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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-11749
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SCIOS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3701481
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
820 WEST MAUDE AVENUE
SUNNYVALE, CALIFORNIA 94085
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 616-8200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The approximate aggregate market value of voting stock held by nonaffiliates of
the registrant as of December 31, 2001 was $1,093,780,520.
As of December 31, 2001, 46,015,167 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Part
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Definitive Proxy Statement with respect to the 2002 Annual Part III
Meeting of Stockholders
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In this Form 10-K, "Scios", "we", "us", and "our" refer to Scios Inc. The
following discussion contains forward-looking statements about our plans,
objectives and future results. These forward-looking statements are based on
our current expectations, and we assume no obligation to update this
information. Realization of these plans and results involves risks and
uncertainties, and our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under "Risk Factors".
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory diseases. Our disease-based technology platform
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets and rationally design small molecule
compounds for large markets with unmet medical needs. We launched Natrecor(R)
following U.S. Food and Drug Administration, or FDA, approval of Natrecor
(nesiritide) for the treatment of acute congestive heart failure, or CHF, on
August 13, 2001, and recorded sales of $14.1 million for the year ended
December 31, 2001. We are focused on the development of three product
candidates, Natrecor for the treatment of acute congestive heart failure,
SCIO-469, an oral, small molecule inhibitor of p38 kinase for the treatment of
rheumatoid arthritis (RA); and small molecule inhibitors of the receptor for
TGF-beta, a cytokine that has been implicated in diseases characterized by
chronic scar formation, or fibrosis.
We were incorporated in California in 1981 under the name California
Biotechnology Inc. and reincorporated in Delaware in 1988. We changed our name
to Scios Inc. in February 1992, and to Scios Nova Inc. in September 1992
following our acquisition of Nova Pharmaceuticals, Inc. We returned to using
the name Scios Inc. in March 1996. Since September 1999, our principal
executive offices have been located at 820 West Maude Avenue, Sunnyvale,
California 94085. Our telephone number is (408) 616-8200.
Our corporate website is located at www.sciosinc.com. We do not intend for
information found on our website to be part of this document.
We own various copyrights, trademarks and trade names used in our business
including the following: Natrecor(R) and Fiblast(R). This document also
includes trademarks, service marks and trade names of other companies,
including the following: Gliadel(R), Biodel(R), Enbrel(R), Remicade(R),
Celebrex(R), Vioxx(R), Anakinra(R), Tezosentan(R), Risperdal(R), Simdax(R),
Paxil(R), Eskalith(R), Eskalith CR(R), Stelazine(R), Thorazine(R) and
Parnate(R).
RECENT DEVELOPMENTS
Since December 31, 2000, the following significant developments have occurred
with respect to our business:
NATRECOR
. On August 13, 2001, we received final approval from the FDA to market
Natrecor for the intravenous treatment of patients with acutely decompensated
congestive heart failure. We submitted an amendment to our New Drug
Application, or NDA, for Natrecor to the FDA in January 2001. The FDA's
Cardiovascular and Renal Drugs Advisory Committee reviewed our amended NDA on
May 25, 2001. The recommendation of that Committee was for unanimous approval
of Natrecor. On July 10, 2001, we received from the FDA an approvable letter
for Natrecor. The approvable letter was issued with two items to be
completed: the pre-approval inspection of our facility and the final
negotiations on the drug's label. During July 2001, the District Office of
the FDA completed the pre-approval inspection and recommended approval of the
Natrecor NDA. During August 2001, the final negotiations on the drug's label
were completed.
. Since August 2001, we have sold Natrecor to about 60% of our approximately
2000-targeted academic and community hospitals. We focused on 2000 of the
more than 5000 hospitals in the United States because 80% of the acute heart
failure patients in this country are treated in those targeted hospitals. In
addition, to enhance our hospital and physician access, we aggressively
pursued contracts with group purchasing organizations, or GPOs. These GPOs
contract for hundreds of their member hospitals and, as a group, assist us in
gaining access for Natrecor and our cardiovascular specialists in thousands
of hospitals. Currently, we have signed GPO arrangements with Owen, Consorta,
Amerinet, and Premier. In addition to GPO agreements, Kaiser Hospital has put
Natrecor on its formulary for its Northern and Southern California
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hospitals. We also recently finalized a purchasing agreement with the
Veteran's Administration, which allowed Natrecor to be placed on the Federal
Supply Schedule.
. In January 2001, we entered into a marketing alliance with Innovex, a
division of Quintiles, to commercialize Natrecor in North America. Innovex
has and will continue to deliver a wide range of sales and marketing
solutions for us, including hiring, training and deploying a dedicated cardio
and emergency medicine sales force of approximately 168 salespeople at our
cost. In December 2001, we amended the January 2001 agreement in relation to
the Natrecor sales force and the infrastructure supporting it. The amendment
will enable us, at our option, to assume control of the Natrecor sales force
in June 2003, one year ahead of schedule. Under the amended agreement,
PharmaBio, a corporate venture group related to Quintiles, will still provide
the $30.0 million in funding to commercialize Natrecor, however the $5.0
million line of credit was eliminated which PharmaBio was scheduled to
provide.
. In March 2001, we initiated the PROACTION, or Prospective Randomized Outcomes
Study of Acutely Decompensated Congestive Heart Failure Treated Initially in
an Outpatient setting with Natrecor, trial, a pilot study designed to compare
the clinical effects, safety profile and economic impact of standard therapy
plus Natrecor to standard therapy plus placebo. The PROACTION trial completed
enrollment of 250 acute CHF patients in December 2001. We expect to complete
the study period follow-up and data analysis in the first half of 2002. These
patients were treated in the emergency department or observation unit of a
hospital, where the majority of the approximately one million
hospitalizations each year for acute CHF begin. A preliminary review of the
blinded data should confirm the ease of use and beneficial safety profile of
Natrecor when administered in a less monitored clinical setting. Review of
the blinded data is also expected to demonstrate that the rate of admissions
from the emergency department is much lower than assumed when the study was
designed. Although useful clinical, safety, and economic data pertaining to
the emergency department may result from this trial, the probability of
finding statistically significant and pharmoeconomic differences between
Natrecor and placebo on in-hospital costs is unlikely.
