SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(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, 1996
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 0-11749
------------------------------
SCIOS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3701481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2450 Bayshore Parkway, Mountain View, California 94043-1173
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 966-1550
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Class D Warrants to purchase Common Stock
Contingent Payment Rights
Common Share Purchase Rights
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 this
Form 10-K. [X]
The approximate aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 17, 1997 was $285,378,440.
As of March 17, 1997, 35,833,923 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Part
Definitive Proxy Statement with respect to III
the 1997 Annual Meeting of Stockholders
PART I
Item 1. BUSINESS
Overview
Scios Inc. ("Scios" or the "Company") is a biopharmaceutical company engaged
in the discovery, development, manufacture and commercialization of novel human
therapeutics based upon its capabilities in both protein-based and
small-molecule drug discovery and development. The Company focuses its
proprietary research and development efforts on products to treat acute
illnesses, primarily in the areas of cardiovascular and renal disorders, and
seeks to collaborate with corporate partners in the development of products to
treat chronic diseases. The Company also has a marketing and sales organization
selling third-party products that generate cash to help fund continued
development of the Company's proprietary products. To date, none of the
Company's proprietary products have been developed to the commercialization
stage.
The Company's lead products are AURICULIN(R) anaritide for the treatment of
oliguric acute renal failure, which is being developed with Genentech, Inc.,
NATRECOR(R) BNP for the treatment of acute congestive heart failure, and
FIBLAST(R) trafermin, which is being developed with partners as a potential
treatment for stroke and various vascular and wound healing indications. Each of
these products is discussed in more detail below in "Business -- Products in
Development."
The Company expects to announce key results in 1997 from Phase III clinical
trials in the United States on the use of AURICULIN in the treatment of acute
renal failure ("ARF") and on the use of NATRECOR in the treatment of acute
congestive heart failure ("CHF"). The outcome of the AURICULIN and NATRECOR
clinical trials could have a substantial effect on the Company's stock price -
either positive or negative - depending on the nature of the results. In May
1995, the Company announced the results of its 500-patient Phase III clinical
trial of AURICULIN for the treatment of ARF. While the results in the broad
population of ARF patients were a disappointment, there was a statistically
significant clinical benefit in the prospectively-defined subgroup of oliguric
(abnormally low urine output) ARF patients. In October 1995, the Company began a
second, pivotal Phase III trial of AURICULIN in patients with oliguric ARF.
Scios cautions investors that the presence of statistically significant results
in one clinical trial does not ensure that these results will be repeated in any
subsequent trial. Scios expects to complete its current AURICULIN trial in the
second half of 1997 and applications will be filed for approval to market the
product in the United States and elsewhere, if the results support such filings.
Scios is evaluating NATRECOR for the treatment of acute CHF in two Phase III
clinical studies. The Company expects to complete a pivotal NATRECOR Phase III
efficacy trial in 1997 and announce the results of such study. At this time, it
is not clear whether the second Phase III trial for NATRECOR will be completed
in 1997 or 1998.
Scios' collaborators on FIBLAST are Kaken Pharmaceuticals Co., Ltd.
("Kaken") of Japan, and the Wyeth-Ayerst Laboratories division of American Home
Products Corporation ("Wyeth-Ayerst"). In June 1996, Kaken filed a New Drug
Application (an "NDA") seeking approval to market FIBLAST in Japan as a
treatment for recalcitrant wounds. In October 1996, Wyeth-Ayerst began working
with Scios on the use of FIBLAST in the treatment of stroke and vascular
disorders.
Scios has capabilities in molecular and cell biology, protein and medicinal
chemistry, molecular modeling, pharmacology, and the bioprocessing sciences, and
has the tools to undertake the rational design of small molecules based on
knowledge of molecular targets. The Company also has a flex-time sales force and
a line of psychiatric products that the sales force markets. This includes four
psychiatric products that are sold under a license from SmithKline Beecham
Corporation: ESKALITH(R), ESKALITH CR(R) (lithium), THORAZINE(R)
(chlorpromazine), STELAZINE(R) (trifluoperazine) and PARNATE(R)
(tranylcypromine). In addition, the sales force markets HALDOL(R) Decanoate
(haloperidol), which is co-promoted with Ortho-McNeil Pharmaceutical, an
affiliate of Johnson & Johnson, and EFFEXOR(R) (venlafaxine HCl), which is
co-promoted with Wyeth-Ayerst. See "Business -- Marketing and Sales".
Prior to approval of its first product, Scios' financial strategy involves
careful management of cash while investing in its product pipeline, and
generating cash flow from its commercial operations and corporate partnerships
supporting specific products under development. Certain of the Company's product
candidates have been licensed to corporate partners for development or are being
developed by Scios with funding from corporate partners. Under its arrangements
with corporate partners, Scios typically receives research and development
funding, payments for clinical supplies and/or milestone payments for achieving
scientific and clinical benchmarks. Generally, the Company is also entitled to
royalties on commercial sales of products by its partner or will share in
profits in countries where Scios is co-marketing the product with its partner.
In some cases, Scios may receive additional revenues from the manufacture of
products.
Scios is seeking to reach profitability in 1998 through development of
certain products, collaborations with corporate partners on other products and
the expansion of its marketing and sales capability. This statement of the
Company's goal and other statements in this Annual Report on Form 10-K
concerning such matters as product development, and the timing thereof, future
revenues, operations and expenditures, regulatory approval and market
introduction of the Company's products and estimates of the capacity of
manufacturing and other facilities to support such products are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("PSLRA-95"). Each statement is based on current expectations of the
Company and is subject to risk and uncertainty. All such forward-looking
statements are necessarily only estimates of future results and the actual
results achieved by the Company may differ materially from these projections due
to a number of factors, including: (1) the Company's ability to demonstrate the
safety and efficacy of its products at each stage of clinical development and
obtain timely regulatory approval and patent and other proprietary rights
protection of its products; (2) decisions made by the U.S. Food and Drug
Administration and other agencies regarding the indications for which the
Company's products may be approved and the timing of such decisions; (3) the
actions of third parties, including collaborators, licensees, manufacturing
partners, and competitors of the Company; (4) market acceptance of the Company's
products; (5) the Company's ability to produce product candidates in commercial
quantities at reasonable cost and in a manner acceptable to various regulatory
authorities; and (6) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors. Factors
creating uncertainty are discussed in more detail in individual sections of this
Annual Report on Form 10-K. In particular see "Business-Product Development
Activities and Risks" below and the "Outlook and Risks" sections of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company was incorporated in California in 1981 under the name California
Biotechnology Inc. and reincorporated in Delaware in 1988. The Company changed
its name to Scios Inc. in February 1992, to Scios Nova Inc. in September 1992
following acquisition of Nova Pharmaceuticals, Inc., and returned to using the
name Scios Inc. in March 1996. The principal executive offices of the Company
are located at 2450 Bayshore Parkway, Mountain View, California 94043. The
telephone number at that location is (415) 966-1550.
Product Development Activity Table
The following table summarizes certain information concerning Scios'
principal products under development. The information in the table is qualified
in its entirety by reference to the more detailed information concerning the
Company's products that is set forth elsewhere in this report:
POTENTIAL APPLICATIONS/ DEVELOPER/CORPORATE
PRODUCT INDICATIONS STATUS* PARTNER (TERRITORY)
AURICULIN(R)anaritide Oliguric acute renal failure Phase III clinical Scios/Genentech, Inc.
NATRECOR(R)BNP Acute congestive Phase III clinical Scios
heart failure
FIBLAST(R)trafermin Recalcitrant wounds (Japan) NDA filed Kaken (Asia)
Stroke Phase II clinical Scios/Wyeth-Ayerst (ex-Asia)
Coronary revascularization Phase II clinical Scios/Wyeth-Ayerst (ex-Asia)
Peripheral revascularization Phase II clinical Scios/Wyeth-Ayerst (ex-Asia)
Insulinotropin Type II diabetes Phase II clinical Novo Nordisk A/S (worldwide)
Vascular endothelial Cardiovascular disorders Preclinical Scios
growth factor
Amyloid protease Alzheimer's disease Research Scios
inhibitors
Serine protease inhibitors Cardiovascular disorders Research Scios
<FN>
* "Research" denotes work up to and including discovery research and initial
bench scale production. "Preclinical" denotes studies in animal models necessary
to support an application to the Food and Drug Administration ("FDA") and
foreign health registration authorities to commence clinical testing in humans.
Clinical trials for pharmaceutical products are conducted in three phases. In
Phase I, studies are conducted to determine safety. In Phase II, studies are
conducted to gain additional safety information, as well as preliminary evidence
as to the efficacy and appropriate doses of the product. In Phase III, studies
are conducted to provide sufficient data for the statistical proof of safety and
efficacy, including dosing regimen. Phase III is the final stage of such
clinical studies prior to the submission of an application for approval of a new
drug or licensure of a biological product. "NDA filed" means an application for
commercial sale of a new drug has been filed in the indicated country seeking
approval to market the product in that country for the covered indication.
</FN>
3
Product Development Activities and Risks
Scios focuses its product development efforts on proprietary therapeutics
for acute illnesses, principally in the areas of acute cardiovascular and renal
disorders. The Company's success will depend on its ability to achieve
scientific and technological advances and to translate such advances into
reliable, commercially competitive products on a timely basis. As described in
"Business -- Products In Development," Scios' products are at various stages of
research and development, and further development and testing will be required
to determine their technical feasibility and commercial viability. The Company
cautions investors that its business is subject to significant risks and
uncertainties. In particular, the proposed development schedules for the
Company's products may be affected by a wide variety of factors, including
technological difficulties, proprietary technology and rights developed by
others, reliance on third parties to perform certain activities or provide
certain resources, and changes in governmental regulation. Many of these factors
will not be within the control of Scios. As a result, there can be no assurance
that any of the products described in this Item 1 or resulting from Scios'
research programs will be successfully developed, prove to be safe and
effective, meet applicable regulatory standards, be capable of being produced in
commercial quantities at reasonable costs, or be successfully marketed.
In developing pharmaceutical products, the Company faces critical challenges
in at least three broad areas: the discovery of novel compounds that are worth
developing; the successful clinical testing in humans of candidate compounds
that the Company deems worthy of development; and competition in many forms and
areas. The discovery process in pharmaceutical development often involves doing
or understanding what has not previously been done or understood, while working
in biological systems that are not always predictable or predictive.
Pharmaceutical drug discovery is an inherently challenging and risky undertaking
in which numerous factors come into play in determining success or failure. Some
of the key factors include the ability to identify appropriate targets and
models to use in understanding complex disease processes, to comprehensively
screen many compounds under consistent conditions to identify those which show
promise, to build on insights gained from numerous and frequently imperfect data
points in selecting the compounds most likely to treat the target disease, even
though the target disease itself is not completely understood (both as to what
causes that disease and how the disease manifests itself), and to avoid being
misled by false indicators. These efforts all take place in increasingly
competitive environments in which many companies are often simultaneously trying
to apply their resources and insights to the same targets and challenges. How
well a particular company marshals its resources to attack an issue will often
determine its success. Because it is impractical, if not impossible, to do
everything imaginable to acquire sufficient knowledge to assure success in
meeting these challenges, intuition, untested assumptions and luck can sometimes
play a significant role in determining a particular company's success in
pharmaceutical discovery and development.
The Company particularly cautions investors that any decision to commence or
continue clinical trials in humans based on the results of preclinical work in
cell-based assays and animal models or an earlier clinical study does not
necessarily mean that the results achieved in subsequent human clinical studies
will be similar to those achieved in the earlier studies. A central issue in all
pharmaceutical development is how well a particular cell-based assay or
preclinical animal model selected by the investigator predicts the effectiveness
of a drug candidate in treating the target disorder in humans. While
well-developed and well-tested models exist for some disorders, often it is not
possible to know with certainty the predictive quality of a model until results
in humans are obtained. In some cases, it turns out that the selected model does
not accurately predict the effect of a drug candidate in humans or whether the
product is safe to use in humans at all.
In clinical testing of compounds selected for development, the Company faces
challenges in several areas. In the clinical trial initiation phase, these
factors include creating a sound study design that will as effectively and
efficiently as possible reveal the safety and efficacy of a particular compound
and then finding appropriate clinical investigators who can identify and recruit
patients and follow the clinical protocol. Each clinical trial itself contains
the risk that a compound will not produce positive clinical results in the
specific subjects included in that study population or that it will produce
ambiguous or mixed results in which the benefits of the compound do not clearly
enough outweigh any adverse side effects, or that judgments will have been
incorrect about how large the study population needed to be to demonstrate the
effects of the compound. Clinical uncertainty exists even where a previous
clinical study has produced a favorable result. When clinical trials for a
compound are completed, a vast quantity of data on a wide range of topics must
be assembled in a manner that will give regulatory authorities the basis,
following intense review by the FDA and comparable regulators in other
countries, to decide whether or not to approve the product for marketing.
Inherent in the regulatory review process is the risk that the particular
regulatory agency will not find sufficiently reliable the methods that the
company selected or that such agency will place different weight on various
factors and results than the developing company did. In addition, when another
company's product is already on the market to treat the target indication, the
4
company developing a new drug for the same indication faces additional
challenges, which may include demonstrating that the new product has superior
properties. Because the regulators in various countries operate under different
regulatory systems and approaches, the decisions and requirements with respect
to the clinical testing of a compound may vary from one country to another.
These issues and a company's inability to address them adequately may lead the
regulatory authority to put limits on how or for what indication a compound may
be marketed, which directly affects a product's commercial success. Failure to
deal with these factors to the satisfaction of the regulatory authority can also
lead to the denial or delay of approval to market a product.
The Company plans to continue the development of selected products primarily
under the sponsorship of corporate partners. Continued funding and participation
by the Company's corporate partners under joint development or licensing
agreements will depend not only on the timely achievement of research and
development objectives by the Company, which cannot be assured, but also on each
corporate partner's own financial, competitive, marketing and strategic
considerations and overall attitude towards engaging in outside collaborations.
Under several of its joint development or license agreements, Scios relies on
its corporate partners to conduct preclinical and clinical trials, to obtain
regulatory approvals, and to manufacture and market products. Although the
Company believes that its corporate partners will have an economic incentive to
meet their contractual responsibilities, the amount and timing of resources
devoted to these activities generally will be controlled by the corporate
partner. The recent wave of mergers among the established pharmaceutical
companies and the downsizing and shift in research strategy that often follows
these mergers have underscored the fact that corporate partners can change their
strategy, and may sometimes drop entirely the collaborations they or their
predecessor have had with other companies. See "Business -- Products in
Development -- Other Research" for an example involving Scios.
All of these factors combine to make drug development extremely challenging
and competitive. At the same time, these factors contribute to the significant
rewards and satisfaction that can accrue to the personnel and stockholders of a
company that successfully overcomes the challenges of drug discovery and
development and creates a new pharmaceutical agent.
Products in Development
AURICULIN(R) anaritide. AURICULIN is a synthetic version of a human hormone,
atrial natriuretic peptide ("ANP"), which is produced in the heart and has a
range of biological activities known to be important in kidney and heart
function, including increasing the elimination of water and salt from the body.
ANP improves kidney function by increasing blood flow into the filtration units
of the kidney and restricting blood outflow.
