SCIOS INC.
Consolidated Balance Sheets
(In thousands, except share, and per share data)
ASSETS June 30, December 31,
2001 2000
------------------ -----------------
------------------ -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ $
20,726 3,291
Marketable securities 65,667 35,356
Accounts receivable 5,083
5,217
Prepaid expenses and other assets 1,241
722
------------------ -----------------
------------------ -----------------
Total current assets 92,717 44,586
Marketable securities, non-current 77,839 32,884
Property and equipment, net 8,171
8,910
Other assets 3,890
2,007
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TOTAL ASSETS $ 182,617 $ 88,387
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,500 $
4,587
Other accrued liabilities 7,726 10,749
Deferred contract revenues 14,098 16,193
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Total current liabilities 30,324 31,529
Long-term debt 40,697 39,095
------------------ -----------------
------------------ -----------------
Total liabilities 71,021 70,624
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Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000
shares authorized; 4,991 shares issued and outstanding -- --
Common stock; $.001 par value; 150,000,000
shares authorized; 45,365,590 and 39,166,373 shares
issued and outstanding, respectively
45 39
Additional paid-in capital 545,450 428,987
Notes receivable from stockholders
(446) (634)
Deferred compensation, net
(106) (417)
Accumulated other comprehensive income 556
1,195
Accumulated deficit (433,903) (411,407)
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Total stockholders' equity 115,596 17,763
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,617 $ 88,387
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The accompanying notes are an integral part of these consolidated financial statements.
SCIOS INC.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
------------------------------------ ----------------------------------
(Unaudited) (Unaudited)
Revenues:
Product sales $ $ $ $ --
2,098 -- 2,098
Research and development contracts
1,484 1,482 2,581 3,376
Gain on sale of marketing rights -- --
-- 9,363
Psychiatric product sales, co-promotion
commissions, net of expenses
1,659 1,584 3,142 2,915
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
17,184
5,241 3,066 6,291
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
Costs and expenses:
Research and development 11,294 22,564 20,578
13,084
Marketing, general and administration 16,758
10,278 2,756 6,232
Restructuring credits -- -- (993)
(993)
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
23,362 13,057 39,322
25,817
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
Loss from operations (18,121) (9,991) (22,138) (19,526)
Other income and expense:
Investment income 1,554
742 1,204 2,588
Interest expense (754) (1,019) (1,603) (2,010)
Realized gains (losses) on securities (100) (184)
135 389
Other expense, net (275) (403) (698) (702)
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
(152) (318) (358)
(308)
---------------- ---------------- --------------- ---------------
---------------- ---------------- --------------- ---------------
Net loss ( 10,309)
(18,273) (22,496) (19,834)
Other comprehensive loss:
Change in unrealized gain (losses) on securities (755) (639)
325 229
---------------- ---------------- --------------- ---------------
Comprehensive loss: $ $ (9,984) $ (23,135) $ (19,605)
(19,028)
================ ================ =============== ===============
Loss per common share:
Basic and diluted $ $ $ $
(0.46) (0.27) (0.57) (0.52)
Weighted average number of common
shares outstanding used in the
calculation of net loss per share:
Basic and diluted 40,087,161 37,780,077 39,653,959 37,780,077
The accompanying notes are an integral part of these consolidated financial statements
SCIOS INC.