. In May 2001, we expanded our existing research collaboration with Medtronic
to initiate a clinical study to evaluate the hemodynamic, endrocrine and
clinical effects of Natrecor using information collected by Medtronic's
Chronicle Implantable Hemodynamic Monitor both during and after infusions of
Natrecor. This study began in July 2001 at the Karolinska Hospital in
Stockholm and is ongoing.
. In October 2001, we launched a nationwide registry to collect and analyze
demographic and treatment data about patients hospitalized due to acutely
decompensated heart failure. ADHERE, the Acute Decompensated HEart failure
national REgistry, is expected to have a unique database of information of
tens of thousands of patients gathered from approximately 300 U.S. hospitals
over the next several years. We believe ADHERE will help clinicians better
determine factors associated with improved clinical outcomes in acute CHF,
the primary cause of more than one million hospital admissions in the U.S.
each year. ADHERE should also provide comprehensive demographic and treatment
data on a wide range of hospitalized heart failure patients. By tracking how
these very sick patients are treated over time, we can use this information
to identify optimal treatment strategies for them and develop comprehensive
acute heart failure guidelines. As of February 28, 2002, 3,064 patients have
been enrolled in the ADHERE Registry.
. In December 2001, we entered into a binding summary of terms with Glaxo Group
Ltd., an affiliate of GlaxoSmithKline, or GSK, in which we will license
Natrecor to GSK in all European markets. Under the terms of the agreement,
GSK will have the rights to sell and distribute the product for which we will
receive an up-front fee and milestone payments totaling (Pounds)15.0 million
British Pounds (which at December 31, 2001 equaled approximately $22 million
U.S. Dollars), in addition to future royalties in the identified countries.
We will manufacture and supply the bulk product to GSK. Both companies will
work together to continue clinical development of Natrecor in Europe. In
order to obtain European approval for Natrecor, GSK expects to use the
extensive clinical data we submitted to obtain approval from the FDA in
August 2001. The companies plan to launch Natrecor in Europe in the first
half of 2004. Scios and GSK executed the binding summary of terms in December
2001 and expect to finalize their full agreement incorporating the terms in
March 2002. Pending completion of the full agreement, the parties have
commenced their respective performance obligations as required under the
detailed terms and conditions of the binding summary of terms.
. In January 2002, we initiated the FUSION, or Management of Patients with CHF
After Hospitalization with Follow Up Serial Infusions Of Natrecor, study, a
multi-center, randomized, open-label pilot study that will be conducted at
approximately 40 U.S. sites and will enroll over 200 patients. Patients will
be randomized to receive either their usual long-term cardiac medications,
with or without IV inotropes, or serial infusions of Natrecor in addition to
their usual long-term cardiac medications, excluding IV inotropes. All
treatment groups will have weekly outpatient visits, and Natrecor patients
will receive infusions for 4 to 6 hours at each weekly visit. Patients will
receive study treatment for 12 weeks, followed by a one-month follow up
period. Data from the FUSION study are expected to be available in the first
quarter of 2003. As of February 28, 2002, 15 patients have been enrolled in
the study.
3
P38 KINASE INHIBITOR PROGRAM
. In January 2001, we completed a Phase Ia clinical trial of SCIO-469
evaluating single doses in healthy volunteers. In April 2001, we completed a
Phase Ib clinical trial in 20 healthy volunteers in which we evaluated the
safety and tolerability of multiple doses of SCIO-469 over a two-week period.
Based on the results of these trials, we filed an Investigational New Drug
application with FDA in November 2001 for a Phase II study with SCIO-469. The
Phase IIa trial in rheumatoid arthritis patients began in February 2002. This
multi-center, randomized, placebo-controlled clinical study will enroll 120
patients who have active RA and are receiving methotrexate. The main
objective of the study is to evaluate the safety and tolerability of six
escalating doses of SCIO-469 in RA patients. The company expects to announce
results from this study in the first quarter of 2003.
NATRECOR
CONGESTIVE HEART FAILURE
According to the American Heart Association's 2001 HEART AND STROKE STATISTICAL
UPDATE, approximately 4.7 million Americans currently suffer from chronic CHF
and 550,000 new cases of CHF will be diagnosed in the United States this year.
Annual expenditures for CHF are estimated to be $21.0 billion, including $15.8
billion for inpatient care.
Chronic CHF is characterized by a progressive loss in the heart's ability to
pump blood. It is attributable to weakening of the contractile cells of the
heart and accumulation of scar tissue. Different diseases can cause CHF,
including coronary artery disease, heart attacks, inflammation of the heart
tissue and diseases of the heart valves. Weakened heart muscle often results in
poor cardiac output because the heart is unable to empty blood adequately from
the ventricles to the circulation with each beat. Blood pools in the
ventricles, and the heart changes from its normal shape and becomes enlarged.
Subsequently, blood begins to back up into the blood vessels of the lungs,
causing marked increases in pulmonary vascular pressures. As pressure
increases, fluid moves from the pulmonary blood vessels into the air spaces,
causing pulmonary congestion. One frequently used measurement of pulmonary
vascular pressure is pulmonary capillary wedge pressure, or PCWP.
CHF symptoms that result from the pooling of blood include shortness of breath,
edema, or fluid retention, and swelling of the legs and feet. CHF symptoms that
result from the inefficiency of the heart to distribute or adequately pump
oxygen-rich blood to body tissues include fatigue and weakness as well as a
loss of appetite. As the disease progresses, these symptoms can severely impact
the patient's quality of life, such that even the ability to perform simple
tasks, such as walking across the room, becomes limited.
In the early stages of CHF, the body activates several hormonal pathways that
help the heart compensate in the short-term but have adverse long-term effects.
These hormones, which include adrenalin, angiotensin II, aldosterone and
endothelin, stimulate the heart to beat faster and stronger, thicken the wall
of the heart and maintain blood pressure by constricting blood vessels and
stimulating the kidney to retain sodium. If these pathways remain activated
over a sustained period of time, the beneficial effects are lost and injurious
effects develop, contributing to an eventual deterioration of heart function.
Current medications and medications under development generally focus on one or
more of these hormonal pathways.
Many CHF patients will eventually experience a rapid deterioration, or
decompensation, and require urgent treatment in the hospital. This condition is
called acute CHF. Acute CHF accounts for approximately one million hospital
admissions each year in the United States. Acute CHF is the most frequent cause
of hospitalization among Medicare patients. In addition, patients suffering
from chronic CHF have a five-year mortality rate of approximately 50%. For more
than a decade, there were no new FDA-approved drugs to treat acute CHF.
