SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---- ACT OF 1934
For the fiscal year ended December 31, 1994
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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
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SCIOS NOVA INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3701481
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2450 Bayshore Parkway, Mountain View, California 94043-1173
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(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 966-1550
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Class D Warrants to purchase Common Stock
Contingent Payment Rights
Common Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 17, 1995 was $275,306,188.
As of March 17, 1995, 35,446,030 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K PART
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Definitive Proxy Statement with respect to III
the 1995 Annual Meeting of Stockholders
PART I
ITEM 1. BUSINESS
GENERAL
Scios Nova Inc. ("Scios Nova" or the "Company") is a biopharmaceutical
company engaged in the discovery, development, and commercialization of novel
human therapeutics using its capabilities in both protein-based and small-
molecule drug discovery and development. The Company focuses its proprietary
research and development efforts on products to treat acute illnesses, primarily
in the areas of cardio-renal disease and inflammation, and seeks to collaborate
with corporate partners in the development of products to treat chronic
diseases. The Company also has a marketing and sales organization selling
third-party products that generate cash to help fund continued development of
the Company's proprietary products, none of which to date has been developed to
the commercialization stage.
The Company funds the development of proprietary products that address
acute illnesses, primarily in the areas of cardio-renal disease and
inflammation, where it has significant product candidates, a strong
competitive advantage and extensive technical expertise. The Company's lead
products for acute conditions are AURICULIN [REGISTERED TRADEMARK] anaritide
for the treatment of acute renal failure and NATRECOR [REGISTERED TRADEMARK]
BNP for the treatment of acute congestive heart failure. In January 1995,
the Company completed enrollment in a 500-patient Phase III clinical trial of
AURICULIN for the treatment of acute renal failure. Following analysis of
the results of this study the Company, together with Genentech, Inc., which
recently entered into a collaboration with Scios Nova for AURICULIN, will
determine the next appropriate development steps for the product. NATRECOR
is currently in Phase II clinical studies for the treatment of acute
congestive heart failure. The Company is also continuing preclinical studies
of its anti-inflammatory compounds.
Therapies for chronic conditions, including FIBLAST-TM- bFGF for wound
healing, insulinotropin for Type II diabetes and a treatment for Alzheimer's
disease, are being developed by corporate partners or by Scios Nova with funding
from corporate partners. Under its arrangements with corporate partners, Scios
Nova typically receives research and development funding, payments for clinical
supplies and/or milestone payments for achieving scientific and clinical
benchmarks. The Company is also entitled to royalties on commercial sales of
products and, in some cases, may receive additional revenues from the
manufacture of products.
Scios Nova's financial strategy involves careful management of cash
through targeted investment in its acute-care pipeline, while underwriting a
portion of this investment with cash flow from its commercial operations,
and generating corporate partner funding for chronic-care products under
development. With an ability to develop its acute-care product pipeline, its
ability to develop therapies for chronic illness under partner sponsorship,
an expanding marketing and sales capability, and a strong financial base,
Scios Nova is seeking to reach sustainable profitability by 1998.
Scios Nova was formed through the September 1992 merger (the "Merger") of
Scios Inc., a Delaware corporation ("Scios"), and Nova Pharmaceutical
Corporation, a Delaware corporation ("Nova"). The Merger brought together
Scios' expertise in producing recombinant proteins with Nova's expertise in
synthesizing small molecules. As a result, Scios Nova has capabilities in
molecular and cell biology, protein and medicinal chemistry, molecular modeling,
pharmacology, and the bioprocessing sciences, and has the tools to undertake the
rational design of small molecules based on knowledge of the associated design
targets. In the Merger, the Company also acquired its sales force and a line of
marketed psychiatric products.
The Company was incorporated in California in 1981 under the name
California Biotechnology Inc. and reincorporated in Delaware in 1988. The
Company changed its name to Scios Inc. in February 1992 and to Scios Nova Inc.
in September 1992 following the Merger. The principal executive offices of the
Company are located at 2450 Bayshore Parkway, Mountain View, California 94043.
The telephone number at that location is (415) 966-1550.
2
PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes certain information concerning Scios Nova's
principal products under development. The information in the table is qualified
in its entirety by reference to the more detailed information concerning the
Company's products that is set forth elsewhere in this report:
POTENTIAL APPLICATIONS/ DEVELOPER/CORPORATE
PRODUCT INDICATIONS STATUS * PARTNER (TERRITORY)
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ACUTE-CARE PRODUCTS:
CARDIO-RENAL DISEASES
AURICULIN [REGISTERED TRADEMARK] anaritide Acute renal failure Phase III clinical Scios Nova/Genentech
NATRECOR [REGISTERED TRADEMARK] BNP Acute congestive Phase II clinical Scios Nova
heart failure
INFLAMMATION
Bradykinin antagonists Inflammatory conditions Research Scios Nova
Cell adhesion Inflammatory conditions Research Scios Nova
inhibitors
CHRONIC-CARE PRODUCTS:
FIBLAST-TM- bFGF Dermal ulcers Phase III clinical Kaken (Asia)
(in Japan)
Amyloid precursor Alzheimer's disease Research Marion Merrell Dow
protein (worldwide)
Insulinotropin Type II diabetes Phase II clinical Pfizer (worldwide)
Human lung surfactant Respiratory distress Preclinical Byk Gulden (Europe)
syndrome
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<FN>
* "Research" denotes work up to and including discovery research and initial
production. "Preclinical" denotes studies in animal models necessary to support
an application to the Food and Drug Administration ("FDA") and foreign health
registration authorities to commence clinical testing in humans. Clinical
trials for pharmaceutical products are conducted in three phases. In Phase I,
studies are conducted to determine safety. In Phase II, studies are conducted
to gain preliminary evidence as to the efficacy and dosages of the product. In
Phase III, studies are conducted to provide sufficient data for the statistical
proof of safety and efficacy, including dosing regimen. Phase III is the final
stage of such clinical studies prior to the submission of an application for
approval of a new drug or licensure of a biological product.
3
PRODUCT DEVELOPMENT ACTIVITIES
Scios Nova focuses its product development efforts on proprietary
therapeutics for acute illnesses, principally in the areas of cardio-renal
disease and inflammation. The Company's success will depend on its ability to
achieve scientific and technological advances and to translate such advances
into reliable, commercially competitive products on a timely basis. As
described below, Scios Nova's products are at various stages of research and
development, and further development and testing will be required to determine
their technical feasibility and commercial viability. The proposed development
schedules for the Company's products may be affected by a variety of factors,
including technological difficulties, proprietary technology of others, reliance
on third parties for support and changes in governmental regulation, many of
which will not be within the control of Scios Nova. Scios Nova's product
development efforts are described below.
PRODUCTS TO TREAT ACUTE ILLNESS
CARDIO-RENAL DISEASES
Scios Nova's two leading products, AURICULIN [REGISTERED TRADEMARK]
anaritide and NATRECOR [REGISTERED TRADEMARK] BNP have resulted from the
Company's program in natural human peptides that improve kidney and heart
function.
AURICULIN [REGISTERED TRADEMARK] ANARITIDE. In January 1995, the Company
completed patient enrollment in its Phase III clinical study of AURICULIN for
the treatment of acute renal (kidney) failure ("ARF"). The placebo-controlled
double-blinded study involved 500 patients at over 60 centers. The primary
clinical endpoint in the Phase III study is a reduction in the need for kidney
dialysis in ARF patients. The study is also designed to evaluate AURICULIN's
potential for decreasing mortality in such patients. ARF, a rapid and severe
decrease in kidney function, has a number of causes, including toxic effects of
certain medications or decreased blood flow to the kidneys, such as may occur in
complicated surgery or after a traumatic injury. ARF affects approximately
160,000 patients annually in the United States, with a mortality rate averaging
50%. Currently there is no available therapy for ARF other than supportive
care.
Statistical analysis of the study will take several months to complete.
Thereafter, the Company, along with its new partner for AURICULIN, Genentech,
Inc. ("Genentech"), will determine the next appropriate steps based on the
results of the study. If the Company and Genentech determine that the results
of the Phase III study provide sufficiently compelling evidence of AURICULIN's
safety and efficacy, the Company will proceed as rapidly as possible to prepare
and submit a New Drug Application ("NDA") to the Food and Drug Administration
("FDA"). If the Company determines that a confirmatory study or studies are
required, the Company plans to initiate the additional study(s) as soon as
practical. It is also possible that the results of the recent study will not
warrant any further development of AURICULIN.
AURICULIN is a synthetic version of a human hormone, atrial natriuretic
peptide ("ANP"), which is produced in the heart and has a range of biological
activities known to be important in kidney and heart function, including
increasing the elimination of water and salt from the body. ANP improves kidney
function by increasing blood flow into the filtration units of the kidney and
restricting blood outflow.
On December 30, 1994, the Company entered into a Collaboration Agreement
(the "Collaboration Agreement") with Genentech relating to the joint development
and commercialization of AURICULIN for use in the treatment of ARF. The
Collaboration Agreement provides for the parties' co-promotion of AURICULIN in
the United States and Canada and gives Genentech exclusive marketing rights in
countries other than the United States and Canada (the "Licensed Territory").
Scios Nova will receive royalties on sales in the Licensed Territory, a $30
million milestone payment upon receipt of U.S. regulatory approval, and
additional payments of up to $20 million upon obtaining regulatory approvals and
achieving certain sales levels in other designated markets.
4
The Company will bear the development costs of AURICULIN anaritide until
the receipt of regulatory approval in North America. Thereafter, all costs of
development and promotion within North America will be shared equally between
the two parties. Genentech will bear all costs for development and promotion
within the Licensed Territory.
Genentech has the right to terminate the Collaboration Agreement within 30
days following receipt of the Phase III clinical results of AURICULIN. In
addition, if the Company does not file an NDA for AURICULIN by December 31,
1997, or if, within 60 days of such filing, the FDA has not accepted for review
an NDA which was filed by December 31, 1997, Genentech has the option of (i)
electing to bring NATRECOR or another natriuretic peptide product under
development by Scios Nova into the Collaboration Agreement for use in the
treatment of ARF or (ii) terminating the Collaboration Agreement. This option
could limit the Company's ability to enter into collaborative arrangements on
NATRECOR or any other natriuretic peptide product until the expiration of such
deadlines. If Genentech were to elect to bring a product into the Collaboration
Agreement in place of AURICULIN, the milestone payments due with respect to such
product would be reduced significantly.
There can be no assurance that the Company will ever receive the requisite
regulatory approvals to market AURICULIN or receive the milestone payments
called for by the Collaboration Agreement. In addition, there can be no
assurance that AURICULIN (or any other product developed under the Collaboration
Agreement) will generate sufficient, if any, revenue (through milestone
payments, sales, royalties, or otherwise) to offset the development and
promotion costs incurred.
Concurrent with the signing of the Collaboration Agreement, Genentech (i)
made a $20 million equity investment in Scios Nova by purchasing a new class of
nonvoting Preferred Stock and (ii) made a $30 million loan commitment, which the
Company may draw against at any time through December 2002. See Note 3 of Notes
to Consolidated Financial Statements.
Scios Nova has received from the FDA Orphan Drug designation of AURICULIN
in ARF. See "Business -- Government Regulation." In March 1994, the Company
entered into a long-term supply agreement pursuant to which a third party will
produce bulk form AURICULIN for Scios Nova via a synthetic process. See
"Business -- Manufacturing."
Scios Nova's scientists were among the first groups to clone the gene
encoding human ANP, and the Company has produced the hormone synthetically and
using recombinant DNA technology. Scios Nova has a worldwide, semi-exclusive
license to patent rights of Merck & Co., Inc. ("Merck & Co."), including an
issued U.S. patent covering the ANP product currently under development by Scios
Nova. This license is royalty free in the United States. The patent licensed
to Scios Nova was issued to Merck & Co. at the conclusion of an interference
proceeding which also involved Scios Nova's patent application covering human
ANP. The patent, which is due to expire in August 2007, allows the Company and
Merck & Co. to prevent others from marketing Scios Nova's form of ANP in the
United States. The Company also has an exclusive license under the ANP patent
rights of Queens University. These patent rights include an issued European
patent which covers numerous forms of ANP, including that being developed by the
Company. This European patent terminates in December 2003.
Scios Nova reacquired rights to AURICULIN from Wyeth-Ayerst Laboratories, a
division of American Home Products Corporation ("AHP"), in 1989. As
consideration for the reacquired rights, the Company made an initial payment to
AHP and agreed to make additional payments out of amounts received by Scios Nova
(exclusive of research and development funding) upon completion of licensing or
other arrangements for the commercialization of AURICULIN. Approximately $3.8
million in milestone payments remains to be paid to AHP if AURICULIN is approved
for marketing. Scios Nova's initial research on AURICULIN was funded by
Biotechnology Research Partners, Ltd. ("BRP"). See Note 10 of Notes to
Consolidated Financial Statements.
