its net realizable value of
zero. Additionally a reduction in workforce of seven employees occurred as a
result of the product discontinuation resulting in $161,000 of severance
costs. BioSepra paid all of the severance and benefits associated with the
workforce reduction in 1998.
A gain of $351,000 was recognized in 1998 as a result of BioSepra's sale of its
instrument inventory to Beckman Instruments, Inc. ("Beckman"). This inventory
had been previously written off and included in the 1997 restructuring charge.
The potential benefits of the restructuring at BioSepra include reduction of
fixed asset depreciation, goodwill amortization and severance costs of
approximately $750,000 in total per year.
K - Accrued Expenses
Included in accrued expenses is $16,589,000 and $9,754,000 of accrued research
and development expenses, $5,310,000 and $472,000 of accrued interest and
$3,355,000 and $1,427,000 of accrued compensation as of December 1998 and 1997,
respectively.
L - Deferred Revenue
In March 1998, Sepracor received $1,875,000 from Hoechst Marion Roussel Inc.
("HMRI") as a milestone payment relating to the license agreement on terfenadine
carboxylate, marketed by HMRI as Allegra(R). As a result of the patent
interference issue raised by the United States Patent and Trademark Office,
("PTO") Sepracor deferred recognition of the revenue, pending the outcome of the
patent interference. (See Notes P and T).
In 1995, Sepracor and BioSepra entered into separate agreements with Beckman
Instruments, Inc. ("Beckman"). Beckman entered into a joint distribution and
development agreement with BioSepra, and Beckman purchased certain preferred
stock of Sepracor. In 1997, the agreement was amended due to the settlement of
the PerSeptive lawsuit, eliminating BioSepra's obligation to repay certain
amounts to Beckman under the agreement. As a result of the amendment, BioSepra
recognized $2,700,000 of license fee revenue in December 1997, which otherwise
would have been deferred at December 31, 1997. BioSepra recognized $3,600,000,
and $900,000, of revenue under the agreement in 1997 and 1996, respectively.
There was no deferred revenue under this agreement as of December 31, 1998 or
December 31, 1997. (See Note Q)
thirty-eight
<PAGE>
Notes to Consolidated Financial Statements (continued)
M - Notes Payable to Bank and Long-Term Debt
Notes payable and long-term debt consist of the following at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
EURIBOR plus .80% French Franc Loan Payable
in quarterly installments through 2000 $ 402 $ 624
EURIBOR plus 1.8%, French Franc Loan Payable
in quarterly installments through 2001 104 138
Variable rate, 7.5% French Franc Line of Credit - 1
LIBOR plus 1.75% Revolving Credit Agreement 2,000 -
Loan from Nova Scotia Business Development
Corporation ("NSBDC") bearing interest at 9.25%
until May 31, 2000 and thereafter at 9.5%, repayable
in 120 consecutive monthly payments of $21 principal
plus interest with a final payment of $20 in June 2005 1,477 1,925
Loan from Atlantic Canada Opportunities Agency,
non-interest bearing, repayable in 60 equal installments
commencing March 15, 1998 277 370
Government grant from Nova Scotia Department
of Economic Development 812 816
Obligations under Capital Leases (See Note O) 343 375
---------------------
5,415 4,249
Less current portion (2,786) (861)
---------------------
Total $ 2,629 $3,388
---------------------
---------------------
</TABLE>
At December 31, 1998, BioSepra's wholly-owned French subsidiary ("BioSepra
S.A.") had three available credit facilities aggregating 4,000,000 French Francs
from three French commercial banks. Sepracor guarantees a certain French Franc
loan held by BioSepra S.A., under which $402,000 and $624,000 were outstanding
as of December 31, 1998 and 1997, respectively. The interest rate on this loan
at December 31, 1998 and 1997 was 4.37% and 4.50%, respectively. Sepracor also
guarantees amounts available under the variable rate credit facility which are
payable on demand and had $0 and $1,000 outstanding at December 31, 1998 and
1997, respectively.
In 1996, Sepracor and BioSepra entered into a revolving credit agreement with a
commercial bank that provides for borrowing of up to $10,000,000, pursuant to
which BioSepra could borrow up to $3,000,000. 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. Sepracor is a
guarantor of all outstanding borrowings. At December 31, 1998, there was
$2,000,000 outstanding under this agreement. The interest rate on these
borrowings at December 31, 1998 was 6.82%.
In 1996, Versicor entered into a term loan agreement with a commercial bank that
provided for borrowing of up to $3,000,000 for the purpose of financing capital
equipment purchases. In December 1997, Versicor replaced this loan with two term
loans of $4,034,000 and $2,000,000. Sepracor entered into a put agreement with
the commercial bank pursuant to which Sepracor agreed to purchase $2,000,000 of
indebtedness of Versicor in the event of a default by Versicor under its loan
agreement with the commercial bank. In the event that the put right is exercised
by the bank, the bank will assign its security interest in the fixed assets of
Versicor to Sepracor.
