SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 12(g)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 12(g)
of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 0-26144
International Murex Technologies Corporation
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(Exact name of registrant as specified in its charter)
Province of British Columbia, Canada N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2255 B. Queen Street, East, Suite 828, Toronto, Ontario, Canada M4E 1G3
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (519) 836-8016
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 12(g) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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The number of common shares outstanding as of November 10, 1997 was
16,628,413, excluding treasury shares.
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Quarterly Report on Form 10-Q
For the Nine Months Ended September 30, 1997
Table of Contents
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Item Page
Number PART I -- FINANCIAL INFORMATION Number
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1 Financial Statements
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 1997 and 1996 5
Consolidated Statements of Changes in
Shareholders' Equity for the
Period January 1, 1996 to September 30, 1997 6
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 9
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
1 Legal Proceedings 19
6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U. S. Dollars)
September 30, December 31,
----------------------------------
1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,101 $ 9,723
Accounts receivable, net of allowance
for doubtful accounts of $2,999
and $3,174, respectively 39,737 33,718
Inventories 21,734 21,534
Amounts due from affiliate 2,589 4,415
Prepaid and other 2,942 1,207
-----------------------------
Total current assets 73,103 70,597
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PROPERTY, PLANT AND EQUIPMENT-
at cost less accumulated depreciation
and amortization 13,309 10,091
PATENTS, TRADEMARKS AND LICENSES-
at cost less accumulated amortization 6,862 5,738
OTHER ASSETS 8,907 8,687
------------------------------
TOTAL $ 102,181 $ 95,113
===============================================================================
See notes to consolidated financial statements.
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September 30, December 31,
--------------------------------
1997 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 11,579 $ 9,757
Accrued expenses:
Professional fees 1,828 2,222
Royalty payments 2,225 1,978
Employee related 5,291 5,985
Income taxes payable 1,600 1,508
Litigation settlements 347 3,310
Restructuring 99 1,402
Other 4,299 2,809
Current portion of capitalized lease obligations 114 151
------------------------------
Total current liabilities 27,382 29,122
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DEFERRED RENT 65 77
LINE OF CREDIT AND NOTE PAYABLE 13,846 9,638
CAPITALIZED LEASE OBLIGATIONS 93
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common shares, without par value,
200,000,000 shares authorized; 16,627,745 and
16,578,853 shares issued, respectively 84,611 84,460
Additional paid-in capital 14,521 13,906
Accumulated deficit (35,342) (41,655)
Less cost of 101,043 and 286,929 common shares
held in treasury, respectively (5) (1,085)
Unrealized gain on marketable securities 5,328 4,405
Accumulated currency translation adjustment (8,225) (3,848)
------------------------------
Shareholders' equity 60,888 56,183
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TOTAL $ 102,181 $ 95,113
===============================================================================
See notes to consolidated financial statements.
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. Dollars, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1997 1996 1997 1996
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REVENUES:
Product sales $ 23,760 $ 24,917 $ 74,870 $ 75,291
License fees and other 2,223 5,445
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Total revenues 25,983 24,917 80,315 75,291
COSTS AND EXPENSES:
Cost of products sold 10,326 8,556 28,314 26,911
Research and development 2,136 1,504 5,863 4,918
General and administrative 3,421 10,147 13,882 20,452
Sales and marketing 6,750 7,164 21,088 21,892
Foreign exchange (gain) loss (43) 227 (68) 951
Royalty expense 1,378 (5,916) 4,784 (3,124)
Restructuring expense 2,100 2,100
-------------------- --------------------
Total costs and expenses 23,968 23,782 73,863 74,100
-------------------- --------------------
Income From Operations 2,015 1,135 6,452 1,191
Interest income 15 138 104 447
Interest expense (321) (92) (933) (1,058)
Loss (gain) on asset disposals (17) 74 (30) 78
Gain (loss) on liquidation of investee 444 (43)
Other income 962 21 987 125
-------------------- --------------------
Income (loss) before income taxes 2,654 1,720 6,580 740
Income tax expense 89 428 267 731
-------------------- --------------------
NET INCOME $ 2,565 $ 1,292 $ 6,313 $ 9
==================== ====================
Net income per common share $ 0.14 $ 0.08 $ 0.36 $ 0.00
==================== ====================
Weighted average shares
outstanding (in thousands) 17,779 16,447 17,681 16,257
==================== ====================
See notes to consolidated financial statements.
