FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
o 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.)
Scios Inc.
2450 Bayshore Parkway
Mountain View, CA 94043
(Address of principal executive offices) (Zip code)
(650) 966-1550
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $001 par value 36,762,162
Part I. Financial Information
Item 1. Financial Statements
2
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share data)
June 30, December 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $14,631 $1,587
Marketable securities 16,914 6,888
Accounts receivable 6,010 4,808
Prepaid expenses 438 786
------------- -----------
Total current assets 37,993 14,069
Marketable securities, non-current 40,345 53,695
Investment in affiliate 10,752 6,939
Property and equipment, net 36,054 36,839
Other assets 2,259 2,419
------------- -----------
TOTAL ASSETS $127,403 $113,961
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $3,000 $3,000
Accounts payable 1,683 2,507
Other accrued liabilities 7,411 10,011
Deferred contract revenue 11,786 3,666
Current portion of long-term debt and capital leases 685 723
------------- -----------
Total current liabilities 24,565 19,907
Long-term debt and capital leases 30,714 349
Minority interests -- 77
------------- -----------
Total liabilities 55,279 20,333
------------- -----------
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares authorized; issued and
outstanding:
10,132 and 12,632, respectively (liquidation -- --
preference of $9,625 and $12,000, respectively)
Common stock; $.001 par value; 150,000,000 shares authorized; issued and
outstanding:
36,762,162 and 36,506,297, respectively 37 37
Additional paid-in capital 409,441 404,456
Treasury stock (4,758) (2,991)
Notes receivable from stockholders (13) (13)
Unrealized gains (losses) on securities 16 (70)
Accumulated deficit (332,599) (307,791)
------------- -----------
Total stockholders' equity 72,124 93,628
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $127,403 $113,961
------------- -----------
See notes to consolidated financial statements.
3
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
--------------- -------------- --------------- --------------
(Unaudited) (Unaudited)
Revenues:
Product sales $7,537 $8,445 $13,696 $17,088
Co-promotion commissions 1,423 1,243 3,119 2,286
Research & development contracts 1,922 2,104 2,396 3,902
--------------- -------------- --------------- --------------
10,882 11,792 19,211 23,276
--------------- -------------- --------------- --------------
Costs and expenses:
Cost of goods sold 4,369 5,130 8,223 10,303
Research and development 13,059 9,119 23,939 17,785
Marketing, general and administration 5,022 4,471 10,348 8,890
Profit distribution to third parties 896 922 1,463 1,917
--------------- -------------- --------------- --------------
23,346 19,642 43,973 38,895
--------------- -------------- --------------- --------------
Loss from operations (12,464) (7,850) (24,762) (15,619)
Other income:
Investment income 1,136 966 1,927 2,069
Interest expense (750) (148) (884) (307)
Realized losses on securities (74) (181) (179) (100)
Other income, net 1 243 149 299
--------------- -------------- --------------- --------------
313 880 1,013 1,961
Equity in net loss of affiliates (525) (646) (1,136) (1,375)
Minority interests -- -- 77 --
--------------- -------------- --------------- --------------
Net loss ($12,676) ($7,616) ($24,808) ($15,033)
--------------- -------------- --------------- --------------
Net loss per common share ($0.35) ($0.21) ($0.69) ($0.42)
--------------- ---------------------------------- --------------
Weighted average number of
common shares outstanding 35,826,469 35,834,351 35,829,065 35,862,428
--------------- -------------- --------------- --------------
See notes to consolidated financial statements.