Sepracor guarantees the loan from NSBDC. The government grant received by
Sepracor Canada Limited may be repayable if Sepracor Canada Limited fails to
meet certain conditions of the agreement. The government assistance is recorded
as debt and is amortized on the same basis as the depreciation of the related
capital assets.
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1999-$2,686,000, 2000-$555,000,
2001-$305,000, 2002-$292,000, 2003-$243,000.
N - Convertible Subordinated Debentures
In 1995, Sepracor issued $80,880,000 of Convertible Subordinated Debentures due
2002 (the "1995 Debentures"). The 1995 Debentures bore interest at 7% payable
semi-annually, commencing on June 1, 1996, and were due on December 1, 2002. The
1995 Debentures were convertible into shares of Common Stock of the Company at
$19.68 per share and were redeemable by the Company on December 1, 1998. As part
of the sale of the 1995 Debentures, Sepracor incurred approximately $2,788,000
of offering costs. These costs were classified in other assets and were being
amortized over the life of the 1995 Debentures, which is seven years.
On October 30, 1998, Sepracor called for the redemption of its 1995 7%
Debentures aggregating $80,880,000. On December 1, 1998, immediately prior to
the redemption, all $80,880,000 of the 1995 Debentures were converted into
4,109,756 shares of Sepracor Common Stock. As a result of the conversion,
Sepracor wrote off $1,582,000 of deferred financing costs against stockholders'
equity (additional paid-in capital).
On February 10, 1998, Sepracor issued $189,475,000 of 6-1/4% Convertible
Subordinated Debentures due 2005 (the "6-1/4% Debentures"). The 6-1/4%
Debentures are convertible into Sepracor Common Stock, at the option of the
holder, at a price of $47.369 per share. The 6-1/4% Debentures bear interest at
6-1/4% payable semi-annually, commencing on August 15, 1998. The 6-1/4%
Debentures are redeemable by the Company on February 18, 2001. The Company may
be required to repurchase the 6-1/4% Debentures at the option of the holders in
certain circumstances. As part of the sale of the 6-1/4% Debentures, Sepracor
incurred approximately $6,105,000 of offering costs which were recorded as other
assets and are being amortized over seven years, the term of the 6-1/4%
Debentures. The net proceeds to the Company after offering costs were
$183,370,000.
On December 10, 1998, Sepracor issued $300,000,000 of 7% Convertible
Subordinated Debentures due 2005 (the "7% Debentures"). The 7% Debentures are
convertible into Sepracor Common Stock, at the option of the holder, at a price
of $124.875 per share. The 7% Debentures bear interest at 7% payable
semi-annually, commencing on June 15, 1999. The 7% Debentures are redeemable by
the
thirty-nine
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company on December 20, 2001. The Company may be required to repurchase the 7%
Debentures at the option of the holders in certain circumstances. As part of the
sale of the 7% Debentures, Sepracor recorded approximately $9,919,000 of
offering costs, which were recorded as other assets and are being amortized over
seven years, the term of the 7% Debentures. The net proceeds to the Company
after offering costs were $290,081,000.
O - Commitments and Contingencies
In 1994, Sepracor, HemaSure and BioSepra entered into an equipment leasing
arrangement that provides for a total of up to $2,000,000 to Sepracor and its
subsidiaries for the purpose of financing capital equipment in the United
States. All outstanding amounts are collateralized by the assets so financed and
are guaranteed by Sepracor. There was $63,000, $64,000 and $193,000, and
$142,000, $150,000 and $459,000, relating to Sepracor, BioSepra and HemaSure,
respectively, outstanding under this agreement at December 31, 1998 and 1997,
respectively.
Future minimum lease payments under all noncancelable leases in effect at
December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Operating Leases Capital Leases
- ----------------------------------------------------------------------
<S> <C> <C>
1999 $1,276 $181
2000 1,030 54
2001 744 54
2002 769 54
2003 805 -
Thereafter 2,830 -
----------------------------
Total minimum lease payments $7,454 $343
Less amount representing interest (52)
------
Present value of minimum lease payments $291
------
------
</TABLE>
Future minimum lease payments under operating leases relate to Sepracor's and
BioSepra's principal office, laboratory and production facilities. The lease
terms provide options to extend the leases. The leases require Sepracor to pay
its allocated share of taxes and operating costs in addition to the annual base
rent payments. Rental expense under these and other leases amounted to
$1,444,000, $1,687,000 and $1,240,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
At December 31, 1998, Sepracor has an accrual relating to the guarantee of a
$5,000,000 HemaSure line of credit. The initial principal payment on this line
of credit is due in August 2000. Interest on the line of credit accrues at 1/2%
above the prime lending rate. Although HemaSure is currently not in default of
the line of credit, Sepracor would be obligated to make payment of $5,000,000
plus accrued interest should a default occur.
