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, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-11749
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 94043x
(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 38,368,652
SCIOS INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $11,034 $10,197
Marketable securities 7,709 13,322
Accounts receivable 3,442 5,215
Prepaid expenses 381 600
------------ -----------
Total current assets 22,566 29,334
Marketable securities, non-current 63,587 41,181
Investment in affiliate 9,050 10,537
Property and equipment, net 32,409 33,583
Other assets 1,887 2,236
------------ -----------
TOTAL ASSETS $129,499 $116,871
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,703 $1,685
Other accrued liabilities 6,904 11,134
Deferred contract revenue 12,562 11,652
Current portion of long-term debt and capital leases 16 339
------------ -----------
Total current liabilities 22,185 24,810
Long-term debt and capital leases 33,832 31,919
------------ -----------
Total liabilities 56,017 56,729
------------ -----------
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000
shares authorized; none issued and outstanding -- --
Common stock; $.001 par value; 150,000,000
shares authorized; issued and outstanding
38,368,652 and 38,032,120, respectively 38 38
Additional paid-in capital 416,044 411,045
Treasury stock (2,292) (4,758)
Notes receivable from stockholders (368) (13)
Unearned compensation, net (597) --
Net unrealized gains on securities 1,255 288
Accumulated deficit (340,598) (346,458)
----------- -----------
Total stockholders' equity 73,482 60,142
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,499 $116,871
------------ -----------
The accompanying notes are an integral part of these 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,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
Revenues:
Product sales $7,407 $8,750 $20,566 $22,446
Co-promotion commissions 1,436 1,381 4,691 4,500
Research & development contracts 4,747 2,445 32,220 4,841
--------------- --------------- --------------- ---------------
13,590 12,576 57,477 31,787
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of goods sold 4,167 4,955 11,957 13,178
Research and development 10,071 8,261 32,535 32,200
Marketing, general and administration 4,985 4,941 14,178 15,289
Profit distribution to third parties 711 1,057 1,909 2,520
--------------- --------------- --------------- ---------------
19,934 19,214 60,579 63,187
--------------- --------------- --------------- ---------------
Loss from operations (6,344) (6,638) (3,102) (31,400)
Other income:
Investment income 1,202 1,043 3,151 2,970
Interest expense (657) (638) (1,951) (1,522)
Realized gains (losses) on securities 169 -- 8,246 (179)
Other income, net 382 150 860 299
--------------- --------------- --------------- ---------------
1,096 555 10,306 1,568
Equity in net loss of affiliates (518) (346) (1,343) (1,482)
Minority interests -- -- -- 77
--------------- --------------- --------------- ---------------
Net income (loss) ($5,766) ($6,429) $5,861 ($31,237)
--------------- --------------- --------------- ---------------
Earnings (loss) per common share:
Basic ($0.15) ($0.18) $0.16 ($0.87)
--------------- --------------- --------------- ---------------
Diluted ($0.15) ($0.18) $0.15 ($0.87)
--------------- --------------- --------------- ---------------
Weighted average number of
common shares outstanding
used in calculation of:
Basic 37,907,160 35,845,927 37,677,168 35,834,686
--------------- --------------- --------------- ---------------
Diluted 37,907,160 35,845,927 38,495,891 35,834,686
--------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these
consolidated financial statements.
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
Net income (loss) ($5,766) ($6,429) $5,861 ($31,237)
Unrealized gain on securities
Holding gain arising during
the period 1,140 203 1,241 376
Less: reclassification adjustment for
gain included in net income (loss) 169 -- 274 87
--------------- --------------- --------------- ---------------
Net unrealized gain on securities 971 203 967 289
--------------- --------------- --------------- ---------------
Comprehensive income (loss) ($4,795) ($6,226) $6,828 ($30,948)
--------------- --------------- --------------- ---------------
The accompanying notes are an integral part of these
consolidated financial statements.