Consolidated Statements of Cash Flows
(In thousands)
Six months ended
June 30,
2001 2000
--------------- --------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (22,496) $ (19,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization
1,417 1,967
Accrued long-term interest payable
1,602 2,010
(Gain) loss on sale of securities
(389) 184
Amortization of deferred compensation
311 170
Changes in assets and liabilities:
Accounts receivable
134 (19)
Accounts payable
3,913 1,079
Other accrued liabilities (3,023) (799)
Prepaid expenses and other assets (2,997)
1,224
Deferred contract revenue (2,095) (742)
Restructuring charges -- (1,052)
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Net cash used in operating activities (23,623) (15,812)
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Cash flows from investing activities:
Purchases of property and equipment ( (701)
678)
Sales/maturities of marketable securities 88,492
34,262
Purchases of marketable securities (163,413) (15,335)
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Net cash provided by (used in) investing activities (75,599)
18,226
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Cash flows from financing activities:
Issuance of common stock and collection of notes
receivable from stockholders, net 116,657
636
Payment of notes payable -- (2,000)
--------------- --------------
Net cash provided by (used in) financing activities 116,657 (1,364)
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Net increase in cash and cash equivalents
17,435 1,050
Cash and cash equivalents, at beginning of period
3,291 11,582
--------------- --------------
Cash and cash equivalents, at end of period $ 20,726 $ 12,632
=============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
The following table sets forth the computation of the Scios' basic and diluted loss per share (in thousands, except per
share amounts):
Three months ended Six months ended
June 30, June 30,
20001 2000 2001 2000
--------------------------------- -------------------------------
Numerator
Basic
Net loss $ 18,273 $10,309 $22,496 $19,834
Diluted
Net loss $18,273 $10,309 $22,496 $19,834
Denominator
Basic
Weighted average shares 40,087 37,781 39,654 37,781
Basic loss per share $ 0.46 $ 0.27 $ 0.57 $ 0.52
Diluted loss per share $ 0.46 $ 0.27 $ 0.57 $ 0.52
The potentially dilutive effect of outstanding options to purchase common stock would have been anti-dilutive as to the
reported losses per share in both 2001 and 2000, and they were therefore excluded from the diluted loss per share calculation for all
periods. Although potentially dilutive, the optional settlement of the Genentech loan through the issuance of preferred stock would
have been anti-dilutive in both 2001 and 2000 and was therefore excluded from the calculations.
At June 30, 2001, we had 5,582,368 outstanding stock options at prices ranging from $3.94 to $27.60 per share. At June 30,
2000, we had 5,207,723 outstanding stock options at prices ranging from $3.69 to $21.13 per share.
4. Industry and Geographic Segment Information
We operate in one business segment, using one measurement of profitability for our business. We receive revenue from product
sales and from licensing and development of products from partners in the United States, Europe and Asia Pacific. At June 30, 2001,
all long-lived assets were located in the United States. All revenues were earned in the United States for the three months ended
March 31, 2001. Revenues for the six months ended June 30, 2001 were earned in the United States and from Japan for bulk FGF
shipments to Kaken.
| At June 30, 2001, we had notes receivable from three officers. The first note is in the amount of $179,466 with interest at 6.30% per annum, due and payable on October 31, 2001. The loan was granted in connection with the payment of income taxes for restricted stock granted to the officer. This loan is collateralized by the vested portion of the officer’s common stock and is classified with other current assets on the balance sheet at June 30, 2001. |
| The second note is in the amount of $280,040 with interest at 5.18% per annum, due and payable on February 28, 2002. The loan was granted in connection with the payment of income taxes for restricted stock granted to the officer. This loan is collateralized by the vested portion of the officer’s stock options and is classified with other current assets on the balance sheet at June 30, 2001. |
| The third note is in the amount of $33,333 with interest at 5.82% per annum. This loan will be forgiven over the next two years based on the continued employment of the officer and is collateralized by the officer’s residence. The loan was granted in connection with a housing subsidy for the officer to live in California. This note balance is classified with other assets on the balance sheet at June 30, 2001. |
If the FDA determines that our third-party manufacturing facilities are not adequate, we may lose the ability to manufacture and sell Natrecor®.
Periodically, the FDA is likely to inspect each of the facilities involved in manufacturing Natrecor(R). Natrecor(R)is manufactured for us by Biochemie GmbH, a subsidiary of Novartis, in Austria and is shipped in powder form to Abbott Laboratories in McPherson, Kansas where it is blended, filled and packaged for shipment. Although each facility has previously passed FDA inspections, future inspections may find deficiencies in the facilities or processes that may delay or prevent the manufacture or sale of Natrecor(R). If deficiencies are identified, we may lose the ability to supply and sell Natrecor(R)extended periods of time.We rely on third-party manufacturers, and if they experience any difficulties with their manufacturing processes, we may not obtain sufficient quantities of Natrecor® to assure availability.