P - Litigation
In July 1997, the PTO informed Sepracor that it had declared an interference
between Sepracor's previously issued method-of-use patent on fexofenadine to
treat allergic rhinitis and another similar patent application of Sepracor, and
the method-of-use patent application held by HMRI on the anti-histaminic effects
of fexofenadine on hepatically impaired patents. The primary objective of a
patent interference, which can only be declared by the PTO, is to determine the
first to invent any overlapping subject matter claimed by more than one party.
In the course of an interference, the parties typically present evidence
relating to their inventive activities as to the overlapping subject matter. The
PTO then reviews the evidence to determine which party has the earliest legally
sufficient inventive date, and, therefore, is entitled to a patent claiming the
overlapping subject matter. (See Note T for further discussion).
If Sepracor prevails in the interference, Sepracor will retain all of its claims
in its issued patent. If, however, Sepracor loses the interference, HMRI will be
issued a U.S. patent containing its claims involved in the interference and may
not be obligated to pay Sepracor milestone or royalty payments pursuant to the
terms of the license agreement whereby Sepracor licensed its U.S. patent rights
covering fexofenadine to HMRI in 1993. In May 1998, HMRI filed an action in
Belgium alleging that Sepracor's European patent relating to fexofenadine is
invalid in Belgium, or is not infringed by HMRI's sales of fexofenadine in
Belgium and Germany. In September 1998, Sepracor commenced infringement
proceedings in the United Kingdom against HMRI and related companies for
infringement of Sepracor's European patent relating to fexofenadine. Sepracor
and HMRI have agreed to resolve the interference by arbitration. The arbitrator
has been selected and a decision, once rendered, must be submitted to the PTO
for final approval. The proceedings are ongoing and the Company is unable to
predict its outcome.
HemaSure is a defendant in two lawsuits brought by Pall Corporation ("Pall"). In
complaints filed in February 1996 and November 1996, Pall alleged that
HemaSure's manufacture, use and/or sale of the LeukoNet product infringes upon
three patents held by Pall.
On October 14, 1996, in connection with the first action concerning U.S. Patent
No. 5,451,321 (the "'321 Patent"), HemaSure filed a motion for summary judgment
of noninfringement. Pall filed a cross motion for summary judgment of
infringement at the same time.
In October 1997, the Eastern District of New York granted in part Pall's summary
judgment motion and held that the LeukoNet product infringes a single claim from
the '321 patent. HemaSure has terminated the manufacture, use, sale and offer
for sale of the filter subject to the court's order. HemaSure appealed the
October 1997 decision to the Court of Appeals for the Federal Circuit. Oral
arguments were heard in February 1999. HemaSure now awaits a decision from the
Federal Circuit. Remaining discovery relating to the damages phase of the first
action has been completed.
With respect to the second action concerning U.S. Patent No. 4,952,572 (the
"'572 patent"), HemaSure has answered the complaint stating that it does not
infringe any claim of the asserted patents. Further, HemaSure has counterclaimed
for declaratory judgment of invalidity, noninfringement and unenforceability of
the '572 patent. Pall has amended its Complaint to add Lydall, Inc., whose
subsidiary supplied filter media for the LeukoNet product, as a co-defendant.
HemaSure has filed for summary judgment of noninfringement, and Pall has
cross-filed for summary judgment of infringement at the same time. Lydall
supported HemaSure's motion for summary judgment of noninfringement, and has
served a motion for summary judgment that the asserted claims of the '572 patent
are invalid as a matter of law. Discovery has been completed in the action.
forty
<PAGE>
Notes to Consolidated Financial Statements (continued)
HemaSure believes, based on advice of its patent counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the LeukoNet product does not infringe any valid enforceable
claim of the two asserted Pall patents. However, there can be no assurance that
HemaSure will prevail in the pending litigations, and an adverse outcome in a
patent infringement action would have a material adverse effect on HemaSure's
financial condition and future business and operations.
Q - Stockholders' Equity
On March 26, 1998, Sepracor and Beckman terminated their Stock Purchase
Agreement under which Beckman acquired 312,500 shares of Sepracor Series B
Redeemable Exchangeable Preferred Stock. Sepracor paid Beckman the original
purchase price of the stock plus accrued dividends totalling $6,850,000. In
addition, BioSepra and Beckman amended their distribution agreement whereby
BioSepra granted a non-exclusive right to manufacture instruments to Beckman,
removed its obligation to manufacture instruments for Beckman, and sold the
discontinued instrument product inventory to Beckman for $250,000.
In May 1998, the stockholders of Sepracor approved an amendment to Sepracor's
Restated Certificate of Incorporation increasing from 40,000,000 to 80,000,000
the number of authorized shares of common stock.
