COMPANY DATA:
COMPANY CONFORMED NAME: SCIOS INC
CENTRAL INDEX KEY: 0000726512
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARI
IRS NUMBER: 953701481
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-11749
FILM NUMBER: 98620118
BUSINESS ADDRESS:
STREET 1: 2450 BAYSHORE PKWY
CITY: MOUNTAIN VIEW
STATE: CA
ZIP: 94043
BUSINESS PHONE: 6509661550
MAIL ADDRESS:
STREET 1: 2450 BAYSHORE PKWY
CITY: MOUNTAIN VIEW
STATE: CA
ZIP: 94043
FORMER COMPANY:
FORMER CONFORMED NAME: SCIOS INC
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: CALIFORNIA BIOTECHNOLOGY INC
DATE OF NAME CHANGE: 19920302
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 March 31, 1999
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 is 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 10 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 38,468,652
SCIOS INC.
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1
SCIOS INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $13,402 $6,683
Marketable securities 11,035 23,394
Accounts receivable 6,654 6,768
Prepaid expenses 924 568
------------ ------------
Total current assets 32,015 37,413
Marketable securities, non-current 57,996 67,234
Property and equipment, net 31,530 32,214
Other assets 1,929 1,968
------------ ------------
TOTAL ASSETS $123,470 $138,829
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,566 $2,327
Other accrued liabilities 12,315 10,087
Deferred contract revenue 16,990 16,896
------------ ------------
Total current liabilities 33,871 29,310
Long-term debt 35,243 34,573
Minority interests -- 20
------------ ------------
Total liabilities 69,114 63,903
------------ ------------
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
38,468,652 and 38,468,652, respectively 38 38
Additional paid-in capital 416,498 416,428
Treasury stock; 733,706 and 754,199
shares, respectively (3,542) (3,481)
Notes receivable from stockholders (111) (145)
Deferred compensation, net (431) (505)
Accumulated other comprehensive income 582 11,412
Accumulated deficit (358,678) (348,821)
------------ ------------
Total stockholders' equity 54,356 74,926
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $123,470 $138,829
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share data)
Three months ended
March 31,
1999 1998
--------------- --------------
(Unaudited)
Revenues:
Product sales $7,822 $8,430
Co-promotion commissions 2,728 1,268
Research & development contracts 2,177 4,592
--------------- --------------
12,727 14,290
--------------- --------------
Costs and expenses:
Cost of goods sold 4,308 4,805
Research and development 10,543 10,527
Marketing, general and administration 5,313 4,711
Profit distribution to third parties 1,117 1,070
Restructuring charges 6,670 --
--------------- --------------
27,951 21,113
--------------- --------------
Loss from operations (15,224) (6,823)
Other income and expense:
Investment income 1,026 987
Interest expense (670) (650)
Realized gains on securities 4,786 8,039
Other income, net 231 19
--------------- --------------
5,373 8,395
Equity in net loss of affiliates -- (244)
--------------- --------------
Income (loss) before provision for
income taxes (9,851) 1,328
Provision for income taxes (6) (4)
--------------- --------------
Net Income (loss) ($9,857) $1,324
--------------- --------------
Other comprehensive income (loss):
Unrealized gains on securities 582 244
--------------- --------------
Comprehensive income (loss) ($9,275) $1,568
--------------- --------------
Earnings (loss) per common share:
Basic ($0.26) $0.04
--------------- --------------
Diluted ($0.26) $0.03
--------------- --------------
Weighted average number of
common shares outstanding
used in calculation of:
Basic 37,746,605 37,273,536
--------------- --------------
Diluted 37,746,605 38,835,221
--------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
SCIOS INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Three months ended
March 31,
1999 1998
----------- ----------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ($9,857) $ 1,324
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 826 971
Accrued long-term interest payable 670 638
Equity in net loss of affiliates -- 244
Gain on sale of securities (4,786) --
Minority interest (20) --
Deferred compensation 74 --
Change in assets and liabilities:
Accounts receivable 114 3,744
Accounts payable 2,239 227
Other accrued liabilities (3,517) (576)
Other (317) 128
Deferred contract revenue 94 299
Restructuring charges 5,745 --
----------- ----------
Net cash provided by (used in) operating activities (8,735) 6,999
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (141) (588)
Proceeds from sale of investment in affiliate -- 144
Sales/maturities of marketable securities 54,102 74,373
Purchases of marketable securities (38,549) (75,927)
----------- ----------
Net cash provided by (used in) investing activities 15,412 (1,998)
----------- ----------
Cash flows from financing activities:
Issuance of common stock and collection of notes
receivable from stockholders, net 400 3,535
Purchase of treasury stock (358) --
Payment of notes payable and capital leases (198)
----------- ----------
Net cash provided by financing activities 42 3,337
----------- ----------
Net increase in cash and cash equivalents 6,719 8,338
Cash and cash equivalents at beginning of period 6,683 10,197
=========== ==========
Cash and cash equivalents at end of period $ 13,402 $ 18,535
=========== ==========
Supplemental cash flow data:
Cash paid during the period for interest -- $12
Supplemental disclosure of non-cash investing
and financing:
Change in net unrealized gains (losses)
on securities $10,830 $44
Investment in affiliate -- $388
The accompanying notes are an integral part of these consolidated
financial statements.