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. Dollars, except share data)
Common Stock Additional
---------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
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December 31, 1995 16,688,931 $84,136 $13,906 ($43,504)
Issued pursuant to employee
stock purchase plan 23,297 91
Exercise of employee stock
options 15,900 50
Issued as stock compensation 281,925 1,692
Shares tendered to treasury
Retirement of treasury shares (431,200) (1,509)
Unrealized gain on marketable
securities
Net income 1,849
Foreign currency translation
------------------------------------------------------------
December 31, 1996 16,578,853 84,460 13,906 (41,655)
Issued pursuant to employee
stock purchase plan 16,806 116
Exercise of employee stock
options 171,500 845
Retirement of treasury shares (185,886) (1,080)
Issued pursuant to class
action settlement 46,472 270
Reversion of settlement shares 615
Unrealized gain on marketable
securities
Net income 6,313
Foreign currency translation
------------------------------------------------------------
September 30, 1997 16,627,745 $84,611 $14,521 ($35,342)
============================================================
Unrealized Accumulated
Gain On Currency Total
Treasury Marketable Translation Shareholders'
Shares Securities Adjustment Equity
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December 31, 1995 ($1,514) ($3,493) $49,531
Issued pursuant to employee
stock purchase plan 91
Exercise of employee stock
options 50
Issued as stock compensation 1,692
Shares tendered to treasury (1,080) (1,080)
Retirement of treasury shares 1,509
Unrealized gain on marketable
securities $4,405 4,405
Net income 1,849
Foreign currency translation (355) (355)
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December 31, 1996 (1,085) 4,405 (3,848) 56,183
Issued pursuant to employee
stock purchase plan 116
Exercise of employee stock
options 845
Retirement of treasury shares 1,080
Issued pursuant to class
action settlement 270
Reversion of settlement shares 615
Unrealized gain on marketable
securities 923 923
Net income 6,313
Foreign currency translation (4,377) (4,377)
-------------------------------------------------------------
September 30, 1997 ($5) $5,328 ($8,225) $60,888
=============================================================
See notes to consolidated financial statements.
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
Nine Months Ended
September 30,
--------------------
1997 1996
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Operating Activities:
Net income $ 6,313 $ 9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,964 2,974
Amortization 602 269
Loss (gain) on sale of property and equipment 30 (78)
Changes in working capital:
Accounts receivable (4,247) 2,196
Inventories (200) (3,557)
Prepaid expenses and other assets (2,401) (108)
Trade accounts payable 1,822 2,770
Accrued expenses (2,619) (2,871)
--------------------
Net cash provided by operating activities 2,264 1,604
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Investing Activities:
Additions to property and equipment (6,300) (3,537)
Additions to patents and licenses (1,726) (5,154)
Proceeds from sale of marketable securities 1,254
Proceeds from sale of property and equipment 88 154
---------------------
Net cash (used in) investing activities (6,684) (8,537)
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Financing Activities:
Increase in borrowings 4,208
Reduction of other long-term liabilities (142) (152)
Proceeds from issuance of common shares 961 41
---------------------
Net cash provided by (used in) financing activities 5,027 (111)
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Effect of Exchange Rate Changes (4,229) (953)
Net (Decrease) in Cash and Cash Equivalents (3,622) (7,997)
Cash and Cash Equivalents at Beginning of Period 9,723 15,771
---------------------
Cash and Cash Equivalents at End of Period $ 6,101 $ 7,774
===============================================================================
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest $933 $447
Cash paid for income taxes $475 $1,127
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Consolidated Statements of Cash Flows (Continued)
(In thousands of U.S. Dollars)
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ending September 30, 1997 and 1996, IMTC retired
$1,080 and $1,509, respectively, of shares held in treasury.