In May 1995, the Company announced the results of its initial Phase III
clinical study of AURICULIN for the treatment of acute renal (kidney) failure
("ARF"). AURICULIN did not reduce the need for dialysis in the broad patient
population, nor did the drug reduce mortality; however, this initial phase III
study did demonstrate that AURICULIN significantly reduced the need for dialysis
in a prospectively-defined subgroup of patients suffering from oliguric ARF
(patients with abnormally low urine output). The placebo-controlled,
double-blinded study involved 504 patients at more than 60 centers. The primary
clinical endpoint in the initial Phase III study was a reduction in the need for
kidney dialysis in ARF patients. The study was also designed to evaluate
AURICULIN's potential for decreasing mortality and to increase 21-day
dialysis-free survival in such patients. The oliguric subgroup represented
approximately 24% of the 504-patient study. In the 120 oliguric ARF patients,
dialysis was required in 64% of the patients receiving AURICULIN compared to 87%
of the patients receiving placebo, a 26% reduction (p=0.005). Treatment with
AURICULIN also significantly increased the number of oliguric patients who
survived for 21 days without requiring dialysis (dialysis-free survival) from 8%
in the placebo-treated patients to 27% in patients treated with AURICULIN
(p=0.008). Treatment with AURICULIN did not significantly reduce mortality in
oliguric patients. Based on these results, discussions with the Food and Drug
Administration and Genentech, and quantitative market research indicating that
oliguric ARF affects up to 80,000 patients in the United States each year, Scios
initiated a second phase III clinical study of AURICULIN for the treatment of
oliguric ARF in October 1995. The study will enroll approximately 250 patients
and is being conducted at 60 to 80 centers throughout the United States and
Canada. The primary clinical endpoint of the study is 21-day dialysis-free
survival. The study is designed to demonstrate whether patients with oliguric
ARF treated with AURICULIN have a higher rate of dialysis-free survival than
patients receiving a placebo. The study is also designed to evaluate the number
of oliguric ARF patients requiring acute dialysis at 14 days and patient
mortality at 21 days following treatment. As with all clinical studies, Scios is
not able to predict whether the results of the second phase III study currently
being conducted will be similar to those achieved in the first phase III study
or if such results will be sufficient to achieve marketing approval. Scios
expects to complete the second Phase III study in the second half of 1997 and
announce the results. If the results support such filings, applications will be
filed for approval to market AURICULIN in the United States and elsewhere.
5
On December 30, 1994, the Company entered into a Collaboration Agreement
(the "Collaboration Agreement") with Genentech, Inc. ("Genentech") relating to
the joint development and commercialization of AURICULIN for use in the
treatment of ARF. The Collaboration Agreement provides for the parties'
co-promotion of AURICULIN in the United States and Canada and gives Genentech
exclusive marketing rights in countries other than the United States and Canada
(the "Licensed Territory"). Generally, Scios will receive a share of profits in
North America and royalties on sales in the Licensed Territory. The
Collaboration Agreement was amended in 1996 (the "Genentech Amendment") by
mutual agreement to reflect the revised development timetable and the timing of
milestone payments. As revised, Scios will receive a $15 million milestone
payment upon the filing of a New Drug Application ("NDA") for AURICULIN in the
United States prior to June 30, 1998 and $15 million upon the earlier of January
1, 2001 or net sales exceeding $100 million over a 12-month period. If the NDA
filing in the United States occurs after June 30, 1998, Genentech may elect to
pay Scios on the preceding schedule or to pay Scios $30 million on receipt of
United States regulatory approval. Additional milestone payments of up to $20
million are due Scios upon obtaining regulatory approvals and achieving certain
sales levels in other designated markets.
The Company is bearing the development costs of AURICULIN until the receipt
of regulatory approval in North America. Thereafter, all costs of development
and promotion within North America will be shared equally between the two
parties. Genentech or its sublicensee will bear all costs for development and
promotion within the Licensed Territory. Subsequent to the license agreement,
Genentech, as part of certain agreements it made with F. Hoffman-La Roche Ltd.,
elected to end marketing activities outside of North America and, therefore,
Genentech is seeking a sublicensee to assume its rights and obligations with
respect to AURICULIN within the Licensed Territory. Scios is being consulted in
such effort but Genentech has the right to select its sublicensee. The effort
put forth by the selected sublicensee will affect the results achieved for
AURICULIN in the Licensed Territory.
Under the original Collaboration Agreement, if the Company did not file a
NDA for AURICULIN by December 31, 1997, or if, within 60 days of such filing,
the FDA has not accepted for review an NDA which was filed by December 31, 1997,
Genentech had certain options described below. The Genentech Amendment extended
from December 31, 1997 to December 31, 1998 the date by which Scios must file an
NDA in the United States in order to avoid Genentech having the option of (i)
electing to bring NATRECOR or another natriuretic peptide product under
development by Scios into the Collaboration Agreement for use in the treatment
of ARF or (ii) terminating the Collaboration Agreement. This option could limit
the Company's ability to enter into collaborative arrangements on NATRECOR or
any other natriuretic peptide product until the expiration of such deadlines. If
Genentech were to elect to bring a product into the Collaboration Agreement in
place of AURICULIN, the milestone payments due with respect to such product
would be reduced significantly.
Looking forward, there can be no assurance that the Company will ever
receive the requisite regulatory approvals to market AURICULIN or receive the
milestone payments called for by the Collaboration Agreement. In part, the
latter will depend on Genentech's assessment of the product's performance and
potential, which could differ from Scios' assessment. In addition, there can be
no assurance that AURICULIN (or any other product developed under the
Collaboration Agreement) will generate sufficient, if any, revenue (through
milestone payments, sales, royalties or otherwise) to offset the development and
promotion costs incurred. These and other statements about AURICULIN are
forward-looking within the meaning of the PSLRA-95 and actual results achieved
by the Company may vary. The actual results and time frame over which they are
achieved by the Company will be determined by numerous factors, principally
including: the safety and efficacy of AURICULIN in oliguric ARF, which is to be
determined in the second Phase III trial currently being conducted that is
expected to be completed in 1997; the Company's success in enrolling patients in
a timely manner; and the scope of any regulatory approval for AURICULIN, which
will require the regulators' acceptance of the Company's work in a wide variety
of areas related to the development of AURICULIN and will depend on the
regulators' analysis and interpretation of the clinical trial results. See
"Business -- Product Development Activities and Risks" for a further discussion
of these factors and their potential impact on commercialization of the
Company's products, including AURICULIN.
6
Concurrent with the signing of the Collaboration Agreement, Genentech made
(i) a $20 million equity investment in Scios by purchasing a new class of
nonvoting preferred stock and (ii) a $30 million loan commitment, which the
Company may draw against at any time through December 2002. See Note 3 of Notes
to Consolidated Financial Statements.
Scios has received from the FDA Orphan Drug designation of AURICULIN in ARF.
See "Business -- Government Regulation." In March 1994, the Company entered into
a long-term supply agreement pursuant to which a third party has been contracted
to produce bulk form AURICULIN for Scios via a synthetic process. See "Business
- -- Manufacturing."
Scios' scientists were among the first groups to clone the gene encoding
human ANP, and the Company has produced the hormone synthetically and using
recombinant DNA technology. Scios has a worldwide, semi-exclusive license to
patent rights of Merck & Co., Inc. ("Merck"), including an issued United States
patent covering the ANP product currently under development by Scios. This
license is royalty free in the United States. The patent licensed to Scios was
issued to Merck at the conclusion of an interference proceeding that also
involved Scios' patent application covering human ANP. The patent, which is due
to expire in August 2007, allows the Company and Merck to prevent others from
marketing Scios' form of ANP in the United States. The Company also has an
exclusive license under the ANP patent rights of Queens University. These patent
rights include an issued European patent which covers numerous forms of ANP,
including that being developed by the Company. This European patent terminates
in December 2003. See "Business -- Patents and Proprietary Rights" for a further
discussion of the patent situation for AURICULIN.
Scios reacquired rights to AURICULIN from Wyeth-Ayerst in 1989. As
consideration for the reacquired rights, the Company made an initial payment to
Wyeth-Ayerst and agreed to make additional payments out of amounts received by
Scios (exclusive of research and development funding) upon completion of
licensing or other arrangements for the commercialization of AURICULIN.
Approximately $5.7 million in milestone payments remain to be paid to
Wyeth-Ayerst if AURICULIN is approved for marketing. Scios' initial research on
AURICULIN was funded by Biotechnology Research Partners, Ltd. to whom Scios owes
certain payments upon the commercialization of AURICULIN. See Note 11 of Notes
to Consolidated Financial Statements.
NATRECOR(R) BNP. Scios is conducting Phase III clinical studies of NATRECOR
for the treatment of acute congestive heart failure ("CHF"). Earlier clinical
studies conducted in approximately 200 patients demonstrated significant
improvements in key measures of heart function following treatment with
NATRECOR. The current Phase III studies are intended, if successful, to provide
the basis for Scios filing an NDA and seeking approval to market NATRECOR in the
United States. The current studies are expected to be completed in 1997 or early
1998, depending on the rate of subject accrual and, if successful, the Company
will file an NDA in the United States. Scios currently does not plan to market
NATRECOR in its own name outside of North America and is seeking licensee(s) to
assume such activities. Under certain circumstances the Company may elect to
allow any such NATRECOR partner to co-promote NATRECOR in North America. This
discussion of NATRECOR includes forward-looking statements within the meaning of
the PSLRA-95, which are based on current information. Many factors could cause
actual results to differ from those described in these forward-looking
statements, principally including the rate of patient enrollment in the NATRECOR
trials, the occurrence of unexpected and severe side effects, the Company's
ability to select a dosing regimen that optimizes the performance of NATRECOR,
the degree of efficacy of NATRECOR, as shown in the various studies the Company
is conducting, and the reaction of potential partners to NATRECOR. See "Business
- -- Product Development Activities and Risks" for a further discussion of factors
that can impact the Company's commercialization of its products, including
NATRECOR.
Acute CHF affects over one million people annually in the United States.
Because the market for treatment of CHF is very competitive, the Company's
success in commercializing NATRECOR will be particularly dependent not only on
strong clinical data but on its ability to produce NATRECOR cost effectively. As
a result, during 1996 the Company shifted from using synthetically-produced
NATRECOR to using material produced by recombinant expression. While more
cost-effective, this change to producing material recombinantly during the
course of the clinical program may create additional regulatory challenges for
the development of NATRECOR. See "Business -- Manufacturing."
7
The Company believes that it was the first to discover human b-type
natriuretic peptide ("BNP"), whose gene it cloned in 1988 as a part of its
program in natural human peptides that improve heart and kidney function. Like
ANP, BNP is made in the heart, and preclinical studies at the Company and
elsewhere suggest that BNP has biological effects similar to ANP in increasing
the elimination of salt and water from the body, dilating blood vessels, and
decreasing the secretion of other hormones which lead to blood vessel
constriction and elevated blood pressure. The Company has an issued United
States patent covering human BNP, which has a term through May 2009. This and
other United States patents issued to Scios are subject to possible extension
due to time taken up in the regulatory approval process. In addition, all issued
patents are subject to the risk that they may be challenged by another entity
which may result in a court invalidating or limiting the patent. See "Business
- -- Patents and Proprietary Rights."
FIBLAST(R) trafermin. FIBLAST trafermin is Scios' form of human basic
fibroblast growth factor, an agent that has been shown to promote angiogenesis
(the growth of new blood vessels), to directly stimulate the growth of
connective tissue, and to possess certain neuroprotective properties, the
mechanisms of which are not yet fully understood. As described below, Scios is
working with two key partners on the development of FIBLAST for a variety of
indications.
Since 1988, Scios has worked with Kaken Pharmaceutical Co., Ltd. ("Kaken"),
the Company's corporate partner for FIBLAST in Japan. Pursuant to a 1988
agreement, Kaken has exclusive rights to develop and market FIBLAST for all
indications in Japan, Korea, Taiwan, Hong Kong and the People's Republic of
China. Scios receives research and development support payments, is entitled to
receive additional payments as regulatory milestones are met, and will receive
royalties on any sales of FIBLAST products by Kaken. In 1994, the Company and
Kaken signed a series of agreements expanding the 1988 agreement. Under the 1994
agreements, Scios will manufacture FIBLAST for the next several years for use by
Kaken. The agreements also establish a collaboration on manufacturing process
development between the companies and provide Kaken with a license to Scios'
manufacturing technology for FIBLAST. It is intended that Kaken be able to
manufacture FIBLAST for its own use in the future. Under the 1994 agreements,
Kaken will make payments to Scios for the supply of material, the process
development collaboration, and the license to FIBLAST manufacturing technology.
Kaken conducted two Phase III trials in Japan for evaluation of FIBLAST in
recalcitrant wounds. Based on the results of these studies, in June 1996 Kaken
filed an NDA in Japan for this indication. Before it may begin to market FIBLAST
in Japan, Kaken must obtain approvals from the Japanese authorities with respect
to the NDA for FIBLAST in the target indication and also for product pricing in
Japan. Obtaining these approvals is a complex process involving a thorough
review of the comprehensive set of data that Kaken is required to submit.
Approval for Kaken to market the product in Japan will require that the Japanese
authorities reach the conclusion that such data demonstrate to the regulators'
satisfaction that FIBLAST is safe and effective in the treatment of recalcitrant
wounds, and that processes and facilities used by Scios for manufacturing the
bulk drug substance used in FIBLAST are satisfactory. Although Japanese
regulators will apply Japanese standards and practices in reviewing Kaken's NDA
seeking approval to market FIBLAST, Kaken faces many of the same challenges and
factors that are discussed in "Business -- Product Development Activities and
Risks."
Following the Company's completion in 1993 of Phase II clinical trials
of FIBLAST in the United States for the treatment of recalcitrant wounds
(pressure sores and neuropathic ulcers), the Company determined not to fund
additional clinical studies of FIBLAST for chronic illnesses, except under
sponsorship of a corporate partner. This decision was driven by the cost of the
extensive clinical trial program expected to be required for approval of such a
product in the United States. To date, the Company has not entered into such a
partnership for the development of FIBLAST in the United States for the
treatment of recalcitrant wounds.
In 1996, Scios signed a Collaboration Agreement with the Wyeth-Ayerst
Laboratories division of American Home Products Corporation ("Wyeth-Ayerst")
creating a joint development and commercialization program to examine the use of
FIBLAST in the treatment of stroke and cardiovascular disorders. Under the terms
of the agreement, Wyeth-Ayerst and Scios will collaborate in the development and
commercialization of FIBLAST in North America, where the companies will share
development costs and profits. Scios has granted Wyeth-Ayerst exclusive
marketing rights outside of North America and the Pacific Rim countries licensed
to Kaken. Scios will receive royalties on sales outside of North America and
payments for bulk drug supply worldwide. Wyeth-Ayerst made a $12 million upfront
payment to Scios in cash and will also pay Scios up to $32 million in milestone
payments upon achievement of key future development events. In addition,
Wyeth-Ayerst has provided a $12 million line of credit that Scios may draw upon
from time to time through December 2004 to fund expansion of its manufacturing
facility for FIBLAST.
8
In extensive preclinical studies, FIBLAST has been shown to protect
neurons from damaging effects associated with stroke, including oxygen and
glucose deprivation, and glutamate release. FIBLAST has demonstrated a reduction
of neuronal death in both permanent occlusion and reperfusion animal models of
stroke. Early in 1996, Scios began a Phase I/II study of FIBLAST for the
treatment of stroke. At the request of Wyeth-Ayerst this trial has been
expanded. In 1997, Wyeth-Ayerst will assume the responsibility of lead
development party for FIBLAST in stroke.