NATRECOR [REGISTERED TRADEMARK] BNP. During 1994, Scios Nova conducted
Phase I/II clinical studies of NATRECOR for the treatment of acute congestive
heart failure ("CHF"). The results of the Phase I/II studies demonstrated
significant improvements in key measures of heart function following treatment
with NATRECOR. Based on these preliminary studies, in October 1994, the Company
initiated a Phase II study for the treatment of acute CHF, which includes
several dose-ranging and safety
5
studies and is expected to involve approximately 200 patients. Contingent on
the results of these trials, Scios Nova hopes to begin Phase III efficacy
studies of NATRECOR for acute CHF in 1996.
Acute CHF affects over 700,000 people annually in the United States.
Because the market for treatment of CHF is very competitive, the Company's
success in commercializing NATRECOR will be particularly dependent not only on
strong clinical data but on its ability to produce NATRECOR cost effectively.
As a result, the Company is analyzing alternative methods of manufacturing
NATRECOR. See "Business -- Manufacturing."
The Company believes that it was the first to discover human brain
natriuretic peptide ("BNP"), whose gene it cloned in 1988, as a part of its
program in natural human peptides that improve heart and kidney function. Like
ANP, BNP is made in the heart and preclinical studies at the Company and
elsewhere suggest that BNP has biological effects similar to ANP in increasing
the elimination of salt and water from the body, dilating blood vessels and
decreasing the secretion of other hormones which lead to blood vessel
constriction and elevated blood pressure. The Company has an issued U.S. patent
covering human BNP, which has a term through May 2009. This and other U.S.
patents issued to Scios Nova are subject to possible extension due to time taken
up in the regulatory approval process. See "Patents and Proprietary Rights."
TREATMENT OF INFLAMMATION
The Company's inflammation program centers around two classes of anti-
inflammatory agents -- bradykinin receptor antagonists and cell adhesion
inhibitors.
BRADYKININ ANTAGONIST PROJECT. Bradykinin antagonists act by blocking the
binding of bradykinin to its receptor. Bradykinin is released from inactive
precursor proteins during the inflammatory process and is a mediator of
inflammation and pain in a variety of conditions, including asthma, sepsis,
trauma and arthritis.
First-generation bradykinin receptor antagonists were acquired by the
Company through an exclusive licensing agreement. The Company subsequently
developed second-generation bradykinin antagonists which, in experiments
measuring the ability of agents to block the binding of bradykinin to its
receptor sites, are substantially more potent than first generation agents. In
1994, the Company conducted preclinical studies of a lead compound, NPC 17731,
in several disease models. The Company determined that the results of these
studies were not sufficiently compelling to proceed to the clinic with the
compound for the indication under evaluation. The Company is continuing to
evaluate NPC 17731 and related compounds in other models of inflammatory
disease. The Company has U.S. and foreign patents that have issued and
applications pending, which cover the second-generation bradykinin antagonists
it has identified.
The bradykinin antagonist project was undertaken by Nova on behalf of Nova
Technology Limited Partnership, a Delaware limited partnership ("NTLP"), that
funded the research and development of certain projects by Nova. In December
1992, the Company exercised an option to acquire all of the limited partnership
interests of NTLP in exchange for Common Stock and contingent royalty payments
based on future product sales. The Company and its licensees remain obligated
to fund further development of the products previously developed on behalf of
NTLP (the bradykinin antagonist project and the drug delivery projects, which
have been licensed to third parties), unless Scios Nova determines, in its
reasonable judgment, that the products to be funded are not commercially viable
and technically feasible from Scios Nova's perspective. See Note 2 of Notes to
Consolidated Financial Statements.
CELL ADHESION INHIBITORS PROJECT. Cell adhesion inhibitors are small-
molecule compounds that inhibit certain white cells, called neutrophils, from
adhering to cells that line blood vessels, an early step in the inflammatory
process. Scios Nova has conducted early-stage clinical studies with a class of
compounds called leumedins, primarily leumedin compound NPC 15669, that inhibit
neutrophil adhesion. In 1993, the Company determined that the safety profile of
NPC 15669 did not warrant further clinical development of the compound, and
during 1994, the Company focused its research efforts in this area on
development of second-generation compounds with an improved therapeutic profile.
The Company has an issued U.S. patent and pending U.S. and foreign
applications covering certain classes of cell adhesion inhibitor compounds of
potential use in treating inflammatory conditions.
6
OTHER RESEARCH. The Company also conducts exploratory research from time
to time on other agents and on new applications of agents under development by
the Company for other indications. Two such projects are the Company's research
exploring novel acute-care applications for serine protease inhibitors and for
its FIBLAST-TM- bFGF.
PRODUCTS TO TREAT CHRONIC ILLNESS
The Company plans to continue the development of therapies for the
treatment of chronic conditions primarily under the sponsorship of corporate
partners. Continued funding and participation by the Company's corporate
partners under joint development and licensing agreements will depend not only
on the timely achievement of research and development objectives by the Company,
which cannot be assured, but also on each corporate partner's own financial,
competitive, marketing and strategic considerations. Under several of its joint
development and license agreements, Scios Nova relies on its corporate partners
to conduct preclinical and clinical trials, to obtain regulatory approvals and
to manufacture and market products. Although the Company believes that its
corporate partners will have an economic incentive to meet their contractual
responsibilities, the amount and timing of resources devoted to these activities
generally will be controlled by the corporate partner.
TISSUE REPAIR
FIBLAST-TM- bFGF. FIBLAST is Scios Nova's form of human basic fibroblast
growth factor ("bFGF"), an agent that promotes angiogenesis (the growth of new
blood vessels) and directly stimulates the growth of connective tissue, as well
as the outer layer of skin.
Since 1988, research and development of FIBLAST has been conducted by both
Scios Nova and Kaken Pharmaceutical Co., Ltd., the Company's Japanese corporate
partner ("Kaken"). Pursuant to a 1988 agreement, Kaken has exclusive rights to
develop and market FIBLAST for all indications in Japan, Korea, Taiwan, Hong
Kong and the People's Republic of China. The Company receives research and
development support payments, is entitled to receive additional payments as
regulatory milestones are met and will receive royalties on any sales of FIBLAST
products. In 1994, the Company and Kaken signed a series of agreements
expanding the 1988 agreement. Under the new agreements, Scios Nova will
manufacture FIBLAST for the next several years for use by Kaken. The agreements
also establish a manufacturing process development collaboration between the
companies and provide Kaken with a license to Scios Nova's manufacturing
technology for FIBLAST. It is intended that Kaken be able to manufacture
FIBLAST for its own use in the future.
Under the new agreements, Kaken will make payments to Scios Nova for the
supply of material, the process development collaboration, and the license to
FIBLAST manufacturing technology. Kaken is currently conducting two Phase III
trials in Japan for evaluation of FIBLAST in recalcitrant wounds. Both studies
began in late 1994 and will continue into late 1995.
Following the Company's completion in 1993 of Phase II clinical trials of
FIBLAST in the United States for the treatment of pressure sores and neuropathic
ulcers, the Company determined not to fund additional clinical studies of
FIBLAST for chronic illnesses, except under sponsorship of a corporate partner.
This decision was driven by the cost of the extensive clinical trial program
expected to be required for approval of such a product in the United States. To
date, the Company has not entered into such a partnership and therefore the
primary focus of Scios Nova's work continues to be supporting its Japanese
partner, Kaken. Scios Nova is also conducting research on the use of FIBLAST
for treatment of certain acute illnesses. See "Business -- Product Development
Activities -- Products to Treat Acute Illness."
The Company is obligated to make payments to Organon International
("Organon") based on amounts received by Scios Nova upon commercialization of
FIBLAST. Approximately $1.9 million remains to be paid under the obligation,
which stems from the Company's 1989 reacquisition of certain FIBLAST rights
previously licensed to Organon. The basic research on FIBLAST was funded by
Biotechnology Research Partners, Ltd. ("BRP"). See Note 8 of Notes to
Consolidated Financial Statements. See also "Business -- Patents and
Proprietary Rights" for a discussion of FIBLAST patent issues.
7
ALZHEIMER'S DISEASE
Beta-AMYLOID PRECURSOR PROTEIN. In July 1992, Scios Nova formed a research
alliance with Marion Merrell Dow, Inc., ("MMD") to jointly develop new therapies
for Alzheimer's disease. The program is focusing on developing pharmaceuticals
that prevent the formation of Beta-amyloid deposits in the brain. MMD will have
exclusive worldwide rights to develop and market Alzheimer's drugs discovered by
the alliance. MMD is funding the ongoing work at the Company and has
established its own research team. As products advance into development and
commercialization, the Company will receive substantial milestone payments and
royalties. In February 1995, the Company was issued a U.S. patent covering
transgenic mice that develop brain tissue deposits characteristic of those found
in humans with Alzheimer's disease, which technology is the basis for the
parties' collaboration.
METABOLIC DISORDERS
INSULINOTROPIN. Through its Metabolic Biosystems subsidiary, the Company
developed insulinotropin in collaboration with Pfizer Inc ("Pfizer"), which is
continuing Phase II clinical trials of insulinotropin for the treatment of Type
II diabetes. Insulinotropin is a potent peptide that stimulates insulin release
when blood sugar levels are above normal. Type II diabetics do not release
enough insulin from the pancreas when blood glucose levels rise in response to
eating a meal and become progressively more resistant to insulin action in
stimulating glucose uptake by muscle and fat tissue. Insulinotropin controls
blood glucose levels in Type II diabetics by stimulating insulin release and
perhaps by overcoming insulin resistance. Present therapies for Type II
diabetics include insulin injections and oral hypoglycemic agents, which can
induce dangerously low blood sugar levels. Because insulinotropin stimulates
insulin release only when blood sugar levels are above normal, it may have a
lower risk of this serious side effect. The Company has produced insulinotropin
synthetically and using recombinant DNA technology.
The Company holds an exclusive license to patent applications covering
insulinotropin held by Massachusetts General Hospital, which rights were
licensed to Pfizer as part of the research collaboration. A U.S. patent
licensed exclusively to the Company covers the form of insulinotropin being
developed by Pfizer under license from the Company. The term of the patent
extends through June 2009. An additional issued patent and a pending
application cover other forms of insulinotropin.
Under the parties' original collaboration agreement, Pfizer had the right
to commercialize products on an exclusive, worldwide basis under a royalty-
bearing license. In early 1994, Scios Nova and Pfizer amended the terms of
their collaboration agreement. Scios Nova agreed to reduce future royalties and
surrender co-marketing and manufacturing rights in exchange for the addition of
product development milestone payments to Scios Nova. As a part of the
amendment, Pfizer also terminated its rights to other technologies developed in
the collaboration.
ADDITIONAL PROJECTS
The Company has from time to time pursued product development activities
outside of the focus areas described above, some of which programs are discussed
below. Scios Nova intends to divest or otherwise leverage technologies which it
concludes are not central to its long-term business strategy.
BNP DIAGNOSTIC. Third-party researchers have determined that the level of
circulating BNP may be a good basis for a diagnostic to identify patients
suffering from congestive heart failure. Scios Nova has licensed Shionogi and
Co., Ltd. the right under the Company's patent position on BNP to develop
diagnostic products for Japan. In 1994 Shionogi received Japanese regulatory
approval to market a radioimmunoassay diagnostic kit employing the technology,
and is expecting to begin marketing the kit in 1995. Scios Nova is now seeking
to commercialize this application of its BNP patent rights in additional
territories.
CNS DISORDERS; GUILFORD PHARMACEUTICALS. In June 1994, the Company's
majority-owned subsidiary, Guilford Pharmaceuticals Inc. ("Guilford"), completed
an initial public offering of $15 million of common stock to pursue the
development of pharmaceutical products for the treatment of diseases of the
central nervous system. As a result of the
8
offering, Scios Nova's ownership interest in Guilford was reduced to
approximately 29%. Scios Nova had previously transferred to Guilford certain
neuroscience technology originally developed by Nova and had licensed to
Guilford the GLIADEL [REGISTERED TRADEMARK] implant project and related drug
delivery technology described below for application in the treatment of tumors
of the central nervous system and cerebral edema ("Guilford Field").
DRUG DELIVERY SYSTEMS. Prior to the Merger, Nova had been developing
certain drug delivery systems. Its two most advanced projects were the GLIADEL
implant to treat primary brain cancer, for which Phase III studies had been
completed, and the SEPTACIN [REGISTERED TRADEMARK] implant for the treatment of
osteomyelitis, a serious bone infection. These projects were developed pursuant
to a license agreement with the Massachusetts Institute of Technology ("MIT")
relating to MIT's BIODEL [REGISTERED TRADEMARK] drug delivery technology. As
noted above, the Company licensed a portion of the drug delivery technology to
Guilford. In 1994, the Company licensed to another third party the drug delivery
technology, including SEPTACIN, for all uses outside the Guilford Field. Scios
Nova thereafter assigned its BIODEL license rights back to MIT, which will
administer these licenses. The Company and MIT will receive royalty and
milestone payments under the license agreements with Guilford and the second
licensee as products are developed. The licensees are also obligated to meet
certain diligence standards in pursuing development of their respective product
candidates. The GLIADEL and SEPTACIN projects were undertaken by the Company on
behalf of NTLP.