4
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 March 31, 1999 and the Company's consolidated results of
operations and cashflows for the three-month periods ended March 31,
1999 and 1998. 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, 1998. 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 and from the
Security and Exchange Commission's Edgar database at web site
www.sec.gov.
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. Restructuring Charges and Expenses
On March 1, 1999, the Company announced a restructuring plan that
included reduction of the Company's full-time workforce by
approximately 30% and the consolidation of its headquarters,
development and research staff into currently leased facilities in
Sunnyvale, California. The Company's Mountain View, California campus
will be sold. In the quarter ending March 31, 1999, the Company
recorded a one-time restructuring charge of approximately $6.7 million
for the disposal of certain excess assets and severance costs. The
accrual and changes to the accrual for the first quarter of 1999 are
summarized in the following table:
Balance at Charges Balance at
(in thousands) March 1, 1999 Utilized March 31,1999
----------------------------------------------------------------------
Facilities $ 360 $ --- $ 360
Workforce reductions 2,819 781 2,038
Contractual commitments 1,110 144 966
Asset write-downs 1,800 --- 1,800
Lease exit costs 581 --- 581
----------- ------------ ------------
$6,670 $925 $5,745
5
3. Computation of Earning (Loss) Per Share
The following table sets forth the computation of the Company's basic
and diluted earnings (loss) per share (in thousands, except per share
amounts):
1999 1998
-------------- -------------
Numerator
Basic
Net income (loss) ($ 9,857) $1,324
Diluted
Net income (loss) ($ 9,957) $ 1,324
Denominator
Basic
Weighted average shares 37,747 37,274
Effect of dilutive securities:
Employee stock options --- 1,562
---------- -----------
Weighted average shares and assumed
conversions 37,747 38,836
Basic earnings (loss) per share ($0.26) $ 0.04
---------- -----------
Diluted earnings (loss) per share ($0.26) $ 0.03
---------- -----------
The potentially dilutive effect of outstanding options to purchase
common stock would have been anti-dilutive in 1999, and they were
therefore excluded from the 1999 diluted earnings calculation. Although
potentially dilutive, the payoff of the Genentech loan through the
issuance of common stock would have been anti-dilutive in both 1999 and
1998 and was therefore excluded from the calculations.
4. Industry and Geographic Segment Information
Management uses one measurement of profitability for its business. The
Company receives revenue from product sales and from licensing and
development of products. The Company markets its products in the U.S.
and Japan and receives licensing revenue from partners in the U.S.,
Canada, Europe and Asia Pacific and operates in one business segment.