Scios has also demonstrated in preclinical studies FIBLAST's potential
to increase blood flow to peripheral blood vessels and reduce the complications
of peripheral vascular disease ("PVD") through angiogenesis, or the growth of
new blood vessels. Scios is the lead development party for FIBLAST in PVD and a
Phase II clinical trial has recently been initiated. In a clinical study in
collaboration with researchers at the National Institutes of Health, Scios and
Wyeth-Ayerst are exploring the potential of FIBLAST to increase blood flow to
the heart in patients with advanced coronary artery disease.
Scios is obligated to make payments to Organon International ("Organon")
based on amounts received by Scios upon commercialization of FIBLAST.
Approximately $700,000 remains to be paid under the obligation, which stems from
the Company's 1989 reacquisition of certain FIBLAST rights previously licensed
to Organon. The basic research on FIBLAST was funded by Biotechnology Research
Partners, Ltd. See Note 11 of Notes to Consolidated Financial Statements. See
also "Business -- Patents and Proprietary Rights" for a discussion of FIBLAST
patent issues.
Other Research. The Company also has conducted discovery research, both on
its own and in collaboration with other companies, to identify other agents for
development or new applications for agents under development by the Company for
other indications. The current focus of Scios' research effort is on the
discovery of agents for cardiovascular and renal applications and on agents to
prevent or delay the onset of Alzheimer's disease. Scios has been granted
patents on a form of vascular endothelial growth factor (VEGF). The Company is
investigating the use of this form of VEGF in a variety of disease states.
Another company holds issued patents on a competing form of VEGF. In July 1992,
Scios formed a research alliance with Marion Merrell Dow, Inc. ("MMD") to
jointly develop new therapies for Alzheimer's disease based on investigation of
the beta-amyloid precursor protein. MMD merged with Hoechst Roussel in 1995 to
form Hoechst Marion Roussel, Inc. ("HMR") and, effective December 1996, HMR
terminated the collaboration. The parties are in discussions to clarify the
rights of each party to use the technology developed in the program. HMR's
decision to terminate this collaboration represents an example of how a change
in the priorities of a corporate sponsor, such as HMR, can impact Scios. This
risk is discussed in the section "Business -- Product Development Activity and
Risks." Scios is seeking a new collaborator for its Alzheimer's research
program. In 1995, the Company was issued a United States patent covering
transgenic mice that develop brain tissue deposits characteristic of those found
in humans with Alzheimer's disease.
Additional Projects
The Company has from time to time pursued product development activities
outside of the focus areas described above, some of which programs are discussed
below. Scios intends to divest or otherwise leverage technologies that it
concludes are not central to its long-term business strategy.
BNP Diagnostic. Third-party researchers have determined that the level of
circulating brain natriuretic peptide (BNP) may be a good basis for a diagnostic
to identify and track patients suffering from congestive heart failure. Scios
has licensed to Shionogi and Co., Ltd. ("Shionogi") the right under the
Company's patent position on BNP to develop diagnostic products in Japan in
exchange for royalties on product sales. Shionogi began selling its BNP
diagnostic in Japan in 1996. Scios has also granted Biosite Diagnostics
Incorporated the nonexclusive right under the Company's BNP patents to develop
BNP diagnostics in the United States, and the Company is now seeking to enter
into agreements with other companies to commercialize the diagnostic application
of its BNP patent rights in additional territories.
CNS Disorders; Guilford Pharmaceuticals. In June 1994, Guilford
Pharmaceuticals Inc. ("Guilford"), at that time a majority-owned subsidiary of
the Company, completed an initial public offering of $15 million of common stock
to pursue the development of pharmaceutical products for the treatment of
diseases of the central nervous system ("CNS"). Following subsequent equity
offerings by Guilford, Scios' ownership interest in Guilford is currently
approximately 10%. Scios had previously transferred to Guilford certain
neuroscience technology originally developed by Nova, and had licensed to
Guilford the GLIADEL(R) implant project and related drug delivery technology
described below for application in the treatment of tumors of the central
nervous system and cerebral edema ("Guilford Field"). The most advanced Guilford
product is GLIADEL, which was approved for marketing in the United States in
1996.
9
Insulinotropin. The Company initially developed insulinotropin under a
collaboration begun with Pfizer Inc ("Pfizer") in 1988. After several years,
Pfizer assumed responsibility for clinical development. As part of that effort,
Pfizer initiated a collaboration with Novo Nordisk A/S of Denmark, a world
leader in insulin and diabetes care products. In 1996, Pfizer elected to
terminate its license from Scios on insulinotropin. Following a three month
review of the product, Novo Nordisk acquired an exclusive license from Scios
under a new agreement providing for Scios to receive from Novo Nordisk an
upfront payment, potential milestone payments based on time and events, and
royalties on product sales. Novo Nordisk is now responsible for development
activities for insulinotropin. Insulinotropin appears to be a potent peptide
that stimulates insulin release when blood sugar levels are above normal. Type
II diabetics do not release enough insulin from the pancreas when blood glucose
levels rise in response to eating a meal and they become progressively more
resistant to insulin action in stimulating glucose uptake by muscle and fat
tissue. Insulinotropin controls blood glucose levels in Type II diabetics by
stimulating insulin release and perhaps by overcoming insulin resistance.
Present therapies for Type II diabetics include insulin injections and oral
hypoglycemic agents, which can induce dangerously low blood sugar levels. If
insulinotropin stimulates insulin release only when blood sugar levels are above
normal, it may have a lower risk of this serious side effect. The Company holds
an exclusive license to patent applications covering insulinotropin held by
Massachusetts General Hospital, which rights were licensed to Novo Nordisk. A
United States patent licensed exclusively to the Company covers the form of
insulinotropin being developed by Novo Nordisk under license from the Company.
The term of the patent extends through June 2009. An additional issued patent
and a pending application cover other forms of insulinotropin.
Drug Delivery Systems. Prior to Scios' acquisition of Nova in 1992, Nova had
been developing certain drug delivery systems. Its two most advanced projects
were the GLIADEL implant to treat primary brain cancer and the SEPTACIN(R)
implant for the treatment of osteomyelitis, a serious bone infection. These
projects were developed pursuant to a license agreement with the Massachusetts
Institute of Technology ("MIT") relating to MIT's BIODEL(R) drug delivery
technology. As noted above, the Company licensed a portion of the drug delivery
technology, including GLIADEL, to Guilford. In 1994, the Company licensed to
another third party the drug delivery technology, including SEPTACIN, for all
uses outside the Guilford Field. Scios thereafter assigned its BIODEL license
rights back to MIT, which will administer these licenses. The Company and MIT
will receive royalty and milestone payments under the license agreements with
Guilford and the other licensee as products are developed. The licensees are
also obligated to meet certain diligence standards in pursuing development of
their respective product candidates. The GLIADEL and SEPTACIN projects were
undertaken by the Company on behalf of Nova Technology Limited Partnership, the
limited partnership that funded Nova's research and development on these
projects. See Note 11 of Notes to Consolidated Financial Statements for a
description of the Company's payment obligations to former limited partners.
Human Lung Surfactant ("hLS"). In early 1996, the Company entered into an
agreement with Byk Gulden Pharmazeutika ("Byk Gulden"), transferring to Byk
Gulden all of the Company's interest in a portfolio of issued patents on the
protein components of lung surfactant, some of which were based on Scios' own
work and some of which Scios had obtained under an assignment of patents and
patent applications owned by Children's Hospital Medical Center of Cincinnati.
The Company received an initial payment and will receive additional fixed
payments if Byk Gulden commercializes an hLS product. Scios will not receive
royalties on sales by Byk Gulden.
Marketing and Sales
Once they have been approved for marketing, the Company ultimately intends
to sell certain of its proprietary products in the United States through its own
sales force for some or all approved indications. This could be done by the
Company alone or jointly with other companies, such as is the case for the
Company's co-promotion agreement on AURICULIN with Genentech. Presently, Scios
generates revenues by marketing products that were developed by others.
10
Third-Party Products. The Company has a sales force of approximately 85
representatives who are employed exclusively by the Company and work on a
part-time basis marketing psychiatric products. The Company currently markets in
the United States four psychiatric products under license from SmithKline
Beecham Corporation ("SB") and co-promotes two other products: HALDOL(R)
Decanoate (haloperidol), a depot injection product to treat schizophrenia that
is distributed by Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of
Johnson & Johnson, and EFFEXOR(R) (venlafaxine HCl), an antidepressant that is
marketed by Wyeth-Ayerst. Since 1993, the Company has jointly promoted HALDOL
with Ortho-McNeil for the treatment of schizophrenia. Under the agreement, the
Company receives quarterly payments based on total sales of the product.
Ortho-McNeil manufactures and distributes HALDOL, and generally indemnifies
Scios against product liability claims. The five-year agreement may be extended
up to an additional three years upon the Company's attainment of revenue goals.
In 1996, Scios and Wyeth-Ayerst entered into an agreement regarding Scios'
promotion of EFFEXOR to selected psychiatrists in the United States. Under the
four-year agreement, Scios is compensated based on increases in prescriptions
written by the psychiatrists to whom Scios promotes. Wyeth-Ayerst manufactures
and distributes EFFEXOR, and generally indemnifies Scios against product
liability claims.
The Company has exclusive rights to market the following SB products in the
United States: ESKALITH(R) and ESKALITH CR(R) (lithium) for the treatment of
manic depressive illness, THORAZINE(R) (chlorpromazine) and STELAZINE(R)
(trifluoperazine) for the treatment of schizophrenia, and PARNATE(R)
(tranylcypromine) for the treatment of depression (collectively, the "SB
Products"). SB currently manufactures and distributes the SB Products. SB may
discontinue manufacturing one or more of the products if it gives the Company at
least 12 months' notice, in which case Scios has the right to manufacture such
product(s). SB is responsible for all ancillary matters relating to sales of the
SB Products (including various administrative tasks) and for the maintenance in
good standing of all new drug applications with respect to the SB Products. The
agreement also grants Scios certain rights to indemnification from SB for
product liability claims. The Company is obligated to spend certain amounts for
marketing support based on the prior year's net sales and to reimburse SB for
certain third-party royalty payments. Scios pays SB 40% of the Company's net
profits (as defined in the Company's agreement with SB) from United States sales
of the SB Products. See Note 3 of Notes to Consolidated Financial Statements.
HALDOL, EFFEXOR and the SB Products all face competition which is likely to
become greater over time. For the SB Products, unit volume for certain products
has been eroding and can be expected to continue to erode due to competition
from generic products sold at substantially lower prices. Generic competition
may also develop for other products. These are forward-looking statements within
the meaning of the PSLRA-95. Numerous factors will influence the impact that
competitive products will have on the Company's revenues from the SB Products
and the Company's co-promotion activities. These factors include the success of
the Company's and its partners' marketing strategies and efforts, the actual and
perceived features of competing products, the amount of the difference in price
of competing products, and the marketing effort by third parties on competing
products. Although past decreases in unit sales of the SB Products have been
partially offset by price increases, there can be no assurance that the market
will accept any additional price increases. Among the SB Products, the Company
has placed particular marketing emphasis on those product formulations, such as
ESKALITH CR (a controlled release formulation), where generic equivalents are
less available.
Although the Company is seeking to acquire the right to market additional
products, numerous factors will determine whether and when the Company is able
to do so and then the degree to which the Company realizes net revenue
contribution from marketing such additional products. Factors influencing the
availability of such additional products on terms favorable to the Company
include the ability of the Company to demonstrate success under its current
agreements, the willingness of other companies to enter into such agreements
with the Company, which will be based in part on where such companies elect to
deploy their own marketing resources, and competition from other companies
offering marketing assistance similar to that offered by the Company.
Proprietary Products. The Company currently plans to participate in
marketing certain of its proprietary products in the United States when and if
approved by the FDA. This section on Proprietary Products describes some of the
challenges the Company will face in developing the capability to market
successfully its own products. This discussion necessarily contains
forward-looking statements within the meaning of the PSLRA-95. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Numerous factors, including
those discussed below, could cause actual results to differ from those described
in these forward-looking statements. Under certain circumstances, the Company
could abandon its plans to market certain of its own products in the United
States in favor of granting outright licenses of its products and technology.
The Company has pursued (and expects to pursue for the foreseeable future) a
strategy of entering into licensing arrangements with other companies as the
means to make its products available outside of the United States.
11
Scios believes that its experience in marketing third-party products under
arrangements such as those described above will prove useful as it prepares to
market its own products. However, to date, Scios' marketing experience has been
limited to psychiatric products, and the Company does not currently have in
place all of the resources to market the products it is seeking to develop. The
commercialization of the Company's major products will require significant
financial resources, as well as sales, marketing and distribution capabilities.
In order to provide funds and expertise to meet these requirements, particularly
outside of North America, the Company will consider entering into additional
corporate partnerships with established pharmaceutical companies, as it has with
Genentech for the co-promotion of AURICULIN and Wyeth-Ayerst for the promotion
of FIBLAST for stroke and cardiovascular disorders. There can be no assurance
that the Company will be able to enter into such partnerships on favorable terms
or develop such a marketing capability on its own. Scios believes that such
collaborations may enable it to speed the timing of product launch and increase
market penetration of selected new therapies. However, such a partnering
arrangement could also result in a lower level of income to Scios than if it
marketed the products entirely on its own. See "Business -- Product Development
Activities and Risks."
The Company's ability to commercialize its products successfully may depend
in part on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Government and other third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. Market acceptance of Scios' products would be
adversely affected if adequate coverage and reimbursement levels are not
provided for approved uses of Company products. In addition, in view of
expressed governmental concerns over drug prices and other healthcare costs,
there can be no assurance that future government and private cost control
initiatives will not adversely affect the Company's ability to maintain price
levels on its products sufficient to realize an appropriate return on
development efforts.
Manufacturing
Scios has concentrated its resources on product discovery and development
prior to investing substantially in manufacturing capability. To date, the
Company has produced only FIBLAST in its own facility and relies on third
parties for the manufacture of other products, including AURICULIN and NATRECOR.
Scios has a production facility which it believes enables it to produce FIBLAST
and potentially other products for itself and others under requirements for
current Good Manufacturing Practices ("cGMP"). However, the Company does not
currently possess the staff or facilities that may be necessary to manufacture
any product in the commercial quantities that may be required in the long term.
The strategy of building or acquiring commercial-scale manufacturing facilities
or utilizing third-party facilities only as the need arises carries with it
certain risks, as there can be no assurance that such facilities can be built,
acquired or used on commercially acceptable terms or that Scios will be able to
meet manufacturing quantity and quality requirements through the use of such
arrangements.
AURICULIN is currently produced by third-party manufacturers under contract
to Scios. The Company has a long-term agreement for the supply of AURICULIN in
bulk form, and has fill and finish services performed by another third party.
The Company believes that it would not be cost effective to qualify alternate
suppliers at this time. However, an inability of either the Company's bulk or
fill and finish manufacturer to provide material to Scios on a timely basis
would cause delays in supply that could have a material adverse effect on the
Company's business. The Company has developed with a third party the process for
the recombinant production of NATRECOR. Having a low-cost manufacturing
capability for NATRECOR and smoothly integrating product produced by such method
into clinical development activities are expected to be keys to commercializing
this product successfully and on a timely basis. Failure to do so could
adversely impact the commercial success of the product. See "Business --
Competition."