HUMAN LUNG SURFACTANT ("hLS"). The Company holds rights in several issued
patents on the protein components of lung surfactant based on its own work and
under an assignment of patents and patent applications owned by Children's
Hospital Medical Center of Cincinnati. Lung surfactant may have therapeutic
value in infant and adult respiratory distress syndromes and other respiratory
disorders. In late 1992, the Company reacquired all rights to the recombinant
hLS technology that had previously been licensed to Genentech, and the Company
continues to seek a partner to develop and market hLS outside of Europe. The
Company previously granted Byk Gulden Pharmazeutika, exclusive European
marketing rights for hLS.
MARKETING AND SALES
The Company intends eventually to sell certain of its proprietary products
through its own sales force for some or all approved indications. Presently,
Scios Nova generates operating profits by marketing products that were developed
by others.
THIRD-PARTY PRODUCTS. The Company has a sales force of approximately 80
representatives who are employed exclusively by the Company and work on a part-
time basis marketing psychiatric products. The Company currently markets in the
United States four psychiatric products under license from SmithKline Beecham
Corporation ("SB") and co-promotes a fifth product distributed by McNeil
Pharmaceutical ("McNeil"), an affiliate of Johnson & Johnson.
Since 1993, the Company has jointly promoted with McNeil HALDOL
[REGISTERED TRADEMARK] Decanoate (haloperidol) for the treatment of
schizophrenia. Under the agreement, the Company receives quarterly payments
based on total sales of the product. McNeil manufactures and distributes HALDOL
Decanoate, and generally indemnifies Scios Nova against product liability
claims. The five-year agreement may be extended up to an additional three years
upon the attainment of revenue goals.
The Company has exclusive rights to market the following SB Products in the
United States: THORAZINE [REGISTERED TRADEMARK] (chlorpromazine) and STELAZINE
[REGISTERED TRADEMARK] (trifluoperazine) for the treatment of schizophrenia,
ESKALITH [REGISTERED TRADEMARK]/ESKALITH CR [REGISTERED TRADEMARK] (lithium)
for the treatment of manic depressive illness and PARNATE [REGISTERED]
TRADEMARK] (tranylcypromine) for the treatment of depression (collectively the
"SB Products"). SB currently manufactures and distributes the SB Products. SB
may discontinue manufacturing one or more of the products if it gives the
Company at least 12 months' notice, in which case Scios Nova has the right to
manufacture such product(s). SB is responsible for all ancillary matters
relating to sales of the SB Products (including various administrative tasks),
for the maintenance in good standing of all new drug applications with respect
to the SB Products, and for the maintenance of product liability insurance with
respect to the SB Products. The agreement also grants Scios Nova certain rights
to indemnification from SB for product liability claims. The Company is
obligated to spend certain amounts for marketing support based on the prior
year's net sales and to reimburse SB for certain third-
9
party royalty payments. Scios Nova pays SB 40% of the Company's net profits, as
defined, from U.S. sales of the SB Products. See Note 3 of Notes to
Consolidated Financial Statements.
The SB Products have a well-established reputation; however, unit volume
for certain products has been eroding and can be expected to continue to erode
due to competition from generic products sold at substantially lower prices.
Although past decreases in unit sales have been partially offset by price
increases there can be no assurance that the market will accept any additional
price increases. Among the SB Products the Company has placed particular
marketing emphasis on those product formulations, such as ESKALITH CR (a
controlled release formulation), where no generic equivalents are available.
Scios Nova plans to acquire or license from third parties additional
products that can be promoted by the Company's sales force. The Company will
consider not only additional psychiatric products, but also products in other
therapeutic areas. Although the Company is actively seeking to acquire such
product rights, there can be no assurances that they will be available on terms
favorable to the Company or at all.
PROPRIETARY PRODUCTS. Scios Nova believes that its experience in marketing
third-party products under arrangements such as those described above will prove
useful when it prepares to market its own products. However, to date, Scios
Nova's marketing experience has been limited to psychiatric products, and the
Company does not currently have the resources to market certain products it is
seeking to develop. The commercialization of the Company's major products will
require significant financial resources as well as worldwide sales, marketing
and distribution capabilities. In order to provide funds and expertise to meet
these requirements, the Company will consider entering into additional corporate
partnerships with established pharmaceutical companies, as it has with Genentech
for the co-promotion of AURICULIN. See "Business -- Product Development
Activities -- Products to Treat Acute Illness." There can be no assurance that
the Company will be able to enter into such partnerships on favorable terms or
develop such a marketing capability on its own. Scios Nova believes that such
collaborations may enable it to speed the timing of product launch and increase
market penetration of selected new therapies. However, such a partnering
arrangement could also result in a lower level of income to Scios Nova than if
it marketed the products entirely on its own.
The Company's ability to commercialize its products successfully may depend
in part on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers, and other organizations.
Government and other third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products, and market acceptance of Scios Nova products would be
adversely affected if adequate coverage and reimbursement levels are not
provided for uses of Company products. In addition, in view of expressed
governmental concerns over drug prices and other healthcare costs, there can be
no assurance that future government and private cost control initiatives will
not adversely affect the Company's ability to maintain price levels on its
products sufficient to realize an appropriate return on development efforts.
MANUFACTURING
Scios Nova has concentrated its resources on product discovery and
development prior to investing substantially in manufacturing capability. To
date, the Company has produced only FIBLAST in limited quantities sufficient for
clinical trials and relies on third parties for the manufacture of other
products, including AURICULIN and NATRECOR. Scios Nova has a production
facility which it believes enables it to produce FIBLAST and potentially other
products for itself and others under requirements for current Good Manufacturing
Practices ("cGMP"). The Company does not currently possess the staff or
facilities necessary to manufacture any product in the commercial quantities
which may be required in the long term. The strategy of building or acquiring
commercial-scale manufacturing facilities or utilizing third-party facilities
only as the need arises carries with it certain risks, as there can be no
assurance that such facilities can be built, acquired or used on commercially
acceptable terms or that Scios Nova will be able to meet manufacturing quantity
and quality requirements through the use of such arrangements.
AURICULIN is currently produced by third-party manufacturers under contract
to Scios Nova. The Company has a long-term agreement for the supply of
AURICULIN in bulk form, and has fill and finish services performed by another
third
10
party. The Company believes that it would not be cost-effective to qualify
alternate suppliers at this time. However, an inability of either the Company's
bulk or fill and finish manufacturer to provide material to Scios Nova on a
timely basis would cause delays in supply which could have a material adverse
effect on the Company's business. To date the Company has also engaged third
parties to manufacture clinical supplies of NATRECOR via a synthetic process.
The Company is currently reviewing its alternatives with respect to the long-
term production of NATRECOR, including whether to manufacture the product
recombinantly or synthetically and whether to do so itself or through third
parties. If Scios Nova elects to manufacture NATRECOR itself over the long
term, it will need to build or acquire substantial additional manufacturing
capacity.
To the extent Scios Nova may from time to time have capacity available in
its production facility, it intends to pursue opportunities to perform contract
manufacturing for third parties. In 1994, the Company produced material for a
third-party customer under its first such arrangement, and in early 1995, the
Company entered into a second agreement to provide manufacturing services for
another party.
McNeil manufactures HALDOL Decanoate, and SB manufactures the SB Products.
If SB were to discontinue manufacturing the SB Products and the Company wished
to continue selling the products, it would have to develop additional facilities
to manufacture independently on a large scale or enter into an arrangement with
a third party to manufacture such products. See "Business -- Marketing and
Sales."
PATENTS AND PROPRIETARY RIGHTS
Scios Nova is seeking patent protection for proprietary technology and
products in the United States and abroad to prevent others from unfairly
capitalizing on its investment in research. Other companies engaged in research
and development of new health care products based on biotechnology also are
actively pursuing patents for their technologies, which they consider to be
novel and patentable. Scios Nova also relies and will continue to rely upon
trade secrets and know-how to develop and maintain its competitive position.
There can be no assurance, however, that others will not develop similar
technology or that confidentiality agreements on which the Company relies to
protect trade secrets will be honored.
The Company currently owns or holds exclusive rights to over 50 issued U.S.
patents and 40 U.S. patent applications pending covering its proprietary
technology and products. The Company also files foreign applications
corresponding to most of its U.S. applications. Scios Nova's issued patents
include patents on AURICULIN, NATRECOR, bradykinin antagonists, insulinotropin,
cell adhesion inhibitors, and lung surfactant proteins. The Company's patent
position with respect to certain principal products under development is
described above. See "Business -- Product Development Activities." If a patent
issues prior to marketing approval, as has been the case with all of the
Company's issued patents to date, Scios Nova can apply for extension of the
patent term for a limited period of time to make up for a portion of the patent
term lost to the regulatory period. The actual period of the extension varies
but generally cannot exceed five years. In certain of its third-party
agreements, the absence of a patent covering a product licensed by Scios Nova
could reduce the royalties due to the Company under the agreements.
The patent position of biotechnology and pharmaceutical firms generally is
highly uncertain and involves complex legal and factual questions. Although
Scios Nova believes it has strong patent positions on certain of its products,
there can be no assurance that any patent will issue on pending applications of
the Company, or that any patent issued will afford the Company significant
commercial protection against competitors for the technology or product covered
by it, or that patents will not be infringed upon or designed around. Third
parties have filed applications for, or have been issued patents relating to,
products or processes which are similar to or competitive with certain of the
Company's products or processes. Scios Nova is incurring and expects to continue
to incur substantial costs in interference proceedings and in defending the
validity or scope of its patents or in challenging the validity or scope of
competing patents. The Company is unable to predict how the courts will resolve
issues relating to the validity and scope of such patents, and if any such
patent were to be interpreted to cover any of the Company's products and could
not be licensed, circumvented or shown to be invalid, the results of Scios
Nova's future operations could be materially and adversely affected. Described
below are patent positions of other
11
companies of which Scios Nova is aware that potentially overlap the Company's
principal research and product development areas discussed above.
AURICULIN. On June 14, 1988, a U.S. patent issued to Organogen
Medizinisch-Molekularbiologische Forsuchungsgesellschaft m.b.H. containing
claims to biologically active fragments of cardiodilatin, a natriuretic peptide
precursor. Scios Nova believes that the claims of the patent may not reasonably
be construed to cover the form of ANP being developed by Scios Nova and, to the
extent any claims of the patent may be interpreted to cover AURICULIN,
reasonable grounds exist for asserting the invalidity of such claims. If any
claims of this patent were determined to be valid and construed to cover the
form of ANP being developed by Scios Nova, Scios Nova's ability to develop
AURICULIN commercially might be hindered or prevented if it were unable to
obtain a license. A corresponding patent has been issued by the European Patent
Office. This patent is currently involved in an opposition proceeding in
Europe.
NATRECOR. Scios Nova has a U.S. patent covering human BNP, which issued in
1992. Scios Nova is aware that Daiichi Pharmaceutical Co., Ltd., Tokyo
("Daiichi") has filed patent applications on porcine BNP in Japan and on human
BNP worldwide. The filing dates of the Daiichi applications covering human BNP
are later than those of the Company; however, there can be no assurance that
Daiichi will not obtain separate patents on BNP in some countries that could be
interpreted to cover Scios Nova products.
FIBLAST. In February 1991, a U.S. patent with one claim covering a form of
FGF protein was issued to Synergen, Inc. ("Synergen"), which was recently
acquired by Amgen Inc. In June 1991, a U.S. patent with one claim covering the
DNA for the same form of FGF was issued to Synergen. Based on a review of the
publicly-available documents relating to these patents, Scios Nova believes that
the Synergen form of FGF or DNA differs from the form of FGF produced by the
Company. Scios Nova filed its own patent applications covering FGF and DNA for
FGF prior to the filing by Synergen of its application. Scios Nova received
notice from the U.S. Patent and Trademark Office ("PTO") that its claims
covering DNA for human basic FGF were allowable, subject to the outcome of a
patent interference proceeding with the Salk Institute for Biological Studies
("Salk"). On October 22, 1993, the PTO Board of Appeals and Interferences ruled
in the proceeding that Scios Nova is entitled to a patent containing claims
covering DNA sequences encoding human basic FGF. Salk has not appealed the
ruling and Scios Nova's application has been returned to the patent examiner for
further administrative processing.