NATRECOR: OUR SOLUTION FOR THE TREATMENT OF ACUTE CONGESTIVE HEART FAILURE
Natrecor is a recombinant form of human B-type natriuretic peptide, or BNP, a
naturally occurring hormone in the body that aids in the healthy functioning of
the heart. BNP is secreted by the ventricles of the heart as a response to CHF.
We believe that the advantage of Natrecor, compared to other forms of therapy
for acute CHF, is that it works on multiple components of the acute CHF disease
pathway. In particular, based upon pre-clinical studies and clinical trials, we
believe that Natrecor:
. dilates veins, which decreases elevated pulmonary pressures, or prelude;
. dilates arteries, which decreases the resistance against which the heart has
to pump, or afterload;
. stimulates the kidney to excrete excess sodium, or natriuresis;
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. stimulates the kidney to excrete excess fluid, or diuresis; and
. opposes many of the injurious consequences caused by the long-term elevation
of hormones such as adrenalin, angiotension II, aldosterone and endothelin.
In clinical trials, Natrecor has also been shown to significantly improve blood
circulation and patient symptoms compared to IV nitroglycerin without the need
for labor-intensive monitoring, and its method of administration does not
require frequent dosing adjustments. In addition, in clinical trials, Natrecor
has not been associated with an increase in the incidence of cardiac
arrhythmias and has demonstrated no evidence of drug interactions with other
agents used concurrently in the treatment of acute CHF.
We have made significant progress since FDA approval of Natrecor. We launched
Natrecor immediately after approval with 168-person cardiovascular sales force
coupled with 2 Area Business Directors and 18 Area Business Managers. As of
February 7, 2002, we stocked Natrecor in approximately 60% of the 2000-targeted
academic and community hospitals. To enhance our hospital and physician access,
we aggressively pursued contracts with GPOs. These GPOs contract for hundreds
of their member hospitals and, as a group, assist us in gaining access for
Natrecor and our cardiovascular specialists in thousands of hospitals.
Currently, we have signed GPO arrangements with Owen, Consorta, and Amerinet,
and Premier. In addition to GPO agreements, Kaiser Hospital has put Natrecor on
its formulary for Northern and Southern California hospitals. We also recently
finalized a purchasing agreement with the Veteran's Administration, which
allowed Natrecor to be placed on the Federal Supply Schedule.
OTHER/COMPETING TREATMENTS FOR CONGESTIVE HEART FAILURE
While some cardiac risk factors such as smoking, high cholesterol, high blood
pressure, diabetes and obesity can be controlled with lifestyle changes, the
majority of patients with CHF require additional treatments to help manage
their disease. Competing medications for the treatment of CHF, including
diuretics, inotropes, vasodilators and beta-blockers, only focus on single
components of the diverse pathways contributing to CHF. For example, diuretics
help the kidneys rid the body of excess fluid, thereby reducing blood volume
and the heart's workload. Inotropes strengthen the heart's pumping action.
Vasodilators, such as ACE inhibitors, cause the peripheral arteries to dilate,
making it easier for blood to flow. Beta-blockers slow the heart rate and
reduce blood pressure by blocking the effects of adrenalin.
Upon arrival at the emergency department, patients who experience acute
episodes of CHF are typically treated with a combination of oxygen, morphine
and intravenous diuretics. A small percentage of patients respond to this
initial therapy and do not require admission to the hospital; however, the
majority of acute CHF patients require additional medical intervention and are
admitted. Additional acute CHF treatments may include intravenous
administration of inotropes, such as dobutamine, and vasodilators, such as
nitroglycerin. While each of these therapies assist in managing acute CHF, each
also has inherent limitations. Inotropes strengthen the contractility of the
heart but increase the incidence of cardiac arrhythmias, or irregular
heartbeats, and are associated with increased mortality. Intravenously
administered nitroglycerin requires careful monitoring and slow dosage
increases in small increments, resulting in delays in attaining positive
responses in acutely ill patients. Moreover, therapeutically effective doses of
IV nitroglycerin are:
. unpredictable from patient to patient;
. very close to toxic degrees of hypotension; and
. associated with increased tolerance or loss of effectiveness.
These complications of IV nitroglycerin often require the transfer of acute CHF
patients to more costly treatment units within the hospital, such as the
cardiac and intensive care units, in order to provide careful patient
monitoring.
NATRECOR CLINICAL TRIALS
We have conducted numerous clinical trials evaluating Natrecor over the past
eight years. Approximately 1,000 patients have been treated with Natrecor in 12
trials, including four pivotal efficacy and safety trials. In all of these
trials, Natrecor administration has been associated with improved blood
circulation and vascular filling pressures in the heart and lungs. Two of the
efficacy trials further demonstrated statistically significant improvement of
symptoms in acute CHF patients.
5
AMENDED NDA SUBMISSION TRIALS
We have completed two trials since the submission of our original NDA, the VMAC
trial, or Vasodilation in the Management of Acute CHF, and the PRECEDENT trial,
or Prospective Randomized Evaluation of Cardiac Ectopy with Dobutamine or
Nesiritide Therapy. These trials formed the basis of our amended NDA.
THE VMAC TRIAL. We began enrollment in our VMAC trial in October 1999 and, in
July 2000, completed enrollment of 498 patients hospitalized for acute CHF in
the United States. This trial compared the effects of Natrecor, IV
nitroglycerin and placebo, when individually added to standard therapy, such as
diuretics and inotropes. The primary endpoints were a reduction in pulmonary
capillary wedge pressure, or PCWP--a measure of the pulmonary vascular pressure
of the heart, reflecting its workload--and improvement of the symptom of
shortness of breath. The VMAC trial achieved both of its primary endpoints. Key
results of the VMAC trial that were presented in November 2000 at the annual
scientific meeting of the American Heart Association include:
. Natrecor produced a 20% decrease in PCWP at three hours, most of which
occurred in the first 15 minutes, which was significantly better than the 7%
decrease in PCWP at three hours for the placebo group;
. Natrecor improved shortness of breath significantly better than placebo;
. Natrecor decreased PCWP significantly faster and to a greater extent than IV
nitroglycerin;
. Natrecor significantly improved breathing in patients receiving standard
active therapy; in contrast, IV nitroglycerin did not significantly improve
breathing in these patients;
. Natrecor-treated patients had significantly fewer adverse events than either
placebo or IV nitroglycerin patients;
. acute CHF patients experiencing active ischemia, which is impaired blood flow
to the heart, showed no significant difference in adverse side effects in
respect to Natrecor, compared to placebo or nitroglycerin; and
. patients receiving Natrecor did not develop tolerance to the drug over time,
and consequently, unlike IV nitroglycerin, the effects of Natrecor were
sustained through 24 hours at the same dosage.