We rely on third parties for the manufacture of bulk drug substances and final drug product for clinical and commercial purposes relating to Natrecor(R). Biochemie GmbH is responsible for manufacturing Natrecor(R)in bulk quantities and Abbott Laboratories is responsible for blending, filling and packaging Natrecor(R), and if they encounter problems in these processes, our revenues from future sales of Natrecor(R)could decrease. Natrecor(R)is manufactured using industry accepted recombinant manufacturing techniques, which must be conducted under strict controls and tight timelines. Natrecor(R)is subject to strict quality control testing during all phases of production and prior to its release to the market. Any quality control testing failures could lead to a reduction in the available supply of Natrecor(R). Biochemie depends on outside vendors for the timely supply of raw materials used to produce our products, including Natrecor(R). Once a supplier's materials have been selected for use in Biochemie's manufacturing process, the supplier in effect becomes a sole or limited source of that raw material due to regulatory compliance procedures. We depend on these third parties to perform their obligations effectively and on a timely basis. If these third parties fail to perform as required, our ability to deliver Natrecor(R)on a timely basis would be impaired. In addition, in the event of a natural disaster, equipment failure, power failure, strike or other difficulty, we may be unable to replace our third party manufacturers in a timely manner and would be unable to manufacture Natrecor(R)to meet market needs. The success of Natrecor(R)is highly dependent on our partner, Innovex L.P., a division of Quintiles Transnational Corp., for marketing, promotion and sales activities. We believe that for Natrecor(R)to be widely adopted, the efforts of an experienced sales force are needed. We have limited experience in managing or operating a marketing organization. Accordingly, we have entered into an exclusive agreement with Innovex to co-promote, sell and distribute Natrecor(R)in the United States. As part of our agreement with Innovex, we are building a sales force of approximately 170 people solely dedicated to the sale of Natrecor(R). If Innovex and we fail to devote appropriate resources to promote, sell and distribute Natrecor(R), sales of Natrecor(R)could be reduced. If Innovex breaches or terminates its agreement with us or otherwise fails to conduct its Natrecor(R)-related activities in a timely manner or if there is a dispute about its obligations, we may need to seek another partner. In that event, we cannot assure you that we will be able to obtain another partner on favorable terms, if at all.The failure of PharmaBio Development, Inc., an affiliate of Innovex, to fulfill its obligation to partially fund the commercialization of Natrecor® may affect our ability to successfully market Natrecor®.
PharmaBio has agreed to fund $30.0 million of our costs to launch Natrecor(R)over the first 24 months of Natrecor(R)'s commercialization and to loan us up to $5.0 million. Of the $30.0 million, we anticipate that $10.0 million will be paid to us in 2001 following FDA approval of Natrecor(R). If PharmaBio breaches or terminates its agreement with us or otherwise fails to fulfill its financial obligations under the agreement and we are unable to secure alternative funding, we may lose our ability to successfully market Natrecor(R). In the area of acute CHF, we face competition from companies with substantial financial, technical and marketing resources, which could limit our future revenues from Natrecor(R). Many therapeutic options are available for patients with acute CHF. Currently used drugs fall into three main categories: vasodilators, inotropes, and diuretics. Natrecor(R)would compete against both vasodilators and inotropes in the acute CHF market. Many of these drugs are available in generic formulation with an associated low cost. In addition, milrinone, an inotrope, is currently promoted by Sanofi-Synthelabo Inc. We may not be able to compete effectively with these long-standing current forms of therapy. In addition, we will price Natrecor(R)above the cost of these existing drugs, which may harm our competitive position relative to these drugs. New drugs in development for the treatment of acute CHF would also compete with Natrecor(R)if approved by the FDA or other regulatory agencies. Tezosentan(R), a non-selective endothelin receptor antagonist, is being developed by Actelion LTD. and has been evaluated in Phase III clinical trials as a vasodilator for the treatment of acute CHF. In addition, Abbott had previously submitted an NDA for Simdax(R), a calcium sensitizer described as an inotrope, but withdrew the application in 2000. To our knowledge, Abbott has not announced its intent to refile an NDA for Simdax(R). If any such new drug in development is approved by the FDA or other regulatory agencies, we may not be able to compete effectively with these new forms of therapy. If we fail to gain approval for Natrecor(R)and our other product candidates in international markets, our market opportunities will be limited. We have not yet filed for marketing clearance for the use of Natrecor(R)or any other product candidates in foreign countries, and we may not be able to obtain any international regulatory approvals for Natrecor(R)or any other product we develop. If we fail to obtain those approvals or if such approvals are delayed, the geographic market for Natrecor(R)or our other product candidates would be limited.We will require a partner to market and commercialize Natrecor® and our other product candidates in international markets.