In October 1992, a U.S. patent was issued to Salk which contains claims
directed to substantially pure mammalian basic FGF containing the 146 amino acid
sequence of bovine basic FGF or a naturally occurring homologous sequence of
another mammalian species. If any claim of this patent were determined to be
valid and construed to cover Scios Nova's human basic FGF, the Company's ability
to develop basic FGF might be hindered or prevented if it were unable to obtain
a license. Scios Nova's outside counsel has reviewed the publicly available
documents relating to the Salk patent. Based upon this review, such counsel has
opined that, to the extent any claims of the patent may be interpreted to cover
human basic FGF, such claims are overly broad and would likely be held invalid
by an informed court.
In May 1994, the European Patent Office issued European Patent No. 0 248
819 to Scios Nova covering recombinantly-produced human bFGF. An opposition
proceeding has been instituted against this patent by Chiron Corp. and
Pharmacia S.p.A. The opposition proceeding is currently at a preliminary
stage. In August 1994, the European Patent Office issued European Patent No.
0 228 449 to Salk covering the 146 amino acid sequence of bovine basic FGF or
an equivalent or analog thereof. The Company may file an opposition to this
patent at any time until May 31, 1995. The results of such opposition
proceedings cannot be predicted with certainty.
In March 1994, the Company obtained a non-exclusive license to make, use
and sell its FIBLAST under a U.S. patent issued to Harvard University containing
claims to purified cationic (basic) FGF. The Harvard patent is based on a
patent application having a filing date earlier than the application which
formed the basis for the Salk patent.
TRADEMARKS. AURICULIN [REGISTERED TRADEMARK] and NATRECOR [REGISTERED]
TRADEMARK] are registered trademarks of Scios Nova and FIBLAST-TM- is a
trademark of Scios Nova. THORAZINE [REGISTERED TRADEMARK], STELAZINE
[REGISTERED TRADEMARK], ESKALITH [REGISTERED TRADEMARK], ESKALITH CR
[REGISTERED TRADEMARK] and PARNATE [REGISTERED TRADEMARK] are registered
trademarks of SB. HALDOL [REGISTERED TRADEMARK] is a registered trademark of
McNeilab, Inc.
12
COMPETITION
Competition is intense in the development of biopharmaceutical products,
particularly in the development of products through the application of
biotechnology. There are numerous companies and academic research groups
throughout the world engaged in similar research and development. Some of the
Company's competitors, including some of its licensees, are working on products
similar to those being developed by Scios Nova, including products in some of
the Company's major product areas. Many of these companies have substantially
greater financial, marketing, and human resources than Scios Nova. With respect
to AURICULIN, Scios Nova is not aware of any currently marketed treatment for
ARF but believes other companies are attempting to develop forms of natriuretic
peptides for indications similar to that being pursued by Scios Nova. In the
case of NATRECOR, a number of products are already marketed for the treatment of
acute CHF. Hence, the Company will need to demonstrate strong clinical results
and an ability to produce NATRECOR cost effectively in order to introduce
NATRECOR into this competitive market.
There can be no assurance that technological developments or superior
marketing capabilities possessed by competitors will not materially adversely
affect the commercial potential of the Company's products. In addition, if the
Company commences significant commercial sales of products, manufacturing
efficiency and marketing capability are likely to be significant competitive
factors. With respect to products no longer covered by patents, such as the SB
Products, Scios Nova faces competition from companies offering generic products.
The Company believes that the competitive success of the Company will be
based primarily on scientific and technological superiority, managerial
competence in identifying and pursuing opportunities, operational competence in
developing, protecting, producing and marketing products, and obtaining timely
regulatory agency approvals and adequate funds. Achieving success in these
areas will depend on the Company's ability to attract and retain skilled and
experienced personnel, to develop and secure the rights to advanced proprietary
technology and to exploit commercially its technology prior to the development
of competitive products by others. Scios Nova expects that there will be
continued competition for highly qualified scientific, technical, and managerial
personnel.
GOVERNMENT REGULATION
The Company's research and development activities and, as for all companies
developing pharmaceuticals, the production and marketing of its products, are
subject to regulation for safety and efficacy by numerous governmental
authorities in the United States and other countries. This regulation is a
significant factor in the production and marketing of the products resulting
from Scios Nova's research and development activities. Testing, production and
marketing of pharmaceutical products for human use require approval of the FDA
and comparable authorities in other countries. Over the next several years,
Scios Nova will be increasing substantially its internal resources and
expenditures to meet these requirements for the products it is developing.
The procedure for seeking and obtaining the required governmental approvals
for a new product involves many steps, including animal testing to determine
safety and potential toxicity. In addition, extensive clinical testing is
required to be conducted in humans to demonstrate the efficacy, optimal dose and
safety of each product. The time and expense required to perform clinical
testing can far exceed the time and expense of developing the product prior to
clinical testing. Whether undertaken by the Company or its commercial partners,
the process of seeking and obtaining these approvals for a new product is likely
to take a number of years and involves the expenditure of substantial resources.
Some of the Company's products will be treated by the FDA as biologics, which
require marketing approval from the FDA for both the product and the
manufacturing facility. There can be no assurance that any of the Company's
products will obtain the necessary approvals on a timely basis, if at all.
Even after initial FDA approval has been obtained, further studies may be
required to provide additional data on safety or to gain approval for the use of
a product as a treatment for clinical indications other than those initially
targeted. Moreover, the FDA may reconsider its approval of any product at any
time and may withdraw such approval. In addition, before the Company's products
can be marketed in foreign countries, they are subject to regulatory approval in
such countries similar to that required in the United States. Except for the
continued marketing of the psychiatric products
13
produced by third parties, marketing approval of the Company's first human
therapeutic product is not expected before 1997 at the earliest, and significant
income will not be generated by the Company until after such approval is
obtained.
The Orphan Drug Act currently provides incentives to manufacturers to
develop and market drugs for rare diseases or conditions affecting fewer than
200,000 persons in the United States at the time of application for orphan drug
designation. A drug that receives orphan drug designation and is the first
product to receive FDA marketing approval for its product claim is entitled to a
seven-year exclusive marketing period in the United States for that product
claim. However, a drug that is considered by the FDA to be different from a
particular orphan drug is not barred from sale in the United States during the
seven-year exclusive marketing period. The Company has received from the FDA
orphan drug designation of AURICULIN in ARF and for hLS in infant respiratory
distress syndrome. Various amendments of the Orphan Drug Act have been
considered by Congress from time to time, some of which could reduce the
benefits of orphan drug status to Scios Nova, if passed.
FDA regulations require that any drug to be tested in humans must be
manufactured according to cGMP regulations. This has been extended to include
drugs that will be tested for safety in animals, in support of human testing.
The cGMPs set certain minimum requirements for procedures, record-keeping and
the physical characteristics of the laboratories used in the production of these
drugs. In addition, various federal, state and local laws and regulations
relating to safe working conditions, laboratory practices, the experimental use
of animals and the storage, use, and disposal of hazardous or potentially
hazardous substances, including radioactive compounds and infectious disease
agents, used in connection with the Company's research work are or may be
applicable to such activities. They include, among others, the United States
Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational
Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, and the Resource Conservation and Recovery Act, national
restrictions on technology transfer, import, export and customs regulations, and
other present and possible future federal, state, and local regulations.
Although the Company believes that its safety procedures for handling and
disposing of hazardous materials comply with prescribed regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company may also incur substantial costs to comply with
environmental regulations if the Company develops additional manufacturing
capacity or otherwise changes its operations. For example, in connection with
the closure of its Baltimore research and development facility in 1994 to
consolidate such activities at its Mountain View headquarters, the Company
incurred costs of approximately $370,000 for chemical disposal, storage and
related costs.
EMPLOYEES
The Company had 283 full-time employees as of December 31, 1994, of which
148 were engaged in research, product and clinical development. The Company
also had 81 part-time employees (primarily its sales force) at December 31,
1994.
ITEM 2. PROPERTIES
The Company's headquarters facility in Mountain View, California consists
of three buildings owned by the Company and land occupied under a long-term
ground lease. The ground lease rates are fixed through July 1997. Future
minimum ground lease payments over the next three years total approximately
$474,000. The three buildings represent 98,000 square feet of office and
laboratory space. The Company presently occupies 68,000 square feet and leases
the remaining space. The Mountain View facility includes a 13,000 square foot
combination process and product development and biological testing facility in
which Scios Nova has produced bulk and clinical supplies of FIBLAST. The
Company expended approximately $3.2 million in capital expenditures in 1994 and
anticipates spending approximately $5 million in capital expenditures in 1995.
In 1994, the Company also occupied under lease a total of 57,428 square
feet of administrative and laboratory facilities in Baltimore, Maryland (the
"Holabird Facility") pursuant to a lease due to expire in 1997. Total rental
payments for the Holabird Facility in 1994 were approximately $324,000. In
1994, the Company consolidated its research and development activities at the
Holabird Facility with those in Mountain View, California. As a result the
Company laid off certain employees, transferred others to Mountain View and,
in early 1995, moved its Baltimore commercial operations and clinical groups,
previously located at the Holabird Facility, to a new site in downtown
Baltimore. In February 1995, Scios Nova purchased the Holabird
14
Facility for $3,000,000 pursuant to an option contained in the lease and also
received assignment of the underlying ground lease, which has term through 2012.
During 1995, the Company will attempt to secure one or more tenants for the
facility and/or sell the facility. The commercial operations group and certain
clinical employees now occupy 7,070 square feet under a five-year lease in
Baltimore's Inner Harbor area. The Company's annual lease payments at this
facility are approximately $106,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at March 17, 1995 are
as follows:
NAME AGE POSITION
---- --- --------
Richard L. Casey 48 Chairman of the Board, President
and Chief Executive Officer
Thomas L. Feldman 44 Vice President of Commercial
Operations
Elliott B. Grossbard, M.D. 47 Vice President of Medical and
Regulatory Affairs
John A. Lewicki, Ph.D 43 Vice President of Research
Arlene M. Morris 43 Vice President of Business
Development
John H. Newman 44 Vice President of Legal Affairs,
General Counsel and Secretary
Armin H. Ramel, Ph.D 69 Vice President of Product
Development
W. Virginia Walker 50 Vice President of Finance and
Administration
Mr. Casey is Chairman of the Board, President and Chief Executive Officer
of Scios Nova. He joined Scios Nova in December 1987 as President and Chief
Executive Officer, and has served as a Director since that time. Mr. Casey was
elected Chairman of the Board in November 1992. From early 1985 to 1987, he was
with ALZA Corporation as Executive Vice President and President of ALZA
Pharmaceuticals. From 1976 to 1985, he worked for Syntex Corporation. He
joined Syntex Laboratories in 1976 as a manager and became director of marketing
research in the following year. In 1979, he was named director of sales, in
1981 was promoted to vice president and in 1983 was appointed general manager of
Syntex
15
Medical Diagnostics. Mr. Casey began his career in pharmaceuticals as a sales
representative for Eli Lilly and Company. From 1968 to 1970, Mr. Casey served
in the U.S. Peace Corps in Ethiopia. Mr. Casey serves on the boards of
Guilford, Karo Bio AB, an affiliated Swedish biotechnology company, and VIVUS
Inc., a publicly-traded medical devices company located in Menlo Park,
California.
Mr. Feldman joined Scios Nova in January 1995 as Vice President of
Commercial Operations. Prior to joining the Company, Mr. Feldman was
responsible for sales and marketing activities in two pharmaceutical companies
affiliated with Johnson & Johnson. From 1993 through 1994, Mr. Feldman was
National Sales Manager at Ortho Pharmaceutical Corporation. From 1973 to 1993,
Mr. Feldman held various sales and marketing positions at McNeil Pharmaceutical,
where he most recently served as National Sales Manager from 1990 to 1993.
Dr. Grossbard joined Scios Nova in 1991 as Vice President of Medical and
Regulatory Affairs. Immediately prior to joining Scios Nova, he was Vice
President of Medical Affairs for HemaGen/PFC, a privately-held company
developing perfluorocarbon products for oxygen transport and as blood
substitutes. From 1982 to 1990, he was Associate Director and later Director of
Clinical Research for Genentech, in charge of the clinical development of
Alteplase (TPA). From 1978 to 1980, as an Assistant Attending Physician at
Memorial Hospital and Assistant Professor of Medicine at Cornell Medical School,
he helped to establish the Bone Marrow Transplant Service at Memorial Hospital.
He received his M.D. from the Columbia College of Physicians and Surgeons in
1973, trained in internal medicine at Massachusetts General Hospital in Boston
and received subspecialty training in hematology at the Columbia-Presbyterian
Medical Center and the Memorial Sloan-Kettering Cancer Center in New York.
Dr. Lewicki joined Scios Nova in 1983 as a Scientist, became Senior
Scientist in 1984, Vice President, Research in August 1986, Vice President and
Deputy Director, Research in March 1987 and Vice President and Director of
Research in February 1988. Dr. Lewicki received his Ph.D. in
Physiology/Pharmacology from the University of California, San Diego in 1979.
From 1979 to 1981, Dr. Lewicki conducted postdoctoral research at the University
of Virginia, Department of Internal Medicine and, from 1981 to 1983, he was a
research pharmacologist at Stanford University, Division of Clinical
Pharmacology.