THE PRECEDENT TRIAL. The PRECEDENT trial compared the safety of Natrecor and
dobutamine, the most commonly used inotrope treatment for acute CHF. Key
results of the PRECEDENT trial indicated that:
. Natrecor produced fewer cardiac arrythmias than dobutamine; and
. use of Natrecor was associated with fewer deaths than the use of dobutamine.
CURRENT CLINICAL TRIALS
In March 2001, we initiated the PROACTION, or Prospective Randomized Outcomes
Study of Acutely Decompensated Congestive Heart Failure Treated Initially in an
Outpatient setting with Natrecor, trial, a pilot study designed to compare the
clinical effects, safety profile and economic impact of standard therapy plus
Natrecor to standard therapy plus placebo. The PROACTION trial completed
enrollment of 250 acute CHF patients in December 2001. We expect to complete
the study period follow-up and data analysis in the first half of 2002. These
patients were treated in the emergency department or observation unit of a
hospital, where the majority of the approximately one million hospitalizations
each year for acute CHF begin. A preliminary review of the blinded data should
confirm the ease of use and beneficial safety profile of Natrecor when
administered in a less monitored clinical setting. Review of the blinded data
is also expected to demonstrate that the rate of admissions from the emergency
department is much lower than assumed when the study was designed. Although
useful clinical, safety, and economic data pertaining to the emergency
department may result from this trial, the probability of finding statistically
significant and pharmoeconomic differences between Natrecor and placebo on
in-hospital costs is unlikely.
In January 2002, we initiated the FUSION, or Management of Patients with CHF
After Hospitalization with Follow Up Serial Infusions Of Natrecor, study, a
multi-center, randomized, open-label pilot study that will be conducted at
approximately 40 U.S. sites and will enroll over 200 patients. Patients will be
randomized to receive either their usual long-term cardiac medications, with or
without IV inotropes, or serial infusions of Natrecor in addition to their
usual long-term cardiac medications, excluding IV inotropes. All treatment
groups will have weekly outpatient visits, and Natrecor patients will receive
infusions for 4 to 6 hours at each weekly visit. Patients will receive study
treatment for 12 weeks, followed by a one-month follow up period. Data from the
FUSION study are expected to be available in the first quarter of 2003. As of
February 28, 2002, 15 patients have been enrolled in the study.
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RESEARCH COLLABORATION WITH MEDTRONIC
In April 2000, we entered into a research collaboration agreement with
Medtronic to study the feasibility of infusing patients with Natrecor via
Medtronic's infusion products. This agreement requires Medtronic to collaborate
with us on the infusion of vasodilators using Medtronic's products until the
first patient is implanted with a Medtronic infusion product administering
Natrecor. In May 2001, we expanded this research collaboration by entering into
an agreement to conduct a clinical study to evaluate the hemodynamic, endocrine
and clinical effects of Natrecor using information collected by Medtronic's
Chronicle Implantable Hemodynamic Monitor, or IHM, both during and after
infusions of Natrecor. A pilot feasibility study began in July 2001 at the
Karolinska Hospital in Stockholm and is ongoing. The Chronicle IHM is an
implanted system designed to measure and record hemodynamic variables over time
such as right ventricular systolic and diastolic pressures, estimated pulmonary
artery diastolic pressure, heart rate and activity. The Chronicle IHM is not
approved for sale in the United States or Europe. In November 2001, Medtronic
and Scios determined the feasibility studies of infusing Natrecor with
Medtronic's implantable delivery devices to be completed. Medtronic and Scios
decided not to pursue feasibility studies concerning infusion of Natrecor with
Medtronic's implantable delivery devices.
P38 KINASE INHIBITOR PROGRAM
THE IMMUNE SYSTEM AND INFLAMMATION
The immune system is composed of multiple cell types, including white blood
cells, each with a specific functional role. This system is regulated by
cytokines, which are proteins produced by immune system cells. When the body
encounters foreign material, or when tissue injury occurs, numerous enzymes in
the immune system are activated, causing the production of various inflammatory
cytokines such as interleukin-1, or IL-1, and tumor necrosis factor-alpha, or
TNF.
One class of the immune system's family of enzymes is the mitogen-activated
protein kinases, or MAP kinases. The MAP kinases are a family of intracellular
signaling enzymes that are activated when cells are either stimulated or
stressed and mediate many beneficial and injurious cellular responses. One of
the MAP kinases, p38 kinase, is responsible for increased production of IL-1,
TNF and the inflammatory enzyme cyclooxygenase-2, or COX-2.
Autoimmune diseases occur when the immune system is abnormally activated
against its own body. In the case of rheumatoid arthritis, the immune system is
activated against joint tissues. White blood cells then invade the joint space,
and, when activated, produce proteins such as IL-1, TNF and COX-2, which result
in pain, swelling and eventual destruction of the affected joints. Other
diseases that are worsened by sustained high levels of TNF and IL-1 include
inflammatory bowel disease and CHF. We believe that patients treated with an
oral p38 kinase inhibitor could experience a reduction in both the symptoms and
the progression of inflammatory diseases since it could inhibit the production
of IL-1, TNF and COX-2.
CURRENT THERAPY FOR AUTOIMMUNE AND INFLAMMATORY DISEASES
Currently, there is no cure or prevention for autoimmune disease. Optimal
medical management requires the early introduction of therapies in order to
prevent the long-term effects of the disease. In the case of rheumatoid
arthritis, long-term effects include irreversible joint damage and hypertrophy
of joint tissues limiting a patient's ability to move the affected joints.
Traditionally, initial drug treatment of inflammatory diseases involves the use
of non-steroidal anti-inflammatory agents. Steroids, such as glucocorticoids,
are often added as the disease or symptoms progress. Although these agents help
patients increase function and improve symptoms, they do not stop progression
of the disease. Moreover, these drugs have been demonstrated to cause both
stomach and kidney problems. In addition, persistent steroid treatment may
result in excess suppression of the immune system, which can lead to infection,
decreased bone marrow function and osteoporosis. Recently, more selective
anti-inflammatory agents, or COX-2 inhibitors, such as Celebrex and Vioxx, have
been introduced for symptom relief; however, they do not alter the progression
of inflammatory disease. Sales of COX-2 inhibitors for the treatment of
inflammatory disease were approximately $4.8 billion in 2000.