We plan to partner with other companies for the sale of Natrecor(R)and our other product candidates outside of the United States. We cannot assure you that we will be able to enter into such arrangements on favorable terms or at all. In addition, partnering arrangements could result in lower levels of income to us than if we marketed our products entirely on our own. In the event that we are unable to enter into a partnering arrangement for Natrecor(R)or our other product candidates in international markets, we cannot assure you we will be able to develop an effective international sales force to successfully market and commercialize those products. If we fail to enter into partnering arrangements for our products and are unable to develop an effective international sales force, our revenues would be limited.If we fail to obtain additional marketing approvals from the FDA for the use of Natrecor® for additional therapeutic indications or if after approval such approval is subsequently revoked, our revenues from Natrecor® will suffer.
In order to expand the medical uses, or therapeutic indications, for which we may market Natrecor(R), we must successfully complete additional clinical trials, which could be lengthy and expensive and will require the allocation of both substantial management and financial resources. Thereafter, we will have to apply separately to the FDA for clearance to market Natrecor(R)f or other indications. We cannot assure you that we will be able to successfully complete the required clinical trials or that the FDA will approve Natrecor(R)for any additional indications. In addition, even if Natrecor(R)is approved by the FDA, we cannot exclude the possibility that serious adverse events related to the use of Natrecor(R)might occur in the future, which could either limit its use or cause the FDA to revoke our approval to market Natrecor(R).We have a history of losses, expect to operate at a loss for the foreseeable future and may never be profitable.
We may not be able to achieve or earn a profit in the future. We began operations in December 1981, and since that time, with the sole exception of 1983, we have not earned a profit on a full-year basis. Our losses have historically resulted primarily from our investments in research and development. As of June 30, 2001, we had an accumulated deficit of approximately $433.9 million. To date, nearly all of our revenues have come from: |X| one-time signing fees from our corporate partners under agreements supporting the research, development and commercialization of our product candidates; |X| one-time payments from our corporate partners when we achieved regulatory or development milestones; |X| research funding from our corporate partners; and |X| our psychiatric sales and marketing division. We expect that our research, development and clinical trial activities and regulatory approvals, together with future general and administrative activities and the costs associated with launching and commercializing our product candidates and launching and commercializing Natrecor(R)in the United States, will result in significant expenses for the foreseeable future. Our operating results are subject to fluctuations that may cause our stock price to decline. Our revenues and expenses have fluctuated significantly in the past. This fluctuation has in turn caused our operating results to vary significantly from quarter to quarter and year to year. We expect the fluctuations in our revenues and expenses to continue, and thus, our operating results should also continue to vary significantly. These fluctuations may be due to a variety of factors including: |X| the timing and realization of milestone and other payments from our corporate partners; |X| the timing and amount of expenses relating to our research and development, product development and manufacturing activities; and|X| the extent and timing of costs related to our activities to obtain patents on our inventions and to extend, enforce and/or defend our patents and other rights to our intellectual property.
Because of these fluctuations, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, causing the market price of our common stock to decline. We believe that period-to-period comparisons of our operating results are not a good indication of our future performance, and you should not rely on those comparisons to predict our future operating or share price performance.We depend on our key personnel and we must continue to attract and retain key employees and consultants.
We depend on our key scientific and management personnel. Our ability to pursue the development of our current and future product candidates depends largely on retaining the services of our existing personnel and hiring additional qualified scientific personnel to perform research and development. We also rely on personnel with expertise in clinical testing, government regulation, manufacturing and marketing. Attracting and retaining qualified personnel will be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. Failure to retain our key scientific and management personnel or to attract additional highly-qualified personnel could delay the development of our product candidates and harm our business.Other than Natrecor®, our product candidates are at early stages of development, and if we are unable to develop and commercialize these product candidates successfully, we will not generate revenues from these products.