Mrs. Morris joined the Company in April 1993 as Vice President of Business
Development. From 1989 until joining Scios Nova, Mrs. Morris served as Vice
President of Business Development at McNeil Pharmaceutical, an affiliate of
Johnson & Johnson, where she was responsible for licensing and new product
development. From 1977 to 1989, Mrs. Morris held various sales and marketing
positions at McNeil. Mrs. Morris began her career in pharmaceuticals as a sales
representative for Syntex Corporation.
Mr. Newman became Vice President, General Counsel and Secretary of Scios
Nova in June 1983, Vice President of Commercial Development, General Counsel and
Secretary in December 1989 and Vice President of Legal Affairs, General Counsel
and Secretary in March 1992. Prior to joining Scios Nova, Mr. Newman was an
attorney in private practice. Mr. Newman serves on the board of Guilford.
Dr. Ramel joined the Company in July 1993 as Vice President of Product
Development. Prior to joining Scios Nova, Dr. Ramel spent eleven years at
Genentech, most recently as Senior Director of Process Sciences, which consisted
of three departments: Cell Culture and Fermentation, Product Recovery, and
Pharmaceutical R&D. Prior to joining Genentech, he was Director of the
Biopolymer Research Department at Hoffmann-La Roche. He held academic positions
at the University of Basel, Switzerland, SUNY at Buffalo and Boston University
Medical School, and was a postdoctoral fellow at UC Berkeley's Biochemistry and
Virus Laboratory. In addition, he was an NIH fellow for two years. Dr. Ramel
holds a Ph.D. in Physical Chemistry from the University of Basel. He serves on
the board of Sepragen Corporation, a publicly-held manufacturer of bioprocessing
equipment used in the production of biopharmaceuticals.
Mrs. Walker became Vice President of Finance of Scios Nova in April 1986,
having served as Controller of Scios Nova since February 1985, and Vice
President of Finance and Administration in March 1992. Prior to joining Scios
Nova, she was Controller for Intersil, Inc., at that time a subsidiary of
General Electric Company, from June 1983 to January 1985 and for more than five
years before that directed various accounting units of Intersil, Inc.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Class D Warrants are traded on the Nasdaq
National Market System under the symbols SCIO and SCIOZ, respectively. The
tables below set forth the high and low sales prices as reported by Nasdaq for
the Common Stock and the Class D Warrants during the last two fiscal years. No
cash dividends have been paid on Common Stock, and the Company does not
anticipate paying cash dividends in the foreseeable future. As of December 31,
1994, there were approximately 7,900 stockholders of record of the Company's
Common Stock.
Common Stock
------------
FY 1994 FY 1993
------- -------
High Low High Low
---- --- ---- ---
Q1 11-1/8 7-1/8 10-1/2 5-7/8
Q2 8-1/8 5-1/4 7 5-1/4
Q3 8-1/2 5-1/2 7-3/4 5-3/8
Q4 7-5/8 4-3/4 13-7/8 7-1/4
Year 11-1/8 4-3/4 13-7/8 5-1/4
Class D Warrants
----------------
FY 1994 FY 1993
------ -------
High Low High Low
---- --- ---- ---
Q1 3-5/8 2-1/4 4-1/4 1-3/4
Q2 2-3/4 1-1/2 2-5/8 1-1/2
Q3 2-3/4 1-7/8 2-5/8 1-3/4
Q4 3 1-3/4 5-3/4 1-3/4
Year 3-5/8 1-1/2 5-3/4 1-1/2
17
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except share data)
Year Ended December 31
1994 1993 1992* 1991 1990
---- ---- ----- ---- ----
Revenues $53,667 $ 47,568 $ 25,085 $ 7,357 $12,425
Loss from operations (31,719) (43,237) (138,703) (21,189) (8,398)
Other income 4,045 6,298 7,338 5,536 3,281
Net loss (27,961) (36,579) (131,946) (17,251) ** (5,131)
Net loss per common share (0.79) (1.05) (5.76) (1.18) (0.44)
Cash and securities 104,439 108,271 134,660 126,680 32,448
Working capital 38,942 96,334 42,842 93,417 15,620
Total assets 146,096 151,278 182,398 160,972 62,911
Long-term obligations 1,739 2,323 401 -- --
Stockholders' equity 126,438 135,299 169,144 156,092 60,078
Employees at
year end 283 337 382 167 153
-------------------------
<FN>
* Includes Nova Pharmaceutical Corporation and Nova Technology Limited
Partnership from the dates of their acquisition, September 3, 1992 and
December 31, 1992, respectively, as well as related charges for in-process
technologies totaling $108.0 million.
** Includes a $6.2 million charge related to the purchase of minority
interests in a subsidiary, Metabolic Biosystems Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 3, 1992, Nova was merged into Scios and the combined company was
renamed Scios Nova Inc. The results of operations of Nova are included with
Scios with effect from the date of the merger and the Company's balance sheets
at December 31, 1992 reflect the inclusion of Nova's assets and liabilities
adjusted to fair value at the merger date. The acquisition was accounted for
under the purchase method of accounting. The excess of the purchase price over
the fair value of the acquired assets was allocated to in-process technology
and was written off, resulting in a one-time non-cash charge to operations of
$87.5 million.
In December 1992, the Company exercised an option to purchase all limited
partnership interests in the Nova Technology Limited Partnership ("NTLP"). The
acquisition of the partnership interests, paid in shares of Scios Nova common
stock, resulted in a one-time $20.5 million non-cash charge to operations.
OPERATING RESULTS (1994, 1993 AND 1992)
Total revenues were $53.7 million in 1994, $47.6 million in 1993 and $25.1
million in 1992. The increase in 1994 over 1993 was principally due to higher
contract revenues and an increase in co-promotion commissions earned under the
Company's agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of
Johnson & Johnson, for the co-promotion of McNeil's psychiatric product
HALDOL[REGISTERED TRADEMARK] Decanoate. Co-promotion commissions were earned
over a twelve-month period in 1994 versus a five-month period in 1993. The 1993
revenue increase over 1992 was principally due to sales of certain psychiatric
products (the "SB Products") under license from SmithKline Beecham Corporation
("SB"), which are included for twelve months in 1993 and four months in 1992.
Revenue from product sales (SB Products) was $42.8 million, $43.6 million and
$17.3 million in 1994, 1993 and 1992, respectively. Product sales declined 2%
from 1993 to 1994. The decrease was due to a drop in unit sales as a result of
generic competition, partially offset by a 1994 price increase. The 1993 product
sales increase over 1992 resulted from inclusion of twelve months of sales in
1993 versus only four months in 1992.
Revenue from research and development contracts was $7.1 million, $3.5 million
and $7.7 million in 1994, 1993 and 1992, respectively. The increase in contract
revenue from 1993 to 1994 was principally due to payments from Pfizer Inc
associated with the renegotiation of the contract for
18
the development of insulinotropin and from Kaken Pharmaceutical Co., Ltd.
("Kaken") for the licensing of the Company's FIBLAST[REGISTERED TRADEMARK] bFGF
manufacturing technology and initiation of Phase III clinical trials in Japan.
The decrease in contract revenue from 1992 to 1993 was principally due to the
cessation of funding under the Company's agreements with Pfizer, NTLP and E.
Merck and receipt in 1992 of milestone payments under the collaboration with
Marion Merrell Dow Inc. to study Alzheimer's disease. Revenues under the
collaboration with Marion Merrell Dow comprised approximately 26% and 49% of
contract revenue in 1994 and 1993, respectively, while revenues under the
collaboration with Kaken were 31% and 19% of contract revenue in 1994 and 1993,
respectively.
Cost of goods sold for the SB Products was $26.5 million, $28.8 million and
$11.7 million in 1994, 1993 and 1992, respectively. The decline from 1993 to
1994 was principally the result of lower unit sales. Gross margins improved from
34% in 1993 to 38% in 1994 due to a sales mix shift towards higher margin
products and a price increase imposed in early 1994. The increase in cost of
goods sold from 1992 to 1993 was the result of twelve months of 1993 sales
versus four months of post-merger sales in 1992.
Research and development expenses were $34.5 million in 1994 compared to $39.5
million and $29.9 million in 1993 and 1992, respectively. The 1994 decrease from
1993 reflects the late 1993 staffing reduction associated with the elimination
of certain projects as a result of the strategic refocusing of the Company and
the 1994 consolidation of Baltimore, Maryland research and development
operations with those in Mountain View, California. The 1993 increase over 1992
is due to the inclusion of a greater share of the cost of Nova operations from
the date of the merger and expanded product development activities for the
Company's lead products.
Marketing, general and administrative expenses were $15.7 million in 1994
compared to $18.2 million and $12.2 million in 1993 and 1992, respectively.
Although higher sales and marketing spending occurred in 1994 to support the
increased sales activities, the increase was more than offset in 1994 by
expense reductions in general and administrative areas associated with the
strategic refocusing and the consolidation of research and development
operations. The cost increase from 1992 to 1993 reflects twelve months of
costs for the Nova administrative and marketing operations in 1993 versus
four months in 1992.
19
The profit distribution to third parties of $5.2 million in 1994 and $4.3
million in 1993 represents SB's share of the net profits from sales of the SB
Products. The 1994 increase over 1993 is due to higher gross margins and a lower
allocation of sales and marketing expenses for SB Product sales. The increase in
profit distribution to third parties from $1.5 million in 1992 to $4.3 million
in 1993 was due to 1993's twelve months of SB Product sales versus only four
months in 1992.
In September 1994, the Company recorded a charge of $3.5 million associated with
the closure of its research and development facility in Baltimore, Maryland and
the transfer of certain research and development operations to Mountain View,
California. The consolidation was undertaken to eliminate redundancies, reduce
future expenses and increase productivity by concentrating research and
development activities in one location. As a result of the consolidation,
forty-one positions were eliminated in 1994 and ten additional positions are
expected to be eliminated in the first quarter of 1995. Twelve employees were
relocated to Mountain View, California. The Company's Commercial Operations
staff, which was formerly located at the site being closed, moved to a smaller
office space in Baltimore in the first quarter of 1995.
Other income decreased to $4.0 million in 1994 from $6.3 million in 1993 and
$7.3 million in 1992. The decrease year to year resulted primarily from lower
income generated by the Company's investment portfolio. The 1994 decrease from
1993 was also due to lower rental income from sublease tenants and higher
royalty expense associated with the increased contract revenue.
In June 1994, the Company's subsidiary, Guilford Pharmaceuticals Inc.,
("Guilford") completed an initial public stock offering which reduced the
Company's ownership in Guilford from 62% to 29%. Upon the reduction in ownership
percentage, the Company began using the equity method of accounting for its
investment in Guilford. Prior to the date of the public stock offering, the
financial results of Guilford were consolidated with those of the Company. The
minority interest of $0.6 million and $0.4 million in 1994 and 1993,
respectively, reflects the minority shareholders portion of Guilford losses when
the Company was fully consolidating Guilford operations.
The equity in net loss of affiliates of $0.9 million in 1994 represents the
Company's share of the losses of Guilford. Recognition of these losses reduced
the Company's investment in Guilford to zero by December 31, 1994. The equity
loss of $0.6 million in 1992 represents the Company's share of the losses of
NTLP from the merger date. The Company's investment in NTLP was reduced to zero
by year-end 1992.
20
OUTLOOK
The Company expects to continue to incur losses for several more years. The
ability of the Company to achieve profitability depends principally upon the
success of: (i) product development efforts and the timing and scope of
regulatory approvals, particularly with respect to the Company's lead products,
AURICULIN[REGISTERED TRADEMARK] anaritide and NATRECOR[REGISTERED TRADEMARK]
BNP; (ii) the Company's strategy of generating operating profits from marketing
and selling the SB Products, HALDOL[REGISTERED TRADEMARK] Decanoate and
additional third-party products, which it is actively seeking to acquire; and
(iii) the development of new third-party funding sources and other revenues to
support continuing research and development programs. Profitability will also be
affected by the Company's ability to undertake complex manufacturing processes
in a cost-effective manner.
In early 1995, the Company completed patient enrollment in its Phase III
clinical study of AURICULIN for the treatment of acute renal (kidney)
failure. Upon completion of the statistical analysis of the study, the
Company, along with its partner, Genentech, will determine the next
appropriate steps based on results of the study. If the Company and Genentech
determine that the results of the Phase III study provide sufficiently
compelling evidence of AURICULIN's safety and efficacy, the Company will
proceed as rapidly as possible to prepare and submit a New Drug Application
to the Food and Drug Administration. If the Company determines that a
confirmatory study or studies are required, the Company plans to initiate the
additional study(s) as soon as is practical. It is also possible that the
results of the study will not warrant any further development of AURICULIN.
Hence, the outcome of the trial, and resulting steps taken by the Company,
will have a significant effect on the Company's future profitability.
