November 13, 2000
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ODER:
SCIOS INC (SCIO)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
In accordance with Federal laws, the Company reminds readers that the following discussion contains forward-looking statements about plans, objectives, future results and intentions of the Company. These forward-looking statements are based on the current expectations of the Company, and the Company assumes no obligation to update this information. Realization of these plans and results involves risks and uncertainties, and the Company's actual results could differ materially from the historical results or future plans discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those items discussed below, as well as the considerations discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Operating Results
Three Months Ended September 30, 2000 and 1999
Revenues
The Company had total revenues of $10.2 million and $14.7 million for the quarters ended September 30, 2000 and 1999, respectively. Net revenues include revenues from product sales, co-promotion commissions, and contracts (including research and development collaborations).
Product sales of psychiatric products under licenses from SmithKline Beecham Corporation ("SB Products") accounted for 69.8 % of the revenues in the third quarter of 2000 and 72.2 % in the third quarter of 1999. However, during this period sales of the SB Products declined $3.5 million from $10.6 million in the third quarter of 1999 to $7.1 million in the current quarter. The decrease was largely the result of reduced distributor inventories caused by manufacturing and product shelf life issues of Eskalith CR (one of five products developed and manufactured by SB that are now sold by the Company), coupled with the erosion of sales as a result of new market entrants and generic drugs.
Co-promotion commissions were $1.9 million for the third quarter of 2000 and $2.0 million for the same quarter in 1999. Co-promotion commissions declined as a result of lower incentive payments received from co-promotion of Risperdal (risperidone). Contract revenues were $1.2 million for the quarter ended September 30, 2000 and $2.1 million for the comparable quarter in 1999. The decline in the current quarter reflects the Company's receipt in 1999 of a one-time milestone payment of $0.3 million for BNP diagnostics, and contract revenues of $0.4 million from Bayer AG ("Bayer"), and $0.2 million in other contract revenues that were not repeated in 2000.
Cost of Goods Sold
Cost of goods sold was $4.2 million, or 59.7% of net product sales, for the quarter ended September 30, 2000, and $5.6 million, or 53.0% of net product sales, for the quarter ended September 30, 1999. Net product sales includes allowances for rebates and product returns. The increase in the percentage relationship between cost of goods sold and product sales was largely due to higher rebates, and product returns due to the manufacturing issues of Eskalith
CR.
Operating Expenses
For the third quarter ended September 30,2000, research and development (R&D) expenses were $9.6 million, up from $7.0 million for the same quarter in 1999. Major development projects in 2000 include Natrecor(R)(nesiritide) clinical trial expenses for the potential treatment of patients with acute decompensated congestive heart failure, and the Company's p38 kinase inhibitor program for rheumatoid arthritis and other inflammatory disorders.
Marketing, general and administrative, and profit distribution to third parties for the three months ended September 30, 2000, were $6.6 million, compared with $7.3 million for the same quarter of 1999. The year over year decline in third quarter expenses was largely attributable to lower profit distributions of $0.9 million primarily due to lower SB Product sales.
Other Income and Expenses
The Company reported other income and expense of $0.1 million expense for the third quarter of 2000 compared to $0.5 million of income in the comparable quarter in 1999. The $0.6 million change was comprised of a $0.2 million increase in interest expense, a $0.2 million write-down of the investment in a privately held company, and a $0.2 million write-down of property and equipment.
The net loss for the three months ended was $10.5 million or $0.28 per share. This compares to a net loss of $4.8 million, or $0.13 per share for the corresponding 1999 quarter.
Nine Months Ended September 30, 2000 and 1999
Revenues
Revenues for the nine-month period ended September 30, 2000 were $30.8 million in 2000 compared to $41.7 million for the same period in 1999. Revenues in 2000 include revenues from product sales of $20.3 million, co-promotion commissions of $5.9 million, and contracts of $4.6 million (including research and development collaborations).
For the nine months ended September 30, 2000 product sales were $20.3 million, a decline of $7.6 million or a 27.4 % decrease over the same period in 1999. As previously mentioned, the decline in product sales was largely attributable to inventory issues with SB and erosion of sales due to increased competition and generic entrants.
For the first nine months of 2000, co-promotion commissions were $6.0 million compared with $6.6 million in 1999 as a result of lower incentive payments received from co-promotion of Risperdal. In this same period, contract revenues totaled $4.6 million in 2000 and $7.1 in 1999. The nine months decrease in contract revenues was mainly the result of a $1.6 million decline in revenues from Bayer, the Company's former Natrecor partner, and from a $0.9 million reduction in milestone and other contract revenues.
Cost of Goods Sold
For the nine month period cost of goods sold was $11.9 million in 2000, and $14.8 million in 1999. Cost of goods as a percent of product sales was 58.8% and 53.1%, respectively, for the nine months ended September 30, 2000 and 1999. The increase in cost of goods sold as a percentage of product sales was principally due to higher rebates and product returns due to the manufacturing issues of Eskalith CR.
Operating Expenses
In the nine-month periods ended September 30, R&D expenses were $30.2 million in 2000 and $25.7 million in 1999. Major development projects in 2000 include Natrecor clinical trial expenses and p38 kinase programs, which were partially offset by the declines in headcount expenses that resulted from the restructure in March 1999. The Company expects R&D costs to increase in 2001, primarily reflecting higher expenses related to the development of Natrecor for other indications, and p38 human trials.