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Nine months ended
September 30,
1998 1997
----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 5,861 ($31,237)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,819 4,525
Accrued long-term interest payable 1,913 1,275
Equity in net loss of affiliates 1,343 1,482
Minority interest -- (77)
Change in assets and liabilities:
Accounts receivable 1,773 (944)
Accounts payable 1,018 (1,128)
Other accrued liabilities (4,230) (3,172)
Other 212 460
Deferred contract revenue 910 8,034
----------- -----------
Net cash provided by (used in) operating activities 11,619 (20,782)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,645) (1,970)
Proceeds from sale of investment in affiliate 144 --
Sales/maturities of marketable securities 212,029 220,220
Purchases of marketable securities (227,855) (217,506)
----------- -----------
Net cash provided by (used in) investing activities (17,327) 744
----------- -----------
Cash flows from financing activities:
Issuance of common stock and collection of notes receivable from
stockholders, net 7,448 --
Purchase of treasury stock (580) (1,767)
Payment of notes payable and capital leases (323) (227)
Proceeds from notes payable and capital leases 0 30,000
----------- -----------
Net cash provided by financing activities 6,545 28,006
----------- -----------
Net increase in cash and cash equivalents 837 7,968
Cash and cash equivalents at beginning of period 10,197 1,587
=========== ===========
Cash and cash equivalents at end of period $ 11,034 $ 9,555
=========== ===========
Supplemental cash flow data:
Cash paid during the period for interest $38 $248
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains on securities $ 967 $ 289
Investment in affiliate $ 1,343 $ 4,949
The accompanying notes are an integral part of these 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 consolidated financial
position at September 30, 1998 and the Company's consolidated results
of operations for the three- and nine-month periods ended September 30,
1998 and 1997. 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 accompanying them
should be read in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1997. 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.
Effective December 31, 1997, the Company has adopted the
provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement requires the
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined
as net income (loss) plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net
income (loss). Specifically FAS 130 requires unrealized holding gains
and losses on the Company's available-for-sale securities, which are
currently reported separately in stockholders' equity, to be included
in other comprehensive income. Comprehensive income for the third
quarter ended September 30, 1998 was a net loss of $4.8 million versus
a net loss of $6.2 million in the same quarter in 1997. During the
nine-month period, comprehensive income was $6.8 million in 1998
compared to a net loss of $30.9 million in 1997.
Effective December 31, 1997, the Company adopted Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share" and,
accordingly, all prior periods presented have been restated. Basic net
income (loss) per share is calculated using the weighted average number
of common shares outstanding for the period. Diluted net income (loss)
is calculated using the weighted average number of common and dilutive
common equivalent shares outstanding during the period.
The following table sets forth the computation of the
Company's basic and diluted net income (loss) per share (in thousands,
except per share amounts):
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------------------------------------- --------------- --------------- --------------- ---------------
Numerator
Basic
Net income (loss) $(5,766) $(6,429) $ 5,861 $(31,237)
Diluted
Net income (loss) $(5,766) $(6,429) $ 5,861 $(31,237)
Denominator
Basic
Weighted average shares 37,907 35,846 37,677 35,835
Effect of dilutive securities:
Employee stock options --- --- 819 ---
----------------------------------------------------------
Weighted average shares and
assumed conversions 37,907 35,846 38,496 35,835
----------------------------------------------------------
Basic earnings (loss) per share $ (0.15) $ (0.18) $ 0.16 $ (0.87)
----------------------------------------------------------
Diluted earnings (loss) per share $ (0.15) $ (0.18) $ 0.15 $ (0.87)
----------------------------------------------------------
The outstanding options to purchase common stock were excluded
from diluted earnings calculations for the third quarter of 1998 and
for the three- and nine-month periods ended September 30, 1997 because
inclusion of the options would have an anti-dilutive effect on earnings
in these periods.
2. Unearned Compensation
In September 1998, the Company granted shares of restricted
stock. The shares vest over a two-year period provided that the recipient is
still employed by the Company. The market value of the shares awarded totaled
$597,000 and has been recorded as a separate component of stockholder's equity.
Unearned compensation is being amortized over the two-year period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In accordance with Federal securities law, the Company reminds readers
that the following discussion contains forward-looking statements about plans,
objectives, future results and intentions of 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 the historical results or future plans discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those items discussed below, as well as the considerations discussed
in the Company's Form 10-K for the year ended December 31, 1997.