All long-lived assets are located in teh United States and revenues by
geopraphic area are as follows for the first quarter of 1999 and 1998,
repectively:
(in thousands) March 31, 1999 March 31, 1998
-------------- -------------- --------------
Revenues - U.S. $ 12,727 $ 12,243
Revenues - International --- 2,047
Total
---------------------- --------------------------
$ 12,727 $ 14,290
6
5. Subsequent Event
On April 27, 1999, the Company was advised by the U.S. Food and Drug
Administration ("FDA") that the FDA did not approve the Company's New
Drug Application for Natrecor(R) (nesiritide) ("Natrecor") in the
treatment of acute congestive heart failure. The FDA determined that
there are uncertainties remaining about the effectiveness and safety of
Natrecor at this time necessitating future study. The Company will work
closely with the FDA to determine what additional clinical studies are
required for approval of Natrecor and with its Natrecor partner, Bayer
AG, to determine the plan for such future trials.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
In accordance with Federal laws, 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, 1998.
Operating Results
The net loss for the quarter ended March 31, 1999 was $9.9 million
compared to net income of $1.3 million in the corresponding quarter of 1998. The
net loss in 1999 was primarily due to a $6.7 million corporate restructuring
charge and a $3.3 million decrease in realized gains on the sale of securities.
Total revenues for the three months ended March 31, 1999 were $12.7
million compared to 1998 first quarter revenues of $14.3 million. The decrease
in revenues was principally due to a $2.4 million decline in research and
development contract revenues as a result of the timing of product development
milestone payments. Product sales from psychiatric products under license from
SmithKline Beecham Corporation (the "SB Products") decreased to $7.8 million
from $8.4 million for the three months ended March 31, 1999 and 1998,
respectively. The Company expects that over time SB Product sales will continue
to erode because of competition from new market entrants and generic drugs.
Co-promotion commissions increased to $2.7 million in 1999 from $1.3 million in
1998. The increase in co-promotion commissions was the result of higher
commissions received from the sales of Risperdal(R) (risperidone) and Paxil(R)
(paroxetine HCl) in the first quarter of 1999 as compared to commissions
received from sales of Haldol(R) Decanoate and Effexor(R) (venlafaxine HCl) in
the comparative quarter in 1998. Contract revenues for the three months ended
March 31, 1999 decreased to $2.2 million in 1999 from $4.6 million in the
corresponding period in 1998, principally due to receipt of product development
milestone payments in 1998.
Total costs and expenses for the three months ended March 31, 1999 were $28.0
million versus $21.1 million for the same period in 1998. Spending for research
and development remained the same at $10.5 million in both 1999 and 1998
quarters. Expenses for marketing, general and administration increased to $5.3
million from $4.7 million for the three-month periods ended March 31, 1999 and
1998, respectively, because of increased headcount and consulting expenses. The
first quarter decrease of $0.5 million in cost of goods from 1998 to 1999 was
the result of lower SB Product sales. Profit distribution to SB remained at $1.1
million from period to period. On March 1, 1999, the Company announced a
restructuring and right-sizing plan that included reduction of the Company's
full-time workforce by approximately 30% or 80 employees and the consolidation
8
of its headquarters, development and research staff into currently leased
facilities in Sunnyvale, California. The Company's Mountain View, California
campus will be sold. In the first half of 1999, the Company will discontinue
using its manufacturing facility due to its low capacity and high operating
expenses and the ready availability of third party recombinant protein
manufacturing capacity. During this period, the Company will have completed the
manufacture of Fiblast(R)(trafermin)required for delivery under its contract
with Kaken. The manufacturing facility will be maintained for a number of
months until a possible inspection by regulatory authorities which could occur
if Kaken receives approval of Fiblast(R)(trafermin) for wound healing in Japan.
The consolidation is expected to create improved management and operational
synergies and save approximately $14.0 million annually. In the quarter ending
March 31, 1999, the Company recorded a one-time restructuring charge of
approximately $6.7 million for the disposition of certain excess assets and
severance costs.
Other income and expense decreased from $8.4 million in income for the
quarter ended March 31, 1998 to $5.4 million in the comparable quarter of 1999.
The decrease was principally due to the $3.3 million decrease in realized gains
on sale of securities. For the three months ended March 31, 1999, the gain on
sale of securities was $4.8 million compared to $8.0 million in 1998. In the
first quarter of 1999, the Company sold 1.3 million shares of Guilford
Pharmaceutical Inc. ("Guilford") stock for a gain of $4.8 million compared to
the Company's sale of its entire interest in Karo Bio AB, completed in March
1998 for an $8.0 million gain. The Company currently owns 80,500 shares of
Guilford stock.