During the nine months ended September 30, 1996, a subsidiary of the
Company, Specialist Diagnostics Limited ("SDL"), entered voluntary
liquidation. Therefore, its financial statements were deconsolidated. During
the three months ended September 30, 1997, approximately $1,700 in cash was
returned to the Company, consequently, as of September 30, 1997, the Company
has an amount due from SDL of $2,589.
See notes to consolidated financial statements.
-8-
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Notes to Consolidated Financial Statements
(In thousands of U.S. Dollars, except per share data)
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1. NATURE OF THE COMPANY AND BASIS OF PRESENTATION:
International Murex Technologies Corporation ("IMTC") operates through
many incorporated subsidiaries throughout the world under the Murex
name (the "Murex Group"). The Murex Group develops, manufactures and
markets medical diagnostic products, licenses its technology and
provides medical services for the screening, diagnosis and monitoring
of infectious diseases and other medical conditions. (IMTC and the
Murex Group are collectively referred to herein for consolidated
financial purposes only as the "Company").
Effective January 1, 1996, IMTC's United Kingdom ("UK") operating
business was restructured into two companies, Murex Diagnostics Limited
("MDL") and Murex Biotech Limited ("MBL"). MDL subsequently changed its
name to Specialist Diagnostics Limited ("SDL") and entered voluntary
liquidation. As of September 30, 1997 and December 31, 1996, IMTC and
its subsidiaries represented predominantly all of the creditors of SDL;
therefore, in the consolidated financial statements, the subsidiary is
assumed to be fully liquidated. During the three months ended September
30, 1997, approximately $1,700 in cash was returned to the Company from
the SDL liquidator. Management expects to ultimately receive additional
net proceeds of $2,589 from the SDL liquidator after settlement of all
liquidation costs, which is reflected as of September 30, 1997 as
amounts due from affiliates.
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Such financial statements do not include all disclosures required by
generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the Company's annual consolidated financial
statements dated December 31, 1996, except as disclosed herein.
Accordingly, the information contained herein should be read in
conjunction with such annual consolidated financial statements and
related disclosures. The accompanying financial statements reflect, in
the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the results
for the interim periods presented. Results of operations for the
quarter and nine months ended September 30, 1997 are not necessarily
indicative of results expected for an entire year.
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2. INVENTORIES:
September 30, December 31,
1997 1996
-------------------------------------------------------------------------
Raw materials and supplies.......... $ 5,605 $ 5,911
Work in process..................... 5,312 5,244
Finished goods...................... 10,817 10,379
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Total inventories................... $ 21,734 $21,534
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3. CONTINGENCIES:
Four class action lawsuits were instituted on behalf of all persons who
had purchased IMTC's securities between May 21, 1992 and August 19,
1992 against IMTC, two executive officers of IMTC, and two
shareholders. Although the defendants denied the allegations in the
complaints, the parties agreed to settle all outstanding claims for
$5.4 million during 1996. In accordance with the Stipulation Settlement
Agreement, the shareholders transferred 185,886 common shares of the
Company's stock to the Company to be used as their portion of the
settlement. During the third quarter of 1997, the claims administrator
finished qualifying claimants and submitted a motion to the U.S.
District Court setting out the final distribution of the settlement
fund, which was approved by the Court during October 1997. The sum of
damages claimed and expenses incurred by the claims administrator and
Plaintiffs' counsel is less than the total settlement fund,
consequently, the Company is entitled to the remaining cash of
approximately $1,500, net of employment costs and 105,766 common shares
of the Company's stock. These shares are valued at $615 ($5.81 per
share), as defined by the settlement agreement. The reversion of the
settlement fund has been reflected in the accompanying financial
statements as an offset to general and administrative costs for the
cash portion and an increase to additional paid-in capital for the
stock portion.