More powerful drugs exist for patients that do not respond to initial drug
therapy. In the case of rheumatoid arthritis, drugs such as methotrexate,
hydroxychloroquine and sulfasalazine can have individual side effects, which
must be monitored closely, and a delay of one to six months for a clinical
response is common.
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Within the past four years, inhibition of inflammatory cytokines has become an
established treatment for autoimmune disease. In the case of rheumatoid
arthritis, two new protein therapeutics, Enbrel and Remicade, were introduced
to inhibit the effects of TNF. Combined U.S. sales of these agents totaled
approximately $956.0 million in 2000. These treatments have been shown to be
effective at arresting the progression of the disease; however, they must be
given by injection or infusion on a repeated basis. Resistance to the treatment
is also an issue with these new drugs. This is due in part to increasing
production by a patient's immune system of antibodies that neutralize
administered proteins.
We are focusing our initial drug development efforts on creating an orally
available small molecule drug for the treatment of rheumatoid arthritis. The
Arthritis Foundation estimates that approximately 2.1 million Americans
currently suffer from rheumatoid arthritis. Decision Resources, an independent
market research group, suggests that the global market for rheumatoid arthritis
therapies will be approximately $6.6 billion by 2009, up from almost $1.5
billion in 1999. Rheumatoid arthritis patients generate more than nine million
physician office visits and more than 250,000 hospitalizations each year. It is
estimated that, in aggregate, the average yearly earnings deficit for all
working individuals with rheumatoid arthritis is approximately $6.5 billion.
SCIO-469: OUR P38 KINASE INHIBITOR FOR THE TREATMENT OF INFLAMMATORY DISEASES
SCIO-469 is a novel oral, small molecule compound designed to inhibit p38
kinase. Oral administration allows for careful dosage adjustment, which may
permit the physician to inhibit TNF sufficiently to obtain a useful therapeutic
effect without subjecting the patient to the risk of infection associated with
complete TNF inhibition.
PRE-CLINICAL STUDIES. In pre-clinical studies of acute and chronic
inflammatory arthritis, orally administered doses of SCIO-469 reduced cellular
production of COX-2 in a dose-dependent manner and reduced COX-2 and TNF levels
in whole blood assays. Statistically significant reductions in inflammation
also were observed in animal models of arthritis. In October 2000, we presented
pre-clinical data involving our p38 kinase inhibitors at the annual scientific
meeting of the American College of Rheumatology. The study demonstrated that
our p38 kinase inhibitors had statistically significant anti-inflammatory
effects in both acute and chronic animal models of inflammation.
CLINICAL TRIALS. In January 2001, we completed a Phase Ia clinical trial of
SCIO-469 evaluating single oral doses in healthy volunteers. This Phase Ia
clinical trial enrolled 30 volunteers. In April 2001, we completed a Phase Ib
clinical trial with 20 healthy volunteers in which we evaluated the safety and
tolerability of multiple doses of SCIO-469 over a two-week period. Based on the
results of these trials, we initiated a Phase IIa clinical trial with
rheumatoid arthritis patients in February 2002. This multi-center, randomized,
placebo-controlled clinical study will enroll 120 patients who have active RA
and are receiving methotrexate. The main objective of the study is to evaluate
the safety and tolerability of six escalating doses of SCIO-469 in RA patients.
The company expects to announce results from this study in the first quarter of
2003.
TGF-BETA PROGRAM
In March 2002, we announced the addition of a new drug candidate that could
become the first oral inhibitor of transforming growth factor (TGF)-beta.
TGF-beta is a multifunctional cytokine, a signaling protein that is produced in
a broad range of diseases characterized by unregulated scarring and eventual
organ failure. Research has indicated that excessive activation of TGF-beta is
involved with driving scar tissue formation, which is thought to contribute to
the progressive loss of function seen in a variety of conditions. Diseases in
which TGF-beta may play a role include congestive heart failure, chronic
obstructive pulmonary disease, liver cirrhosis and kidney disease. Current
therapies for these conditions treat symptoms exclusively or are only modestly
effective in slowing disease progression.
Scios has developed novel and potent small molecule inhibitors that are
designed to block activation of the TGF-beta receptor. They have been shown to
be effective in reducing scar formation or fibrosis when given orally to
animals. Scios expects to advance two lead molecules representing different
chemical classes through pre-clinical development and is planning to announce
the first medical indication for this new therapeutic class in 2003.
8
STRATEGY
We are focused on developing and commercializing novel pharmaceutical products
that address large market opportunities with unmet medical needs, initially in
the areas of cardiovascular and inflammatory disease. Key elements of our
strategy include:
. MAXIMIZING THE NEAR-TERM COMMERCIAL OPPORTUNITIES FOR NATRECOR. Natrecor is
the first drug to be approved by the FDA for the treatment of acute CHF in
over a decade. We have a focused 168-persons sale force dedicated to
establishing Natrecor as the standard of care. We believe that this sales
force is the largest in the United States exclusively dedicated to the acute
CHF market. We also intend to expand the near-term commercial opportunities
for Natrecor in the area of acute CHF by obtaining approvals to market
Natrecor in European nations through a licensing agreement with GSK, and
through collaborators outside of the European markets.
. EXPANDING THE COMMERCIAL OPPORTUNITIES FOR NATRECOR. We plan to expand the
market opportunities for Natrecor including its use in additional clinical
settings. We plan to pursue additional clinical settings for Natrecor
including its use in serial outpatient infusions.
. ADVANCING THE DEVELOPMENT OF OUR SMALL MOLECULE THERAPEUTICS PROGRAM. We
plan to continue to add state-of-the-art technologies to enhance our ability
to develop small molecule therapeutics in addition to our traditional
strengths in developing protein therapeutics. The major advantages of small
molecule therapeutics are the potential for oral administration, the ability
to adjust dosing to maximize efficacy and minimize toxicity and the ease and
cost of manufacturing. Currently, we are developing SCIO-469, an oral, small
molecule inhibitor of p38 kinase for the treatment of rheumatoid arthritis.