Further development of the Company's products will require substantial
additional investment to cover, among other things, the costs of clinical
trials, the securing of commercial scale manufacturing capability and the
marketing and sales expenses associated with product introductions. While market
introduction of new products will require considerable expenditures by the
Company, revenues generated from such products, assuming they are successfully
developed, may not be realized for several years. In the case of AURICULIN, the
Company alone is responsible for continued development costs, but marketing and
related costs will be shared by Genentech in the United States and Canada.
Genentech will also share in any marketing profits from AURICULIN sales in the
United States and Canada.
21
Sales of the SB Products are likely to decrease during the next few years
because of increased competition from generic products. The Company hopes to
more than offset any such decrease with revenues from its co-promotion of
HALDOL[REGISTERED TRADEMARK] Decanoate and the promotion of any additional
third-party products. There can be no assurance that such additional products
will be available on terms favorable to the Company or at all.
A portion of the Company's revenues will continue to be derived from
collaborative research agreements. Future collaborative funding will depend, in
part, upon priorities set by the sponsors in relation to the sponsor's other
product opportunities and its assessment of the continued benefit of sponsoring
a particular program at the Company. Other licenses, as well as agreements to
manufacture and supply bulk materials, are also subject to termination by the
licensee or contract sponsor under certain circumstances. For the reasons stated
above, the operating results of the Company are expected to fluctuate from
period to period. Inflation is not expected to have a significant effect upon
the business of the Company. In addition, because the Company participates in a
highly dynamic industry, the Company's common stock price is subject to
significant volatility as a result of developments in the biopharmaceutical
industry.
PRO FORMA OPERATING RESULTS
Operating results of the Company reflect the effects of the merger of Scios and
Nova from the merger date, September 3, 1992. The following pro forma financial
information for 1992 assumes that the merger of Scios and Nova had occurred on
the first day of 1992 adjusted to exclude certain non-recurring merger-related
expenses.
On a pro forma basis, total revenues for 1992 would have been approximately
$56.2 million with SB Product sales of $43.7 million and contract revenues of
$12.5 million. Gross margins from product sales, as a percentage of such sales,
would have been 32% in 1992. Pro forma research and development expenses would
have been $46.8 million and marketing, general and administration expenses $16.6
million in 1992.
Pro forma total costs and expenses for 1992, including cost of goods sold and
profit distribution to third parties would have been $97 million with other
income of $8.5 million.
22
LIQUIDITY AND CAPITAL RESOURCES
Combined cash, cash equivalents and securities (both current and non-current)
totaled $104.4 million at December 31, 1994, a decrease of $3.8 million from
December 31, 1993. The decrease is mainly attributable to the $19.7 million used
to fund operations and $3.2 million of spending on property, plant and equipment
partially offset by proceeds from the sale of preferred stock to Genentech ($20
million). Working capital decreased from $96.3 million at December 31, 1993 to
$38.9 million at December 31, 1994. The decrease resulted principally from a
decrease in current available-for-sale securities and a corresponding increase
in non-current available-for-sale securities.
To date, the Company's operations and capital requirements have been financed
primarily from the proceeds of public and private sales of common stock,
research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. The tax effect of the
Company's net operating losses and tax credit carryforwards will provide an
additional source of liquidity only to the extent that profitable operations are
achieved prior to the expiration of carryforward periods. The utilization of
losses generated through the date of the merger will be subject to annual
limitations.
OUTLOOK
The Company's cash, cash equivalents and marketable securities of approximately
$104.4 million at December 31, 1994, together with revenues from product sales,
collaborative agreements and interest income, will be used to fund new and
continuing research and development programs, expanded clinical trials for its
products under development and other general purposes. The Company believes its
cash resources will be sufficient to meet its capital requirements for at least
the next two years.
Over the long term, the Company will need to arrange additional financing for
the future operation of its business, including the commercialization of its
products currently under development, and will consider collaborative
arrangements and additional public or private financings, including additional
equity financings. There can be no assurances that such additional funding can
be obtained on reasonable terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules
appearing on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS. The information required by Item 10 of Form
10-K with respect to identification of directors is incorporated by reference to
the information contained in the section captioned "Election of Directors" of
the Company's definitive Proxy Statement for the 1995 Annual Meeting of
Stockholders.
IDENTIFICATION OF EXECUTIVE OFFICERS. See pages 15 and 16 of this Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the sections captioned "Executive
Compensation" and "Stock Option Grants and Exercises" of the Company's
definitive Proxy Statement for the 1995 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Security
Ownership of Management and Principal Stockholders" of the Company's definitive
Proxy Statement for the 1995 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Transactions" of the Company's definitive Proxy Statement for
the 1995 Annual Meeting of the Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. See Index to Financial Statements and
Financial Statement Schedules at page F-1 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES. See Index to Financial Statements
and Financial Statement Schedules at page F-1 of this Form 10-K.
(3) EXHIBITS. See Exhibit Index at page 25 of this Form 10-K.
(b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed in the
last quarter of 1994.
24
EXHIBIT INDEX
Exhibit
Number Page
------ ----
3.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . .
3.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J
10.1 Biotechnology Research Partners, Ltd. Agreement of Limited
Partnership dated October 29, 1982; Development Contract,
Technology License Agreement and Joint Venture Agreement
between Biotechnology Research Partners, Ltd. and the
Registrant dated December 29, 1982; Promissory Note dated
December 29, 1982; and Memorandum of Understanding between
Battery Park Credit Company and Biotechnology Research
Partners, Ltd. dated December 28, 1982 . . . . . . . . . . . . . A
10.2 1983 Incentive Stock Option Plan, as amended, and form of
Stock Option Agreement, Promissory Note and Pledge
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . E
10.3 Common Stock Purchase Agreement dated April 15, 1985 between
the Registrant and American Home Products Corporation. . . . . . B
10.4 Agreement of Purchase and Sale (Real Estate) and Joint Escrow
Instructions by and between Charleston Properties and Bio-Shore
Holdings, Ltd. dated December 30, 1986 . . . . . . . . . . . . . C
10.5 1986 Supplemental Stock Option Plan, as amended, and form of
Stock Option Agreement, Promissory Note and Pledge Agreement . . E
10.6 Rights Exercise Agreement between the Registrant and American
Home Products Corporation dated February 28, 1986 and Letter
of March 26 and May 16, 1986 . . . . . . . . . . . . . . . . . . B
10.7 Subscription and Shareholders Agreement between the Registrant
and Swedish Genetic Investments AB dated October 2, 1987 . . . . D
10.8 Employment Letter dated November 11, 1987 and Promissory
Notes dated January 4, 1988, between the Registrant and
Richard L. Casey . . . . . . . . . . . . . . . . . . . . . . . . D
10.9 Rights Agreement dated as of June 18, 1990 between the
Registrant and The First National Bank of Boston . . . . . . . . F
10.10 Agreements and Plan of Reorganization dated November 26, 1991
between the Registrant and each of Jeffrey S. Flier, Ronald C.
Kahn, Bruce M. Spiegelman and Joel F. Habener. . . . . . . . . . H
10.11 1992 Equity Incentive Plan . . . . . . . . . . . . . . . . . . . H
10.12 Agreement and Plan of Reorganization by and among the Registrant,
Nova Pharmaceutical Corporation and DD Acquisition Subsidiary,
Inc. dated as of May 12, 1992, as amended, July 17, 1992 . . . . J
10.12 Form of Technology Transfer Agreement between Nova Technology
Limited Partnership, Nova and Nova Technology Corporation. . . . I
25
Page
----
10.14 Form of Manufacturing and Marketing Agreement between Nova
Technology Limited Partnership and Nova. . . . . . . . . . . . . I
10.15 Amended and Restated Agreement of Limited Partnership of Nova
Technology Limited Partnership . . . . . . . . . . . . . . . . . I
10.16 Form of Research Agreement between Nova Technology Limited
Partnership and Nova . . . . . . . . . . . . . . . . . . . . . . I
10.17 Form of Guaranty given by Nova to Nova Technology Limited
Partnership and its limited partners . . . . . . . . . . . . . . I
10.18 Form of Purchase Option Agreement between each of the limited
partners of Nova Technology Limited Partnership and Nova . . . . I
10.19 Nonemployee Director Stock Option Plan . . . . . . . . . . . . . G
10.20 Warrant Agreement dated December 1, 1987 between the Registrant
and IBJ Schroder Bank & Trust Company. . . . . . . . . . . . . . K
10.21 Consulting Agreement dated August 1, 1993 between the Registrant
and Solomon H. Snyder, MD. . . . . . . . . . . . . . . . . . . . Q
10.22 Consulting Agreement dated September 3, 1992 between the
Registrant and Hans Mueller. . . . . . . . . . . . . . . . . . . R
10.23 Lease dated September 30, 1985, as amended, between McCormick
Properties, Inc. and the Registrant. . . . . . . . . . . . . . . O
10.24 Agreement dated March 21, 1986 between Celanese and Nova,
including option agreement and other exhibits thereto. . . . . . L
10.25 Purchase Option Agreements dated December 1, 1987 and December
30, 1987 between Nova and the limited partners of Nova Technology
Limited Partnership. . . . . . . . . . . . . . . . . . . . . . . K
10.26 Warrant Agreement dated December 1, 1987 between Nova and Dean
Witter Reynolds Inc. . . . . . . . . . . . . . . . . . . . . . . K
10.27 Purchase Agreement dated as of July 29, 1988 between Nova and SKB
Properties, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . M
10.28 Stock Purchase Warrant dated July 29, 1988 to purchase Common
Stock of the Registrant. . . . . . . . . . . . . . . . . . . . . M
10.29 CNS Psychiatric Products Agreement dated June 30, 1990 between
SmithKline Beecham Corporation and Nova. . . . . . . . . . . . . N
10.30 Master Security Agreement, Promissory Note and Negative Covenant
Agreement, each dated April 28, 1993, between the Registrant and
General Electric Capital Corporation . . . . . . . . . . . . . . P
10.31 Master Lease Agreement dated July 16, 1993 between the Registrant
and General Electric Capital Corporation . . . . . . . . . . . . P
26
10.32 Collaboration Agreement dated December 30, 1994 between the
Registrant and Genentech, Inc. . . . . . . . . . . . . . . . . . .
10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between
the Registrant and Genentech, Inc. . . . . . . . . . . . . . . . .
10.34 Note Agreement dated December 30, 1994 between the Registrant and
Genentech, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Computation of Loss per Share. . . . . . . . . . . . . . . . . . .
22.1 Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . .
24.1 Consent of Coopers & Lybrand . . . . . . . . . . . . . . . . . . .
25.1 Powers of Attorney. Reference is made to page 29.
--------------------
A Filed as an exhibit to Form S-1 Registration Statement (File No. 2-86086),
as amended, and incorporated herein by reference.
B Filed as an exhibit to Form S-1 Registration Statement (File No. 33-3186),
as amended, and incorporated herein by reference.
C Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1986 and
incorporated herein by reference.
D Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1987 and
incorporated herein by reference.
E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988 and
incorporated herein by reference.
F Filed as an exhibit to Form 8-K filed on June 19, 1990 and Form 8-A
Registration Statement filed on June 20, 1990 and incorporated herein by
reference.
G Filed as an exhibit to Form S-8 Registration Statement (File No. 33-39878)
filed on April 8, 1991 and incorporated herein by reference.
H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 and
incorporated herein by reference.
I Filed as an exhibit to Form S-1 Registration Statement (File No. 33-14937)
filed on behalf of Nova Technology Limited Partnership and incorporated
herein by reference.
J Filed as an exhibit to Form S-4 Registration Statement (File No. 33-49846)
filed on July 22, 1992 and incorporated herein by reference.
K Filed as an exhibit to Form S-3 Registration Statement of Nova (File No.
33-14938) and incorporated herein by reference.
L Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1985 and incorporated herein by reference.
M Filed as an exhibit to Nova's Report on Form 8-K dated July 29, 1988 and
incorporated herein by reference.
N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1990 and incorporated herein by reference.
O Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1986 and incorporated herein by reference.
27
P Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993 and incorporated herein by reference.
Q Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993 and incorporated herein by reference.
R Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1992 and
incorporated herein by reference.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCIOS NOVA INC.
Date: March 24, 1995 By /s/ Richard L. Casey
------------------------------------
Richard L. Casey
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard L. Casey his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard L. Casey Chairman of the Board, President and March 24, 1995
---------------------
Richard L. Casey Chief Executive Officer
(Principal Executive Officer)
/s/ W. Virginia Walker Vice President of Finance and March 24, 1995
---------------------
W. Virginia Walker Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer)
/s/ Myron Du Bain Director March 24, 1995
---------------------
Myron Du Bain
/s/ Steven D. Goldby Director March 24, 1995
---------------------
Steven D. Goldby
/s/ William F. Miller Director March 24, 1995
---------------------
William F. Miller
/s/ Donald E. O'Neill Director March 24, 1995
---------------------
Donald E. O'Neill
/s/ Robert W. Schrier Director March 24, 1995
---------------------
Robert W. Schrier
/s/ Solomon H. Snyder Director March 24, 1995
---------------------
Solomon H. Snyder
/s/ Eugene L. Step Director March 24, 1995
---------------------
Eugene L. Step
29
FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-7
Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the information
is included in the consolidated financial statements or notes thereto.)
