-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVjeHz5pm0F5hS+uVbOHhUiw/cVbt1agui88PAkbf4Z5JL6GkRJdK/2cpTPjulkI PIRYtLiJmjta0YiP27ddOg== 0000916641-97-001042.txt : 19971106 0000916641-97-001042.hdr.sgml : 19971106 ACCESSION NUMBER: 0000916641-97-001042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971105 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDCO RESEARCH INC CENTRAL INDEX KEY: 0000723385 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953318451 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09771 FILM NUMBER: 97708353 BUSINESS ADDRESS: STREET 1: 85 T W ALEXANDER DRIVE P O BOX 13886 STREET 2: STE 308 CITY: RESEARCH TRIANGLE PA STATE: NC ZIP: 27709 BUSINESS PHONE: 9195498117 MAIL ADDRESS: STREET 1: 85 T W ALEXANDER DRIVE STREET 2: STE 308 CITY: RESEARCH TRIANGLE PA STATE: NC ZIP: 27709 10-Q 1 THIRD QUARTER REPORT Medco Research, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-9771 MEDCO RESEARCH, INC. -------------------- (Exact name of registrant as specified in its charter) Delaware 95-3318451 -------- ---------- (State or other Jurisdiction of (I.R.S. Identification No.) Employer incorporation or organization) 85 T W Alexander Drive, ----------------------- Research Triangle Park, North Carolina 27709 -------------------------------------- ----- (Address of principal executive offices) (Zip Code) (919) 549-8117 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock American Stock Exchange ------------ ----------------------- (Title of Class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of common stock, as of the latest practical date 10,496,932 as of October 21, 1997. Pursuant to the Securities Exchange Act of 1934 Release 15502 and Rule 240.03 (b), the pages of this document have been numbered sequentially. The total pages contained herein are 13. 1 Medco Research, Inc. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets
September 30 December 31 1997 1996* ------------------------------------ (in thousands, except share data) (Unaudited) Assets Current assets: Cash and cash equivalents $1,289 $ 9,107 Investments held to maturity 6,690 6,439 Accounts and notes receivable: Royalties 5,318 3,794 Other 649 2,227 Accrued interest income 385 377 Prepaid expenses 280 293 ------------------------------------ Total current assets 14,611 22,237 Investments held to maturity 29,039 19,579 Deferred asset - 124 Property and equipment, at cost, net of accumulated depreciation and amortization 237 308 Patent, trademark and distribution rights, at cost, net of accumulated amortization 1,693 380 ==================================== Total assets $45,580 $42,628 ==================================== Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 3,022 $ 2,685 Accrued royalties 582 1,179 ------------------------------------ Total current liabilities 3,604 3,864 Deferred revenue - 548 Deferred royalty payments 961 1,717 ------------------------------------ Total liabilities 4,565 6,129 ------------------------------------ Stockholders' equity Common stock, no par value, authorized 40,000,000 shares; shares issued of 11,155,832 at September 30, 1997 and December 31, 1996; shares outstanding of 10,486,932 and 10,740,032 at September 30, 1997 and December 31, 1996, respectively. 52,216 52,216 Accumulated deficit (4,525) (11,394) Cost of stock held in treasury, 668,900 shares at September 30, 1997 and 415,800 shares at December 31, 1996 (6,676) (4,323) ------------------------------------ Total stockholders' equity 41,015 36,499 ------------------------------------ Commitments and contingencies ==================================== Total liabilities and stockholders' equity $45,580 $42,628 ==================================== See accompanying notes to consolidated financial statements. *Abstracted from audited year-end financial statements. 