During 1995, the UK Inland Revenue questioned the tax basis of
inventory, accounts receivable and property, plant and equipment
related to the 1992 purchase of assets from The Wellcome Foundation
Limited ("Wellcome"). If Inland Revenue is successful in its argument,
a tax charge of up to $4.2 million could arise. Management believes it
has meritorious defenses against the claims of Inland Revenue and that
the Company has sufficient tax loss carryforwards to offset any tax
charges. Therefore, the Company has not recorded a provision for losses
related to this matter.
4. RESTRUCTURING:
During September 1996, the Company recorded a restructuring charge of
$2,100. The restructuring was driven by the need to reposition the
Company for its movement into the patient monitoring business. The
worldwide plan resulted in personnel reductions of approximately 50
people from various functions. The restructuring provision consisted
predominantly of estimated costs for employee severance and other
benefits. As of December 31, 1996, 35 employees left the Company
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related to the restructuring plan, resulting in actual payments of
$698. As such, the remaining accrual at December 31, 1996 was $1,402.
The Company substantially completed the restructuring during the nine
months ended September 30, 1997, and $99 remained accrued at September
30, 1997 for payments to former employees.
5. RECONCILIATION OF CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("CANADIAN GAAP" AND U.S. GAAP"):
There were no differences between Canadian GAAP and U.S. GAAP during
the year ended December 31, 1996 and the quarter and nine months ended
September 30, 1997.
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INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Form 10-Q for the Nine Months Ended September 30, 1997
Part I - Financial Information
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Amounts expressed in U.S. Dollars)
This report contains or refers to forward-looking information
including future revenues, products, and income and is based upon
current expectations that involve a number of business risks and
uncertainties. Among the factors that could cause actual results to
differ materially from any forward-looking statement include, but are
not limited to, technological innovations of competitors, delays in
product introductions, changes in health care regulations and
reimbursements, litigation claims, changes in foreign economic
conditions or currency translation, product acceptance or changes in
government regulation of the Company's products, as well as other
factors discussed in other Securities and Exchange Commission filings
for the Company.
FINANCIAL CONDITION
During the quarter and nine months ended September 30, 1997, the
Company continued its profitability, generated cash from operations
and maintained positive working capital.
Litigation and Technology Disputes
The Murex Group's business utilizes newly-developed technologies
that include patents on processes and devices. These types of
technologies are the focal point for the biotechnology industry. The
ownership and patentability of such processes or devices have become
increasingly complex, resulting in competitive claims of ownership
within the industry.
IMTC and several subsidiaries of the Murex Group were involved in
several lawsuits, including technology patent issues, which were
settled during 1996. The Company is not presently the defendant in any
material judicial proceeding. The Company is vigorously pursuing its
patent infringement suit in which the Company is the plaintiff against
Abbott Laboratories ("Abbott"), and continues to defend one UK Inland
Revenue Claim, both of which are discussed below.
On July 2, 1996, a subsidiary of IMTC, Murex Diagnostics
Corporation ("MDC"), filed a patent infringement suit against Abbott
seeking injunctive relief against Abbott and damages for infringement
of a patent held by MDC for a particle-bound binding component
immunoassay. The suit alleges that two Abbott systems, the Abbott
IMx(TM)Immunoassay and the Abbott AxSYM(TM) System, infringe one or
more claims of MDC's patent. A motion for Summary Judgement filed by
Abbott was subsequently denied, in all aspects, by the US District
Court. Murex is anticipating to go to trial in mid-1998, unless an out
of court settlement can be reached. The 1998 legal costs to be
incurred by the Company for this litigation will not exceed the 1997
legal costs incurred to date.
During 1995, the UK Inland Revenue questioned the tax basis of
inventory, accounts receivable and property, plant and equipment
related to the 1992 purchase of assets from Wellcome. If the Inland
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Revenue is successful in its argument, a tax charge of up to $4.2
million could arise. Management believes it has meritorious defenses
against the claims of the Inland Revenue and that the Company has
sufficient tax loss carryforwards to offset any tax charges.
Therefore, the Company has not recorded a provision for losses related
to this matter.