4
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Six months ended
June 30,
1997 1996
------------ -----------
(Unaudited)
Cash flows from operating activities:
Net loss ($24,808) ($15,033)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 2,738 2,301
Deferred contract revenue 8,120 (1,859)
Equity in net loss of affiliates 1,136 1,375
Minority interests (77) --
Change in assets and liabilities:
Accounts receivable (1,202) (299)
Accounts payable (824) (2,585)
Other accrued liabilities (2,600) (673)
Other 508 462
------------ -----------
Net cash used by operating activities (17,009) (16,311)
------------ -----------
Cash flows from investing activities:
Payments for property and equipment, net (1,953) (2,070)
Sales/maturities of marketable securities 101,525 97,306
Purchases of marketable securities (98,115) (76,544)
------------ -----------
Net cash provided by investing activities 1,457 18,692
------------ -----------
Cash flows from financing activities:
Purchase of treasury stock (1,767) (1,455)
Issuance of notes payable 30,638 --
Other (275) 51
------------ -----------
Net cash provided (used) by financing activities 28,596 (1,404)
------------ -----------
Net increase in cash and cash equivalents 13,044 977
Cash and cash equivalents at beginning of period 1,587 2,847
------------ -----------
Cash and cash equivalents at end of period $ 14,631 $ 3,824
------------ -----------
Supplemental cash flow data:
Cash paid during the period for interest ($246) ($307)
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized losses on securities (86) (821)
Investment in affiliate $ 4,948 $ 4,708
See notes to consolidated financial statements.
5
SCIOS INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Accounting Policies
The unaudited consolidated financial statements of Scios Inc.
("Scios" or the "Company") reflect, in the opinion of management, all
adjustments, consisting only of normal and recurring adjustments,
necessary to present fairly the Company's financial position at June
30, 1997 and the Company's results of operations for the three and
six-month periods ended June 30, 1997 and 1996. Interim-period results
are not necessarily indicative of results of operations or cash flows
for a full-year period.
These financial statements and the notes thereto should be
read in conjunction with the Company's annual report on Form 10-K for
the year ended December 31, 1996. Investors are encouraged to review
the Form 10-K for a broader discussion of the Company's business and
the opportunities and risks inherent in the Company's business. Copies
of the 10-K are available from the Company on request.
The year-end balance sheet data were derived from audited
financial statements, but do not include all disclosures required by
generally accepted accounting principles.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share", which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS
128 supersedes Accounting Principles Board Opinion No. 15 and is
effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires restatement of all prior-period
earnings per share data presented after the effective date. FAS 128
will not have a material impact on the Company's financial position,
results of operations or cashflows.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income". This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for fiscal years beginning after December 15,
1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all
changes in stockholders' equity except those resulting from investments
or contributions by stockholders. The Company is evaluating alternative
formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of operations.
6
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information".
This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic area and major
customers. This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". The new standard becomes effective for fiscal years
beginning after December 15, 1997, and requires that comparative
information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
2. 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 other purchasers of the
Company's stock during the period from October 6, 1993 to May 2, 1996.
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(R)
anaritide. The plaintiffs are appealing the District court's ruling in
favor of the Company. 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.
7
Item 2. 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. 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 those discussed in the Company's Form 10-K for the year ended
December 31, 1996.
Operating Results
The net loss for the quarter ended June 30, 1997 was $12.7 million
compared to a net loss of $7.6 million in the corresponding quarter of 1996. For
the six-month periods ended June 30, 1997 and 1996, the net losses were $24.8
million and $15.0 million, respectively. For both the three and six-month
periods, the increase in net losses was primarily due to lower product sales and
higher research and development expenses.
Total revenues for the three months ended June 30, 1997 were $10.9
million, versus $11.8 million for the corresponding period in 1996. Product
sales from psychiatric products under license from SmithKline Beecham
Corporation (the "SB Products") declined to $7.5 million from $8.4 million for
the three months ended June 30, 1997 and 1996, respectively. The decline in
sales was the result of competition from new market entrants and generic
alternatives to the SB Products.
For the six months ended June 30, 1997 and 1996, revenues were $19.2
million and $23.3 million, respectively. The year-to-year decrease resulted from
a decline in product sales and research and development contract revenues which
were partially offset by higher revenue from co-promotion commissions. The
increase in co-promotion commissions resulted from sales growth of HALDOL(R)
Decanoate, a product co-promoted with Ortho-McNeil Pharmaceutical, an affiliate
of Johnson and Johnson, and on sales of EFFEXOR(R) (venlafaxine HCl), a product
co-promoted with Wyeth-Ayerst Laboratories, a division of American Home Products
Corporation. Contract revenues for the six-month period decreased $1.5 million
from 1996 to 1997 due to receipt of a one-time licensing payment in 1996 and the
cessation of funding for Alzheimer's research under a contract that ended in
December 1996.