In 1996, Sepracor issued stock options to certain consultants. As a result,
$248,000 was initially recorded as unearned compensation and $14,000 was
recorded as amortization. In 1997, an adjustment of $107,000 was made for
cancelled options and $33,000 was recorded as amortization. In 1998, Sepracor
issued stock options to certain consultants. As a result, $172,000 was recorded
as unearned compensation and $28,000 was recorded as amortization. An adjustment
of $94,000 was made for cancelled options.
R - Stock Plans and Warrants
Stock Plans: The Company has three stock-based compensation plans, which are
described below. The Company records the issuance of stock options using APB
Opinion 25 and related interpretations in accounting for its plans. However, had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates, the Company's net loss
and basic and diluted loss per share for the years ended December 31, 1998, 1997
and 1996 would have been increased to the pro forma amounts indicated in the
following table:
<TABLE>
<CAPTION>
1998 1997 1996
Net Basic and Diluted Net Basic and Diluted Net Basic and Diluted
(in thousands) Loss(1) Loss Per Share Loss(1) Loss Per Share Loss(1) Loss Per Share
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As reported $ (93,433) $(3.23) $(26,723) $(0.97) $(60,710) $(2.25)
Pro forma $(105,229) $(3.64) $(30,745) $(1.11) $(63,398) $(2.35)
</TABLE>
(1) Net loss represents net loss applicable to common shares.
The effects of applying the fair value of stock based compensation in this pro
forma disclosure are not indicative of future amounts, since the valuation of
stock options granted was initiated in 1995 and additional awards in future
years are not anticipated.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 6 years, expected volatility of 50%, a
risk-free interest rate of 4.5% to 5.7% and no dividends in 1998 and an expected
life of 7 years, expected volatility of 60%, a risk-free interest rate of 5.0%
to 7.8% and no dividends in 1997 and 1996.
In 1991, the Board of Directors adopted the 1991 Restated Stock Option Plan (the
"1991 Plan") which amended and restated the 1985 Stock Option Plan. The Plan
provides for the granting of Incentive Stock Options ("ISOs") to officers and
key employees of Sepracor and nonstatutory stock options ("NSOs") to officers,
key employees, consultants and directors of Sepracor. ISOs and NSOs granted
under the Plan have a maximum term of ten years from the date of grant and have
an exercise price not less than the fair value of the stock on the date of grant
and vest over five years. In May 1996, the stockholders approved an amendment to
the 1991 Plan increasing the number of shares of common stock, which may be
granted to 5,000,000. In May 1998, the stockholders approved an amendment to the
1991 Plan increasing the number of shares of common stock which may be granted
to 7,500,000. Stock option activity related to this plan is summarized in the
table below.
The 1991 Directors Stock Option Plan (the "1991 Directors Plan") provides for
the granting of NSOs to directors of Sepracor who are not officers or employees
of Sepracor. The options granted under the 1991 Directors Plan have a maximum
term of ten years from date of grant and have an exercise price of not less than
the fair market value of the stock on the date of grant and vest over five
years. In 1996, the shareholders approved an amendment to the 1991 Directors
Plan increasing the number of shares of common stock which may be granted to
275,000. In May 1998, the stockholders approved an amendment to the 1991
Directors Plan increasing the number of shares of common stock which may be
granted to 500,000.
In October 1997, the Board of Directors approved the Company's 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan permits the Company to grant ISOs and NSOs
to purchase up to 500,000 shares of Common Stock to employees and consultants of
the Company. Executive officers are not entitled to receive stock options under
the 1997 Plan. ISOs and NSOs granted under the 1997 Plan have a maximum term of
ten years from the date of grant and vest over five years. ISOs may not be
granted at an exercise price less than fair market value.
forty-one
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following tables summarize information about stock options outstanding at
December 31, 1998: (in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Per Share Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - 6.00 653 5.54 $ 5.39 380 $ 5.25
6.38 - 14.13 492 6.20 10.30 201 8.97
14.62 - 14.62 683 6.78 14.62 395 14.62
14.75 - 24.13 384 7.87 18.69 192 18.67
24.25 - 24.25 540 8.54 24.25 15 24.25
24.75 - 24.75 45 8.10 24.75 9 24.75
36.75 - 36.75 1,044 9.42 36.75 - -
38.00 - 48.63 568 9.37 44.75 1 41.00
62.25 - 62.25 166 9.79 62.25 - -
84.75 - 84.75 360 9.93 84.75 - -
- -----------------------------------------------------------------------------
$ 1.50 - 84.75 4,935 8.04 $29.29 1,193 $11.55
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
Average Average Average
Price Per Price Per Price Per
Number Share Number Share Number Share
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 3,485 $13.16 3,277 $ 9.55 3,225 $ 7.77
Granted 2,153 48.96 757 24.10 651 13.77
Exercised (622) 7.98 (433) 6.00 (429) 3.88
Cancelled (81) 22.59 (116) 9.84 (170) 6.37
- ----------------------------------------------------------------------------------------
Balance at December 31 4,935 $29.29 3,485 $13.16 3,277 $ 9.55
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Options exercisable at
December 31 1,193 1,240 1,088
Weighted-average fair
value of options granted
during the year $26.65 $15.88 $ 9.46
</TABLE>
There were 1,113,000 options available for future grant as of December 31, 1998.