Liquidity and Capital Resources
The Company has sufficient cash resources and adequate working
capital to carry on its current business and meet existing capital
requirements over the next twelve months and beyond. Cash and working
capital totaled $6.1 million and $45.7 million, respectively at
September 30, 1997. For the nine months ended September 30, 1997, the
Company generated cash from operations of $2.3 million.
On November 12, 1996, the Company entered into a three year, $15
million line of credit facility with Bank of America, which is
collateralized by the accounts receivable and inventory of its United
States ("US"), UK and Barbados subsidiaries. Based on the value of the
collateral, the borrowings outstanding of $12,378,000 and a letter of
credit outstanding of $809,000, there were $2,053,000 unused and
available under this credit facility as of September 30, 1997. The
credit facility was drawn upon for, among other things, payments
associated with the Innogenetics alliance, working capital and ongoing
business activities. The Company has an interest rate swap agreement
with the lender that fixed the interest rate at 8.9% for a notional
principal amount of $8.0 million.
The Company's working capital and capital requirements will
depend upon numerous factors including: the results of research and
development, the levels of resources devoted to the establishment and
expansion of marketing and manufacturing, technological developments,
and the timing and costs of obtaining approvals for new products.
Depending on the outcome of these factors, the Company may need to
raise additional funds in the future for use to fund acquisitions,
complete products in development, and for general purposes. There are
no assurances that such funds will be available on favorable terms, if
at all.
The Company anticipates that its current capital resources,
availability under its line of credit facility, and anticipated
profitability will enable it to maintain planned operations over the
next twelve months and beyond.
Management Outlook
The key to the Company's growth is the ability to identify new
needs in the marketplace, and to expeditiously meet these needs
through access to appropriate innovations and technologies, and to
rapidly incorporate them into the Murex Group's product line. However,
there can be no assurance that the Murex Group will successfully add a
significant number of new products to its product line.
Management believes that strategic ventures and licensing
arrangements position the Company for the future and play an important
role in the achievement of management's corporate objectives. The
strategic ventures, licensing transactions and Murex Group product
innovations discussed below are examples of the Company's recent
successes in capitalizing on the Company's world-wide distribution
network and product technologies.
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During February 1996, MDC entered into an exclusive distribution,
development and license agreement with Innogenetics N.V.
("Innogenetics") to develop and market gene probe products for the
monitoring of patients and the classification of viral diseases. Under
the terms of the agreement, MDC paid $5.9 million during 1996 and $1.6
million during 1997 to Innogenetics for the exclusive rights to
distribute Innogenetics' LiPA(R) products, excluding HCV, for 15
years. MDC will also pay Innogenetics a royalty of 10% of the Murex
Group's net sales of Innogenetics' products. This strategic alliance
with Innogenetics has provided the Murex Group with exclusive rights
to the Murex/Innogenetics LiPA(R) HIV-1 Reverse Transcriptase ("HIV-1
RT") monitoring test. This test simultaneously detects wild-type and
HIV mutations associated with the reverse transcriptase drugs AZT,
ddI, ddC and 3TC. The Company launched the test world-wide, except in
the US and France where the product is distributed for research use
only, late in the second quarter of 1997. In the US, Murex
Diagnostics, Inc. ("MDI") has had discussions with the Food and Drug
Administration but has not yet filed an application for the clearance
of the test.
The reverse transcriptase drugs AZT, ddI, ddC and 3TC are
currently being utilized, separately and in combination, to treat HIV
patients. Resistance to the drugs occurs as virus mutations develop
that may eventually cause the drug, or combination of drugs, to become
ineffective against the virus. The Murex/Innogenetics LiPA HIV-1 RT
test is the first rapid assay to identify HIV mutant strains.
Resistant mutations occur with all the approved HIV therapies.