In addition, we are focusing on the development of small molecule inhibitors
of the TGF-beta receptor, which we hope will prove to be useful for a broad
range of diseases characterized by unregulated scarring and eventual organ
failure.
. BROADENING OUR PRODUCT PORTFOLIO THROUGH LICENSE OR ACQUISITION. We believe
that we can leverage our Natrecor-dedicated sales force by marketing
additional products to the acute care market. We are evaluating the licensing
or acquisition of additional product candidates, several of which are in the
areas of cardiovascular and inflammatory disease. We may also acquire
additional technologies or businesses that we believe will enhance our
research and development capabilities.
. COLLABORATING SELECTIVELY WITH BIOTECHNOLOGY AND PHARMACEUTICAL
COMPANIES. As we expand certain aspects of our development pipeline, we
intend to partner with biotechnology and pharmaceutical companies in order to
gain access to additional research and development or marketing expertise.
Our approach to partnership will be on a selective basis, seeking to maintain
the highest possible value of our product candidates. In order to accomplish
this task, we intend to delay partnering of any product until its clinical
utility has been established.
MARKETING AND SALES--NATRECOR
NATRECOR EDUCATION
We continue to build awareness for Natrecor among key target audiences through
a variety of tactical programs, including medical seminars, continuing medical
education programs, advisory boards and publications. At December 31, 2001, we
had hired 12 Scientific Affairs Managers and a Director of Scientific Affairs
who are focused in educating physicians on diseases of the cardiovascular
system and building relationships with opinion-leading cardiologists. We
continue to identify and develop relationships with physicians and nurses who
play a leading role in the diagnosis and treatment of CHF.
In addition, we launched a nationwide registry to collect and analyze
demographic and treatment data about patients hospitalized due to acutely
decompensated heart failure. ADHERE, the Acute Decompensated HEart failure
national REgistry, is expected to have a unique database of information of tens
of thousands of patients gathered from approximately 300 U.S. hospitals over
the next several years. We believe ADHERE will help clinicians better determine
factors associated with improved clinical outcomes in acute decompensated heart
failure, the primary cause of more than one million hospital admissions in the
U.S. each year. ADHERE should also provide comprehensive demographic and
treatment data on a wide range of hospitalized heart failure patients. By
tracking how these chronically ill patients are treated over time, we can use
this information to identify optimal treatment strategies for them and develop
comprehensive acute heart failure guidelines.
SALES FORCE TEAM
In early 2001, in connection with Innovex, we built our sales force team in
anticipation of the FDA approval of Natrecor. We initially hired two Area
Business Directors, 18 Area Business Managers to manage our sales force, and a
168-person
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cardiovascular sales force. Our management team and sales force have extensive
experience in and have been involved in the successful commercialization of
hospital based products. Our team of 188-persons is the largest sales force
solely dedicated to the acute heart failure market.
GROUP PURCHASING ORGANIZATIONS (GPO)
To enhance our hospital and physician access, we have aggressively pursued
contracts with GPOs. These GPOs contract for hundreds of their member hospitals
and, as a group can assist Scios in gaining access for Natrecor and our
cardiovascular specialists in thousands of hospitals. We currently have signed
GPO arrangements with Owen, Consorta, Amerinet, and Premier. In addition to GPO
agreements, Kaiser Hospital has put Natrecor on its formulary for its Northern
and Southern California hospitals, and we have entered into a purchasing
agreement with the Veteran's Administration, which allowed Natrecor to be
placed on the Federal Supply Schedule.
GLAXOSMITHKLINE AGREEMENT (GSK)
In December 2001, we entered into a binding summary of terms with Glaxo Group
Ltd., an affiliate of GlaxoSmithKline, or GSK, in which we will license
Natrecor to GSK in all European markets. Under the terms of the agreement, GSK
will have the rights to sell and distribute the product for which we will
receive an up-front fee and milestone payments totaling (Pounds)15.0 million
British Pounds (which at December 31, 2001 equaled approximately $22 million
U.S. Dollars), in addition to future royalties in the identified countries. We
will manufacture and supply the bulk product to GSK. Both companies will work
together to continue clinical development of Natrecor in Europe. In order to
obtain European approval for Natrecor, GSK expects to use the extensive
clinical data we submitted to obtain approval from the FDA in August 2001. The
companies expect to launch Natrecor in Europe in the first half of 2004. No
revenue has been recognized related to this agreement through December 31, 2001.
OUR AGREEMENT WITH INNOVEX
In January 2001, we entered into a sales and marketing alliance with Innovex, a
subsidiary of Quintiles Transnational Corp. As part of the three and one half
year agreement, PharmaBio Development, Inc., an affiliate of Innovex, agreed to
fund $30.0 million of our costs to launch Natrecor over the first 24 months of
the commercialization of Natrecor and to loan us up to $5.0 million. Under the
agreement, Innovex identified, hired, trained and deployed a dedicated
cardiology and emergency medicine sales force of 168 persons at our cost to
launch Natrecor. In December 2001, Scios, Innovex and PharmaBio, amended the
January 2001 agreement in relation to the Natrecor sales force and the
infrastructure supporting it. The amendment will enable Scios, at its option,
to assume control of the Natrecor sales force in June 2003, one year earlier.
Of the $30.0 million in funding to be provided by PharmaBio, we received $10.0
million in the fourth quarter of 2001, and will receive the remaining $20.0
million over the following 17 months. Under the amendment, we eliminated the
$5.0 million line of credit provided by PharmaBio to Scios. As part of the
funding agreement, we will pay PharmaBio a declining royalty rate on net sales
of Natrecor through early 2008. We also granted PharmaBio a warrant to purchase
700,000 shares of our common stock at an exercise price of $20.00 per share.
LICENSING ARRANGEMENTS WITH THIRD PARTIES
We have licensed some of our product candidates to third parties, who are now
responsible for product development. Under these arrangements, we typically
receive a combination of up-front payments, milestone payments upon their
achievement of scientific and clinical benchmarks and royalties on commercial
sales of products by our partners.
BNP
In 1998, we entered into a cross-license agreement with Shionogi under which we
granted Shionogi a royalty-free, nonexclusive license to our BNP patent rights
for the diagnostic field. In exchange, Shionogi granted us a royalty-bearing,
exclusive license under Shionogi's BNP patents to develop therapeutic products.