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 drug supply; 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 AG on Natrecor; Kaken Pharmaceutical Co., Ltd. and
Wyeth-Ayerst Laboratories on Fiblast; and Novo Nordisk A/A on GLP-1 in
developing and commercializing the Company's products.
9
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will not be
required to modify or replace significant portions of hardware and software so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications and replacement of existing
hardware and software, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed on a timely
basis, the Year 2000 Issue could have an impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation.
To date the Company has fully completed its assessment of all internal systems
that could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
are Year 2000 compliant. That assessment did, however, indicate that certain
systems were at risk. Affected systems include chromatography, clinical case
report forms tracking, and statistical analysis software. The Company is
currently assessing cost comparisons on whether to remediate or replace this
equipment and expects to have the equipment corrected and re-tested by October
31, 1999. The Company has gathered information about the Year 2000 compliance
status of its significant suppliers and contractors and continues to monitor
their compliance. For its information technology exposures, to date the
Company is 70% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than November 30, 1999.
The Company is in the process of querying its important suppliers and
contractors that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent Year 2000
issue that would materially impact the company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable. The Company will update its analysis of external agent
systems in subsequent reports.
10
The Company will utilize both internal and external resources to
reprogram, or replace, test and implement the software and scientific equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at approximately $75,000 and is being funded through operating cash
flows. To date, the Company has incurred approximately $11,000 related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $30,000 is attributable to the purchase of new software, $20,000
for new hardware, which will be capitalized, and $14,000 for the repair of
hardware and software.
The Company plans to complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including continued availability of certain
resources, and other factors. Estimates on the status of completion and the
expected completion dates are based on costs incurred to date compared to total
expected costs. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
The Company has not completed a formal contingency plan for
non-compliance, but it is developing a plan based on the information obtained
from third parties and an on-going evaluation of the Company's own systems.
The Company anticipates having a contingency plan in place by November 30,
1999, which will include development of backup procedures, identification of
alternate suppliers and possible increases in supplies inventory levels. The
Company has not identified its most reasonably likely worst case scenario with
respect to possible losses in connection with Year 2000 related problems. The
Company plans on completing this analysis by November 30, 1999.
The information above contains forward-looking statements including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements about
the Year 2000 should be read in conjunction with the Company's disclosures in
its Annual Report or Form 10-K as filed with the Securities and Exchange
Commission.
11
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current
and non-current) totaled $82.4 million at March 31, 1999, a decrease of $14.9
million from December 31, 1998. The decrease was primarily attributable to cash
used to fund operations and to a decrease of $5.9 million in the value of the
Company's Guilford stock between year-end 1998 and the time of the sale. The
Company sold most of its holding in Guilford in the first quarter of 1999.
The Company is striving to achieve profitability over the next several
years. The timing on which the Company will succeed in its objective to achieve
and sustain profitability, in the short term, depends principally on the success
of the Company and its collaboration partner, Bayer, in achieving regulatory
approvals and generating sales from Natrecor. The Company is determining with
the FDA the nature of the additional clinical trials that the agency will
require before it would consider approval of Natrecor for marketing.
Profitability will also depend on a number of other factors including the
Company's success and timeliness of its other product development, clinical
trial, regulatory approval 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 resources of $82.4 million in cash, cash equivalents and
marketable securities at March 31, 1999, together with revenues from product
sales, collaborative agreements and interest income, 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 Company's decisions concerning the degree
to which it will incur expenses to launch its products in the United States
market following the necessary regulatory approvals, the results of the
Company's partnering efforts, 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 Company's ability to co-promote and market products 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.
12
SIGNATURES
Pursuant to the requirements of the Securites 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.
May 11, 1999 By: s/s Richard B. Brewer
Date Richard B. Brewer
Chief Executive Officer
May 11, 1999 By: s/s David W. Gryska
Date David W. Gryska
Chief Financial Officer