To the extent Scios has from time to time had capacity available in its
production facility, it has performed contract manufacturing for third parties
and the Company has produced for third-party customers pharmaceutical grade
supplies of products of interest to such third parties. The Company may engage
in similar work in the future.
Ortho-McNeil manufactures HALDOL, Wyeth-Ayerst manufactures EFFEXOR and SB
manufactures the SB Products. If SB were to discontinue manufacturing the SB
Products and the Company wished to continue selling the products, the Company
would have to develop additional facilities to manufacture independently on a
large scale or enter into an arrangement with a third party to manufacture such
products. See "Business -- Marketing and Sales."
12
Patents and Proprietary Rights
Scios is seeking patent protection for proprietary technology and products
in the United States and abroad to prevent others from unfairly capitalizing on
its investment in research. Other companies engaged in research and development
of new health care products based on biotechnology also are actively pursuing
patents for their technologies, which they consider to be novel and patentable.
Scios also relies and will continue to rely upon trade secrets and know-how to
develop and maintain its competitive position. There can be no assurance,
however, that others will not develop similar technology or that confidentiality
agreements on which the Company relies to protect trade secrets will be honored.
The Company currently owns or holds exclusive rights to approximately 53
issued United States patents and 27 United States pending patent applications
covering its proprietary technology and products. The Company also files foreign
applications corresponding to most of its United States applications. Scios'
issued patents include patents on AURICULIN, NATRECOR, FIBLAST and
insulinotropin. The Company's patent position with respect to certain principal
products under development is described above in the section discussing each
product. See "Business -- Product Development Activities and Risks." If a patent
issues prior to marketing approval, as has been the case with all of the
Company's issued patents to date, Scios can apply for extension of the patent
term for a limited period of time to make up for a portion of the patent term
lost to the regulatory approval period. The actual period of the extension
varies but generally cannot exceed five years. In certain of its third-party
agreements, the absence of a patent covering a product licensed by Scios could
reduce the royalties due to the Company under the agreements.
This section entitled "Patents and Proprietary Rights" contains
forward-looking statements under the PSLRA-95. Actual results will vary
depending on numerous factors, many of which are discussed. Investors should
appreciate that the patent position of biotechnology and pharmaceutical firms is
generally highly uncertain and involves complex legal and factual questions.
Although Scios believes it has strong patent positions on certain of its
products, there can be no assurance that any patent will issue on pending
applications of the Company, or that any patent issued will afford the Company
significant commercial protection against competitors for the technology or
product covered by it, or that patents will not be infringed upon or designed
around. Third parties have filed applications for, or have been issued patents
relating to, products or processes which are similar to or competitive with
certain of the Company's products or processes. Scios is incurring and expects
to continue to incur substantial costs in interference proceedings and in
defending the validity or scope of its patents or in challenging the validity or
scope of competing patents. The Company is unable to predict how the courts will
resolve issues relating to the validity and scope of such patents. If any such
patent were to be interpreted to cover any of the Company's products and could
not be licensed, circumvented or shown to be invalid, the results of Scios'
future operations could be materially and adversely affected. Described below
are patent positions of other companies of which Scios is aware that potentially
overlap the Company's principal product development areas discussed above.
AURICULIN. On June 14, 1988, a United States patent issued to Organogen
Medizinisch-Molekularbiologische Forschungsgesellschaft m.b.H. containing claims
to biologically active fragments of cardiodilatin, a natriuretic peptide
precursor. Scios believes that the claims of the patent may not reasonably be
construed to cover the form of ANP being developed by Scios and, to the extent
any claims of the patent may be interpreted to cover AURICULIN, reasonable
grounds exist for asserting the invalidity of such claims. If any claims of this
patent were determined to be valid and construed to cover the form of ANP being
developed by Scios, Scios' ability to develop AURICULIN commercially might be
hindered or prevented if it were unable to obtain a license. A corresponding
patent has been issued by the European Patent Office. This patent is currently
involved in an opposition proceeding in Europe in which Scios is participating.
NATRECOR. Scios has been issued United States and European patents covering
human BNP. Scios is aware that Daiichi Pharmaceutical Co., Ltd., Tokyo
("Daiichi") has filed patent applications on porcine BNP in Japan and on human
BNP worldwide. The filing dates of the Daiichi applications covering human BNP
are later than those of the Company. On July 12, 1995 the European Patent Office
issued a patent to Daiichi containing claims that overlap with certain claims of
Scios' issued European patent. Scios has filed an opposition to the Daiichi
patent. If Scios does not prevail in the opposition proceeding, Scios' ability
to develop NATRECOR commercially in Europe might be hindered or prevented if it
were unable to obtain a license.
FIBLAST. In February 1991, a United States patent with one claim covering a
form of fibroblast growth factor (FGF) protein was issued to Synergen, Inc.
("Synergen"), which was later acquired by Amgen Inc. In June 1991, a United
States patent with one claim covering the DNA for the same form of FGF was
issued to Synergen. Based on a review of the publicly-available documents
relating to these patents, Scios believes that the Synergen form of FGF or DNA
differs from the form of FGF produced by the Company. On August 8, 1995,
following a decision favorable to Scios in a patent interference proceeding with
the Salk Institute for Biological Studies ("Salk"), Scios received a United
States patent covering DNA sequences, expression vectors and microorganisms used
in the recombinant production of human basic FGF. On May 7, 1996, Scios received
a United States patent covering the recombinant production of human basic FGF.
On February 18, 1997, Scios received a United States patent covering
recombinantly produced human basic FGF.
13
In October 1992, a United States patent was issued to Salk which contains
claims directed to substantially pure mammalian basic FGF containing the 146
amino acid sequence of bovine basic FGF or a naturally occurring homologous
sequence of another mammalian species. If any claim of this patent were
determined to be valid and construed to cover Scios' human basic FGF, the
Company's ability to develop basic FGF might be hindered or prevented if it were
unable to obtain a license. Scios' outside counsel has reviewed the
publicly-available documents relating to the Salk patent. Based upon this
review, such counsel has opined that, to the extent any claims of the patent may
be interpreted to cover human basic FGF, such claims are overly broad and would
likely be held invalid by an informed court.
In May 1994, the European Patent Office issued European Patent No. 0 248 819
to Scios covering recombinantly-produced trafermin, Scios' form of basic FGF
known by the product name FIBLAST. An opposition proceeding has been instituted
against this patent by Chiron Corp. and Pharmacia S.p.A. In June 1996, the
Opposition Division of the European Patent Office upheld the validity of the
Scios patent; however, the opponents have filed an appeal against this ruling.
In August 1994, the European Patent Office issued European Patent No. 0 228 449
to Salk covering the 146 amino acid sequence of bovine basic FGF or an
equivalent or analog thereof. The Company has filed an opposition to this
patent. The results of these opposition proceedings cannot be predicted with
certainty.
In March 1994, the Company obtained a non-exclusive license to make, use and
sell FIBLAST under a United States patent issued to Harvard University
containing claims to purified cationic (basic) FGF. The Harvard patent is based
on a patent application having a filing date earlier than the application which
formed the basis for the Salk patent.
Trademarks. AURICULIN(R), NATRECOR(R) and FIBLAST(R) are registered trademarks
of Scios. ESKALITH(R), ESKALITH CR(R), THORAZINE(R), STELAZINE(R) and PARNATE(R)
are registered trademarks of SB. HALDOL(R) is a registered trademark of
McNeilab, Inc. EFFEXOR(R) is a registered trademark of Wyeth-Ayerst.
Competition
Competition is intense in the development of biopharmaceutical products,
particularly in the development of products through the application of
biotechnology. There are numerous companies and academic research groups
throughout the world engaged in similar research and development. Some of the
Company's competitors, including some of its licensees, are working on products
similar to those being developed by Scios. Many of these companies have
substantially greater financial, marketing and human resources than Scios. With
respect to AURICULIN, Scios is not aware of any currently-marketed treatment for
ARF but believes other companies are attempting to develop forms of natriuretic
peptides and certain growth factors for indications similar to those being
pursued by Scios. In the case of NATRECOR, a number of products are already
marketed for the treatment of acute CHF. Hence, the Company will need to
demonstrate strong clinical results and an ability to produce NATRECOR
cost-effectively in order to introduce NATRECOR into this competitive market.
FIBLAST faces potential competition from other growth factors.
There can be no assurance that technological developments or superior
marketing capabilities possessed by competitors will not materially adversely
affect the commercial potential of the Company's products. In addition, if the
Company commences significant commercial sales of products, manufacturing
efficiency and marketing capability are likely to be significant competitive
factors. With respect to products no longer covered by patents, such as the SB
Products, Scios faces competition from companies offering generic products.
14
The Company believes that the competitive success of the Company will be
based primarily on scientific and technological superiority, managerial
competence in identifying and pursuing opportunities, operational competence in
developing, protecting, producing and marketing products, and obtaining timely
regulatory agency approvals and adequate funds. Achieving success in these areas
will depend on the Company's ability to attract and retain skilled and
experienced personnel, to develop and secure the rights to advanced proprietary
technology and to exploit commercially its technology prior to the development
of competitive products by others. Scios expects that there will be continued
competition for highly qualified scientific, technical and managerial personnel.
This section entitled Competition contains forward-looking statements within the
meaning of the PSLRA-95. Numerous factors, including the factors identified
above, could cause actual results to differ from those described in these
forward-looking statements.
Government Regulation
The industry in which the Company participates -- the development and
marketing of pharmaceutical products -- is heavily regulated. As is true for all
companies developing pharmaceuticals, the Company's research and development
activities and the production and marketing of its products are subject to
extensive regulation for safety and efficacy by numerous governmental
authorities in the United States and other countries. This regulation is a
significant factor in the production and marketing of the products resulting
from Scios' research and development activities. Testing, production and
marketing of pharmaceutical products for human use require approval of the FDA
and comparable authorities in other countries. Over the next several years,
Scios expects to increase substantially its internal resources and expenditures
to meet these requirements for the products it is developing. See "Business --
Product Development Activities and Risks."
The procedure for seeking and obtaining the required governmental approvals
for a new product involves many steps, beginning with animal testing to
determine safety and potential toxicity. In addition, extensive human clinical
testing is required to demonstrate the efficacy, optimal dose and safety of each
product. The time and expense required to perform clinical testing can far
exceed the time and expense of developing the product prior to clinical testing.
Whether undertaken by the Company or its commercial partners, the process of
seeking and obtaining these approvals for a new product is likely to take a
number of years and involves the expenditure of substantial resources. In
addition, there can be no assurance that any of the Company's products will
obtain the necessary approvals on a timely basis, if at all. The regulatory
environment is constantly evolving and one of the demands on companies in the
pharmaceutical industry is to take account of and anticipate these changes in
order to minimize negative impact on the Company or its product development
timelines. As a developer of pharmaceutical products, the Company and its
commercial partners must also deal with differences in the regulatory
requirements of different countries. Although there is an effort at greater
harmonization of regulatory standards, differences still impact whether and in
what time frame a product may be approved in a particular country, if at all.
Because of these differences between countries, approval in one country does not
assure approval in another.
Even if initial FDA approval is obtained for a product, further studies may
be required to provide additional data on safety or to gain approval for the use
of a product as a treatment for clinical indications other than those initially
targeted. Moreover, the FDA may reconsider its approval of any product at any
time and may withdraw such approval. In addition, before the Company's products
can be marketed in foreign countries, they are subject to regulatory approval in
such countries similar to that required in the United States. Accordingly,
numerous factors will impact the timing, extent and value of any regulatory
approvals that may be obtained for the Company's products, including changes in
regulatory requirements, which may either decrease or increase the burden on the
Company, the level of side effects exhibited by the Company's products as
compared to their beneficial effects, the availability of adequate resources to
regulatory agencies which will impact the speed of regulatory review, and the
price the Company is able to charge for its products.
15
The Orphan Drug Act currently provides incentives to manufacturers to
develop and market drugs for rare diseases or conditions affecting fewer than
200,000 persons in the United States at the time of application for orphan drug
designation. A drug that receives orphan drug designation and is the first
product to receive FDA marketing approval for its product claim is entitled to a
seven-year exclusive marketing period in the United States for that product
claim. However, a drug that is considered by the FDA to be different from a
particular orphan drug is not barred from sale in the United States during the
seven-year exclusive marketing period. The Company has received from the FDA
orphan drug designation of AURICULIN in ARF. Various amendments of the Orphan
Drug Act have been considered by Congress from time to time, some of which, if
passed, could reduce the benefits to Scios of orphan drug status.
FDA regulations require that any drug to be tested in humans must be
manufactured according to cGMP regulations. This has been extended to include
drugs that will be tested for safety in animals, in support of human testing.
The cGMPs set certain minimum requirements for procedures, record-keeping and
the physical characteristics of the laboratories used in the production of these
drugs. In addition, various federal, state and local laws and regulations
relating to safe working conditions, laboratory practices, the experimental use
of animals, and the storage, use and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research work are or may be
applicable to such activities. They include, among others, the United States
Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational
Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, and the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future federal, state and local regulations. Although
the Company believes that its safety procedures for handling and disposing of
hazardous materials comply with prescribed regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
The Company may also incur substantial costs to comply with environmental
regulations if the Company develops additional manufacturing capacity or
otherwise changes its operations. For example, in connection with the closure of
its Baltimore research and development facility in 1994 to consolidate such
activities at its California headquarters, the Company incurred costs of
approximately $370,000 for chemical disposal, storage and related costs.
Furthermore, the Company employs third-party contractors that it believes to be
reliable to perform certain work in connection with the disposal of hazardous
materials generated in the Company's research in compliance with applicable
laws. Notwithstanding such reliance, the Company may remain responsible for the
materials and the actions of its contractors related to such materials. From
time to time, the Company has been notified that certain of its contractors may
not have disposed of such materials in full compliance with applicable laws and
that the Company may be required to contribute to the cost of environmental
clean-up efforts. See Item 3 below and Note 10 of Notes to Consolidated
Financial Statements.
Employees
The Company had 335 employees as of December 31, 1996, of which 190 were
engaged in research, product and clinical development and 79 were part-time
employees (primarily its sales force).
Item 2. PROPERTIES
The Company's headquarters facility in Mountain View, California, consists
of three buildings owned by the Company and land occupied under a long-term
ground lease. The ground lease rates are fixed through July 2010. Future minimum
ground lease payments over the next five years total approximately $913,000. The
three buildings represent 98,000 square feet of office and laboratory space. The
Company presently occupies approximately 88,000 square feet and leases the
remaining space. The Mountain View facility includes a 13,000 square foot
combination process and product development and biological testing facility in
which Scios has produced bulk and clinical supplies of FIBLAST. In 1995, the
Company leased a 52,000 square foot building in Sunnyvale, California, and
constructed research laboratories. The Company relocated its discovery research
group to the Sunnyvale facility in September 1996. The Company's annual lease
payments for the Sunnyvale facility are approximately $700,000. The Company
expended approximately $6.7 million in capital expenditures in 1996 and
anticipates spending approximately $2.5 million in capital expenditures in 1997.