2 Medco Research, Inc. Consolidated Statements of Operations (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------------------------------------------------------- September 30 September 30 September 30 September 30 (in thousands, except per share data) 1997 1996 1997 1996 -------------------------------------------------------------------------------- Net Revenues: Royalty revenue $5,050 $3,938 $14,217 $9,978 Royalty expense 679 526 2,264 1,917 -------------------------------------------------------------------------------- Gross Margin 4,371 3,412 11,953 8,061 -------------------------------------------------------------------------------- Operating Expenses: Research & development costs 1,533 1,490 5,204 4,248 General and administrative expenses 464 602 1,842 2,294 -------------------------------------------------------------------------------- 1,997 2,092 7,046 6,542 -------------------------------------------------------------------------------- Operating Income 2,374 1,320 4,907 1,519 Other Income: Interest and other income, net 523 477 1,521 1,501 Licensing income 400 - 700 350 -------------------------------------------------------------------------------- Income before taxes 3,297 1,797 7,128 3,370 Provision for income taxes 133 42 259 56 -------------------------------------------------------------------------------- Net income $ 3,164 $ 1,755 $ 6,869 $ 3,314 ================================================================================ Net income per share $0.30 $0.16 $ 0.65 $ 0.30 ================================================================================ Weighted average number of common shares and common share equivalents 10,489 10,930 10,560 10,947 outstanding ================================================================================ See accompanying notes to consolidated financial statements. 3 Medco Research, Inc. Consolidated Statements of Stockholders' Equity (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 1997 (in thousands, except share data) Common Stock ---------------------------------- Cost of Stock Number of Accumulated held in shares Amount deficit Treasury Total ------------------------------------------------------------------------------------------- Balance at December 31, 1996 10,740,032 $52,216 $(11,394) $(4,323) $36,499 Purchase of stock held in - - treasury (253,100) (2,353) (2,353) Net income - - 6,869 - 6,869 =========================================================================================== Balance at September 30, 1997 10,486,932 $52,216 $(4,525) $(6,676) $41,015 =========================================================================================== See accompanying notes to consolidated financial statements. 4 Medco Research, Inc. Consolidated Statements of Cash Flows (Unaudited) NINE MONTHS ENDED -------------------------------------------- September 30 September 30 1997 1996 -------------------------------------------- (in thousands) Operating activities Net income $ 6,869 $ 3,314 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of property and equipment 109 104 Amortization of patent, trademark and distribution rights 419 44 Loss on sale of equipment 11 - Gain on investments available for sale - ( 49) Net amortization of investment discount 211 (261) Changes in operating assets and liabilities: Accounts receivable 54 (2,314) Prepaid expenses 13 (118) Accounts payable and accrued expenses 337 (313) Accrued royalty expense (597) (785) Accrued interest income (8) 97 Deferred asset 124 982 Deferred revenue (548) (752) Deferred royalty payments (756) (511) -------------------------------------------- Net cash provided by (used in) operating activities $6,238 $(562) -------------------------------------------- (Continued) 5 Medco Research, Inc. Consolidated Statements of Cash Flows (Unaudited) NINE MONTHS ENDED ---------------------------------------------- September 30 September 30 1997 1996 ---------------------------------------------- (in thousands) Investing activities Purchase of securities available for sale - (76) Purchase of securities held to maturity (17,422) (19,341) Sale of securities available for sale - 5,656 Maturity of securities held to maturity 7,500 19,500 Purchases of property and equipment (51) (69) Proceeds from sale of equipment 2 - Purchases of patent and license (1,732) (351) ---------------------------------------------- Net cash provided by (used in) investing activities (11,703) 5,319 ---------------------------------------------- Financing activities Purchase of stock held in treasury (2,353) (997) ---------------------------------------------- Net cash used in financing activities (2,353) (997) ---------------------------------------------- Increase/(decrease) in cash and cash equivalents (7,818) 3,760 Cash and cash equivalents at beginning of period 9,107 4,305 ---------------------------------------------- Cash and cash equivalents at end of period $1,289 $8,065 ============================================== See accompanying notes to consolidated financial statements.