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Stockholders of Scios Nova Inc.:
We have audited the accompanying consolidated balance sheets of Scios Nova Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Scios Nova Inc.
and subsidiaries as of December 31, 1994 and 1993, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
San Jose, California
February 1, 1995
F-2
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 29,674 $ 13,587
Available-for-sale securities 22,441 90,312
Accounts receivable 3,529 2,614
Other receivables 70 1,681
Prepaid expenses 1,147 1,200
--------------------------------------------------------------------------------
Total current assets 56,861 109,394
Available-for-sale securities, non-current 52,324 4,372
Property and equipment, net 35,118 36,879
Other assets 1,793 633
--------------------------------------------------------------------------------
Total Assets $ 146,096 $ 151,278
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,301 $ 2,168
Other accrued liabilities 11,557 9,637
Deferred contract revenue 2,444 617
Current portion of long-term debt 617 638
--------------------------------------------------------------------------------
Total current liabilities 17,919 13,060
Minority interests -- 596
Long-term debt 1,739 2,323
Commitments (Notes 9 and 10)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares
authorized; 21,053 issued and outstanding -- --
Common stock; $.001 par value; 150,000,000 shares
authorized; issued and outstanding: 35,283,200 and
35,109,937, respectively 35 35
Additional paid-in capital 391,745 370,468
Notes receivable (27) (159)
Unrealized losses on securities (2,309) --
Accumulated deficit (263,006) (235,045)
--------------------------------------------------------------------------------
Total stockholders' equity 126,438 135,299
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 146,096 151,278
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994 1993 1992
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues:
Product sales $ 42,792 $ 43,585 $ 17,344
Co-promotion commissions 3,770 500 --
Research & development contracts 7,105 3,483 7,741
--------------------------------------------------------------------------------
53,667 47,568 25,085
--------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 26,541 28,782 11,713
Research and development 34,491 39,490 29,945
Marketing, general and administration 15,681 18,190 12,191
Profit distribution to third parties 5,173 4,343 1,495
Restructuring charges 3,500 -- --
Write-off of purchased technology -- -- 108,444
--------------------------------------------------------------------------------
85,386 90,805 163,788
--------------------------------------------------------------------------------
Loss from operations (31,719) (43,237) (138,703)
Other income:
Investment income 4,386 6,592 6,846
Other income (expense), net (341) (294) 492
--------------------------------------------------------------------------------
4,045 6,298 7,338
Equity in net loss of affiliates (883) (15) (581)
Minority interests 596 375 --
--------------------------------------------------------------------------------
Net loss $(27,961) $(36,579) $(131,946)
--------------------------------------------------------------------------------
Net loss per common share $ (0.79) $ (1.05) $ (5.76)
--------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 35,219,442 34,768,195 22,915,336
--------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994 1993 1992
--------------------------------------------------------------------------------
(IN THOUSANDS)
Cash flows from operating activities:
Net Loss $ (27,961) $ (36,579) $(131,946)
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 4,693 4,588 3,440
Write-off of purchased technology -- -- 108,444
Other 1,898 1,219 1,301
Change in assets and liabilities,
net of
Nova acquisition:
Accounts receivable (915) 2,211 (2,226)
Accounts payable 1,133 321 (2,577)
Other accrued liabilities 2,498 (513) (1,236)
Other (997) 149 1,552
--------------------------------------------------------------------------------
Net cash used by operating
activities (19,651) (28,604) (23,248)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment, net (3,179) (2,269) (4,773)
Acquisition of Nova Pharmaceutical
Corporation and Nova Technology
Limited Partnership,
net of cash received -- -- (3,435)
Sales of marketable securities 454,147 266,226 95,798
Purchases of marketable securities (435,036) (229,325) (90,056)
--------------------------------------------------------------------------------
Net cash provided (used) by
investment activities 15,932 34,632 (2,466)
Cash flows from financing activities:
Proceeds from issuance of preferred
stock 20,000 -- --
Proceeds from exercise of common stock
warrants -- -- 7,950
Issuance of common stock and collection
of notes receivable from stockholders,
net 411 2,032 785
Issuance of common stock for technology
acquisition -- -- 712
Issuance of long-term debt -- 2,801 --
Payments of long-term debt (605) (349) (10,483)
--------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 19,806 4,484 (1,036)
-------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 16,087 10,512 (26,750)
Cash and cash equivalents at beginning
of period 13,587 3,075 29,825
--------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 29,674 $ 13,587 $ 3,075
--------------------------------------------------------------------------------
Supplemental cash flow data:
Net unrealized securities losses $ (2,309) -- --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Notes
Common Stock Additional Preferred Receivable Unrealized
----------------------- Paid-In Stock from Losses on Accumulated
Shares Par Value Capital Par Value Stockholders Securities Deficit Total
------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balances at
December 31, 1991 18,322,847 $183 $222,429 $-- $ -- $ -- $ (66,520) $ 156,092
Issued in acquisitions 14,863,238 149 135,380 135,529
Warrants exercised 1,232,188 12 7,939 7,951
Options exercised 125,158 1 869 (85) 785
Other 74,681 1 732 733
Change in par value (311) 311 --
Net loss (131,946) (131,946)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1992 34,618,112 $ 35 $367,660 $-- $ (85) $ -- $(198,466) $(169,144)
Options exercised 409,255 2,106 (74) 2,032
Incentive plan awards 61,357 449 449
Other 21,213 253 253
Net loss (36,579) (36,579)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1993 35,109,937 $ 35 $370,468 $-- $(159) $ -- $(235,045) $ 135,299
Issued to
Genentech, Inc. 20,000 20,000
Options exercised 71,702 375 132 507
Incentive plan awards 65,349 578 578
Other 36,212 324 324
Unrealized losses on
available-for-sale
securities (2,309) (2,309)
Net loss (27,961) (27,961)
------------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 35,283,200 $ 35 $391,745 $-- $ (27) $(2,309) $(263,006) $ 126,438
------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Scios Nova Inc. ("the Company") and its wholly-owned and
majority-owned subsidiaries. Other affiliates, more than 20% but less than 50%
owned, are accounted for on the equity basis. Intercompany transactions and
balances are eliminated on consolidation.
CASH EQUIVALENTS The Company considers all highly liquid investments with
original maturities of less than ninety days to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
AVAILABLE-FOR-SALE SECURITIES Beginning January 1, 1994, the Company adopted
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities at December 31, 1994 were deemed by management to be
available for sale and are stated at fair value with net unrealized gains or
losses reported in stockholders' equity. Adoption of Statement No. 115 did not
have a material effect on the Company's Consolidated Financial Statements.
Available-for-sale securities consist of short- and medium-term interest-bearing
corporate securities and U.S. Treasury Notes.
At December 31, 1993, the Company followed Financial Accounting Standards No.
12, "Accounting for Certain Marketable Securities." At December 31, 1993, all
marketable securities were stated at cost, which approximated market value.
Premiums and discounts were amortized over the period from acquisition to
maturity.
CONCENTRATION OF CREDIT RISK The Company's excess cash is invested in a
diversified portfolio of securities consisting of U.S. Treasury Notes, deposits
with major banks and financial institutions, and in investment-grade
interest-bearing corporate securities issued by companies in a variety of
industries.
DEPRECIATION AND AMORTIZATION Buildings and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets (3 to 7 years for equipment and 5 to 40 years for buildings).
Leasehold improvements are amortized on a straight-line basis over the shorter
of the asset life or fixed lease term.
PRODUCT SALES Revenue from sales of certain psychiatric products (the "SB
Products") under license from SmithKline Beecham Corporation (see Note 3) is
recognized in the period in which the products are shipped. Provision is made
for estimated returns and allowances, cash discounts and rebates attributable
to Medicaid programs.
F-7
CO-PROMOTION COMMISSIONS Revenue from co-promotion commissions (see Note 3) is
recognized based on estimated sales levels of McNeil Pharmaceutical's
psychiatric product HALDOL [REGISTERED TRADEMARK] Decanoate for the
contract year.
CONTRACT REVENUES Research and development contract revenues from
cost-reimbursement agreements are recorded as the related expenses are incurred,
up to contractual limits. Payments received which are related to future
performance are deferred and recorded as revenues as they are earned over
specified future performance periods. Research and development payments for
which no services are required to be performed in the future and license
payments irrevocably received are recognized as revenues upon receipt. Research
and development expenses in 1994, 1993 and 1992 include approximately $2.9
million, $3.1 million and $5.5 million, respectively, incurred in connection
with programs subject to cost reimbursement, collaborative or other performance
agreements.
PER SHARE DATA Loss per share is based on the weighted average number of common
shares outstanding for all periods. Stock options, warrants and preferred stock
are antidilutive and therefore excluded from the calculation.
2. Merger with Nova Group
A. NOVA PHARMACEUTICAL CORPORATION On September 3, 1992 ("date of merger"), Nova
Pharmaceutical Corporation ("Nova") was merged into Scios Inc. ("Scios") and the
combined company was renamed Scios Nova Inc. The acquisition was accounted for
under the purchase method of accounting. The results of operations of Nova are
included with the Company's results of operations with effect from the date of
merger.
The Company issued common stock and stock options valued at $114.5 million,
assumed liabilities of $22.9 million and incurred $3.6 million in additional
costs related to the merger. Total consideration as allocated to the assets
acquired was as follows:
(IN THOUSANDS)
Current assets $ 3,995
Marketable securities 40,472
Property and equipment 8,026
Other assets 1,022
In-process technology 87,465
--------------------------------------------------------------------------------
$140,980
--------------------------------------------------------------------------------
F-8
The portion of the purchase price allocated to in-process technology was charged
as an operating expense in 1992.
B. NOVA TECHNOLOGY LIMITED PARTNERSHIP In December 1992, the Company exercised
its option to acquire all limited partner interests in Nova Technology Limited
Partnership ("NTLP") for $20.4 million and transaction costs of approximately
$0.1 million. The Company also issued contingent payment rights to all limited
partners of the partnership, pursuant to which the Company is obligated until
January 15, 2008 to pay royalties on the sale or license of certain products
that were under development by the partnership.
The total expense of $20.5 million was allocated entirely to in-process
technologies and charged as an operating expense in 1992.
C. CASH FLOWS The merger of Scios and Nova and the acquisition of NTLP included
certain non-cash investing and financing activities as follows (in thousands of
dollars):
Common stock and stock options issued $ 134,817
Liabilities assumed 22,902
Assets acquired (53,192)
In-process technology (107,962)
Cash paid 3,435
D. UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma condensed
statement of operations information has been prepared to give effect to the
merger as if such transaction had occurred at the beginning of the period
presented. The historical results of operations have been adjusted to reflect
the elimination of nonrecurring and merger-related expenses. The information
presented is not necessarily indicative of the results of future operations of
the merged companies.
YEAR ENDED DECEMBER 31, (UNAUDITED) 1992
--------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT SHARE DATA)
Revenues $ 56.1
Net loss $(33.9)
Pro forma loss per share $(1.07)
F-9
3. Joint Business Arrangements
A. AGREEMENT WITH SMITHKLINE BEECHAM Under the terms of an agreement with
SmithKline Beecham Corporation ("SB"), the Company has the exclusive U.S. rights
to market the SB Products. SB is fully responsible for ancillary matters
relating to sales of the SB Products (including various administrative tasks),
for the maintenance in good standing of all New Drug Applications with respect
to the SB Products and for the maintenance of product liability insurance. The
Company pays SB 40% of net profits, as defined in the agreement, from U.S. sales
of the SB Products.
B. AGREEMENT WITH MCNEIL PHARMACEUTICAL In July 1993, the Company entered into a
five-year agreement with McNeil Pharmaceutical ("McNeil"), an affiliate of
Johnson & Johnson, to jointly promote the injectable antipsychotic HALDOL
[REGISTERED TRADEMARK] Decanoate. Under the agreement, the Company receives
payments based on achieving specified levels of sales. McNeil manufactures and
distributes the product. The agreement may be extended up to an additional three
years upon the attainment of revenue goals.
C. AGREEMENT WITH GENENTECH, INC. In December 1994, the Company entered into a
collaboration agreement with Genentech, Inc. ("Genentech") for the development
and commercialization of AURICULIN [REGISTERED TRADEMARK] anaritide for the
treatment of acute renal failure. The two companies will co-promote AURICULIN
for this indication in the United States and Canada, and share equally profits
from its commercialization. Genentech received exclusive marketing rights to
markets outside North America in return for a royalty on sales. Concurrent with
the collaboration agreement, Genentech purchased $20 million of Scios Nova
preferred stock, convertible into approximately 2.1 million shares of common
stock and provided a $30 million loan to the Company in the form of a letter of
credit (see Note 9). The loan can be drawn down through the year 2002. Genentech
has also agreed to pay the Company up to $50 million in milestone payments upon
the achievement of key development events and commercial targets.