Prior to February 1995, the Company occupied under lease a total of 57,428
square feet of administrative and laboratory facilities in Baltimore, Maryland
(the "Holabird Facility"). In 1994, the Company consolidated its research and
development activities at the Holabird Facility with those in California. As a
result, the Company laid off certain employees, transferred others to California
and, in early 1995, moved its Baltimore commercial operations and clinical
groups, previously located at the Holabird Facility, to a new site in downtown
Baltimore. In February 1995, Scios purchased the Holabird Facility for $3
million pursuant to an option contained in the lease and also received
assignment of the underlying ground lease, which has a term through 2012. The
Company is endeavoring to sell the Holabird Facility.
16
Item 3. LEGAL PROCEEDINGS
In September 1996, the United States District Court for the Northern
District of California dismissed with prejudice a lawsuit that had been filed by
certain stockholders in May 1995 against the Company and Richard L. Casey, its
chairman and chief executive officer, on behalf of the individual plaintiffs and
on behalf of other purchasers of the Company's stock during the period from
October 6, 1993 to May 2, 1995. The action alleged violations of federal
securities laws, claiming that the defendants issued a series of false and
misleading statements, including filings with the Securities and Exchange
Commission, regarding the Company and clinical trials involving AURICULIN. The
plaintiffs have filed notice that they will appeal the District Court's ruling
in favor of the Company.
In November 1995, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the alleged
disposal of hazardous substances by a subcontractor of Nova Pharmaceutical
Corporation, which was acquired by the Company in 1992. The Company is one of
many potentially responsible parties that have been identified as associated
with this specific site. The Company is in the process of responding to the
EPA's request for additional information on materials disposed of at this site.
The ultimate outcome of this action cannot presently be determined. Accordingly,
no provision for any liability or loss that may result from adjudication or
settlement thereof has been made in the accompanying consolidated financial
statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
MANAGEMENT
Executive Officers
The executive officers of the Company and their ages at March 17, 1997 are
as follows:
Name Age Position
Richard L. Casey 50 Chairman of the Board, President and
Chief Executive Officer
Roberto P. Rosenkranz, Ph.D. 46 Executive Vice President and
Chief Operating Officer
Elliott B. Grossbard, M.D. 49 Senior Vice President, Medical Development
Thomas L. Feldman 46 Vice President of Commercial Operations
John A. Lewicki, Ph.D. 45 Vice President of Research
John H. Newman 46 Vice President of Legal Affairs,
General Counsel and Secretary
Armin H. Ramel, Ph.D. 71 Vice President of Product Development
17
Mr. Casey is Chairman of the Board, President and Chief Executive Officer of
Scios Inc. He joined Scios in December 1987 and has served as a Director since
that time. From early 1985 to 1987, he was with ALZA Corporation as Executive
Vice President and President of ALZA Pharmaceuticals. From 1976 to 1985 he
worked for Syntex Corporation, in various positions including director of
marketing research, director of sales, vice president and general manager of
Syntex Medical Diagnostics. Mr. Casey began his career in pharmaceuticals as a
sales representative for Eli Lilly and Company. From 1968 to 1970, Mr. Casey
served in the U.S. Peace Corps in Ethiopia. Mr. Casey serves on the boards of
Guilford Pharmaceuticals Inc., an affiliated publicly-held development-stage
neuroscience company located in Baltimore, Maryland; VIVUS, Inc., a
publicly-held medical devices company located in Menlo Park, California; and
Karo Bio AB, an affiliated privately-held Swedish biotechnology company.
Dr. Rosenkranz joined Scios in July 1996 as Executive Vice President and
Chief Operating Officer. Prior to joining Scios, he was with Roche Laboratories
where he was Director of Business Operations, ethical pharmaceuticals, for
Northern California and Nevada. Previously, he was with Syntex Laboratories for
12 years and held the positions of Director of Managed Care Sales, Director of
Business and Commercial Development, Director of Marketing and Sales Force
Strategy, Director of New Product Development, and Head of Institutes Operations
and Renovascular Pharmacology for Syntex Research. A doctoral graduate of the
University of California, Davis, Dr. Rosenkranz received a Ph.D. in pharmacology
and toxicology with an emphasis in neuropharmacology. He also holds an MBA from
Santa Clara University and an undergraduate degree in psychology from Stanford
University. Dr. Rosenkranz is the author of more than 70 scientific
publications, the holder of six scientific patents and a member of a number of
professional scientific and business associations.
Dr. Grossbard joined Scios in 1991 as Vice President of Medical and
Regulatory Affairs and became Senior Vice President in 1996. Immediately prior
to joining Scios, he was Vice President of Medical Affairs for HemaGen/PFC, a
privately-held company developing perfluorocarbon products for oxygen transport
and as blood substitutes. From 1982 to 1990, he was Associate Director and later
Director of Clinical Research for Genentech, in charge of the clinical
development of Alteplase (TPA). From 1978 to 1980, as an Assistant Attending
Physician at Memorial Hospital and Assistant Professor of Medicine at Cornell
Medical School, he helped to establish the Bone Marrow Transplant Service at
Memorial Hospital. He received his M.D. from the Columbia College of Physicians
and Surgeons in 1973, trained in internal medicine at Massachusetts General
Hospital in Boston and received subspecialty training in hematology at the
Columbia-Presbyterian Medical Center and the Memorial Sloan-Kettering Cancer
Center in New York.
Mr. Feldman joined Scios in January 1995 as Vice President of Commercial
Operations. Prior to joining the Company, Mr. Feldman was responsible for sales
and marketing activities in two pharmaceutical companies affiliated with Johnson
& Johnson. From 1993 through 1994, Mr. Feldman was National Sales Manager at
Ortho Pharmaceutical Corporation. From 1973 to 1993, Mr. Feldman held various
sales and marketing positions at McNeil Pharmaceutical, where he most recently
served as National Sales Manager from 1990 to 1993.
Dr. Lewicki joined Scios in 1983 as a Scientist, and became Senior Scientist
in 1984, Vice President, Research in August 1986, Vice President and Deputy
Director, Research in March 1987, and Vice President and Director of Research in
February 1988. Dr. Lewicki received his Ph.D. in Physiology/Pharmacology from
the University of California, San Diego in 1979. From 1979 to 1981, Dr. Lewicki
conducted postdoctoral research at the University of Virginia, Department of
Internal Medicine, and, from 1981 to 1983, he was a research pharmacologist at
Stanford University, Division of Clinical Pharmacology.
Mr. Newman joined Scios in 1983 as Vice President, General Counsel and
Secretary, and became Vice President of Commercial Development, General Counsel
and Secretary in December 1989 and Vice President of Legal Affairs, General
Counsel and Secretary in March 1992. Prior to joining Scios, Mr. Newman was an
attorney in private practice.
Dr. Ramel joined the Company in July 1993 as Vice President of Product
Development. Prior to joining Scios, Dr. Ramel spent eleven years at Genentech,
most recently as Senior Director of Process Sciences, which consisted of three
departments: Cell Culture and Fermentation, Product Recovery, and Pharmaceutical
R&D. Prior to joining Genentech, he was Director of the Biopolymer Research
Department at Hoffmann-La Roche Inc. He held academic positions at the
University of Basel, Switzerland, SUNY at Buffalo and Boston University Medical
School, and was a postdoctoral fellow at UC Berkeley's Biochemistry and Virus
Laboratory. In addition, he was an NIH fellow for two years. Dr. Ramel holds a
Ph.D. in Physical Chemistry from the University of Basel. He serves on the board
of Sepragen Corporation, a publicly-held manufacturer of bioprocessing equipment
used in the production of biopharmaceuticals.
18
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Class D Warrants are traded on the Nasdaq
National Market System under the symbols SCIO and SCIOZ, respectively. The
tables below set forth the high and low sales prices as reported by Nasdaq for
the Common Stock and the Class D Warrants during the last two fiscal years.
Prices represent quotations among dealers without adjustment for retail markups,
markdowns or commissions, and may not represent actual transactions. No cash
dividends have been paid on Common Stock, and the Company does not anticipate
paying cash dividends in the foreseeable future. As of December 31, 1996, there
were approximately 6,382 stockholders of record of the Company's Common Stock.
Common Stock
------------
FY 1996 FY 1995
------- -------
High Low High Low
---- --- ---- ---
Q1 5-11/16 4-1/16 8-3/4 6-5/8
Q2 8-3/16 4-1/16 7-5/8 2-7/8
Q3 7-3/16 5 4-7/8 3-11/16
Q4 7-1/8 4-5/8 4-9/16 3-1/4
Year 8-3/16 4-1/16 8-3/4 2-7/8
Class D Warrants
----------------
FY 1996 FY 1995
------- -------
High Low High Low
---- --- ---- ---
Q1 1-3/16 1/2 2-7/16 1-3/4
Q2 1-1/4 13/32 2 21/32
Q3 7/8 3/8 1 11/16
Q4 3/4 3/8 15/16 9/16
Year 1-1/4 3/8 2-7/16 9/16
19
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994 1993 1992*
- ----------------------- ---- ---- ---- ---- -----
Revenues $ 64,223 $ 49,187 $ 53,667 $ 47,568 $ 25,085
Loss from operations (22,053) (28,175) (31,719) (43,237) (138,703)
Other income 4,497 5,049 4,045 6,298 7,338
Net loss (18,403) (26,382) (27,961) (36,579) (131,946)
Net loss per common share (0.51) (0.74) (0.79) (1.05) (5.76)
Cash and securities 62,170 87,069 104,439 108,271 134,660
Working capital (5,838) 11,642 38,942 96,334 42,842
Total assets 113,961 131,550 146,096 151,278 182,398
Long-term obligations 426 1,082 1,739 2,323 401
Stockholders' equity 93,628 109,394 126,438 135,299 169,144
Employees at year end 335 301 283 337 382
- -------------------
<FN>
* Includes Nova Pharmaceutical Corporation and Nova Technology Limited
Partnership from the dates of their acquisition, September 3, 1992 and December
31, 1992, respectively, as well as related charges for in-process technologies
totaling $108.0 million.
</FN>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements about plans,
objectives, future results and intentions of Scios Inc. (the "Company"). These
forward-looking statements are based on the current expectations of the Company,
and the Company assumes no obligation to update this information. Realization of
these plans and results involves risks and uncertainties, and the Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below, as well as in other sections of this Annual Report on
Form 10-K for the year ended December 31, 1996.
Operating Results (1996, 1995 and 1994)
Total revenues for Scios were $64.2 million in 1996, $49.2 million in 1995
and $53.7 million in 1994. The revenue increase from 1995 to 1996 was due to
higher research and development contract revenues and co-promotion commissions.
The revenue decline from 1994 to 1995 was the result of lower product sales,
co-promotion commissions and research and development contract revenues.
Revenue from product sales of certain psychiatric products ("SB Products")
under license from SmithKline Beecham Corporation ("SB") was $38.2 million,
$41.4 million and $42.8 million in 1996, 1995 and 1994, respectively. Product
sales declined 8% from 1995 to 1996 and 3% from 1994 to 1995 due to competition
from generic drugs.
20
Co-promotion commissions were $6.5 million, $2.3 million, and $3.8 million
in 1996, 1995 and 1994, respectively. The Company receives co-promotion
commissions under agreements with Ortho-McNeil Pharmaceutical ("Ortho-McNeil"),
an affiliate of Johnson & Johnson, for the co-promotion of Ortho-McNeil's
psychiatric product HALDOL(R) Decanoate, and with Wyeth-Ayerst Laboratories
("Wyeth-Ayerst"), a division of American Home Products Corporation, for the
co-promotion of Wyeth-Ayerst's psychiatric product EFFEXOR(R) (venlafaxine HCl).
Co-promotion revenue under both agreements is based on achieving aggregate sales
levels over contract years, which do not coincide with calendar years.
Consequently, annual revenue recognition is based, in part, on the Company's
forecast of sales for the respective contract years. Co-promotion commissions
increased from 1995 to 1996 as a result of increasing sales of HALDOL(R)
Decanoate and from revenue recognized for seven months of contract year sales of
EFFEXOR(R) (venlafaxine HC1) under the new agreement with Wyeth-Ayerst completed
in June of 1996. Commissions declined from 1994 to 1995 because actual sales of
HALDOL(R) Decanoate for the contract year ended July 1995 were less than the
Company's forecast at December 31, 1994.
Revenue from research and development contracts was $19.5 million in 1996,
$5.5 million in 1995 and $7.1 million in 1994. The increase from 1995 to 1996
was principally due to receipt of $12.0 million from Wyeth-Ayerst upon entering
into a collaboration agreement for the development and commercialization of
FIBLAST(R) trafermin ("FIBLAST") for the treatment of neurological and
cardiovascular disorders and $2.0 million received under other agreements. The
decrease from 1994 to 1995 was due primarily to a milestone payment from Pfizer
Inc and a final payment under an agreement with E. Merck, both of which were
received in 1994. In 1996, the payment from Wyeth-Ayerst accounted for 62% of
total research and development contract revenue. Revenues under a collaboration
with Hoechst Marion Roussel to study Alzheimer's disease comprised approximately
8%, 32% and 26% of contract revenue in 1996, 1995 and 1994, respectively, while
revenues under the collaboration with Kaken Pharmaceutical Co., Ltd. ("Kaken")
to develop FIBLAST in Japan for the treatment of dermal ulcers, were 9%, 30% and
31% of contract revenue in 1996, 1995 and 1994, respectively.
Cost of goods sold for the SB Products was $22.3 million, $24.7 million and
$26.5 million in 1996, 1995 and 1994, respectively. The declines from year to
year were principally the result of lower unit sales. Gross margins improved to
42% in 1996 from 40% in 1995 and 38% in 1994 due to a sales mix shift towards
higher margin products and annual price increases. Future changes in gross
margins will be principally dependent upon the effects of price increases,
competition in the marketplace and changes in the product mix.
Research and development expenses were $39.4 million in 1996, $29.3 million
in 1995 and $34.5 million in 1994. The increase from 1995 to 1996 was the result
of higher staffing levels and greater expenses for clinical trials and drug
supply to support further development of the Company's lead products. The
decline from 1994 to 1995 reflects the September 1994 consolidation of the
Company's Baltimore, Maryland research and development operations with the
Company's operations in California.
Marketing, general and administrative expenses were $19.8 million in 1996,
$18.2 million in 1995, and $15.7 million in 1994. The spending increase from
1995 to 1996 was principally due to higher depreciation. The increase in
spending from 1994 to 1995 was primarily the result of higher sales and
marketing expenses and spending to support expanded business development and
computer automation activities.
The profit distribution to third parties of $4.8 million, $5.1 million and
$5.2 million in 1996, 1995 and 1994, respectively, represents SB's share of the
net profits from sales of the SB Products. The decrease from 1995 to 1996 was
principally due to declining product sales while the 1994 to 1995 decrease was
due to higher sales and marketing expenses attributable to SB Product sales.
The restructuring charge of $3.5 million recorded in 1994 was the result of
the Company's closure of its research and development facility in Baltimore,
Maryland.
Other income was $4.5 million in 1996, $5.0 million in 1995 and $4.0
million in 1994. The decrease from 1995 to 1996 was due to lower investment
income from the Company's invested portfolio and higher royalty expenses offset
in part by gains on the sale of 200,000 shares of Guilford Pharmaceuticals Inc.
("Guilford") stock and other marketable securities in the Company's investment
portfolio. The 1995 increase over 1994 was due to a net gain on sales of
securities in 1995 versus a net loss on sales of securities in 1994 and
increased interest earnings resulting from higher average interest rates on the
invested portfolio.