6 Medco Research, Inc. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS General The accompanying interim financial statements have been prepared by Medco Research, Inc. (the "Company") in accordance with generally accepted accounting principles. Certain disclosures and information normally included in financial statements have been condensed or omitted. In the opinion of the management of the Company, these financial statements contain all adjustments (all of a recurring nature) necessary for a fair presentation for the interim periods. These statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Adoption of New Accounting Pronouncements The Company will adopt Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires the Company to change its method of computing, presenting and disclosing earnings per share information. Upon adoption, all prior period data presented will be restated to conform to the provisions of SFAS No. 128. If the Company had adopted SFAS No. 128 for the periods ended September 30, 1997 and 1996, the following computation would have been used to arrive at basic income per common share and diluted income per common share and would have been presented on the consolidated statements of operations:
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30 1997 September 30 1996 September 30 1997 September 30 1996 ----------------- ----------------- ----------------- ----------------- (in thousands except per share data) Basic: Net income per common share $ 0.30 $ 0.16 $ 0.65 $ 0.30 ---- ---- ---- ---- Weighted average shares 10,489 10,930 10,560 10,947 ====== ====== ====== ====== Diluted: Net income per common share $ 0.30 $ 0.16 $ 0.65 $ 0.30 ---- ---- ---- ---- Weighted average shares 10,566 10,936 10,591 10,962 ====== ====== ====== ======
The Company will adopt Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131") for its fiscal year ended December 31 1998. SFAS No. 131 requires the Company to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Preliminary analysis of this pronouncement by the Company indicates that the pronouncement will not have a material impact on the Company. 7 Medco Research, Inc. The Company will adopt Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") for its fiscal year ended December 31, 1998. SFAS No. 130 requires the Company to display an amount representing the total comprehensive income for the period in a financial statement which is displayed with the same prominence as other financial statements. Upon adoption, all prior period data presented will be restated to conform to the provisions of SFAS No. 130. The Company has yet to determine the impact, if any, of adoption of the new pronouncement. Arbitration of ATP License Agreement In November 1996, Dr. Eliezer Rapaport, the licensor of the Company's potential adenosine triphosphate ("ATP") drug, commenced an arbitration before the American Arbitration Association of his claim that the Company had breached its May 20, 1991 license agreement by failing to devote reasonable efforts in preparing and filing within three years of FDA approval of its Investigational New Drug application, that is, by May 8, 1995, a New Drug Application ("NDA") for the use of ATP in the treatment of at least one type of human cancer. (Arbitration is the binding dispute resolution method provided for in the agreement.) The licensor is seeking the return of all licensed ATP patent rights for the Company's alleged breach of contract and failure to return such rights. He also is seeking an unspecified amount of punitive damages and $44 million in compensatory damages. He has computed such compensatory damages on the basis of "total worldwide billings of an approved ATP medication for treatment of cancer...". In discussions with Dr. Rapaport held as early as May 1995, the Company continuously maintained, and it currently believes, that it has not breached the agreement. Data from the Company's Phase II clinical trials indicate ATP demonstrated no tumor response, as defined in the protocol, in patients with non-small cell lung cancer, and the Company so advised its licensor. (The Company believes that such responses are the benchmark accepted in the pharmaceutical industry for filing an NDA for a cancer treatment drug.) Therefore, the Company believes such damage claim, which is based on ATP as a cancer treatment is unfounded. The Company believes Dr. Rapaport has incurred no damages from the Company's drug development activities. The Company is vigorously defending itself against the allegations of Dr. Rapaport, which the Company believes are without any merit. The arbitration commenced in May 1997 and final briefs were filed in September 1997. The Company has been notified by the American Arbitration Association that in November 1997 the arbitration panel will decide whether the Company has any liability to Dr. Rapaport. 