Total costs and expenses for the three months ended June 30, 1997 were
$23.3 million versus $19.6 million for the same period in 1996. Spending for
research and development increased to $13.1 million in 1997 from $9.1 million in
1996 as a result of higher staffing levels and clinical trials costs to support
expanded product development activities. Expenses for marketing, general and
administration increased to $5.0 million in 1997 from $4.5 million in 1996. The
second quarter decline in profit distribution to third parties and cost of goods
from 1996 to 1997 was the result of lower SB Product sales.
8
Total costs and expenses for the six months ended June 30, 1997 were
$44.0 million versus $38.9 million for the same period in 1996. Spending for
research and development increased to $23.9 million in 1997 from $17.8 million
in 1996 for the reasons noted in the paragraph above. Expenses for marketing,
general and administration increased to $10.4 million in 1997 from $8.9 million
in 1996 because of higher staffing levels. Profit distribution to third parties
and cost of goods decreased from 1996 to 1997 because of lower SB Product sales.
Other income decreased to $0.3 million in the quarter ended June 30,
1997 from $0.8 million in the comparable quarter of 1996. For the six-month
periods ended June 30, 1997 and 1996, other income decreased to $1.0 million
from $2.0 million. The decrease for both three and six-month periods was
principally due to an increase in interest expense associated with a loan from
Genentech, Inc. ("Genentech") at the end of the first quarter of 1997. The
decline in equity in the net loss of affiliates, for both the three and
six-month periods, was the result of the Company's decreasing share of losses of
Guilford Pharmaceuticals Inc. ("Guilford"). The Company's percentage ownership
of Guilford and subsequent share of losses has declined to 7.8% due to
Guilford's most recent share offering completed in April 1997.
The Company expects to announce key results in the second half of 1997
from two Phase III clinical trials in the United States on the use of
NATRECOR(R) BNP for the treatment of acute congestive heart failure. The outcome
of the clinical trials could have a substantial effect on the Company's stock
price - either positive or negative - depending on the nature of the results.
For example, the Company's stock price dropped earlier in the year on the
announcement that the Company was terminating clinical development of
AURICULIN(R) anaritide for the treatment of oliguric acute renal failure.
The ability of the Company to achieve profitability depends principally
on the Company's success in developing and commercializing its own products and
on its ability to complete agreements with third parties that result in
additional revenue. The Company's success in commercializing its own products
will depend on: the demonstrated safety and efficacy of products in development;
the time taken to complete clinical trials and regulatory submissions; the
timing and scope of regulatory approvals, particularly with respect to the
Company's lead products, NATRECOR and FIBLAST(R) trafermin; the Company's
ability to secure a commercial scale cost-effective drug supply; and the level
of market acceptance if products are approved. The Company's ability to raise
additional revenue through third parties will be dependent on: its success in
marketing and selling the SB Products, HALDOL, EFFEXOR and any additional
third-party product rights which it may acquire; the disposition of various
patent proceedings related to the protection of the Company's potential
products; the perceived value of the Company's current product portfolio and
research programs to outside parties; and the success of third parties, such as
Kaken Pharmaceuticals Co., Ltd. in Japan, in developing and commercializing the
Company's products.
9
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $71.9 million at June 30, 1997, an increase of $9.7
million from December 31, 1996. The increase resulted from a $30 million loan
from Genentech which was partially offset by $17.0 million used to fund
operating activities, $2.0 million for the purchase of property and equipment
and $1.8 million for the acquisition of treasury stock.