To date, none of our product candidates has been commercialized. Other than Natrecor(R), all of our product candidates are in early stages of development. We face the risk of failure normally found in developing biotechnology products based on new technologies. Successfully developing, manufacturing, introducing and marketing our early-stage product candidates will require several years and substantial additional capital. Our operations depend on compliance with complex FDA and comparable international regulations. If we fail to obtain approvals on a timely basis or to achieve continued compliance, the commercialization of our products could be delayed. We cannot assure you that we will receive the regulatory approvals necessary to commercialize our product candidates, which could cause our business to fail. Our product candidates are subject to extensive and rigorous government regulation by the FDA and comparable agencies in other countries. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If our potential products are marketed abroad, they will also be subject to extensive regulation by foreign governments. In addition, we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may impede our ability to obtain such approvals. The results of preclinical studies and clinical trials of our products may not be favorable. In order to obtain regulatory approval for the commercial sale of any of our product candidates, we must conduct both preclinical studies and human clinical trials. These studies and trials must demonstrate that the product is safe and effective for the clinical use for which we are seeking approval. We are currently planning to conduct Phase II clinical trials of our lead p38 kinase inhibitor small molecule compound. The results of these or other clinical trials that we may conduct in the future may not be successful. Adverse results from our current or any future trials would harm our business. We also face the risk that we will not be permitted to undertake or continue clinical trials for any of our product candidates in the future. Even if we are able to conduct such trials, we may not be able to satisfactorily demonstrate that the products are safe and effective and thus qualify for the regulatory approvals needed to market and sell them. Results from preclinical studies and early clinical trials are often not accurate indicators of results of later- stage clinical trials that involve larger human populations.Our products use novel alternative technologies and therapeutic approaches, which have not been widely studied.
Many of our product development efforts focus on novel alternative therapeutic approaches and new technologies that have not been widely studied. These approaches and technologies may not be successful. We are applying these approaches and technologies in our attempt to discover new treatments for conditions that are also the subject of research and development efforts of many other companies.Rapid changes in technology and industry standards could render our potential products unmarketable.
We are engaged in a field characterized by extensive research efforts and rapid technological development. New drug discoveries and developments in our field and other drug discovery technologies are accelerating. Our competitors may develop technologies and products that are more effective than any we develop or that render our technology and potential products obsolete or noncompetitive. In addition, our potential products could become unmarketable if new industry standards emerge. To be successful, we will need to enhance our product candidates and design, develop and market new product candidates that keep pace with new technological and industry developments. Many other companies are targeting the same diseases and conditions as we are. Competitive products from other companies could significantly reduce the market acceptance of our products. The markets in which we compete are well-established and intensely competitive. We may be unable to compete successfully against our current and future competitors. Our failure to compete successfully may result in pricing reductions, reduced gross margins and failure to achieve market acceptance for our potential products. Our competitors include pharmaceutical companies, biotechnology companies, chemical companies, academic and research institutions and government agencies. For example, many pharmaceutical and biotechnology companies have initiated research programs similar to ours. Many of these organizations have substantially more experience and more capital, research and development, regulatory, manufacturing, sales, marketing, human and other resources than we do. As a result, they may:|X| develop products that are safer or more effective than our product candidates; |X| obtain FDA and other regulatory approvals or reach the market with their products; |X| more rapidly than we can, reducing the potential sales of our product candidates; |X| devote greater resources to market or sell their products; |X| adapt more quickly to new technologies and scientific advances; |X| initiate or withstand substantial price competition more successfully than we can; |X| have greater success in recruiting skilled scientific workers from the limited pool of available talent; |X| more effectively negotiate third-party licensing and collaboration arrangements; and |X| take advantage of acquisition or other opportunities more readily than we can.In addition, our product candidates, if approved and commercialized, will compete against well-established existing therapeutic products that are currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations. We face and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for relationships with academic and research institutions and for licenses to proprietary technology. In addition, we anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments continue to expand the understanding of various diseases. While we will seek to expand our technological capabilities to remain competitive, research and development by others may render our technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us.
If we are unable to protect our intellectual property rights adequately, the value of our potential products could be diminished.