Therefore, it is critical to monitor the development of mutations so
therapies can be appropriately combined and adjusted. The new HIV-1 RT
test provides crucial information relating to the development of
resistance to individual and combination therapy. By obtaining
resistance information, physicians can avoid using drugs that may not
be effective, thereby improving patient care and eliminating the
expense of unnecessary and ineffective therapy. In addition, a
physician may utilize resistance information prior to starting or
changing therapy by screening a patient for the presence of existing
drug resistant mutations.
The broadening of the Company's focus into the world-wide
emerging diagnostics monitoring market, which management expects to
exceed $1 billion by the year 2000, should support revenue growth in
the coming years. The Innogenetics distribution, developing and
licensing agreement gives the Murex Group access to the rapidly
growing gene probe market for monitoring patients and the
classification of viral diseases. The monitoring market directly
complements the Company's existing markets of screening and diagnosis
and also leverages its worldwide marketing and distribution network.
The diagnostic monitoring market includes tests that, among other
applications, assess a patient through the course of a disease or
infection, monitor various forms of anti-viral therapies and monitor
conditions associated with transplants. In contrast, screening and
diagnosis tests are used to indicate whether a patient is, or is not,
carrying a disease or infection. In patient use, screening and
diagnosis tests are usually only required to be administered once
while monitoring tests are usually administered numerous times.
Patient monitoring has become an important and critical element
of patient care and treatment. The Murex Group believes it can capture
a significant portion of this emerging market by strategically
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positioning itself in key segments of the market including AIDS
therapy, organ transplantation and other immune compromised
conditions.
In addition to the agreement above, during May 1997, the Company
licensed its trademarked Sample Addition Monitor (SAM(TM)) technology
to Innogenetics. The color-coded SAM technology will be utilized in
Innogenetics' enzyme immunoassay products (EIA) with the first being
Innogenetics' HIV Ag assay. Developed by Murex's internal research and
development, SAM's color-coded reagents change color in each testing
step of an assay. The technology assists clinicians in ensuring that
samples have been added and the testing procedure has been conducted
correctly. The Company's SAM technology is utilized in selected Murex
products and it has been licensed to a number of large healthcare
companies, including Chiron Corporation.
Effective June 1997, Genelabs Diagnostics SA of Geneva,
Switzerland, ("Genelabs") appointed MDC to handle distribution of its
diagnostics products in Europe and South America. The move is expected
to benefit hospitals and laboratories in terms of product availability
and technical support, and expand the supply of Genelabs' specialty
tests for the diagnosis of infectious diseases and immunological
disorders to new areas of need. Agreements made between the two
companies, which are exclusive or co-exclusive depending on the
country, provide for the sale of viral confirmatory tests including,
Western Blots for Human TCell Lymphotropic Virus ("HTLV"), Human
Immunodeficiency Virus ("HIV"), EpsteinBarr Virus ("EBV") and
cytomegalovirus ("CMV"), Autoblot 36 and Western Blot instrumentation,
as well as Hepatitis E Elisa.
Effective February 1997, the Murex Group and Digene Corporation
("Digene") entered into a five year agreement to work together to
create a direct European sales operation for Digene's sexually
transmitted disease diagnostics business. Digene will sell its Hybrid
Capture(R) human papilloma virus ("HPV") DNA test directly in selected
European markets using the Company's existing distribution
infrastructure in exchange for selling service fees and a percentage
of Digene HPV sales. All other Digene products exclusively sold by
Murex in Europe will not be affected by this transaction. In August
1997, the Company further extended the strategic alliance with Digene
by obtaining exclusive rights to market Digene's new Hybrid Capture(R)
II HIV RNA, CMV and Hepatitis B ("HBV") tests in the UK, Western and
Eastern Europe, Africa, the Middle East and Singapore, following
receipt of appropriate import and export authorizations from the FDA
and relevant foreign authorities.
During January 1997, MDC entered into a 10 year, worldwide
Original Equipment Manufacturer ("OEM") distribution agreement with
Eurogenetics N.V. ("Eurogenetics"). Pursuant to the terms of the
agreement, the Murex Group will distribute Eurogenetics' mircotitre
plate EIA kits for rubella, toxoplasmosis, CMV, chlamydia, herpes and
beta-2 microglobulin.