In 1996, the stockholders approved the 1996 Employee Stock Purchase Plan (the
"1996 Plan"). Under the 1996 Plan, an aggregate of 120,000 shares of Common
Stock may be purchased by employees at 85% of market value on the first or last
day of each six month offering period, whichever is lower, through accumulation
of payroll deductions ranging from 1% to 10% of compensation as defined, subject
to certain limitations. Employees purchased 17,216, 31,423 and 23,977 shares for
a total of $583,000, $556,000 and $296,000, during the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998, there were 69,628
shares of authorized but unissued Common Stock reserved for future issuance
under the 1996 Plan.
Stock Warrants: Sepracor received $407,000 from the exercise of warrants to
purchase 55,209 shares of Common Stock in 1998. At December 31, 1998, there were
no outstanding warrants.
S - Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to tax benefit carryforwards and to differences
between the financial statement amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates.
A valuation reserve is established if it is more likely than not that all or a
portion of the deferred tax asset will not be realized. Accordingly, a valuation
reserve has been established for the full amount of the deferred tax asset.
Sepracor's statutory and effective tax rates were 34% and 0%, respectively, for
the years 1998, 1997 and 1996. The effective tax rate was 0% due to net
operating losses ("NOL") and nonrecognition of any deferred tax asset. At
December 31, 1998, Sepracor had federal and state tax NOL carryforwards of
approximately $170,000,000 and $118,000,000, which will expire through 2013 and
2003, respectively. Based upon the Internal Revenue Code and changes in company
ownership, utilization of the NOL will be subject to an annual limitation.
Sepracor also had a NOL from its operation in France of approximately
$10,000,000. Approximately $6,000,000 of this NOL will expire in 2000; the
remainder may be carried forward indefinitely. Sepracor also has an NOL from its
operation in Canada of approximately $3,000,000, which may be carried forward
indefinitely. At December 31, 1998, Sepracor had federal and state research and
experimentation credit carryforwards of approximately $6,000,000 and $4,800,000,
respectively, which will expire through the year 2013. Sepracor also had
Canadian research and experimentation credits of $1,000,000 which will expire
through 2008.
The components of Sepracor's net deferred taxes were as follows at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Assets
<S> <C> <C>
NOL carryforwards $ 70,066 $ 50,213
Reserves 135 226
Tax credit carryforward 12,243 7,989
Patent 547 489
Accrued expenses 8,756 5,434
Research and development capitalization 20,730 9,827
Equity in loss of investees 10,596 7,638
Other 1,069 1,605
- -----------------------------------------------------------------------------
Liabilities
Basis difference of subsidiaries (13,628) (13,628)
Property and Equipment - -
Valuation allowance $(110,514) $(69,793)
- -----------------------------------------------------------------------------
Net deferred taxes $ - $ -
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
forty-two
<PAGE>
Notes to Consolidated Financial Statements (continued)
T - Agreements
In 1993, Sepracor licensed to Marion Merrell Dow (now HMRI) its U.S. patent
application covering the use of terfenadine carboxylate, a metabolite of
terfenadine, marketed by HMRI as Seldane, to be developed by HMRI. Under this
agreement, Sepracor recorded $3,750,000 as license fee revenue in 1994, for the
issuance of a patent covering the use of terfenadine carboxylate. The agreement
called for future license fees of up to $3,750,000 subject to certain other
milestones and royalties on sales if and when they occur. In 1997, Sepracor had
received the first milestone payment of $1,875,000 and recorded $469,000 in
sub-license expense payable to a third party for the year ended December 31,
1997. In March 1998, Sepracor received $1,875,000 from HMRI as the final
milestone payment. As a result of the patent interference issue raised by the
PTO, Sepracor deferred recognition of this revenue, pending the outcome of the
patent interference. (See Notes L and P).
In December 1997, Sepracor signed a license agreement with Schering-Plough
Corporation ("Schering") giving Schering exclusive worldwide rights to
Sepracor's patents covering descarboethoxyloratadine ("DCL"), an active
metabolite of loratadine that in preclinical studies has shown the potential for
greater potency. Under the agreement, Schering paid Sepracor an initial license
fee of $5,000,000 in January 1998. The agreement includes royalties on DCL
sales, if any, beginning at product launch. The royalty rate paid to Sepracor
will escalate over time and upon the achievement of sales volume and other
milestones.