Our success is dependent in part on obtaining, maintaining and enforcing our patents and other proprietary rights. Patent law relating to the scope of claims in the biotechnology field in which we operate is still evolving and surrounded by a great deal of uncertainty. Accordingly, we cannot assure you that our pending patent applications will result in issued patents. Because certain U.S. patent applications may be maintained in secrecy until a patent issues, we cannot assure you that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology. Other companies, universities and research institutions have or may obtain patents and patent applications that could limit our ability to use, manufacture, market or sell our product candidates or impair our competitive position. As a result, we may have to obtain licenses from other parties before we could continue using, manufacturing, marketing or selling our potential products. Any such licenses may not be available on commercially acceptable terms, if at all. If we do not obtain required licenses, we may not be able to market our potential products at all or we may encounter significant delays in product development while we redesign potentially infringing products or methods. In addition, although we own a number of patents, including issued patents and patent applications relating to Natrecor(R)and certain of our p38 kinase inhibitors, the issuance of a patent is not conclusive as to its validity or enforceability, and third parties may challenge the validity or enforceability of our patents. We cannot assure you how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings. It is possible that a competitor may successfully challenge our patents or that challenges will result in limitations of their coverage. In addition, the cost of litigation to uphold the validity of patents can be substantial. If we are unsuccessful in such litigation, third parties may be able to use our patented technologies without paying licensing fees or royalties to us. Moreover, competitors may infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement claims, which are expensive and time- consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or may refuse to stop the other party from using the technology at issue on the grounds that its technology is not covered by our patents. Policing unauthorized use of our intellectual property is difficult, and we cannot assure you that we will be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States. In addition to our patented technology, we also rely on unpatented technology, trade secrets and confidential information. We may not be able to effectively protect our rights to this technology or information. Other parties may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We require each of our employees, consultants and corporate partners to execute a confidentiality agreement at the commencement of an employment, consulting or collaborative relationship with us. However, these agreements may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies. If we fail to negotiate or maintain successful arrangements with third parties, our development and marketing activities may be delayed or reduced. We have entered into, and we expect to enter into in the future, arrangements with third parties to perform research, development, regulatory compliance, manufacturing or marketing activities relating to some or all of our product candidates. If we fail to secure or maintain successful collaborative arrangements, our development and marketing activities may be delayed or reduced. We may be unable to negotiate favorable collaborative arrangements that, if necessary, modify our existing arrangements on acceptable terms. Most of our agreements can be terminated under certain conditions by our partners. In addition, our partners may separately pursue competing products, therapeutic approaches or technologies to develop treatments for the diseases targeted by us or our efforts. Even if our partners continue their contributions to the collaborative arrangements, they may nevertheless determine not to actively pursue the development or commercialization of any resulting products. Also, our partners may fail to perform their obligations under the collaborative arrangements or may be slow in performing their obligations. In these circumstances, our ability to develop and market potential products could be severely limited.We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our product candidates.
We face an inherent business risk of exposure to product liability claims in the event that the use of our product candidates is alleged to have resulted in harm to others. This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice litigation. We may incur significant liability if product liability or malpractice lawsuits against us are successful. Although we maintain product liability insurance, we cannot be sure that this coverage is adequate or that it will continue to be available to us on acceptable terms.We use hazardous materials in our business, and any claims relating to improper handling storage or disposal of these materials could harm our business.
Our research and development activities involve the controlled use of hazardous materials, chemicals, biological agents and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any resulting damages, and any such liability could exceed our resources. We may be required to incur significant costs to comply with these laws in the future. Failure to comply with these laws could result in fines and the revocation of permits, which could prevent us from conducting our business.Our stock price continues to experience large fluctuations, and you could lose some or all of your investment.
The market price of our stock has been and is likely to continue to be highly volatile. These price fluctuations have been rapid and severe. The market price of our common stock may fluctuate significantly in response to the following factors, most of which are beyond our control:
|X| variations in our quarterly operating results;
|X| changes in securities analysts 'estimates of our financial performance;
|X| changes in market valuations of similar companies;
|X| announcements by us or our competitors of significant contracts; |X| acquisitions, strategic partnerships, joint ventures or
capital commitments;
|X| additions or departures of key personnel;
|X| future sales of common stock;
|X| announcements by us or our competitors of technological innovations of new therapeutic products, clinical trial results and
developments in patent or other proprietary rights;
|X| announcements regarding government regulations, public concern as to the safety of
|X| drugs developed by us or others or changes in reimbursement policies; and
|X| fluctuations in stock market price and volume, which are particularly common among securities of biopharmaceutical companies.