21
The $0.3 million gain in equity in affiliate in 1996 versus the $3.3
million loss in 1995, was the result of profitable operations of Guilford in
1996 versus unprofitable operations in 1995. The increase in loss of affiliate
from $0.9 million in 1994 to $3.3 million in 1995 was the result of higher
Guilford losses in 1995. The Company's percent ownership in Guilford has
declined from 62% in May 1994 to 10% at December 31, 1996 as a result of
Guilford's public stock offerings and the recent sale of Guilford stock by
Scios. Since Guilford's initial public stock offering in June 1994, the Company
has used the equity method of accounting for its investment. Prior to the public
stock offering, the financial results of Guilford were consolidated with those
of the Company. The minority interest of $0.6 million in 1994 reflects the
minority shareholders' portion of Guilford's losses when Guilford was fully
consolidated. The minority interest of $(1.1) million in 1996 is the share of
Biotechnology Research Partners net income attributable to the minority
partners.
Outlook and Risks
The Company is striving to achieve profitability in the next several years.
The ability of the Company to achieve profitability depends principally upon:
(i) the safety and efficacy of the Company's products, the progress of its
product development efforts, its success in enrolling patients in clinical
trials and the timing and scope of regulatory approvals, particularly with
respect to the Company's lead products AURICULIN(R) anaritide ("AURICULIN"),
NATRECOR(R) BNP, and FIBLAST, and the degree of market acceptance of these
products if approved for sale; (ii) the Company's success in generating
operating profits from marketing and selling the SB Products, HALDOL(R)
Decanoate, EFFEXOR(R) (venlafaxine HCl) and additional third-party product
rights which it may acquire, the Company's ability to establish and maintain
profitable arrangements under which to represent the products of third parties,
the impact of competing products and the Company's ability to forecast future
trends affecting the timing of revenue recognition such as the level of Medicaid
rebates and rate of sales growth over a particular period and continuing
availability of these products from its partners; and (iii) the development of
new third-party funding sources and other revenues to support continuing
research and development programs and the results realized by third parties on
whom the Company may rely to sell its products, particularly outside of the
United States. Profitability will also be affected by the Company's ability to
undertake complex manufacturing processes in a cost-effective manner, to
scale-up and then manufacture products the Company expects to market directly,
and any products manufactured for third parties. With limited manufacturing
resources of its own, the Company has entered into contracts with, and is
dependent upon, third-party suppliers for the manufacture of its lead products.
Although the Company does not currently foresee a supply problem, future product
supply and the Company's profitability could be affected by events at these
suppliers over which the Company has limited control.
Further development of the Company's products will require substantial
additional investment to cover, among other things, the costs of clinical
trials, the securing of commercial-scale manufacturing capability and the
marketing and sales expenses associated with product introductions and start-up
costs. While market introduction of new products will require considerable
expenditures by the Company, revenues generated from such products, assuming
they are successfully developed, may not be realized for several years.
Principal factors that could affect the level of new product revenues will
include the rate of market penetration, the availability of alternative
therapies, the price charged by the Company per course of therapy, the breadth
of the approved indication allowed by the Food and Drug Administration and what,
if any, income can be obtained from potential third-party licensees. In the case
of AURICULIN, the Company alone is responsible for continued development costs
in the United States and Canada through United States regulatory approval.
Genentech Inc. ("Genentech") is responsible for development costs in the rest of
the world. Following its decision to cease marketing of products outside the
United States and Canada using its own salesforce, Genentech is seeking to
sublicense its rights to market AURICULIN outside the United States and Canada.
Marketing costs and marketing profits will be shared by the Company and
Genentech in the United States and Canada. Genentech will pay the Company a
royalty on sales in other countries. In the case of FIBLAST for use in
neurological and cardiovascular disorders, development and commercialization
expenses and any subsequent revenues will be shared with Wyeth-Ayerst at varying
percentages. In the case of NATRECOR, the Company has not yet elected to partner
the therapeutic applications, although it plans to do so, at least for markets
outside of North America.
22
Sales of the SB Products, in total, are likely to continue to decline
during the next few years because of continuing competition from generic
products. The Company hopes to more than offset any such decrease with payments
received for the co-promotion of HALDOL(R) Decanoate, EFFEXOR(R) (venlafaxine
HCl), and revenues from the promotion of any additional third-party products.
Factors influencing the availability of such additional products on terms
favorable to the Company include the ability of the Company to demonstrate
success under its current agreements and the willingness of other companies to
enter into such agreements.
A portion of the Company's revenues will continue to be derived from
collaborative research agreements. Future collaborative funding will depend, in
part, upon priorities set by the sponsors in relation to the sponsors' other
product opportunities and their assessment of the continued benefit of
sponsoring a particular program at the Company. Other licenses and agreements to
manufacture and supply bulk materials are also subject to termination by the
licensee or contract sponsor under certain circumstances.
For the reasons stated above, the operating results of the Company are
expected to fluctuate from period to period. Inflation is not expected to have a
significant effect upon the business of the Company. In addition, because the
Company participates in a highly dynamic industry, the Company's common stock
price is subject to significant volatility as a result of developments at both
the Company and in the biopharmaceutical industry in general.
Liquidity and Capital Resources
Combined cash, cash equivalents and securities (both current and
non-current) totaled $62.2 million at December 31, 1996, a decrease of $24.9
million from December 31, 1995. The decrease was mainly attributable to $19.1
million used to fund operations, $6.7 million of spending on property, plant and
equipment and $2.0 million used for the purchase of treasury stock partially
offset by $3.6 million from the sale of Guilford stock. Working capital
decreased from $11.6 million at December 31, 1995 to $(5.8) million at December
31, 1996. The decrease resulted principally from a reduction in the amount of
marketable securities classified as current assets.
In November 1995, the Company announced that its board of directors had
authorized the expenditure of up to $6.0 million for the repurchase of shares of
the Company's common stock. As of December 31, 1996, the Company had purchased
677,000 shares at an aggregate price of $3.0 million under this program.
To date, the Company's operations and capital requirements have been
financed primarily from the proceeds of public and private sales of common
stock, research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. The Company's net
operating losses and credit carryforwards will provide an additional source of
liquidity only to the extent that profitable operations are achieved prior to
the expiration of carryforward periods. The utilization of losses generated
through the date of the 1992 merger with Nova Pharmaceutical Corporation will be
subject to annual limitations.
Outlook and Risks
The Company's cash, cash equivalents and marketable securities of
approximately $62.2 million at December 31, 1996, together with revenues from
product sales, collaborative agreements and interest income, will be used to
fund new and continuing research and development programs, expanded clinical
trials for its products under development and for other general purposes. In
addition to its cash and marketable securities balances, the Company may also
fund operations through borrowing under its $30.0 million line of credit from
Genentech or by the sale of all, or a portion, of its equity investment in
Guilford. The Company also has a $12.0 million line of credit from Wyeth-Ayerst
available to expand its manufacturing facility for FIBLAST. The Company believes
its cash resources and lines of credit will be sufficient to meet its capital
requirements for the next several years. Key factors which will affect future
cash use and the timing of the Company's need to seek additional financing
include the results of the Company's partnering efforts and the timing and
amounts realized from licensing and partnering activities, the rate of spending
required to develop the Company's products and respond to changing business
conditions and the net contribution produced by the Commercial Operations
Division from co-promoting and marketing current and future products for third
parties.
23
Over the long term, the Company may need to arrange additional financing
for the future operation of its business, including the commercialization of its
products currently under development, and will consider collaborative
arrangements and additional public or private financings, including additional
equity financings. Factors influencing the availability of additional funding
include the Company's progress in product development, investor perception of
the Company's prospects and the general conditions of the financial markets.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules appearing on page
F-1 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors. The information required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information contained in the section captioned "Election of Directors" of
the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders.
Identification of Executive Officers. See pages 17 and 18 of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the sections captioned "Executive
Compensation" and "Stock Option Grants and Exercises" of the Company's
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Security
Ownership of Management and Principal Stockholders" of the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Transactions" of the Company's definitive Proxy Statement for
the 1997 Annual Meeting of the Stockholders.
24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. See Index to Financial Statements and
Schedules at page F-1 of this Form 10-K.
(2) Financial Statement Schedules. See Index to Financial Statements
and Schedules at page F-1 of this Form 10-K.
(3) Exhibits. See Exhibit Index at page 25 of this Form 10-K.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed in the
last quarter of 1996.
EXHIBIT INDEX
Exhibit
Number Page
3.1 Certificate of Incorporation...........................................................................R
3.2 Bylaws.................................................................................................J
10.1 Biotechnology Research Partners, Ltd. Agreement of Limited Partnership
dated October 29, 1982; Development Contract, Technology License Agreement
and Joint Venture Agreement between Biotechnology Research Partners, Ltd. and
the Registrant dated December 29, 1982; Promissory Note dated December 29, 1982;
and Memorandum of Understanding between Battery Park Credit Company and
Biotechnology Research Partners, Ltd. dated December 28, 1982..........................................A
10.2 1983 Incentive Stock Option Plan, as amended, and form of Stock Option
Agreement, Promissory Note and Pledge Agreement........................................................E
10.3 Common Stock Purchase Agreement dated April 15, 1985 between the Registrant
and American Home Products Corporation.................................................................B
10.4 Agreement of Purchase and Sale (Real Estate) and Joint Escrow Instructions
by and between Charleston Properties and Bio-Shore Holdings, Ltd.
dated December 30, 1986................................................................................C
10.5 1986 Supplemental Stock Option Plan, as amended, and form of Stock Option
Agreement, Promissory Note and Pledge Agreement........................................................E
10.6 Rights Exercise Agreement between the Registrant and American Home Products
Corporation dated February 28, 1986 and Letter of March 26 and May 16, 1986............................B
10.8 Employment Letter dated November 11, 1987 between the Registrant and
Richard L. Casey.......................................................................................D
25
10.9 Rights Agreement dated as of June 18, 1990 between the Registrant and
The First National Bank of Boston......................................................................F
10.11 1992 Equity Incentive Plan.............................................................................H
10.12 Agreement and Plan of Reorganization by and among the Registrant, Nova
Pharmaceutical Corporation and DD Acquisition Subsidiary, Inc. dated as of May 12,
1992, as amended, July 17, 1992........................................................................J
10.13 Form of Technology Transfer Agreement between Nova Technology Limited
Partnership, Nova and Nova Technology Corporation......................................................I
10.14 Form of Manufacturing and Marketing Agreement between Nova Technology
Limited Partnership and Nova...........................................................................I
10.15 Amended and Restated Agreement of Limited Partnership of Nova Technology
Limited Partnership....................................................................................I
10.16 Form of Research Agreement between Nova Technology Limited Partnership and Nova........................I
10.17 Form of Guaranty given by Nova to Nova Technology Limited Partnership
and its limited partners...............................................................................I
10.18 Form of Purchase Option Agreement between each of the limited partners of
Nova Technology Limited Partnership and Nova...........................................................I
10.19 Nonemployee Director Stock Option Plan.................................................................G
10.20 Warrant Agreement dated December 1, 1987 between the Registrant and
IBJ Schroder Bank & Trust Company......................................................................K
10.27 Purchase Agreement dated as of July 29, 1988 between Nova and SKB Properties, Ltd......................M
10.29 CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline
Beecham Corporation and Nova...........................................................................N
10.30 Master Security Agreement, Promissory Note and Negative Covenant Agreement,
each dated April 28, 1993, between the Registrant and General Electric
Capital Corporation....................................................................................O
10.31 Master Lease Agreement dated July 16, 1993 between the Registrant and General
Electric Capital Corporation...........................................................................O
10.32 Collaboration Agreement dated December 30, 1994 between the Registrant and
Genentech, Inc.........................................................................................Q
10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between the
Registrant and Genentech, Inc..........................................................................Q
10.34 Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc.......................Q
26
10.35 Assignment of Lease dated March 22, 1995 for premises located at 820 West Maude
Avenue, Sunnyvale, California..........................................................................R
10.36 Special Warranty Deed of Improvements dated February 24, 1995 from Rouse-Teachers
Properties, Inc. ("ARTP") to the Registrant and Assignment of Ground Lease dated
February 22, 1995 from RTP to the Registrant...........................................................R
10.37 Lease Agreement dated January 20, 1995 between the Registrant and PDL-RTKL
Associates, a Maryland General Partnership.............................................................R
11.1 Computation of Loss per Share..............................................Filed electronically herewith
21.1 Subsidiaries of Registrant.................................................Filed electronically herewith
23.1 Consent of Coopers & Lybrand...............................................Filed electronically herewith
24.1 Powers of Attorney. Reference is made to page 29.
- -------------------
<FN>
A Filed as an exhibit to Form S-1 Registration Statement (File No.
2-86086), as amended, and incorporated herein by reference.
B Filed as an exhibit to Form S-1 Registration Statement (File No.
33-3186), as amended, and incorporated herein by reference.
C Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1986
and incorporated herein by reference.
D Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987
and incorporated herein by reference.
E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988
and incorporated herein by reference.
F Filed as an exhibit to Form 8-K filed on June 19, 1990 and Form 8-A
Registration Statement filed on June 20, 1990 and incorporated herein
by reference.
G Filed as an exhibit to Form S-8 Registration Statement (File No.
33-39878) filed on April 8, 1991 and incorporated herein by reference.
H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991
and incorporated herein by reference.
I Filed as an exhibit to Form S-1 Registration Statement (File No.
33-14937) filed on behalf of Nova Technology Limited Partnership and
incorporated herein by reference.
J Filed as an exhibit to Form S-4 Registration Statement (File No.
33-49846) filed on July 22, 1992 and incorporated herein by reference.
K Filed as an exhibit to Form S-3 Registration Statement of Nova (File
No. 33-14938) and incorporated herein by reference.
L Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1985 and incorporated herein by reference.
27
M Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and
incorporated herein by reference.
N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1990 and incorporated herein by reference.
O Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 and incorporated herein by reference.
P Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1992
and incorporated herein by reference.
Q Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994
and incorporated herein by reference.
R Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 and incorporated herein by reference.
</FN>
28
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.
SCIOS INC.
Date: March 28, 1997 By: /s/ Richard L. Casey
Richard L. Casey
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard L. Casey his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that the said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard L. Casey Chairman of the Board, March 28, 1997
Richard L. Casey President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Kevin J. McPherson Director of Finance March 28, 1997
Kevin J. McPherson (Principal Accounting Officer)
/s/ Samuel H. Armacost Director March 28, 1997
Samuel H. Armacost
/s/ Myron Du Bain Director March 28, 1997
Myron Du Bain
/s/ Robert W. Schrier Director March 28, 1997
Robert W. Schrier
/s/ Burton E. Sobel Director March 28, 1997
Burton E. Sobel
/s/ Solomon H. Snyder Director March 28, 1997
Solomon H. Snyder
/s/ Eugene L. Step Director March 28, 1997
Eugene L. Step
29
FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Accountants......................................F-2
Consolidated Balance Sheets at December 31, 1996 and
December 31, 1995 ....................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994......................................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................................F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 .........................F-6
Notes to Consolidated Financial Statements ............................F-7
Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the information
is included in the consolidated financial statements or notes thereto.)
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Scios Inc.:
We have audited the accompanying consolidated balance sheets of Scios
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996.