For therapeutic products, we pay royalties on net sales for the life of the
patent in countries where Shionogi holds one or more BNP patents. In countries
where Shionogi has no issued patent covering BNP, but one or more pending
patent applications which cover BNP, we are obligated to pay a reduced royalty
on the net sales of our therapeutic products during the pendency of such
applications, up to a maximum of four years following commencement of our sales
in the country where such applications are pending, after which the royalty
obligation shall cease, unless and until the pending applications result in one
or more issued claims covering BNP, in which case we would be obligated to pay
the full royalty from the date of patent issuance until the expiration or
invalidity of the
10
BNP patents in question. Shionogi holds patents relating to BNP in Japan and
Europe. We believe that Shionogi may have a patent application pending in the
United States.
We have licensed to Biosite Diagnostics and Abbott Laboratories the right to
use our patents on BNP for diagnostic purposes. Biosite has developed and is
currently marketing a point-of-care diagnostic test for BNP levels in the
United States and Europe. This test is used to identify individuals with CHF or
to monitor progression of their disease or their response to treatment. We are
currently receiving royalties from Biosite on the sales of their diagnostic
products. Abbott is continuing to develop its BNP diagnostic product.
FIBROBLAST GROWTH FACTOR
In 1982, Biotechnology Research Partners, Ltd., a California limited
partnership, or BRP, was formed primarily to conduct research and
experimentation in the field of biotechnology and to develop and produce from
genetically engineered micro-organisms or cells new products that have
potential pharmaceutical and other commercial applications. Out of this
research, Fibroblast Growth Factor, or FGF, was discovered. FGF is a naturally
occurring protein, which stimulates the growth of new blood vessels. In 1988,
we licensed the FGF technology to Kaken Pharmaceutical. In April 2001, Kaken
received approval from the Japanese Ministry of Health and Welfare to market an
FGF-based product for the treatment of recalcitrant dermal ulcers in Japan. As
part of the partnership agreement for BRP, BRP and Scios share in the royalties
from product sales of FGF. During 2001, we received royalties on sales of
FGF-based products by Kaken in Japan. The distributions of the royalty payments
were approximately 63% to Scios and 37% to the limited partners of BRP. Costs
and expenses are shared in this same percentage for audit, legal, and general
and administrative expenses. Scios R&D, Inc., a wholly owned subsidiary of
Scios, owns 100% of BRP, Inc., the general partner of BRP. Scios owns
approximately 59% of BRP and consolidates the results of BRP in its financial
statements.
In November 1999, we granted a license to Chiron covering rights to FGF in the
areas not previously licensed by us. We may receive up to $12.0 million in
milestone payments upon Chiron's completion of certain development objectives.
In addition, we will receive royalties based on sales of FGF products in
countries where we hold patents. Chiron has completed separate Phase II human
clinical trials evaluating FGF as a treatment for coronary artery and
peripheral vascular disease.
We have also granted nonexclusive licenses under our FGF patents and technology
to Orquest, for the development of products for the treatment of bone fractures.
We are obligated to make payments to Organon International based on amounts
received by us upon commercialization of FGF. Approximately $0.2 million
remains to be paid under this obligation, which stems from our 1989
reacquisition of certain FGF rights previously licensed to Organon.
VASCULAR ENDOTHELIAL GROWTH FACTOR\\121\\
VEGF\\121\\ is a naturally occurring protein used to stimulate the growth of
new blood vessels. In May 1996, we granted a license to GenVec for the use of
the gene encoding VEGF\\121\\ in gene therapy products. GenVec is currently
conducting Phase II clinical trials of its BIOBYPASS angiogen which
incorporates the use of our licensed technology. This product is being
evaluated to treat coronary artery disease and peripheral vascular disease. We
will receive royalties on any future sales of these products.
GLUCAGON-LIKE PEPTIDE-1
GLP-1 is a potent peptide that stimulates insulin release when blood sugar
levels are above normal. In 1988, we licensed from Massachusetts General
Hospital the exclusive use of certain patent applications for GLP-1 and certain
analogs upon which we will pay a royalty on any future sales. In 1996, we
granted Novo Nordisk an exclusive license to our GLP-1 technology and the
additional rights we acquired pursuant to the Massachusetts General Hospital
license. We will receive royalties on product sales made by Novo Nordisk. Novo
Nordisk is responsible for development activities for GLP-1 and has initiated
Phase II human clinical trials of a GLP-1 analog that they are developing as a
treatment for Type 2 diabetes.
ALZHEIMER'S DISEASE
We have concluded separate research collaborations with Eli Lilly and with
DuPont Pharmaceuticals to develop new therapies for Alzheimer's Disease. The
joint research phase of our collaboration with DuPont ended in November 2000.
The
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joint research phase of our collaboration with Eli Lilly ended December 31,
2001. Under the Eli Lilly agreement, we are entitled to receive potential
milestone payments if certain events are achieved, and Eli Lilly is entitled to
commercialize any resulting products subject to royalty payments to us. With
the termination of the DuPont and Eli Lilly collaborations, the Company has
decided to discontinue further substantial research efforts relating to
identification and characterization of proteins and biological mechanisms
implicated in Alzheimer's disease.
DRUG DELIVERY SYSTEMS
Prior to our acquisition of Nova Pharmaceuticals in 1992, Nova had been
developing several drug delivery systems, including the Gliadel implant to
treat primary brain cancer. The Gliadel technology was developed pursuant to a
license agreement with the Massachusetts Institute of Technology relating to
MIT's Biodel drug delivery technology. We licensed Gliadel to Guilford
Pharmaceuticals in 1994. Gliadel was approved for marketing in the United
States in 1996. We assigned our Biodel license rights back to MIT, which
administers the licensing of this technology, including the license with
Guilford. We and MIT are receiving royalty and milestone payments under the
license agreement with Guilford. We conducted the Gliadel project on behalf of
Nova Technology Limited Partnership, the limited partnership that funded Nova's
research and development on these projects. In December 1992, the Company
exercised its option to acquire all interests in Nova Technology Limited
Partnership for $20.4 million. The Company also issued contingent payment
rights to all limited partners of the partnership, pursuant to which the
Company is obligated until January 15, 2008 to pay royalties on the sale or
license of certain products that were under development by the partnership. The
Company had accrued $44,000 at December 31, 2001 as a result of royalties
associated with the commercialization of Guilford's Gliadel wafer.