On February 4, 1998, Sepracor signed a collaboration and license agreement with
Janssen Pharmaceutica, N.V. ("Janssen"), a wholly-owned subsidiary of Johnson &
Johnson, relating to the development and marketing of norastemizole, a third
generation nonsedating antihistamine. Under the terms of this agreement, the
companies will jointly fund the development of norastemizole, and Janssen has an
option to acquire certain rights regarding the product in the U.S. and abroad.
When exercised, Janssen and Sepracor will equally share the costs and profits
associated with the further development, marketing and sales of norastemizole in
the U.S. Sepracor will also retain the right to co-promote the product in the
U.S. Alternatively, Sepracor can elect to receive royalties on Janssen sales of
norastemizole in the U.S. in the event it decides not to co-promote the product.
Outside of the U.S., Janssen has the right to develop and market norastemizole,
and Sepracor will earn royalties on product sales, if any. In addition, Janssen
has worldwide over-the-counter rights to norastemizole.
On July 20, 1998, Sepracor signed a second license agreement with Janssen (the
"Janssen Norcisapride Agreement") giving Janssen exclusive worldwide rights to
Sepracor's patents covering norcisapride, an isomer of the active metabolite of
Propulsid(TM). Under the terms of the Janssen Norcisapride Agreement, Sepracor
has exclusively licensed its norcisapride rights to Janssen, which expects to
develop and market the norcisapride product worldwide. Under the Janssen
Norcisapride Agreement, Janssen would pay Sepracor royalties on norcisapride
sales, if any, beginning at first product launch. Royalty rates paid to Sepracor
will escalate upon the achievement of sales volume milestones.
On December 4, 1998, Sepracor signed a license agreement (the "Lilly
(R)-fluoxetine Agreement") with Eli Lilly and Company ("Lilly") giving Lilly
exclusive worldwide rights to Sepracor's patents covering (R)-fluoxetine,
which is a modified form of an active ingredient found in Prozac(R). Under
the terms of the Lilly (R)-fluoxetine Agreement, and subject to approval
under the Hart Scott Rodino Antitrust Improvements Act of 1976, (as amended,
the "HSR Act"), Sepracor will receive an initial milestone payment and
license fee of $20,000,000 which will be recorded as revenue in accordance
with the terms of the Agreement. Additional milestone payments of up to
$70,000,000 will be made based on the progression of (R)-fluoxetine through
development. In addition, Sepracor will receive royalties on (R)-fluoxetine
worldwide sales, if any, beginning at product launch. Under the HSR Act,
Sepracor has received a request from the Federal Trade Commission for
additional information in connection with the Lilly (R)-fluoxetine Agreement
and plans to fully respond to the request.
U - Employees' Savings Plan
Sepracor has a 401K savings plan (the "401K Plan") for all domestic employees.
Under the provisions of the 401K Plan, employees may voluntarily contribute up
to 15% of their compensation up to the statutory limit. In addition, Sepracor
can make a matching contribution at its discretion. Sepracor matched 50% of the
first $2,000 contributed by employees up to $1,000 maximum per employee during
1996. In June 1997, this match was raised to 50% of the first $3,000. Sepracor
incurred expenses of $177,000, $119,000 and $49,000 in 1998, 1997 and 1996,
respectively, as its matching contribution.
V - Business Segment and Geographic Area Information
Effective for the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. ("SFAS") 131, "Disclosures about Segments of
an Enterprise and Related Information". This approach designates the Company's
internal organization as used by management for making operating decisions and
assessing performance as the source of business segments.
Sepracor assesses performance and makes operating decisions primarily based
on the results of Sepracor. Sepracor represents the primary pharmaceutical
business, which excludes BioSepra and equity investments in HemaSure Inc.,
Versicor Inc. and ChiRex Inc. BioSepra represents the results of BioSepra
Inc. without any adjustments for minority interests or intercompany
adjustments and eliminations. Included in "Other" are consolidation
adjustments and eliminations, which are primarily made up of equity in
investee losses and minority interests. Financial information by segment and
geographic area is presented below with adjustments and eliminations
including items such as equity in investee losses and minority interests.
forty-three
<PAGE>
Notes to Consolidated Financial Statements (continued)
ITEM 31.