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Scios Inc. and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 29, 1997
F-2
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS December 31,
1996 1995
------------ -----------
Current assets:
Cash and cash equivalents $1,587 $2,847
Marketable securities 6,888 25,986
Accounts receivable 4,808 3,014
Prepaid expenses 786 869
------- -------
Total current assets 14,069 32,716
Marketable securities, non-current 53,695 58,236
Investment in affiliate 6,939 2,937
Property and equipment, net 36,839 35,531
Other assets 2,419 2,130
----- -----
TOTAL ASSETS $113,961 $131,550
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $3,000 $3,000
Accounts payable 2,507 3,778
Other accrued liabilities 10,011 7,863
Deferred contract revenue 3,666 5,775
Current portion of long-term debt and capital leases 723 658
------- -------
Total current liabilities 19,907 21,074
Long-term debt and capital leases 349 1,082
Minority interests 77 --
Commitments (Notes 9, 10 and 11)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares authorized;
issued and outstanding: 12,632 and 16,053, respectively
(liquidation preference of $12,000 and $15,250, respectively) -- --
Common stock; $.001 par value; 150,000,000 shares authorized;
issued and outstanding: 36,506,297 and 36,009,055, respectively 37 36
Additional paid-in capital 404,456 399,155
Treasury stock (2,991) (967)
Notes receivable from stockholders (13) (20)
Unrealized gains (losses) on securities (70) 578
Accumulated deficit (307,791) (289,388)
-------- --------
Total stockholders' equity 93,628 109,394
------ -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,961 $131,550
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Revenues:
Product sales $38,189 $41,396 $42,792
Co-promotion commissions 6,503 2,331 3,770
Research & development contracts 19,531 5,460 7,105
------ ----- -----
64,223 49,187 53,667
------ ------ ------
Costs and expenses:
Cost of goods sold 22,313 24,742 26,541
Research and development 39,424 29,341 34,491
Marketing, general and administration 19,779 18,226 15,681
Profit distribution to third parties 4,760 5,053 5,173
Restructuring charges -- -- 3,500
------ ----- -----
86,276 77,362 85,386
------ ------ ------
Loss from operations (22,053) (28,175) (31,719)
Other income:
Investment income 5,942 5,283 4,386
Other expense (1,445) (234) (341)
------ ---- ----
4,497 5,049 4,045
Equity in net income (loss) of affiliate 274 (3,256) (883)
Minority interests (1,121) -- 596
------ ----- -----
Net loss ($18,403) ($26,382) ($27,961)
======== ======== ========
Net loss per common share ($0.51) ($0.74) ($0.79)
-------- -------- --------
Weighted average number of
common shares outstanding 35,885,922 35,809,876 35,219,442
---------- ---------- ----------
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, 1996 1995 1994
------------ ----------- ------------
Cash flows from operating activities:
Net loss $(18,403) $(26,382) $(27,961)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 5,330 3,882 4,693
Deferred contract revenue (2,109) 3,331 1,827
(Gain)/loss on sale of assets (2,620) 241 96
Equity in net (income) loss of affiliate (274) 3,256 1,898
Minority interest in net income 1,121 -- --
Change in assets and liabilities:
Accounts receivable (1,794) 585 (915)
Accounts payable (2,315) 477 1,133
Other accrued liabilities 2,148 (1,821) 671
Other (206) (60) (997)
------- ------- -------
Net cash used by operating activities (19,122) (16,491) (19,555)
======= ======= =======
Cash flows from investing activities:
Purchase of affiliates warrants -- (167) --
Payments for property and equipment, net (6,682) (5,698) (3,432)
Proceeds from sale of investment in affiliate 3,600 -- --
Proceeds from sale of assets 44 163 157
Sales/maturities of marketable securities 219,027 220,754 454,147
Purchases of marketable securities (196,036) (227,324) (435,036)
------- ------- -------
Net cash provided by (used in) investing activities 19,953 (12,272) 15,836
====== ======= ======
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 20,000
Issuance of common stock and collection of
notes receivable from stockholders, net 601 519 411
Purchase of treasury stock (2,024) (967) --
Issuance of notes payable -- 3,000 --
Payment of long-term debt (668) (616) (605)
------- ------- -------
Net cash provided by (used in) financing activities (2,091) 1,936 19,806
====== ===== ======
Net increase (decrease) in cash and cash equivalents (1,260) (26,827) 16,087
Cash and cash equivalents at beginning of period 2,847 29,674 13,587
------- ------- -------
Cash and cash equivalents at end of period $ 1,587 $ 2,847 $ 29,674
======= ======= ========
Supplemental cash flow data:
Cash paid during the period for interest $419 $203 $256
Supplemental disclosure of non-cash investing
and financing activities:
Unrealized securities gains (losses) (648) 2,887 (2,309)
Investment in affiliate 4,708 6,026 --
Incentive plan awards -- $873 $578
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Notes Unrealized
Common Stock Additional Preferred Receivable Gains
-------------------- Paid-In Stock Treasury from (Losses) on Accumulated
Shares Par Value Capital Par Value Stock Stockholders Securities Deficit Total
------ --------- ------- --------- ----- ------------ ---------- ------- -----
Balances at
December 31, 1993 35,109,937 $35 $370,468 $ -- $ -- ($159) $ -- ($235,045) $135,299
Issued to Genentech Inc. 20,000 20,000
Options exercised 71,702 375 375
Notes receivable from
stockholders 132 132
Incentive plan awards 65,349 578 578
Other 36,212 324 324
Unrealized losses on
available-for-sale
securities (2,309) (2,309)
Net loss (27,961) (27,961)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 35,283,200 $35 $391,745 $ -- $ -- ($27) ($2,309) ($263,006) $126,438
Conversion of preferred 500,000 1 (1) 0
Purchase of treasury stock (967) (967)
Options exercised 123,171 512 512
Notes receivable from
stockholders 7 7
Incentive plan awards 102,684 873 873
Unrealized gains on
available-for-sale
securities 2,887 2,887
Investment in Guilford 6,026 6,026
Net loss (26,382) (26,382)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1995 36,009,055 $36 $399,155 $ -- (967) ($20) $578 ($289,388) $109,394
Conversion of preferred 342,100 1 (1) 0
Purchase of treasury stock (2,024) (2,024)
Options exercised 155,142 594 594
Notes receivable from
stockholders 7 7
Unrealized losses on
available-for-sale
securities (648) (648)
Investment in Guilford 4,708 4,708
Net loss (18,403) (18,403)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1996 36,506,297 $37 $404,456 $ -- ($2,991) ($13) ($70) ($307,791) $93,628
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
SCIOS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Scios Inc. (the "Company") is a biopharmaceutical company engaged in
the discovery, development, manufacture and commercialization of novel
human therapeutics. The Company's research and development efforts are
primarily focused on cardiorenal disorders. The Company has research
and development collaborations with a number of other
biopharmaceutical companies under which it may share costs and
revenues. Scios' commercial operations division also markets six
psychiatric products in the United States in co-operation with the
Company's partners. In the course of its development activities, the
Company has sustained operating losses and expects such losses to
continue through at least 1997.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Scios
Inc. and its wholly-owned and majority-owned subsidiaries. Other
affiliates, more than 20% but less than 50% owned, are accounted for
on the equity basis. Intercompany transactions and balances are
eliminated on consolidation. The Company accounts for its 10%
ownership in Guilford Pharmaceuticals Inc. ("Guilford") under the
equity method because it has representation on Guilford's Board of
Directors.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with maturities of
less than ninety days, at the time acquired, to be cash equivalents.
Cash equivalents are stated at cost, which approximates market value.
Marketable Securities
All marketable securities at December 31, 1996 and 1995 were deemed by
management to be available-for-sale and are stated at fair value with
net unrealized gains or losses reported in stockholders' equity.
Realized gains and losses on sales of all such securities are reported
in earnings and computed using the specific identification cost
method.
Business Risk and Credit Concentration
A majority of the Company's revenues are derived from product sales,
which consist entirely of sales in the United States under a license
agreement with SmithKline Beecham Corporation ("SB") (see Note 3). Any
factor adversely affecting demand for, or supply of, the psychiatric
products covered by the license agreement could materially adversely
affect the Company's business and financial performance.
F-7
The Company's excess cash is invested in a diversified portfolio of
securities consisting of United States Treasury Notes, government
agency securities, deposits with major banks and financial
institutions, and in investment-grade interest-bearing corporate
securities issued by companies in a variety of industries.
Depreciation and Amortization
Buildings and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets
(3 to 7 years for equipment and 40 years for buildings). Leasehold
improvements are amortized on a straight-line basis over the shorter
of the asset life or fixed-lease term.
Product Sales
Revenue from sales of certain psychiatric products (the "SB Products")
under license from SB (see Note 3) is recognized in the period in
which the products are shipped. Provision is made for estimated
returns and allowances, cash discounts and rebates attributable to
Medicaid programs.
Co-promotion Commissions
Revenue from co-promotion commissions (see Note 3) is recognized based
on estimated sales levels of Ortho-McNeil Pharmaceutical's psychiatric
product HALDOL(R) Decanoate and Wyeth-Ayerst Laboratories' psychiatric
product EFFEXOR(R) (venlafaxine HCl) for their respective contract
years.
Contract Revenues
Research and development contract revenues from cost-reimbursement
agreements are recorded as the related expenses are incurred, up to
contractual limits. Payments received that are related to future
performance are deferred and recorded as revenues as they are earned
over specified future performance periods. Research and development
payments for which no services are required to be performed in the
future and license payments irrevocably received are recognized as
revenue upon receipt. Research and development expenses in 1996, 1995
and 1994 include approximately $1.9 million, $1.4 million and $2.9
million, respectively, incurred in connection with programs subject to
cost reimbursement, collaborative or other performance agreements.
Per Share Data
Loss per share is based on the weighted average number of common shares
outstanding for all periods, adjusted for treasury stock. Stock
options, warrants and preferred stock are antidilutive and therefore
excluded from the calculation.
Treasury Stock
Treasury stock is stated at cost and is considered issued and
outstanding.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to
the Company for loans with similar terms, the carrying value of notes
payable and capital lease obligations approximates fair value.
Estimated fair values for short-term investments, which are separately
disclosed elsewhere, are based on quoted market prices for the same or
similar instruments.
F-8
3. Joint Business Arrangements
a. Agreement with SmithKline Beecham Corporation
Under the terms of an agreement with SB, the Company has the exclusive
rights to market certain SB Products in the United States. SB is fully
responsible for ancillary matters relating to sales of the SB Products
(including various administrative tasks), for the maintenance in good
standing of all New Drug Applications with respect to the SB Products
and for the maintenance of certain product liability insurance. The
Company pays SB 40% of net profits, as defined in the agreement, from
sales of the SB Products.
b. Agreement with Ortho-McNeil Pharmaceutical
In July 1993, the Company entered into a five-year agreement with
Ortho-McNeil Pharmaceutical ("Ortho-McNeil"), an affiliate of Johnson &
Johnson, to jointly promote the injectable antipsychotic HALDOL(R)
Decanoate in the United States. Under the agreement, the Company
receives payments based on achieving specified sales levels over a
contract year beginning in August and ending in July. Ortho-McNeil
manufactures and distributes the product. The agreement may be extended
up to an additional three years upon the attainment of revenue goals.
c. Agreements with Wyeth-Ayerst Laboratories
In April 1996, the Company entered into a four-year agreement with
Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"), an affiliate of American
Home Products Corporation, to promote the antidepressant EFFEXOR(R)
(venlafaxine HCl) to selected psychiatrists in the United States. Under
the agreement, the Company receives payments based on achieving
specified increases in sales to the selected psychiatrists over an
adjusted base level during each contract year beginning in June.
Wyeth-Ayerst manufactures and distributes the product. The agreement may
be terminated by either party during the contract period if certain
sales targets are not met.
In October 1996, the Company entered into a collaboration agreement with
Wyeth-Ayerst for the joint development and commercialization of
FIBLAST(R) trafermin ("FIBLAST") for the treatment of neurological and
cardiovascular disorders. The two companies will co-promote FIBLAST for
these indications in North America and share development costs and
profits. Wyeth-Ayerst received exclusive marketing rights outside North
America and certain Pacific Rim countries in return for a royalty on
sales and payments for bulk drug supply worldwide. Wyeth-Ayerst has
provided a $12.0 million line of credit that the Company may use to fund
expansion of its manufacturing facility for FIBLAST (see Note 9).
d. Agreement with Genentech, Inc.
In December 1994, the Company entered into a collaboration agreement
with Genentech, Inc. ("Genentech") for the development and
commercialization of AURICULIN(R) anaritide ("AURICULIN") for the
treatment of acute renal failure. The two companies will co-promote
AURICULIN for this indication in the United States and Canada, and share
equally in profits from its commercialization. Genentech received
exclusive marketing rights to other markets outside North America in
return for a royalty on sales. Concurrent with the collaboration
agreement, Genentech purchased $20.0 million of Scios preferred stock,
convertible into approximately 2.1 million shares of common stock and
provided a $30.0 million loan to the Company in the form of a letter of
credit (see Note 9). The Company can borrow against the loan through the
year 2002. Genentech has also agreed to pay Scios up to $50.0 million in
milestone payments upon the achievement of key development events and
certain commercial targets. At December 31, 1996, no milestone payments
had been made and Genentech had converted 8,421 shares of preferred
stock into 842,100 shares of common stock.
F-9
e. Agreements with Kaken Pharmaceutical Co., Ltd.
In September 1994, the Company entered into a series of agreements with
Kaken Pharmaceutical Co., Ltd. ("Kaken") to expand a previous agreement
signed in 1988 for FIBLAST. Under the 1994 agreements, the Company will
collaborate with Kaken to further develop the FIBLAST manufacturing
process, provide Kaken a license to the Company's FIBLAST manufacturing
technology and supply FIBLAST product. In return, the Company will
receive milestone payments which are contingent on Kaken's continuing
development of the product. On December 31, 1996, the Company's deferred
revenue of $3.7 million consisted of payments received to date under
these agreements.
4. Affiliate
In June 1994, Guilford, then a fully-consolidated subsidiary of the
Company, completed an initial public offering which decreased the
Company's ownership from 62% to 29%. As a result, the equity method of
accounting was adopted by the Company. Prior to the date of the public
offering, the financial results of Guilford were fully consolidated with
those of the Company. Due to subsequent public stock offerings, and the
sale by the Company of 200,000 shares of Guilford stock in 1996, the
Company's ownership in Guilford has been reduced to 10%. The Company has
continued to use the equity method of accounting for its investment in
Guilford because it has representation on Guilford's Board of Directors.
5. Marketable Securities
Unrealized gains and losses on marketable securities at December 31,
1996 by classification were as follows:
Unrealized Unrealized
(in thousands) Cost Basis Gains Losses Fair Value
-------------- ---------- ----- ------ ----------
Debt securities:
U.S. Government &
Government Agency
Securities $45,679 $ 47 $(224) $45,502
Corporate Bonds 14,974 32 (49) 14,957
Equity Investments -- 124 -- 124
--- --- --- ---
Total $60,653 $203 $(273) $60,583
======= ==== ===== =======
F-10
Unrealized gains and losses on marketable securities at December 31,
1995 by classification were as follows:
Unrealized Unrealized
(in thousands) Cost Basis Gains Losses Fair Value
-------------- ---------- ----- ------ ----------
Debt securities:
U.S. Government &
Government Agency
Securities $61,507 $425 $(56) $61,876
Corporate Bonds 22,137 235 (26) 22,346
------ --- --- ------
Total $83,644 $660 $(82) $84,222
======= ==== ==== =======
At December 31, 1996, scheduled maturities for marketable securities was
less than one year for $6,888,000 and between one and five years for
$53,571,000.
