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 September 30, 1997
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.)
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 37,865,668
Part I. Financial Information
Item 1. Financial Statements
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
September 30, December 31,
1997 1996
------------------ -----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $9,555 $1,587
Marketable securities 9,813 6,888
Accounts receivable 5,752 4,808
Prepaid expenses 523 786
------------------ -----------------
Total current assets 25,643 14,069
Marketable securities, non-current 48,347 53,695
Investment in affiliate 10,406 6,939
Property and equipment, net 34,323 36,839
Other assets 2,260 2,419
------------------ -----------------
TOTAL ASSETS $120,979 $113,961
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $3,000 $3,000
Accounts payable 1,379 2,507
Other accrued liabilities 6,839 10,011
Deferred contract revenue 11,700 3,666
Current portion of long-term debt and capital leases 685 723
------------------ -----------------
Total current liabilities 23,603 19,907
Long-term debt and capital leases 31,168 349
Minority interests -- 77
------------------ -----------------
Total liabilities 54,771 20,333
------------------ -----------------
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares
authorized; issued and outstanding: 0 and 12,632,
respectively (liquidation preference of $0 and -- --
$12,000, respectively)
Common stock; $.001 par value; 150,000,000 shares
authorized; issued and outstanding: 37,865,668 and
36,506,297, respectively 38 37
Additional paid-in capital 409,750 404,456
Treasury stock (4,758) (2,991)
Notes receivable from stockholders (13) (13)
Unrealized gains (losses) on securities 219 (70)
Accumulated deficit (339,028) (307,791)
------------------ -----------------
Total stockholders' equity 66,208 93,628
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $120,979 $113,961
------------------ -----------------
See notes to consolidated financial statements.
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------------- ------------- --------------- --------------
(Unaudited) (Unaudited)
Revenues:
Product sales $8,750 $11,705 $22,446 $28,793
Co-promotion commissions 1,381 2,204 4,500 4,490
Research & development contracts 2,445 2,641 4,841 6,543
--------------- ------------- --------------- --------------
12,576 16,550 31,787 39,826
--------------- ------------- --------------- --------------
Costs and expenses:
Cost of goods sold 4,955 6,663 13,178 16,966
Research and development 8,261 11,129 32,200 28,914
Marketing, general and administration 4,941 5,106 15,289 13,996
Profit distribution to third party 1,057 1,668 2,520 3,585
--------------- ------------- --------------- --------------
19,214 24,566 63,187 63,461
--------------- ------------- --------------- --------------
Loss from operations (6,638) (8,016) (31,400) (23,635)
Other income:
Investment income 1,043 730 2,970 2,799
Interest expense (638) (2) (1,522) (309)
Realized losses on securities -- (35) (179) (135)
Other income (expense), net 150 (269) 299 30
--------------- ------------- --------------- --------------
555 424 1,568 2,385
Equity in net gain (loss) of affiliates (346) 2,682 (1,482) 1,307
Minority interests -- -- 77 --
--------------- ------------- --------------- --------------
Net loss ($6,429) ($4,910) ($31,237) ($19,943)
--------------- ------------- --------------- --------------
Net loss per common share ($0.18) ($0.14) ($0.87) ($0.56)
--------------- ------------- --------------- --------------
Weighted average number of
common shares outstanding 35,845,927 35,931,277 35,834,686 35,885,377
--------------- ------------- --------------- --------------
See notes to consolidated financial statements.
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Nine months ended
September 30,
1997 1996
------------ -----------
(Unaudited)
Cash flows from operating activities:
Net loss ($31,237) ($19,943)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,525 3,445
Deferred contract revenue 8,034 (1,986)
Equity in net loss of affiliates 1,482 (1,307)
Minority interests (77) --
Change in assets and liabilities:
Accounts receivable (944) (2,216)
Accounts payable (1,128) (1,785)
Other accrued liabilities (1,897) 763
Other 460 (335)
------------ -----------
Net cash used by operating activities (20,782) (23,364)
------------ -----------
Cash flows from investing activities:
Payments for property and equipment, net (1,970) (5,968)
Sales/maturities of marketable securities 220,220 143,059
Purchases of marketable securities (217,506) (112,331)
------------ -----------
Net cash provided by investing activities 744 24,760
------------ -----------
Cash flows from financing activities:
Purchase of treasury stock (1,767) (1,602)
Issuance of notes payable, net of capital lease payments 29,523 --
Other 250 (37)
------------ -----------
Net cash provided (used) by financing activities 28,006 (1,639)
------------ -----------
Net increase (decrease) in cash and cash equivalents 7,968 (243)
Cash and cash equivalents at beginning of period 1,587 2,847
------------ -----------
Cash and cash equivalents at end of period $ 9,555 $ 2,604
------------ -----------
Supplemental cash flow data:
Cash paid during the period for interest $ 248 $ 309
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains losses on securities $ 289 $ 723
Investment in affiliate $ 4,949 $ 4,708
See notes to consolidated financial statements.