We are at risk of securities class action litigation. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. Several years ago, we were the subject of a securities class action lawsuit, which was eventually dismissed with a determination that the plaintiffs had no basis for their claim. If we face such litigation in the future, it could result in substantial costs and a diversion of management's attention and resources, which could harm our business. We have implemented provisions in our charter documents that may ultimately delay, discourage or prevent a change in our management or control of us. Our certificate of incorporation and bylaws contain provisions that could make it more difficult for our stockholders to replace or remove our directors or to effect any other corporate action. These provisions include those which: |X| prohibit holders of less than ten percent of our outstanding capital stock from calling special meetings of stockholders; |X| prohibit stockholder action by written consent, thereby requiring stockholder actions to be taken at a meeting of our stockholders; and|X| establish advance notice requirements for nominations for election to the board of directors or for proposing matters than can be acted upon by stockholders at stockholder meetings.
Moreover, our certificate of incorporation does not provide for cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates. Some of the above provisions may also have possible anti-takeover effects, which may make an acquisition of us by a third party more difficult, even if such an acquisition could be beneficial to our stockholders. In addition, our certificate of incorporation also authorizes us to issue up to 20,000,000 shares of preferred stock in one or more different series with terms to be determined by our board of directors at time of issuance. As of June 30, 2001, an aggregate of 71,053 shares of preferred stock had been designated for issuance as Series A or Series B preferred stock by the board of directors and 4,991 shares of Series B preferred stock were issued and outstanding. Issuance of other shares of preferred stock could also be used as an anti-takeover device.We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. In the normal course of our business, we employ established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency values. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We attempt to place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We maintain an investment portfolio of various issuers, types and maturities, which consist of both fixed and variable rate financial instruments. These securities are classified as available-for-sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component in stockholders’ equity, net of applicable taxes. At any time, sharp changes in interest rates can affect the value of our investment portfolio and its interest earnings. Currently, we do not hedge these interest rate exposures. However, through our money manager, we maintain management control systems to monitor interest rate risk. The risk management control systems use analytical techniques as well as other procedures to review interest rate risk. Assuming a hypothetical interest rate increase of 10%, the fair value of our total investment portfolio as of June 30, 2001 would have potentially incurred a loss of $479,000. Our exposure to foreign currency fluctuations is currently limited to our supply contract for Natrecor®, which is denominated in German Marks. Changes in the exchange rate between German Marks and the U.S. dollar could adversely affect our manufacturing costs. All of our other contracts are denominated in U.S. dollars. Exposure to foreign currency exchange rate risk may change over time as our business evolves and our products are introduced into international markets. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses.
(a) The following individuals were elected directors of Scios, each to serve until the Annual Meeting of Stockholders in 2002:
Total Vote For Total Vote Withheld
Name Each Director From Each Director
---- -------------- ------------------
Samuel H. Armacost 35,072,131 1,373,160
Richard B. Brewer 35,064,818 1,380,473
Randal J. Kirk 34,955,102 1,490,189
Donald B. Rice, Ph.D. 35,070,778 1,374,513
Charles A. Sanders, M.D. 35,042,005 1,403,286
Solomon H. Snyder, M.D. 35,073,989 1,371,302
Burton E. Sobel, M.D. 35,071,225 1,374,066
Eugene L. Step 35,064,182 1,381,109
(b) The following matters were submitted and each was approved by our stockholders, with votes cast as indicated:
o To approve an amendment to our 1992 Equity Incentive Plan:
Votes cast for: 31,875,840
Votes cast against: 4,397,020
Abstentions: 172,431
o To approve adoption of our 2001 Employee Stock Purchase Plan:
Votes cast for: 35,201,976
Votes cast against: 1,078,771
Abstentions: 164,544
FACE="Times New Roman, Times, Serif" SIZE=2>o To ratify the selection
of PricewaterhouseCoopers LLP as our independent accountant for fiscal 2001:
Votes cast for: 36,318,005
Votes cast against: 46,256
Abstentions: 81,030
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
| Report on Form 8-K Filed on May 29, 2001. On May 25, 2001, Scios Inc., announced that the Cardiovascular and Renal Drugs Advisory Committee to the U.S. Food and Drug Administration unanimously recommended approval of Natrecor® (nesiritide) for the treatment of acute congestive heart failure. |
| Report on Form 8-K Filed on July 13, 2001. On July 10, 2001, Scios Inc., announced that it has received a letter from the U.S. Food and Drug Administration stating that the Natrecor® (nesiritide) New Drug Application is approvable. |