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31, 1998 Sepracor BioSepra Other Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 10,007 $ 7,399 $ - $ 17,406
Interest income 13,041 150 - 13,191
Interest expense 16,747 222 - 16,969
Depreciation and amortization 4,219 1,045 (18) 5,246
Restructuring charges - (351) - (351)
Equity in investee losses - - 7,482 7,482
Gain on sale of ChiRex Inc. - - - -
Net loss 84,659 1,813 6,811 93,283
Total assets 535,733 14,717 863 551,313
Investment in affiliates -- - 1,490 1,490
Loan guarantee of affiliate -- - 5,000 5,000
Capital expenditures 6,920 368 - 7,288
<CAPTION>
Year Ended December 31, 1997 Sepracor BioSepra Other Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 2,043 $13,294 - $ 15,337
Interest income 5,608 158 - 5,766
Interest expense 5,904 72 - 5,976
Depreciation and amortization 3,048 1,566 - 4,614
Restructuring charges - 4,179 - 4,179
Equity in investee losses - - 2,755 2,755
Gain on sale of ChiRex Inc. - - 30,069 30,069
Net loss/(income) 51,003 3,804 (28,684) 26,123
Total assets 110,253 14,906 3,348 128,507
Investment in affiliates - - 3,971 3,971
Loan guarantee of affiliate - - - -
Capital expenditures 2,372 281 - 2,653
<CAPTION>
Year Ended December 31, 1996 Sepracor BioSepra Other Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers $ 718 $14,323 - $15,041
Interest income 6,527 186 - 6,713
Interest expense 5,926 214 - 6,140
Depreciation and amortization 2,002 2,398 - 4,400
Restructuring charges - - - -
Equity in investee losses - - 17,539 17,539
Gain on sale of ChiRex Inc. - - - -
Net loss 41,294 2,120 16,696 60,110
Total assets 120,914 23,169 2,606 146,689
Investment in affiliates - - 3,100 3,100
Loan guarantee of affiliate - - - -
Capital expenditures 9,103 1,018 - 10,121
<CAPTION>
Geographic area data:
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
United States:
Unaffiliated customers $11,740 $ 9,810 $11,651
Related parties 7 - -
Transfer to other geographic areas - (16) 3,050
-------------------------------------------
Total 11,747 9,794 14,701
-------------------------------------------
Europe:
Unaffiliated customers 5,666 5,527 6,187
Transfer to other geographic areas 1,278 1,571 2,999
-------------------------------------------
Total 6,944 7,098 9,186
-------------------------------------------
Eliminations and adjustments (1,285) (1,555) (8,846)
-------------------------------------------
Total Revenues $17,406 $15,337 $15,041
===========================================
Long-lived Assets
United States $34,475 $18,567 $24,288
Europe 766 753 700
Canada 6,137 5,836 6,016
-------------------------------------------
Total Long-lived Assets $41,378 $25,156 $31,004
-------------------------------------------
-------------------------------------------
</TABLE>
Of the $11,740,000, $9,810,000 and $11,651,000 United States sales to
unaffiliated customers for the years ended December 31, 1998, 1997 and 1996,
respectively, $243,000, $168,000, and $630,000, respectively, were export sales
to the Far East. Revenues are attributed to geographic locations based on the
selling location.
W - Subsequent Event
On February 25, 1999, Sepracor entered into an agreement with HemaSure pursuant
to which Sepracor invested $2,000,000 in HemaSure in exchange for 1,333,334
shares of HemaSure Common Stock and for warrants to purchase 667,000 of
additional shares of HemaSure Common Stock. This has resulted in Sepracor's
ownership of HemaSure increasing from 33% to 42% as of February 25, 1999.
On February 25, 1999, BioSepra acquired 51% of the outstanding common stock of
Biosphere Medical, S.A. ("Biosphere"), a French societe anonyme. BioSepra
acquired the 51% ownership by granting an exclusive license pertaining to
certain patents and technology and the transfer of certain other technology to
Biosphere. BioSepra has the option to acquire the remaining 49% of the
outstanding common stock of Biosphere through December 31, 2004, as defined.
Additionally, the holder of the remaining 49% of the outstanding common stock of
Biosphere has an option to require BioSepra to purchase its shares from December
31, 2003 until December 31, 2004 at a price of not less than FF6,000,000
($1,072,000 December 31, 1998). The results of operations for Biosphere will be
included in BioSepra's operations from the date of acquisition. The historical
results of operations of Biosphere are not material to BioSepra's financial
statements.
forty-four
<PAGE>
Annual Meeting Information
The Annual Meeting of Shareholders will be held at 9:00 a.m. on May 19, 1999 at
the offices of Hale and Dorr LLP, Sixty State Street, Boston, MA.
Common Stock
The Common Stock of Sepracor Inc. is traded on the Nasdaq Stock Market under the
symbol SEPR.
General Counsel
Hale and Dorr LLP, Boston, MA
Patent Counsel
Pennie & Edmonds, New York, NY
Independent Accountants
PricewaterhouseCoopers LLP, Boston, MA
Corporate Headquarters
Sepracor Inc.
111 Locke Drive
Marlborough, MA 01752
Telephone: (508) 481-6700
Facsimile: (508) 357-7499
Transfer Agent and Registrar
Questions regarding accounts, address
changes, stock transfer and lost certificates
should be directed to:
BankBoston, N.A.
c/o Boston EquiServe, L.P.
P.O. Box 8040
Boston, MA 02266-8040
Phone: (781) 575-3120
Directors
James G. Andress
Former Chairman, Beecham Pharmaceuticals,
Former President and COO, Sterling Drug Inc.