For the nine months ended September 30, 2000, marketing, general and administrative, profit distribution to third parties, and restructuring charge credits totaled $18.5 million compared with $26.2 million for the same period in 1999. The major factors that resulted in the decline in expenses of $7.7 million were the absence of restructuring charges of $6.7 million included in 1999, and lower profit distributions of $2.0 million, partially offset by higher marketing and general and administrative expenses of $2.0 million. The increase in marketing, general and administrative was principally the result of Natrecor marketing activities and other consulting expenses during the period. The Company expects its marketing costs to significantly rise in 2001, to support the sales force build-up and product promotion activities in preparation for the launch of Natrecor. The Company anticipates that Natrecor will obtain Food and Drug Administration ("FDA") approval in mid 2001.
Other Income and Expenses
Other income and expense decreased $7.0 million from the nine-month period in 1999 to the comparable period in 2000. The decline in other income was principally due to the $5.2 million decrease in realized gains on sale of securities. In the first quarter of 1999, the Company sold its remaining 1.3 million shares of Guilford Pharmaceuticals, Inc. stock for a gain of $4.8 million. Investment income increased by $0.4 million for the nine-month period in 2000 from the comparable period in 1999. The increase was primarily due to the increases in interest rates from period to period. Interest expense increase from $2.1million in 1999 to $2.9 million in 2000 was a result of increased average notes payable balances and higher interest rates from period to period.
For the nine-month periods ended September 30, 2000 and 1999, net losses were $30.3 million or $0.80 per share and $18.4 million or $0.49 per share, respectively.
In 1999, the Company determined with the FDA the nature of the additional clinical trial (referred to by the Company as the "VMAC Trial") that the agency requires before it will consider approval of Natrecor for marketing. The Company has continued regular interactions with the FDA about the filing of an amended NDA containing the results of the VMAC Trial. The Company initiated enrollment in the VMAC Trial in October 1999 and on July 31, 2000 announced the completion of the 480 patient study. The results of the trial will be presented at the American Heart Association's Clinical Trial Results Plenary Session on November 15, 2000.
The ability of the Company to achieve profitability depends principally on the Company's success in developing and commercializing its own products and on its ability to complete agreements with third parties that result in additional revenue. Among the factors that will determine the Company's success in commercializing its products are: the demonstrated safety and efficacy of products in development; the cost of and the time taken to complete clinical trials and regulatory submissions; the timing and scope of regulatory approvals, particularly with respect to the Company's lead product Natrecor; the Company's ability to maintain a cost-effective drug supply; the Company's success in developing and implementing cost effective sales and marketing strategies either on its own behalf or in partnership with other companies; and the level of market acceptance if products are approved, both at product launch and over time. The Company's ability to raise additional revenue through third parties will be dependent on the factors described above, as well as other factors such as: its success in marketing and selling the third-party products which it may acquire the right to co-promote; the disposition of various patent proceedings related to the protection of the Company's potential products; the perceived value of the Company's current product portfolio and research programs to outside parties; and the success of third parties, such as Kaken Pharmaceutical Co., Ltd. and Chiron Corporation on Fiblast and Novo Nordisk A/S on GLP-1, in developing and commercializing the Company's products.
Liquidity and Capital Resources
Combined cash, cash equivalents and marketable securities (both current and non-current) totaled $73.1 million at September 30, 2000, a decrease of $27.6 million from December 31, 1999. The decrease was primarily attributable to cash used to fund operations and to the repayment of $4.6 million on the debt to Genentech Inc.
The Company's resources of $73.1 million in cash, cash equivalents and marketable securities (both current and non-current) at September 30, 2000, together with revenues from product sales, collaborative agreements, interest income and any funding from existing or future debt or equity arrangements, will be used to support current and new clinical trials for proprietary products under development, to support development and commercialization efforts for prospective products and for other general purposes. The Company has terminated its equipment lease line-of credit after drawing down approximately $0.6 million in the third quarter of 1999. Key factors that will affect future cash use and the timing of the Company's need to seek additional financing include the Company's decisions concerning the degree to which it will incur expenses to launch its products in the United States market following the necessary regulatory approvals, the results of the Company's partnering efforts, the timing and amounts realized from licensing and partnering activities, the rate of spending required to develop the Company's products and respond to changing business conditions, and the net contribution produced by the Company's ability to co-promote and market products for third parties.
Over the long-term, the Company may need to arrange additional financing for the future operation of its business, including the commercialization of products currently under development, and it will consider collaborative arrangements and additional public or private financing, including additional equity financing. Factors influencing the availability of additional funding include, but are not limited to, the Company's progress in product development, investor perception of the Company's prospects and the general conditions of the financial markets.
The information above contains forward-looking statements including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions, and the adequacy of its resources that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that actual results may be materially different than those expected and that forward-looking statements should be read in conjunction with the Company's disclosures in its most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 133, ("SFAS133" ), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 will be effective for fiscal 2001. The Company does not currently hold derivative instruments or engage in hedging activities.
In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 requires that license and other up front fees received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. The Company has not yet determined the impact of its implementation on the reporting of the Company's contract revenue.
In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB No. 25," ("FIN 44"). The Interpretation clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation was effective July 1, 2000, and did not have a material effect on the financial position or results of operations of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No significant change in market risk has occurred since the filing by the Company on form 10-K for the year ended December 31, 1999. Reference is made to Part II, item 7, Financial Risk Management, in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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