The Company's worldwide marketing and distribution capabilities
motivate companies such as Innogenetics, Genelabs, Digene and
Eurogenetics to partner with the Company in licensing agreements and
product development and thereby contribute to the flow of new and
creative products. The Company's alliances provide the Murex Group
with access to technology, strengthen and extend the Company's
monitoring market strategy and allow the Company to further penetrate
its existing markets in blood screening and clinical diagnostics.
Throughout 1997 and beyond, the Company will actively seek out
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acquisitions, strategic business alliances and other opportunities
that will support the Company's future.
During June 1997, the Company sold TTP Corporation ("TTP"), a
wholly-owned subsidiary of MDC, to Shield Diagnostics Group plc.
("Shield"). TTP owned the intellectual property and other rights to
ten products used for the diagnosis of thyroid dysfunction and the
measurement of cardiovascular/blood coagulation degradation products.
TTP's assays are targeted to a specific segment of the diagnostics
industry that is not a part of the Company's long-term strategy of
focusing on the screening, diagnosis and monitoring of infectious
diseases. Therefore, the divestiture of TTP is an element of the Murex
Group's overall plan that will allow the Company to focus its
resources on the infectious disease diagnostics monitoring market. The
Company will continue to manufacture and sell the TTP product line
acquired by Shield for a period of three years, pursuant to a purchase
commitment. This will provide Shield security regarding availability
of the products while they are being integrated into Shield's business
as well as permit Shield to utilize the Murex Group's worldwide
distribution network.
MDC completed a non-exclusive, out-licensing transaction during
the second quarter of 1994 by licensing to Abbott certain technology
acquired as part of the 1992 acquisition of the diagnostics division
of Wellcome. For the nine months ended September 30, 1997, MDC accrued
$940,000 of pro-rata excess minimum royalty revenue for 1997. The
underlying revenue stream associated with this licensing agreement has
been growing at approximately 40% per year. It continues to remain
strong and growing and the Company expects the minimum royalty levels
to continue to be exceeded until the expiration of the patent in the
year 2004. Therefore, beginning in 1998, the Company anticipates
receiving at least $3 million per year from this licensing
arrangement.
Recent Murex Group product innovations, such as SAM(TM), and
tests for HTLV, syphilis and E-Coli, should contribute to future sales
growth. These new and enhanced products, created through the Company's
in-house research and development endeavors, strengthened the
Company's broad line of well-established virology and bacteriology
products and allowed the Company to enter new markets in targeted
areas around the world.
In addition to relying on research and development and licensing
of core technologies, management's operation strategy also focuses on
quality, customer service, reducing costs and improving cash flows.
-16-
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RESULTS OF OPERATIONS
Total revenues for the quarter and nine months ended September
30, 1997 increased $1,066,000 and $5,024,000 to $25,983,000 and
$80,315,000, respectively, from $24,917,000 and $75,291,000 for the
prior year periods. These increases are primarily attributable to the
ongoing royalty revenue generated from licensing certain technology to
Abbott, the fixed payments made by Digene in accordance with the
February 1997 agreement and the sale of certain technologies to
Shield. The technologies sold to Shield are targeted to a specific
segment of the diagnostics industry that is not part of the Company's
long term strategy. The strength of the US Dollar against most major
currencies during the quarter and nine months ended September 30, 1997
relative to the prior year periods caused a decrease in the Dollar
equivalent product sales revenue. Murex operates a worldwide
distribution network; consequently, approximately 70% of the Company's
product sales are denominated in currencies other than the US Dollar,
the reporting currency of the Company. The changes in product sales
represent actual increases using a constant currency basis of $271,000
and $3,554,000, offset by negative foreign exchange impacts of
$1,377,000 and $3,830,000 for the three and nine month periods,
respectively.