Timothy J. Barberich
President and Chief Executive Officer, Sepracor Inc.
Digby W. Barrios
Former President and CEO, Boehringer Ingelheim Corporation
Robert J. Cresci
Managing Director, Pecks Management Partners Ltd.
Robert F. Johnston
Managing Director, Johnston Associates
Keith Mansford, Ph.D.
Former Chairman, R&D, SmithKline Beecham plc
James F. Mrazek
Former Vice President and General Manager,
Healthcare Division of Johnson & Johnson Products Inc.
Alan A. Steigrod
Former Executive Vice President, Glaxo Holdings plc
Officers
Timothy J. Barberich
President and Chief Executive Officer
David S. Barlow
Executive Vice President and President, Pharmaceuticals
David P. Southwell
Executive Vice President; Chief Financial Officer and Secretary
Paul D. Rubin, M.D.
Executive Vice President, Drug Development & ICE Research
James R. Hauske, Ph.D.
Senior Vice President, Discovery
Douglas E. Reedich, Ph.D., J.D.
Senior Vice President, Legal Affairs & Chief Patent Counsel
Robert F. Scumaci
Senior Vice President, Finance & Administration, and Treasurer
Stephen A. Wald
Vice President, Chemical R&D
[PHOTO OF EXECUTIVES WITH CAPTION BELOW]
Pictured left to right: Paul D. Rubin, M.D., James R. Hauske, Ph.D., David S.
Barlow, Timothy J. Barberich, Stephen A. Wald, David P. Southwell and Robert F.
Scumaci, Not pictured here: Douglas E. Reedich, Ph.D., J.D.
Sepracor and ICE are trademarks of Sepracor Inc. HemaSure and LeukoNet are
trademarks of HemaSure Inc. BioSepra is a trademark, and Hyper D is a registered
trademark of BioSepra Inc. Ventolin, Zofran and Serevent are registered
trademarks of Glaxo Group Limited. Proventil and Claritin are registered
trademarks of Schering Corporation. Foradil is a registered trademark of
Ciba-Geigy Corporation. Atock is a trademark of Yamanouchi, Inc. Hismanal is a
registered trademark of Janssen Pharmaceutica N.V. Seldane is a registered
trademark of Merrell Dow Pharmaceuticals, Inc. Ditropan is a registered
trademark of Marion Merrell Dow. Allegra is a registered trademark of Merrell
Pharmaceuticals. Cardura is a registered trademark of Pfizer Inc. Orudis is a
registered trademark of Rhne-Poulenc Rorer, S.A. Actron is a trademark of Bayer
Corporation. Prozac is a registered trademark of Eli Lilly and Company.
Propulsid and Sporanox are registered trademarks of Johnson & Johnson. Toradol
is a registered trademark of Syntex USA. Levaquin is a trademark of Daiichi
Pharmaceutical Company LTD. POROS is a registered trademark of PerSeptive
BioSystems, Inc. Prilosec is a registered trademark of Astra Aktiebolag.
Prevacid is a registered trademark of TAP Holdings Inc. Imovane is a registered
trademark of Rhone-Poulenc Sante. Meridia is a registered trademark of Knoll
Pharmaceutical Company. Zyban is a trademark of Glaxo Group Limited. Ambien is a
registered trademark of Synthelabo. Paxil is a trademark of Smithkline Beecham
Corp. Zoloft is a registered trademark of Pfizer Inc. Wellbutrin is a registered
trademark of Glaxo Wellcome Inc. Pantozol is a trademark of Byk Gulden Lomberg
Chemische Fabrik GMBH.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Sepracor Inc. on Forms S-8 (File Nos. 33-43460, 33-44808, 33-48428,
333-05217, 333-05219, 333-94774, 333-48719, 333-05221, 333-58557, 333-58559,
333-58563, 33-48429, 33-63710 and 33-79724) and Forms S-3 (File Nos. 333-460,
333-51879, and 333-75561) of our reports dated February 19, 1999, except as
to the information in Note W for which the date is February 25, 1999, on our
audits of the consolidated financial statements and financial statement
schedule of Sepracor, Inc. as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998, which reports are
incorporated by reference in this Annual Report on Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 23, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Sepracor Inc. on Form S-8 (File Nos. 33-43460, 33-48428, 333-05217,
333-05219, 333-94774, 333-48719, 333-05221, 333-58557, 333-58559, 333-58563,
33-48429, 33-63710 and 33-79724) and Form S-3 (File Nos. 333-460, 333-51879
and 333-75561) of our reports dated February 2, 1999, on our audits of the
consolidated financial statements and financial statement schedule of
BioSphere Medical, Inc. and subsidiaries (formerly known as BioSepra, Inc.)
as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, which reports are incorporated by reference
in this Annual Report on Form 10-K/A.
/s/ Arthur Andersen LLP
Boston, Massachusetts
July 22, 1999