The Company realized gains of $279,000 and losses of $379,000 on the
disposal of marketable securities during 1996 and gains of $998,000 and
losses of $929,000 on the disposal and write-down of marketable
securities during 1995.
6. Property and Equipment
December 31,
(in thousands) 1996 1995
---- ----
Laboratory equipment $10,408 $ 9,026
Computer and related equipment 3,136 3,239
Furniture and other 2,239 1,623
Buildings and building improvements 47,253 43,483
------ ------
63,036 57,371
====== ======
Accumulated depreciation and
amortization (29,424) (24,709)
------- -------
33,612 32,662
Construction in progress 3,227 2,869
----- -----
$36,839 $35,531
======= =======
7. Other Assets
December 31,
(in thousands) 1996 1995
---- ----
Deposits $ 193 $ 318
Other assets 216 402
Equity investments 1,000 --
Employee notes receivable 1,010 1,410
----- -----
$2,419 $2,130
====== ======
F-11
8. Other Accrued Liabilities
December 31,
(in thousands) 1996 1995
---- ----
Accrued Medicaid rebates $ 1,393 $ 1,864
Accrued payroll 3,502 1,708
Profit distribution to third parties 1,210 1,639
Accrued clinical trial expenses 832 752
Accrued royalties payable 1,790 213
Other 1,284 1,687
----- -----
$10,011 $7,863
======= ======
In September 1994, the Company recorded a charge of $3.5 million
associated with the closure of its research and development facility in
Baltimore, Maryland and the transfer of certain research and development
operations to the Company's California facilities. Of the total
restructuring charge, severance and related costs accounted for 49%,
asset write-downs 27%, facility carrying costs 13% and chemical disposal
and other expenses 11%.
As of December 31, 1995, actual cash expenditures incurred as a result
of the restructuring plan were approximately $2.6 million. No additional
charges were recorded. In 1995, the Company terminated its lease on the
Baltimore research and development facility by exercising its option to
purchase the building for approximately $3 million.
9. Lease and Debt Commitments
a. Operating Leases
The Company leases facilities in California and Maryland and the land on
which the Company's Mountain View, California facilities are located
under operating leases. The long-term ground lease expires in 2053.
Beginning in July 2010, a portion of the annual ground rent is subject
to renegotiation. In addition, the Company has entered into operating
leases covering certain laboratory and computer equipment.
Future minimum payments under these leases are as follows:
Land and
Facilities Equipment
Operating Operating
(in thousands) Leases Leases
-------------- ------ ------
1997 $ 875 $ 639
1998 908 538
1999 944 327
2000 980 --
2001 1,016 --
Thereafter 2,123 --
----- -----
$6,846 $1,504
====== ======
Rent expense for all facilities operating leases was approximately
$1,177,000, $456,000 and $565,000 in 1996, 1995 and 1994,
respectively.
F-12
b. Capital Leases and Borrowing Arrangements
At December 31, 1996, long-term debt and capital lease commitments
were:
Capital
(in thousands) Debt Leases
-------------- ---- ------
1997 $ 781 $17
1998 359 --
---- --- ---
1,140 17
Less future interest (84) (1)
--- --
$1,056 $16
====== ===
Long-term debt consists of two five-year notes, secured by equipment,
at interest rates of 9.9% and 9.8%, due in April 1998 and October
1998, respectively. Under the terms of the notes, the Company is
required to maintain certain covenants concerning minimal tangible net
worth, current ratio, liabilities to net worth ratio and minimum cash
and marketable securities balances.
In December 1996, the Company secured a $3.0 million bank loan payable
in June 1997 at a floating interest rate based on the six-month LIBOR
rate plus 0.75% (6.38% at December 31, 1996). The loan is secured by
$3.3 million of Government securities.
c.Genentech Loan Commitment
As part of the AURICULIN agreement with Genentech, Genentech has
committed to loan the Company up to $30.0 million. The commitment is
presently secured by a letter of credit. The loan can be drawn down
through the year 2002, and bears interest at the prime rate. The loan
is repayable in cash or Scios common stock, at the prevailing market
price, at the Company's option at any time through December 31, 2002.
No amounts were outstanding under the agreement at December 31, 1996.
d.Wyeth-Ayerst Loan Commitment
As part of the FIBLAST agreement, Wyeth-Ayerst has committed to loan
the Company up to $12 million to fund expansion of the Company's
manufacturing facility for FIBLAST. The loan can be drawn down through
the year 2004, and will bear interest at the one-year LIBOR rate plus
0.225% (6.005% at December 31, 1996). No amounts were outstanding
under the agreement at December 31, 1996.
10. Litigation
In September, 1996, the United States District Court for the Northern
District of California dismissed with prejudice a lawsuit that had been
filed by certain stockholders in May, 1995 against the Company and
Richard L. Casey, its chairman and chief executive officer, on behalf of
the individual plaintiffs and on behalf of other purchasers of the
Company's stock during the period from October 6, 1993 to May 2, 1995.
The action alleged violations of federal securities laws, claiming that
the defendants issued a series of false and misleading statements,
including filings with the Securities and Exchange Commission, regarding
the Company and clinical trials involving AURICULIN. The plaintiffs have
filed notice that they will appeal the District Court's ruling in favor
of the Company.
F-13
On November 29, 1995, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the
alleged disposal of hazardous substances by a subcontractor of Nova
Pharmaceutical Corporation, which the Company acquired in 1992. The
Company is one of many potentially responsible parties that have been
identified as associated with this specific site. The Company is in the
process of responding to the EPA's request for additional information on
materials disposed of at this site. The ultimate outcome of this action
cannot presently be determined. Accordingly, no provision for any
liability or loss that may result from adjudication or settlement
thereof has been made in the accompanying consolidated financial
statements.
11. Research Commitments
The Company's commitments for research sponsorship payments to
collaborators and institutions during 1997, 1998 and 1999 aggregate
approximately $86,000.
In 1988, the Company purchased the interests of Biotechnology Research
Partners, a limited partnership in a joint venture and made a down
payment of $575,000. The balance of the purchase price is to be paid in
quarterly installments in accordance with the following formula: (i)
until the minority partners have received payments of approximately
$22.8 million, the Company will pay approximately 37% of the royalty
income from third-party licenses and approximately 3.7% of the Company's
gross sales of Partnership products; (ii) thereafter, until the minority
partners have received aggregate payments of approximately $34.1
million, the Company will pay approximately 31% of the royalty income
and approximately 3.1% of the Company's gross sales of Partnership
products; and (iii) thereafter, until the earlier of 20 years from the
date of exercise of the option or the time all patents relating to the
Partnership's technology expire and all information relating to that
technology becomes part of the public domain, the Company will pay to
the minority partners approximately 20.5% of the royalty income and
approximately 2% of the Company's gross sales of Partnership products.
As of December 31, 1996, $1.1 million was accrued for payments to the
minority partners in 1997. Partnership products for which minority
partners will receive payments include AURICULIN and FIBLAST.
In December 1992, the Company exercised its option to acquire all
interests in Nova Technology Limited Partnership for $20.4 million. The
Company also issued contingent payment rights to all limited partners of
the partnership, pursuant to which the Company is obligated until
January 15, 2008 to pay royalties on the sale or license of certain
products that were under development by the partnership. As of December
31, 1996, $0.6 million was accrued for payment in 1997 as a result of
royalties associated with the commercialization of Guilford
Pharmaceuticals' GLIADEL(R) wafer.
12. Stockholders' Equity
At December 31, 1996, warrants were outstanding to purchase approximately
789,000 shares of the Company's common stock at $26.74 per share and are
exercisable through June 1998.
a. Convertible Preferred Stock
The Company's convertible preferred stock may be issued in series that
have such rights as may be designated by the Board of Directors from
time to time. There were 12,632 shares of preferred stock issued and
outstanding at December 31, 1996. These non-voting shares, which are
convertible at the option of the holder into 1,263,200 shares of common
stock, were issued to Genentech in connection with the AURICULIN
collaboration agreement. Each share of preferred stock is entitled to
receive non-cumulative dividends in preference to any dividends declared
and paid on common stock. No dividends have been declared or paid as of
December 31, 1996. In the event of liquidation or dissolution of the
Company, each share of preferred stock is entitled to receive a
distribution amount in preference to common stock of $950 per share,
plus declared but unpaid dividends.
F-14
b. Common Stock
The Company has a Common Share Purchase Rights Plan under which
stockholders have a right to purchase for each share held, one share of
the Company's common stock at a 50% discount and, in certain
circumstances, a share of common stock of an acquirer at a similar
discount. The rights become exercisable, at $55.00 per right, in the
event of an acquisition or tender offer which results in the acquisition
of 20% or more of the Company's common stock. The rights may be
redeemed, in certain circumstances, at $0.01 per right and expire on
July 31, 2000.
13. Employee Benefits and Stock Option Plans
The Company has a qualified profit sharing plan and trust under Internal
Revenue Service Code sections 401(a) and 401(k). Employees are eligible
to participate in the plan the first day of the month after hire and can
elect to contribute to the plan up to 15% of salary subject to current
statutory limits. In 1996, the Company matched employee contributions at
a rate of 100% to a maximum of $3,000 per employee, except as restricted
by statutory limits. The Company contribution is 100% vested at the end
of an employee's third year of employment. Company contributions to the
plan totaled approximately $649,000 in 1996, $633,000 in 1995 and
$794,000 in 1994.
Under the Company's stock option plans, the Board of Directors has the
authority to determine to whom options will be granted, the number of
shares, the vesting period and the exercise price (which cannot be less
than fair market value at date of grant for incentive stock options or
85% of fair market value ("FMV") for nonstatutory options). The options
are exercisable at times and in increments as specified by the Board of
Directors, generally expire ten years from date of grant and fully vest
over periods from three to five years. The following shares are
authorized and available for grant as of December 31, 1996:
Shares
Plan Shares Options Available
Title Authorized Outstanding for Grant Option Price
----- ---------- ----------- --------- ------------
1983/86 2,200,000 1,074,043 -- Not less than 85% of FMV
1989 170,000 33,000 -- FMV
1992 3,500,000 2,650,189 279,834 Not less than 85% of FMV
1996 100,000 19,091 80,909 Not less than 85% of FMV
NQ 443,161 -- -- Not less than 85% of FMV
As of December 31, 1996 the Company had not issued any options at less
than FMV.
F-15
Additional information with respect to the activity of outstanding
options is summarized in the following table:
Number of Aggregate
Common Stock Shares Option Price Price
------------ ------ ------------ -----
(in thousands)
Balances at December 31, 1993 3,920,431 $0.16-$21.13 $29,720
Granted 303,149 $6.63-$ 9.00 2,597
Exercised (71,702) $2.56-$ 9.13 (375)
Canceled (457,043) $2.56-$18.46 (3,683)
Balances at December 31, 1994 3,694,835 $0.16-$21.13 $28,259
Granted 780,580 $3.50-$ 7.50 5,512
Exercised (123,171) $0.16-$ 7.13 (512)
Canceled (520,701) $2.56-$21.13 (4,237)
Balances at December 31, 1995 3,831,543 $2.56-$21.13 $29,022
Granted 627,000 $4.56-$ 6.88 3,579
Exercised (155,142) $2.56-$ 7.13 (594)
Canceled (527,078) $3.50-$21.13 (3,797)
Balances at December 31, 1996 3,776,323 $3.50-$21.13 $28,210
At December 31, 1996, options to purchase 2,363,314 shares were fully
vested.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost
related to options has been recognized in 1996. Had compensation cost
for stock options in 1995 and 1996 been determined based on the fair
value at the grant date for awards in those years consistent with the
provisions of SFAS No. 123, the Company's net loss per share for the
respective years would have been:
December 31,
(in thousands, except per share amounts) 1996 1995
---------------------------------------- ---- ----
Net loss - as reported ($18,403) ($26,382)
Net loss - pro forma ($19,029) ($26,617)
Net loss per share - as reported ($0.51) ($0.74)
Net loss per share - pro forma ($0.53) ($0.74)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes single option pricing method assuming: a risk
free rate of 6.41%, an expected option life of 5 years, no payment of
dividends and a volatility factor of 0.8134. The risk-free rate was
calculated in accordance with the grant date and the expected option
life. The volatility factor and expected option life was calculated using
1995 and 1996 historical data.
F-16
The options outstanding by exercise price at December 31, 1996 are as
follows:
Weighted
Number of Average Weighted
Options Remaining Average
Exercise Price Outstanding Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
$3.50-$ 6.13 789,066 7.83 $ 5.47
$6.50-$ 7.00 674,932 3.36 $ 6.81
$7.13-$ 7.13 919,190 5.75 $ 7.13
$7.21-$ 9.00 837,696 7.53 $ 7.82
$9.13-$21.13 555,439 4.91 $ 11.15
----- ------ ------- ---- ------
$3.50-$21.13 3,776,323 6.03 $ 7.47
===== ====== ========= ==== =======
The options currently exercisable by exercise price at December 31, 1996
are as follows:
Number of Weighted
Options Average
Exercise Price Exercisable Exercise Price
-------------- ----------- --------------
$3.50-$ 6.13 297,180 $ 5.67
$6.50-$ 7.00 530,103 $ 6.82
$7.13-$ 7.13 752,723 $ 7.13
$7.21-$ 9.00 243,598 $ 8.12
$9.13-$21.13 539,710 $ 11.16
----- ------ ------- ------
$3.50-$21.13 2,363,314 $ 7.90
===== ====== ========= =======
14. Significant Customers
In 1996, Wyeth-Ayerst contributed 21% of total revenues. In 1995 and
1994, no individual customer or partner contributed more than 10% of
total revenues.
At December 31, 1996, the $4.8 million in accounts receivable included
the following receivables associated with Commercial Operations: $1.2
million from Ortho-McNeil, $0.8 million from Wyeth-Ayerst and $0.7
million from SB. Also included was a $1.0 million receivable related to
an equipment lease agreement.
15. Income Taxes
The Company's deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized.
The Company has federal and state income tax net operating loss ("NOL")
and research credit carryforwards at December 31, 1996 for tax purposes
available as follows:
Federal NOL $249,000,000
State NOL 37,000,000
Federal Research Credit 9,500,000
State Research Credit 2,600,000
F-17
These federal and state NOL carryforwards expire in the years 1998
through 2011, and 1997 through 2000 respectively. The federal and state
research credit carryforwards expire in the years 1998 through 2010, and
2002 through 2010, respectively.
Due to a change in the ownership of the Company, as defined, a portion
of the federal and state NOL carryover is subject to an annual
utilization limitation. Should another change in ownership occur, future
utilization of the Company's NOL carryforwards may be subject to
additional limitations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
Year Ended December 31,
-----------------------
(in thousands) 1996 1995
-------------- ---- ----
Depreciable and amortizable
assets, primarily technology $ 8,500 $ 6,800
Other accrued liabilities 3,400 3,200
State (net of federal benefit) 7,000 5,000
Net operating loss carryforward 84,600 76,600
Research credit 9,500 8,500
Valuation allowance (113,000) (100,100)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation
allowance against its otherwise recognizable net deferred tax assets.
F-18