The gross profit on total revenues increased to 64.7% from 64.3%
for the nine months ended September 30, 1997 compared to the same
period in 1996. The cost of products sold was $10,326,000 and
$28,314,000 for the quarter and nine months ended September 30, 1997,
respectively, compared to $8,556,000 and $26,911,000 for the prior
year periods. The increase in cost of goods sold is primarily due to
the strength of the Pound since the majority of manufacturing is done
in the UK.
Total costs and expenses, excluding cost of products sold, of
$13,642,000 and $45,549,000 for the quarter and nine months ended
September 30, 1997, respectively, reflect net decreases of $1,584,000
and $1,640,000 from the quarter and nine months ended September 30,
1996. Research and development cost for the quarter and nine months
ended September 30, 1997 increased by $632,000 and $945,000 to
$2,136,000 and $5,863,000, respectively. The increase in research and
development expenditures is a result of the Company's strategy of
developing innovative products for its distribution network and
continuously improving its existing products. The Company has also
been improving its HCV test design and manufacturing process to meet
the changing requirements of this considerable market. General and
administrative expenses of $3,421,000 and $13,882,000 for the quarter
and nine months ended September 30, 1997 reflect decreases of
$6,726,000 and $6,570,000 compared to the prior year. As discussed in
Note 3 of the accompanying financial statements, the Company is
entitled to the reversion of the class action settlement fund, of
which the net cash portion is considered as a reduction to general and
administrative expenses. The previous year's general and
administrative expenses of $10,147,000 and $20,452,000 for the three
and nine month periods included legal, employee compensation, and
other expenses associated with settling the Company's HCV patent
litigation during the third quarter of last year. Sales and marketing
expenses of $6,750,000 and $21,088,000 reflect decreases of $414,000
-17-
and $804,000 compared to the quarter and nine months ended September
30, 1996. Foreign exchange gains were $43,000 and $68,000 for the
quarter and nine months ended September 30, 1997, respectively, versus
losses of $227,000 and $951,000 reported for the comparable prior year
periods. The 1996 foreign exchange losses were caused predominantly by
the strengthening of the British Pound in relation to the US and
German currencies, as well as the weakening of the South African Rand.
The royalty expense was $1,378,000 and $4,784,000 for the quarter and
nine months ended September 30, 1997, respectively, compared to
credits of $5,916,000 and $3,124,000 for the prior year periods. As a
result of the settlement of the HCV litigation during the third
quarter of 1996, a reversal was made to royalty accruals made in
previous years, which produced a $5.9 million net credit to royalty
expense. During September 1996, the Company recorded a restructuring
charge of $2.1 million before tax. The restructuring was driven by the
need to reposition the Company for its movement into the patient
monitoring business, and consisted predominantly of estimated costs
for employee severance and other benefits.
Net interest expense (income) was $306,000 and $829,000 compared
to $(46,000) and $611,000 for the quarter and nine months ended
September 30, 1997 and 1996, respectively. The Company currently has
access to capital at favorable rates via the line of credit with Bank
of America. However, during the nine months ended September 30, 1997,
the Company increased the amount borrowed. In the prior year, the
Company factored its Italian receivables to fund the agreement with
Innogenetics. Other income was $962,000 and $987,000 for the three and
nine months ended September 30, 1997, primarily from realized gains on
marketable securities. The equity in loss of investee represents SDL's
net loss for the quarter and nine months ended September 30, 1996.
-18-
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
Form 10-Q for the Nine Months Ended September 30, 1997
Part II - Other Information
- -----------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
See Note 3 to the financial statements for information regarding
current legal proceedings.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
Exhibit 11 Statement Regarding Computation of Per Share Earnings
2. Reports on Form 8-K
None
-18-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION
(Registrant)
Date: November 11, 1997 By: /s/ C. Robert Cusick
-------------------- -------------------------------------
C. Robert Cusick, Vice Chairman
President & CEO
Date: November 11, 1997 By: /s/ Steve Ramsey
-------------------- -------------------------------------
Steve Ramsey, Vice President & CFO
-20-
EXHIBIT INDEX
Exhibit Description
------- -----------
11 Statement Regarding Computation of Per
Share Earnings
27 Financial Data Schedule