D. AGREEMENT WITH KAKEN PHARMACEUTICAL CO., LTD. In September 1994, the Company
entered into a series of agreements with Kaken Pharmaceutical Co., Ltd.
("Kaken") to expand a previous agreement signed in 1988 for FIBLAST [REGISTERED]
TRADEMARK] bFGF ("FIBLAST"). Under the new agreements, the Company will
collaborate with Kaken to further develop the FIBLAST manufacturing process,
supply
F-10
FIBLAST product to Kaken and provide Kaken a license to the Company's FIBLAST
manufacturing technology. In return, Kaken will make milestone payments to the
Company which are contingent on Kaken's continuing development of the
product.
4. Affiliates
In June 1994, Guilford Pharmaceuticals Inc. ("Guilford"), a fully consolidated
subsidiary of the Company, completed an initial public offering which resulted
in the Company's ownership declining from 62% to 29%. As a result, the equity
method of accounting was adopted by the Company. Prior to the date of the public
offering, the financial results of Guilford were fully consolidated with those
of the Company.
5. Available-For-Sale Securities
Unrealized gains and losses on available-for-sale securities at December 31,
1994 by classification were as follows:
Unrealized Unrealized
Fair Value Cost Basis Gains Losses Net
--------------------------------------------------------------------------------
(IN THOUSANDS)
Debt securities:
U.S. Government &
Government Agency
Securities $37,872 $39,732 $-- $(1,860) $(1,860)
Corporate Bonds 36,893 37,342 7 (456) (449)
--------------------------------------------------------------------------------
Total $74,765 $77,074 $ 7 $(2,316) $(2,309)
--------------------------------------------------------------------------------
At December 31, 1994, scheduled maturities for available-for-sale securities
were less than one year for $22,441,000 and between one and five years for
$52,324,000.
The Company realized gains of $43,879 and losses of $225,717 on the disposal of
available-for-sale securities during 1994.
F-11
6. Property and Equipment
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
(IN THOUSANDS)
Laboratory equipment $ 12,012 $ 12,409
Computer and related equipment 4,138 4,170
Furniture and other 2,782 2,811
Buildings and building improvements 41,371 39,401
--------------------------------------------------------------------------------
60,303 58,791
Accumulated depreciation and
amortization (26,532) (23,007)
33,771 35,784
Construction in progress 1,347 1,095
--------------------------------------------------------------------------------
$ 35,118 $ 36,879
--------------------------------------------------------------------------------
7. Other Assets
DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
(IN THOUSANDS)
Deposits $ 127 $ 23
Other assets 268 9
Employee notes receivable 1,360 563
Acquired technology 38 38
--------------------------------------------------------------------------------
$1,793 $633
--------------------------------------------------------------------------------
8. Other Accrued Liabilities
Other accrued liabilities at December 31, 1994 and 1993 comprised the
following:
1994 1993
--------------------------------------------------------------------------------
(IN THOUSANDS)
Accrued Medicaid rebates $ 2,387 $2,428
Accrued payroll 2,640 2,708
Profit distribution to third parties 1,645 1,361
Costs related to Nova acquisition 207 940
Restructure reserve 2,290 --
Other 2,388 2,200
--------------------------------------------------------------------------------
$11,557 $9,637
--------------------------------------------------------------------------------
F-12
In September 1994, the Company recorded a charge of $3.5 million associated with
the closure of its research and development facility in Baltimore, Maryland and
the transfer of certain research and development operations to the Company's
Mountain View, California headquarters. Of the total restructuring charge,
severance and related costs accounted for 34%, asset write-downs 49%, facility
carrying costs 7% and chemical disposal and other expenses 10%.
As of December 31, 1994, actual cash expenditures incurred as a result of the
restructuring plan were approximately $1.2 million. The remaining $2.3 million
provision consists of $0.5 million of additional cash expenses and $1.8
million of non-cash write-downs. It is anticipated that the remaining costs will
be incurred by year-end 1995. In early 1995, the Company terminated its lease on
the Baltimore research and development facility by exercising its option to
purchase the building for approximately $3 million. The Company has recorded a
charge of $1.25 million for the impairment of leasehold improvements in the
Baltimore facility.
1994 1994
Provision Activity Balance
--------------------------------------------------------------------------------
(IN THOUSANDS)
Severance and relocation $1,178 $1,028 $ 150
Asset write-downs 1,701 (87) 1,788
Facility carrying costs 250 50 200
Chemical disposal and other 371 219 152
--------------------------------------------------------------------------------
$3,500 $1,210 $2,290
--------------------------------------------------------------------------------
9. Lease and Debt Commitments
A. OPERATING LEASES The Company leases facilities under various operating leases
in California and the land on which the Company's California facilities are
located. The long-term ground lease expires in 2053. Beginning in July 2010, a
portion of the annual ground rent is subject to renegotiation.
Future minimum payments under these leases are as follows:
Operating Leases
--------------------------------------------------------------------------------
(IN THOUSANDS)
1995 $171
1996 181
1997 181
1998 178
1999 186
--------------------------------------------------------------------------------
$897
--------------------------------------------------------------------------------
F-13
Rent expense for all operating leases was approximately $565,000, $601,000 and
$565,000 in 1994, 1993 and 1992, respectively.
B. CAPITAL LEASES and Long-term Debt At December 31, 1994, long-term debt and
capital lease commitments were:
Capital Leases Debt
--------------------------------------------------------------------------------
(IN THOUSANDS)
1995 $135 $ 680
1996 128 680
1997 9 778
1998 -- 375
1999 -- --
--------------------------------------------------------------------------------
272 2,513
Less future interest (30) (399)
--------------------------------------------------------------------------------
$242 $2,114
--------------------------------------------------------------------------------
Long-term debt consists of two five-year notes, secured by equipment, at
interest rates of 9.5% and 9.8%. Under the terms of the notes, the Company is
required to maintain a minimum cash and marketable securities balance of $35
million.
C. GENENTECH LOAN COMMITMENT As part of the AURICULIN agreement with Genentech,
Genentech has provided a $30 million loan to the Company in the form of a letter
of credit. The loan can be drawn down through the year 2002, bearing interest at
the prime rate. The loan is repayable in cash or Scios Nova common stock, at the
prevailing market price, at the Company's option at any time through December
31, 2002.
10. Research Commitments
The Company's commitments for research sponsorship payments to collaborators and
institutions during 1995, 1996 and 1997 aggregate approximately $259,000.
In 1988, the Company purchased the interests of Biotechnology Research Partners,
a limited partnership ("BRP") in a joint venture and made a down payment of
$575,000. The balance of the purchase price is to be paid in quarterly
installments in accordance with the following formula: (i) until the minority
partners have received payments of approximately $22.8 million, the Company will
pay approximately 37% of the royalty income from third-party licenses and
approximately 3.7% of the Company's gross sales of Partnership products; (ii)
thereafter, until the minority
F-14
partners have received aggregate payments of approximately $34.1 million, the
Company will pay approximately 31% of the royalty income and approximately 3.1%
of the Company's gross sales of Partnership products; and (iii) thereafter,
until the earlier of 20 years from the date of exercise of the option or the
time all patents relating to the Partnership's technology expire and all
information relating to that technology becomes part of the public domain, the
Company will pay to the minority partners approximately 20.5% of the royalty
income and approximately 2% of the Company's gross sales of Partnership
products.
11. Stockholders' Equity
As part of the merger, the outstanding Nova warrants were converted into
warrants to purchase approximately 4,645,000 shares of Scios Nova common stock.
At December 31, 1994, warrants were outstanding to purchase approximately
2,662,000 shares at prices ranging from $8.84 to $55.13 per share and are
generally exercisable through June 1998.
The Company's preferred stock may be issued in series that have such rights as
may be designated by the Board of Directors from time to time. There were 21,053
shares of Series A preferred stock issued and outstanding at December
31, 1994. These non-voting shares, which are convertible at the option of the
holder into 2,105,300 shares of common stock, were issued to Genentech in
connection with the AURICULIN collaboration agreement. They have rights to
dividends if a dividend is paid on the common stock and preference upon a merger
or liquidation of the Company equal to the $950.00 per share purchase price.
There was no preferred stock issued and outstanding in the years ended 1993
and 1992.
The Company has a Common Share Purchase Rights Plan under which stockholders
have a right to purchase for each share held, one share of the Company's common
stock at a 50% discount and, in certain circumstances, a share of common stock
of an acquirer at a similar discount. The rights become exercisable, at $55.00
per right, in the event of an acquisition or tender offer which results in the
acquisition of 20% or more of the Company's common stock. The rights may be
redeemed, in certain circumstances, at $0.01 per right and expire on July
31, 2000.
12. Employee Benefits and Stock Option Plans
The Company has a qualified profit sharing plan and trust under Internal Revenue
Service Code sections 401(a) and 401(k). Employees are eligible to participate
in the plan at the beginning of each calendar quarter during the year and can
elect to contribute to the plan up to 15% of their
F-15
salary subject to current statutory limits. In 1994, the Company matched
employee contributions at a rate of 100% to a maximum of $3,000 per employee for
the calendar year. The Company contribution vests over a three-year period.
Company contributions to the plan totaled approximately $794,000 in 1994,
$845,000 in 1993 and $234,000 in 1992.
Under the Company's stock option plans, the following shares of common stock are
authorized and available for grant as of December 31, 1994:
Shares
Shares Options Available
Plan Title Authorized Outstanding For Grant Option Price
--------------------------------------------------------------------------------
1983/86 2,200,000 1,275,689 41,912 Not less than 85% FMV
1989 170,000 43,000 0 Fair Market Value
1992 3,500,000 2,364,406 817,357 Not less than 85% FMV
NQ 443,161 11,740 0 Not less than 85% FMV
Additional information with respect to the activity of outstanding options is
summarized in the following table.
Number of Aggregate
Common Stock Shares Option Price Price
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balances at December 31, 1991 1,683,235 $5.00-$19.62 $ 16,896
Granted:
In connection with Nova merger 639,824 $0.64-$20.54 3,304
Other 2,794,908 $2.56-$21.62 24,915
Exercised (125,158) $5.12-$14.00 (870)
Canceled (816,665) $5.50-$21.62 (13,153)
--------------------------------------------------------------------------------
Balances at December 31, 1992 4,176,144 $0.64-$21.13 31,092
Granted 317,269 $0.01-$ 6.88 2,035
Exercised (409,255) $0.01-$ 9.13 (2,106)
Canceled (163,727) $5.63-$21.13 (1,301)
--------------------------------------------------------------------------------
Balances at December 31, 1993 3,920,431 $0.16-$21.13 29,720
Granted 303,149 $6.63-$ 9.00 2,597
Exercised (71,702) $2.56-$ 9.13 (408)
Canceled (457,043) $2.56-$18.46 (3,650)
--------------------------------------------------------------------------------
Balances at December 31, 1994 3,694,835 $0.16-$21.13 $ 28,259
--------------------------------------------------------------------------------
At December 31, 1994, options to purchase 2,437,370 shares were fully vested.
F-16
13. Significant Customers
In 1994, 1993 and 1992, no customers contributed more than 10% of total
revenues.
In 1994, of the $3.5 million in accounts receivable, $1.5 million was a
receivable from SB for prior period sales of the SB Products and $1.3 million
was a receivable from McNeil based on realizing specific sales levels.
14. Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. As of January 1, 1993, no cumulative effect adjustment was
required for the adoption of SFAS 109, as the resulting net deferred tax asset
was fully reserved by a valuation allowance.
The Company has federal and state income tax net operating loss ("NOL")
carryforwards at December 31, 1994 for tax purposes available as follows:
Federal $206,000,000
State 47,000,000
These federal and state carryforwards expire in the years 1997 through 2008, and
1997 through 1999, respectively.
Due to a change in the ownership of the Company, as defined, approximately
$120,000,000 of the federal NOL carryover is subject to an annual utilization
limitation of $15,700,000, and approximately $22,700,000 of the state NOL
carryover is subject to an annual utilization limitation of $9,300,000. Should
another change in ownership occur, future utilization of the Company's NOL
carryforwards may be subject to additional limitations.
F-17
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
YEAR ENDED DECEMBER 31, 1994 1993
--------------------------------------------------------------------------------
(IN THOUSANDS)
Depreciable and amortizable assets,
primarily technology $ 6,000 $ 5,900
Other accrued liabilities 3,100 2,500
State (net of federal benefit) 3,800 4,000
Net operating loss carryforward 70,000 57,800
Research credit 7,500 6,000
Valuation allowance (90,400) (76,200)
--------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
--------------------------------------------------------------------------------
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
F-18