Operating Results
The Company had a net loss of $5.8 million for the three-month period
ended September 30, 1998 compared to a net loss of $6.4 million in the
corresponding quarter of 1997. For the nine-month period ended September 30,
1998, net income was $5.9 million as compared to the net loss of $31.2 million
in 1997. For the nine-month period, the increase in net income was primarily due
to the increase in contract revenue from signing an agreement with Bayer AG
("Bayer") for the commercialization of the Company's product Natrecor(R)
(nesiritide), milestone payments from Novo Nordisk A/S ("Novo Nordisk") for
development of insulinotropin and contract funding from Eli Lilly & Company
("Eli Lilly") and DuPont Pharmaceuticals ("Dupont") for the Alzheimer's research
programs.
Total revenues for the three months ended September 30, 1998 were $13.6
million versus $12.6 million for the corresponding quarter in 1997, and $57.5
million and $31.8 million for the nine-month periods ended September 30, 1998
and 1997, respectively. The year-to-year increase was principally due to $20.0
million received from Bayer under the Natrecor agreement, receipt of milestone
payments from Novo Nordisk related to development of insulinotropin, and
increased funding for the Company's Alzheimer's research program from Eli Lilly
and DuPont. Product sales from psychiatric products under license from
SmithKline Beecham Corporation (the "SB Products") decreased to $20.6 million
from $22.4 million for the nine-month periods ended September 30, 1998 and 1997,
and to $7.4 million from $8.8 million for the three months ended September 30,
1998 and 1997, respectively. The Company expects that sales of these products
will continue to erode because of competition from new market entrants and
generic drugs. Revenue from co-promotion commissions was $1.4 million for the
third quarter and $4.7 million for the first nine months of 1998. Although the
revenue from co-promotion commissions was little changed from the prior year,
there was a significant change in the product line promoted by the Company. In
April 1998, the Company entered into a new agreement with Janssen Pharmaceutica
("Janssen") for the co-promotion of Janssen's product Risperdal(R)
(risperidone). In September 1998, the Company announced the signing of a new
agreement with SmithKline Beecham to co-promote Paxil(R) (paroxetine HCl) in the
United States. In the second quarter, the Company and Ortho-McNeil
Pharmaceutical agreed to terminate their co-promotion contract for Haldol(R)
Decanoate because of new generic competition. In May 1998, the Company announced
the termination of the co-promotion agreement with Wyeth-Ayerst Laboratories
("Wyeth-Ayerst") under which the Company had been co-promoting Effexor(R)
(venlafaxine HCl).
Total costs and expenses for the three- and nine-month periods ended
September 30, 1998 were $19.9 million and $60.6 million, respectively, versus
$19.2 million and $63.2 million for the same periods in 1997. For the current
quarter, spending for research and development increased to $10.1 million in
1998 from $8.3 million in 1997, and to $32.5 million from $32.2 million in the
nine-month periods ended September 30, 1998 and 1997. The year-to-year increase
for the three-month period was primarily due to increased headcount and clinical
trials expenses. For the three-month periods ended September 30, 1998 and 1997,
respectively, marketing, general and administration expenses increased to $5.0
million from $4.9 million. For the nine-month periods, expenses for marketing,
general and administration decreased to $14.2 million from $15.3 million, which
was principally due to lower depreciation expenses for leasehold improvements in
1998 compared to 1997. The decreases in cost of goods and profit distribution to
third parties from 1997 to 1998 for both the three- and nine-month periods were
the result of lower SB Product sales in 1998.
Other income increased to $1.1 million in the quarter ended September
30, 1998 from $0.6 million in the comparable quarter of 1997. For the nine-month
periods ended September 30, 1998 and 1997, other income increased to $10.3
million from $1.6 million. The increase for the nine-month period was
principally due to a gain on the sale of the Company's entire interest in its
subsidiary, Karo Bio AB ("Karo Bio"), a Swedish biotechnology company, through a
public stock offering completed in March 1998. Following the sale of its stock,
the Company no longer has any financial interest in the results of Karo Bio. For
the nine-month periods ended September 30, 1998 and 1997, interest expense
increased due to interest on the loan from Genentech Inc., which was drawn down
at the end of the first quarter of 1997.
The change in equity in the net loss of affiliates for both the three-
and nine-month periods ended September 30, 1998, was the result of the Company's
share of losses of Guilford Pharmaceuticals Inc., in which it has a 7%
ownership.