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
September 30, 1997 and the Company's results of operations for the
three and nine-month periods ended September 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.
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, 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(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.
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 September 30, 1997 was $6.4 million
compared to a net loss of $4.9 million in the corresponding quarter of 1996. For
the nine-month periods ended September 30, 1997 and 1996, the net losses were
$31.2 million and $19.9 million, respectively. For both the three and nine-month
periods, the increase in net losses was primarily due to lower product sales and
changes in the net gains and losses of affiliates.
Total revenues for the three months ended September 30, 1997 were $12.6
million versus $16.6 million for the corresponding period in 1996. Product sales
from psychiatric products under license from SmithKline Beecham Corporation (the
"SB Products") declined to $8.8 million from $11.7 million for the three months
ended September 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 nine months ended September 30, 1997 and 1996, revenues were
$31.8 million and $39.8 million, respectively. The year-to-year decrease
resulted from a decline in product sales and research and development contract
revenues. The decline in sales was the result of competition from new market
entrants and generic alternatives to the SB Products. Contract revenues for the
nine-month period decreased $1.7 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 September 30, 1997 were
$19.2 million versus $24.6 million for the same period in 1996. Spending for
research and development decreased to $8.3 million in 1997 from $11.1 million in
1996 as a result of lower clinical trials costs due to suspension of the
Company's Phase III trial for AURICULIN(R)anaritide and the successful
completion of the Company's Phase III trials for NATRECTOR(R)BNP for the
treatment of acute congestive heart failure. Expenses for marketing, general and
administration decreased to $4.9 million in 1997 from $5.1 million in 1996. The
third quarter decline in profit distribution to third parties and cost of goods
from 1996 to 1997 was the result of lower SB Product sales.
Total costs and expenses for the nine months ended September 30, 1997
were $63.2 million versus $63.5 million for the same period in 1996. Spending
for research and development increased to $32.2 million in 1997 from $28.9
million in 1996 because of higher staffing levels and clinical trial costs.
Expenses for marketing, general and administration increased to $15.3 million in
1997 from $14.0 million in 1996 because of higher staffing levels and an
increase in depreciation expense. Profit distribution to third parties and cost
of goods decreased from 1996 to 1997 because of lower SB Product sales.
Other income increased to $0.6 million in the quarter ended September
30, 1997 from $0.4 million in the comparable quarter of 1996. For the nine-month
periods ended September 30, 1997 and 1996, other income decreased to $1.6
million from $2.4 million. The decrease for the nine-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
nine-month periods, was the result of the Company's affiliate, Guilford
Pharmaceuticals Inc. ("Guilford"), reporting net losses in 1997 as opposed to
net gains in 1996. The Company's percentage ownership of Guilford and
corresponding share of gains or losses is approximately 7.8%.
In September 1997, the Company announced positive Phase III clinical
results from its pivotal efficacy study of NATRECTOR(R) BNP for the treatment of
acute congestive heart failure. Based on the results of this study, the Company
plans to file a New Drug Application ("NDA") with the Food and Drug
Administration in the first half of 1998. The Company also completed enrollment
in a separate 300 patient safety study, the results of which will be included in
the NDA filing and presented at an appropriate scientific forum. The timing of
the NDA filing will be dependent on factors such as the speed with which the
Company can assemble extensive data from numerous areas into the format required
for the NDA.
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. Among the factors that will determine the Company's success
in commercializing its products are: 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; the Company's success in developing and implementing
cost-effective sales and marketing strategies; and the level of market
acceptance, if products are approved, at product launch and over time. The
Company's ability to raise additional revenue through third parties will be
dependent on the factors described above, as well as other factors such as: its
success in marketing and selling the SB Products, HALDOL(R) Decanoate,
EFFEXOR(R) (venlafaxine HCl) 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 and Wyeth-Ayerst Laboratories in the United States, in developing and
commercializing the Company's products.
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $67.7 million at September 30, 1997, an increase of
$5.5 million from December 31, 1996. The increase resulted from a $30 million
loan from Genentech which was partially offset by $20.8 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, including the success and timeliness of its product
development efforts, clinical trials, regulatory approvals, and product
introduction efforts, as well as the Company's election to either market its
products on its own or in partnership with other companies who may fund a
portion of product launch costs. 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 $67.7
million at September 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 and
commercialize 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.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Net Loss Per Share
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCIOS INC.
/s/ Richard L. Casey
November 13, 1997 By:_____________________________________
Date Richard L. Casey
Chairman and Chief Executive Officer
/s/ David Southern
November 13, 1997 By:_____________________________________
Date David Southern
Controller (Chief Accounting Officer)