8 Medco Research, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Third Quarter and Nine Months of 1997 Compared to Third Quarter and Nine Months of 1996 Net Revenues. Royalty revenues were $5.050 million and $14.217 million for the third quarter and first nine months of 1997, an increase of 28% and 43%, respectively, over the comparable periods of 1996. However, it should be noted that royalty revenues in third quarter 1996 included approximately $.875 million attributable to the purchase of a multi-month supply of Adenoscan, instead of normal monthly purchases, by a major radiopharmacy. Royalty revenues, less royalty revenue unrelated to the third quarter of 1996, for the third quarter and first nine months of 1997 increased 65% and 56%, respectively. This increase reflects the continued growth of Adenoscan. Fujisawa USA, Inc. is responsible for substantially all of the royalty revenue of the Company. Gross Margin. Gross margin from adenosine revenues was $4.371 million and $11.953 million for the third quarter and first nine months of 1997, an increase of 28% and 48%, respectively, over the comparable periods of 1996. This significant increase reflects the growth in net revenues. Royalty expense, which is payable to the University of Virginia Alumni Patents Foundation from whom the Company acquired exclusive rights to Adenocard, and represents one-half of royalty revenue earned by the Company from Adenocard sales, was $.679 million and $2.264 million for the third quarter and first nine months of 1996, an increase of 29% and 18%, respectively. Third quarter royalty expense increased 29% principally as a result of a one time payment to satisfy Adenocard outstanding royalties owed by Sanofi Pharma, the Company's manufacturing and marketing partner for Adenoscan and Adenocard in Europe and countries other than the United States and Canada. Operating Expenses. Total operating expenses were $1.997 million and $7.046 million for the third quarter and first nine months of 1997, a decrease of 5% and an increase 8%, respectively. Research and development expenditures were $1.533 million and $5.204 million for the third quarter and first nine months of 1997, an increase of 3% and 23%, respectively, reflecting increased expenditures associated with the completion of the adenosine for cardioprotection trials and expenditures for arbitration of the ATP license agreement. General and administrative expenditures were $.464 million and $1.842 million for the third quarter and first nine months of 1997, a decrease of 23% and 20%, respectively. This decrease is the result of lower overall spending in third quarter 1997 and one-time employee related charges incurred in the first half of 1996. Other Income . Interest income was $.533 million and $1.531 million for the third quarter and first nine months of 1997, an increase of 12% and 2%, respectively. Milestone payments recognized by the Company in the third quarter and first nine months of 1997 as income of $.400 million and $.700 million, respectively, paid by Suntory Limited, the Company's development and marketing partner for adenosine in Japan, following Suntory's initiation of Phase III clinical trials of Adenoscan in Japan . Income Per Share. In the third quarter 1997 the Company had net income of $3.164 million or $0.30 per share and a nine month net income of $6.869 million or $0.65 per share, compared to net income of $1.755 million or $0.16 per share and $3.314 million or $0.30 per share for the year earlier periods, an increase of 88% and 115%, respectively. However, income per share in the third quarter 1996 9 Medco Research, Inc. included approximately $0.08 per share attributable to the purchase of a multi-month supply of Adenoscan, instead of normal monthly purchases, by a major radiopharmacy which when adjusted reflects growth for the third quarter and first nine months of 1997 of 275% and 192%, respectively, over the comparable periods of 1996. FINANCIAL CONDITION As of September 30, 1997, the Company had total cash and investments of $37.018 million comprised of $1.289 million of cash and cash equivalents and $35.729 million of investments in U.S. Treasury Notes and high quality corporate debt securities. Included in liabilities at September 30, 1997 is an accrued liability (current and non-current portion) of $1.8 million relating to the balance of the Company's guaranteed royalty obligation to Abbott Laboratories pursuant to the terms of the Company's settlement of litigation relating to the manufacturing and marketing rights to Adenoscan. Included in current assets at September 30, 1997 is a deferred asset of $.2 million relating to royalties to be received by the Company from Fujisawa and paid by the Company to Abbott. Of the 29% of Adenoscan net sales received as royalty revenue by the Company, 4% will be applied to the deferred asset and 25% will be recognized as royalty revenue. At such time, if any, during the first five years after the approval of the Adenoscan NDA that the deferred asset is fully recovered, the Company thereafter will recognize royalty revenue of 29% through the end of the five year period. Adenoscan and Adenocard are the Company's two commercial products, and they are marketed by the Company's exclusive licensees principally in the United States, Canada, United Kingdom, and Germany. Substantially all of the