The Company has experienced net operating losses since its inception
and expects to continue to incur losses for at least the next two years. The
Company's ability to achieve and sustain profitability, and therefore the rate
of utilization of the Company's current financial resources, will depend upon a
number of factors, particularly the success and timeliness of its product
development, clinical trials, regulatory approval and product introduction
efforts. Other contributing factors will be the Company's success in developing
new revenue sources to support research and development programs and its success
in marketing and promoting the SB Products, HALDOL, EFFEXOR and any other
third-party products that may be licensed by the Company.
The Company's cash, cash equivalents and marketable securities of $71.9
million at June 30, 1997, together with revenues from product sales,
collaborative agreements, interest income, funding from existing or future debt
arrangements and proceeds from the sale of equity holdings in affiliates will be
used to fund continuing research and development programs, current and new
clinical trials, commercialization efforts on behalf of future products and for
other general purposes. The Company believes its cash resources will be
sufficient to meet its operating and capital requirements for at least the next
two years. Key factors which will affect future cash use and the timing of the
Company's need to seek additional financing include the success 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, the Company's ability to respond to changing business conditions and
the net contribution obtained from the Company's marketing efforts for third
parties.
Over the long term, the Company may need to arrange additional
financing for the future operation of its business, including the
commercialization of products currently under development, and it will consider
collaborative arrangements and additional public or private financings,
including additional equity financings. Factors influencing the availability of
additional funding include, but are not limited to, the Company's progress in
product development, investor perception of the Company's prospects and the
general conditions of the financial markets.
10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 13, 1997.
(a) The following individuals were elected directors of the
Company, each to serve until a successor is elected:
Total Vote For Total Vote Withheld
Name Each Director From Each Director
Samuel H. Armacost 30,203,034 2,902,100
Richard L. Casey 31,058,627 2,046,507
Myron Du Bain 31,185,728 1,919,406
Robert W. Schrier, M.D. 31,128,815 1,976,319
Solomon H. Snyder, M.D. 30,826,574 2,278,560
Burton E. Sobel, M.D. 31,168,552 1,936,582
Eugene L. Step 30,830,790 2,274,344
(b) The following matters were approved by stockholder vote, with
votes cast as indicated:
To ratify and approve amendments to the Company's 1992 Equity
Incentive Plan:
Votes for: 25,713,951
Votes against 6,980,986
Abstentions: 410,197
To ratify the selection of Coopers & Lybrand as the Company's
independent auditors for fiscal year 1997:
Votes cast for: 32,612,982
Votes cast against: 283,888
Abstentions: 208,264
Broker non-votes were not relevant to the foregoing matters.
11
(c) The following matters that were submitted by stockholders of
the Company were defeated by stockholder vote, with votes cast
as indicated:
Stockholder proposal to appoint a special committee to seek a
buyer for the Company:
Votes cast for: 4,986,918
Votes cast against: 16,672,246
Abstentions: 420,113
Broker Non-Votes: 11,025,887
Stockholder proposal to require an independent chairman of the
board:
Votes cast for: 5,700,377
Votes cast against: 15,875,089
Abstentions: 503,811
Broker Non-Votes: 11,025,857
Stockholder proposal to form a shareholder advisory committee:
Votes cast for: 4,986,116
Votes cast against: 16,657,933
Abstentions: 453,198
Broker Non-Votes: 11,025,887
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.11 1992 Equity Incentive Plan
11.1. Computation of Net Loss Per Share for the three months ended
June 30, 1997 and June 30, 1996.
11.2. Computation of Net Loss Per Share for the six months ended
June 30, 1997 and June 30, 1996
(b) Reports on Form 8-K
Report on Form 8-K, dated April 2, 1997 (pursuant to Item 5) regarding
the Company's announcement of the Company's suspension of development of
AURICULIN for oliguric acute renal (kidney) failure.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIOS INC.
August 12, 1997 By: /s/ Richard L. Casey
- --------------------
Date Richard L. Casey, Chairman and
Chief Executive Officer
August 12, 1997 By: /s/ Kevin McPherson
- --------------------
Date Kevin McPherson, Director of
Finance (Chief Accounting
Officer)