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 cost of and 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(R)
(nesiritide) and Fiblast(R) (trafermin); the Company's ability to secure a
cost-effective supply of product; the Company's success in developing and
implementing cost effective sales and marketing strategies, either on its own
behalf or in partnership with other companies; and the level of market
acceptance if products are approved, both 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 third-party products which it may acquire
the right to co-promote; 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 Bayer, Wyeth-Ayerst (in the
United States and Europe), Kaken Pharmaceutical Co., Ltd. (in Japan) and Novo
Nordisk in developing and commercializing certain of the Company's products.
Year 2000 Computer Systems Compliance
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. The Company has developed plans to address the potential
exposures related to the impact on its computer systems for the year 2000 and
beyond. A project team is continuing its assessment of key internal computer
systems and is developing and implementing plans to correct the problems. The
Company expects the assessment to be successfully completed during 1999 and
believes that with these plans, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if such modifications
and conversions are not made, or are not completed in a timely fashion, the Year
2000 issue could have a material impact on the operations of the Company.
In addition to risks associated with the Company's own computer
systems, the Company has relationships with, and is dependent upon, a large
number of third parties that provide information, goods and services to the
Company. These include financial institutions, suppliers, vendors, research
partners and governmental entities. If significant third parties experience
failures in their computer systems due to Year 2000 non-compliance, it could
affect the Company's ability to process transactions or engage in similar normal
business activities. While some of these risks are outside the control of the
Company, the Company has instituted a program to identify key third parties,
update contracts and address any non-compliance issues.
The total cost of the Year 2000 systems assessments and conversions is
funded through operating cash flows and the Company is expensing these costs.
The financial impact of making the required system changes cannot be known
precisely at this time, but is not expected to be material to the Company's
financial position, results of operations or cash flows.
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $82.3 million at September 30, 1998, an increase of
$17.6 million from December 31, 1997. The increase was due to $11.6 million from
operations and $7.4 million from the exercise of stock options and equity
purchases partially offset by $1.6 million of property and equipment purchases
and $0.6 million of treasury stock purchases. Included in the cash provided by
operating activities was $20.0 million received from Bayer immediately upon
signing of the worldwide strategic alliance to market Natrecor(R) (nesiritide)
and $7.7 million received from the sale of all of the stock the Company owned in
Karo Bio.
During the third quarter, the Company purchased approximately 100,000
shares of the Company's common stock under its stock repurchase program. In
October, the Company announced that it had added $5.0 million to its repurchase
program and since that announcement has bought an additional 229,000 shares of
its common stock in the open market during October.
The Company expects to continue to incur losses until it is able to
achieve significant product revenues from the sale of Natrecor(R) (nesiritide).
Because the Bayer agreement for Natrecor(R) (nesiritide) provides for sizable
milestone payments that are dependent on regulatory approvals in the United
States and Europe, quarter to quarter financial performance during the next few
years is expected to show significant fluctuation. The Company's utilization of
current financial resources will depend upon a number of factors. With respect
to Natrecor(R) (nesiritide), these factors include the success of Bayer and the
Company in securing regulatory approval for the product and the level of market
acceptance achieved. For additional products or indications, these factors
include: the timeliness and success of product development efforts, clinical
trials, manufacturing capabilities, regulatory approvals and product
introduction efforts. Other contributing factors will be the Company's ability
to develop new revenue sources to support research and development programs and
its success in marketing and promoting the products of third-parties that may be
licensed by the Company.
The Company's cash resources of $82.3 million at September 30, 1998,
together with revenues from product sales, collaborative agreements and interest
income, proceeds from the sale of stock held as equity investments, and any
funding from existing or future debt arrangements, will be used to support
current and new clinical trials for proprietary products under development, to
support commercialization efforts for prospective 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 several years. Key
factors that 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, the rate of spending required to develop the Company's products and
respond to changing business conditions, the degree to which the Company will
incur expenses to launch its products following the necessary regulatory
approvals and the net contribution produced by the Company's ability to
co-promote and market products for third parties.
Over the long-term, the Company will 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
None.
(b) Reports on Form 8-K
Report on Form 8-K, dated October 27, 1998 (pursuant to Item 5) regarding
the Company's announcement of a new President and Chief Executive Officer.
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.
November 12, 1998 by: /s/ Richard B. Brewer
------------------------------------
Richard B. Brewer, President and CEO
November 12, 1998 by: /s/ David Southern
------------------------------------
David Southern, Controller
Chief Accounting Officer