Company's royalty revenue is obtained by Fujisawa USA from sales of these drugs in the U.S. The Company will not generate revenues from its other products unless and until it or its licensees receive marketing clearance from the FDA and appropriate governmental agencies in other countries. The Company cannot predict the timing of any potential marketing clearance nor can assurances be given that the FDA or such agencies will approve any of the Company's products. For the near term the Company expects to receive substantially all of its royalty revenues from sales of its products in the U.S. by Fujisawa USA. IMPACT OF INFLATION Although it is difficult to predict the impact of inflation on costs and revenues of the Company in connection with the Company's products, the Company does not anticipate that inflation will materially impact its costs of operation or the profitability of its products when marketed. CAUTIONARY STATEMENT The Company operates in a highly competitive environment that involves a number of risks, some of which are beyond the Company's control. The following statement highlights some of these risks. Statements contained in Management's Discussion and Analysis of Financial Conditions and Results of Operations which are not historical facts are forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be 10 Medco Research, Inc. attained. Forward looking statements involve known and unknown risks that could cause the Company's actual results to differ materially from expected results. Factors that could cause actual results to differ materially from the Company's expectations include, among others, the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; the unpredictability of the duration and results of the U.S. Food and Drug Administration's review of New Drug Applications and/or the review of other regulatory agencies worldwide; the possible impairment of, or inability to obtain, intellectual property rights; intense competition; the uncertainty of obtaining, and the Company's dependence on, third parties to manufacture and sell its products; results of pending or future litigation and other risk factors detailed from time to time in the Company's Securities and Exchange Commission filings. 11 Medco Research, Inc. Part II: OTHER INFORMATION Item 1. Legal Proceedings Incorporated herein by reference is the Arbitration of ATP License Agreement, inclusive, set forth in the Notes to the Financial Statements set forth in Item 1 of Part I of this Report, set forth on page 8 hereof. Item 6. Exhibits and Reports on Form 8-K a. Exhibits: 11. Computation of Net Income per Common Share b. Reports on Form 8-K: None 12 Medco Research, Inc. SIGNATURES Pursuant to 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. Medco Research, Inc. Date: November 10, 1997 By: /s/ Roger D. Blevins - ----------------------- -------------------- Roger D. Blevins, Pharm.D. President and Chief Operating Officer Date: November 10, 1997 By: /s/ Glenn C. Andrews - ----------------------- -------------------- Glenn C. Andrews Vice President, Finance and Administration Chief Financial Officer Date: November 10, 1997 By: /s/ Adam C. Derbyshire - ----------------------- ---------------------- Adam C. Derbyshire Corporate Controller & Secretary 13 EX-11 2 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------------- ---------------------------------------- September 30 September 30 September 30 September 30 1997 1996 1997 1996 ------------------- ------------------- ------------------- -------------------- (in thousands except per share data) PRIMARY Weighted average shares outstanding 10,489 10,930 10,560 10,947 Net effect of dilutive stock options based on the treasury stock method using average market price 77 6 31 15 =================== =================== =================== ==================== 10,566 10,936 10,591 10,962 =================== =================== =================== ==================== Net income $3,164 $1,755 $6,869 $3,314 =================== =================== =================== ==================== Net income per share $0.30 $0.16 $0.65 $0.30 =================== =================== =================== ==================== FULLY DILUTED Weighted average shares outstanding 10,489 10,930 10,560 10,947 Net effect of dilutive stock options based on the treasury stock method using ending market price, if higher than average market price 161 6 161 14 ------------------- ------------------- ------------------- -------------------- 10,650 10,936 10,721 10,961 =================== =================== =================== ==================== Net income $3,164 $1,755 $6,869 $3,314 =================== =================== =================== ==================== Net income per share $0.30 $0.16 $0.64 $0.30 =================== =================== =================== ====================
14 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1997 SEP-30-1997 1,289 6,690 6,632 0 0 14,611 717 480 45,580 3,604 0 52,216 0 0 (11,201) 45,580 0 16,438 0 9,310 9,310 0 0 7,128 259 6,869 0 0 0 6,869 0.65 0.64
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