PSYCHIATRIC SALES AND MARKETING DIVISION
Since 1990, our Psychiatric Sales and Marketing Division, or PSMD, had the
exclusive right to market certain products in the United States under a
licensing agreement with GSK, including Eskalith and Eskalith CR, Thorazine,
Stelazine, and Parnate. GSK was responsible for the manufacture and
distribution of these products. As part of our agreement with GSK, we paid GSK
40% of our net profits from the sales of these products. We sold the marketing
rights back to GSK and terminated the licensing agreement effective March 31,
2001. We received from GSK $4.0 million in 2001 and $3.0 million in 2002, and
expect to receive a final payment of $2.4 million in 2003.
RESEARCH AND DEVELOPMENT
Our technical capabilities now include disease-based gene microarrays,
bioinformatics, structural informatics and state-of-the-art medicinal
chemistry, including computational chemistry modeling, all of which have added
to our traditional technical strengths in protein cloning and expression.
In order to discover new pathways of disease, our research has assembled tissue
samples from a broad array of human and experimental diseases of the
cardiovascular system. We analyze these tissues for the expression of new genes
that may be involved in particular diseases. We do this by a technique known as
microarray gene display, in which fluorescent tags identify which genes may be
up regulated or down regulated during the course of a particular disease. We
then apply commercial and proprietary software analysis to the sequence of
these genes and to the patterns of their expression in order to highlight
cellular pathways that may be playing a particular role in a disease process.
This process is known as bioinformatics.
Particular attention is paid either to the presence of a known enzyme
participating unexpectedly in a disease process or to a novel enzyme. Our
molecular biologists then express these candidate target enzymes in an
activated state as pure proteins and develop high throughput screening assays
to discover inhibitors of those enzymes within our chemical compound library,
which we have developed over the last several years. Applying the tools of
structural informatics, our protein chemists develop computer-based,
three-dimensional structures of these enzymes that guide our chemists in
developing lead inhibitory molecules with respect to potency and selectivity.
Once we have brought a drug candidate to the optimum level of potency and
safety, we test the drug at both the cellular and animal level, again applying
gene microarray technology. This allows the rapid evaluation of the drug for
efficacy while ensuring that potential toxicities are minimized before testing
in the clinic.
We are focused on diseases of the cardiovascular system, with a particular
emphasis on inflammation in both its acute and chronic forms and scarring as a
cause of chronic organ failure. Our research has emphasized an emerging family
of protein therapeutic targets known as protein kinases. Kinases are naturally
occurring intracellular signaling "switches" that work by
12
attaching phosphate groups to other proteins, thereby activating cellular
processes controlled by those proteins, including the transcription of new
proteins. While the vast majority of protein kinases are engaged in beneficial
work on behalf of the cells of the body, medical research over the last decade
has clearly demonstrated that cellular pathways abnormally activated by certain
kinases contribute to both the symptoms and progression of many diseases. By
applying the most advanced technologies available with proprietary methodology,
including the development of gene analysis software, we have dedicated
ourselves to the identification of kinases participating in diseases within our
strategic focus and developing and testing inhibitors of those enzymes for
potential therapeutic value. The rapid pre-clinical and clinical development of
our p38 kinase inhibitor, SCIO-469, and our preliminary advances in our
TGF-beta program represents the initial success of this innovative approach.
Our aggregate research and development expense totaled $48.1 million in 2001,
$39.3 million in 2000, and $34.3 in 1999.
MANUFACTURING
Our products are manufactured for us by third parties. In 1995, we entered into
an agreement with BioChemie GmbH in Austria for the manufacture of Natrecor. We
expect the agreement to run through 2009. BioChemie ships Natrecor in powder
form to Abbott Laboratories in McPherson, Kansas, where it is blended, filled
and packaged for shipment. We also maintain arrangements with several companies
to manufacture our p38 kinase inhibitor compounds and intend to enter into a
long-term supply relationship if our compounds continue to proceed through
development.
PATENTS AND PROPRIETARY RIGHTS
We seek patent protection for proprietary technology and products in the United
States and abroad to prevent others from unfairly capitalizing on our
investment in research. Other companies engaged in research and development of
new healthcare products also actively pursue patents for their technologies. We
also rely upon trade secrets and know-how to reinforce our competitive
position. However, trade secret protection will not preclude others from
independently developing technology similar to ours, nor can there be any
assurance that third parties that have signed confidentiality agreements with
us will honor those agreements.
We currently own or hold exclusive rights to 82 issued U.S. patents and 50 U.S.
pending patent applications covering our proprietary technology and products.
We also own or hold exclusive rights to foreign patents and patent applications
corresponding to most of the U.S. patents and patent applications in our
portfolio. Our issued patents include patents on Natrecor, certain of our p38
kinase inhibitors, FGF, VEGF\\121\\ and GLP-1. Our proprietary position with
respect to certain principal products under development is described below. If
a patent issues prior to marketing approval, as has been the case with all of
our issued patents to date, we can apply for extension of the patent term for a
limited period of time to make up for a portion of the patent term lost to the
regulatory approval period. The absence of a patent covering products, which we
have licensed to third parties, could reduce the royalties due to us under the
agreements with those parties.
NATRECOR
We have been issued United States, Canadian and European patents covering the
endogenous form of Natrecor, human BNP. Our U.S. patents on Natrecor are
subject to possible extension due to time taken up in the regulatory approval
process. We believe our key patent on Natrecor, which currently expires in May
2009, may be extended to late 2013 or early 2014. Pursuant to a
royalty-bearing, exclusive license granted to us by Shionogi, we also have the
exclusive right to develop therapeutic products using BNP under certain patents
and applications on BNP originally filed by Daiichi Pharmaceutical and
subsequently acquired by Shionogi. Shionogi holds patents in Japan and Europe.
We believe that Shionogi may have a patent application pending in the United
States. Although we were granted a Japanese patent on BNP, the patent was
revoked in 1998 in an opposition filed against the patent by an unidentified
party. The opposition did not challenge the originality of our BNP discovery
but based its challenge solely on an interpretation of utility requirements for
patentability peculiar to Japanese patent law. We appealed the revocation to
the Tokyo High Court. On March 13, 2001, the Tokyo high court affirmed the
revocation. Because we believe the decision is contrary to both Japanese
precedent and patentability requirements in the United States and Europe, we
have appealed the revocation to the Japanese Supreme Court. The decision does
not affect our patent rights outside of Japan, nor does the revocation impact
our ability to exclusively market BNP in Japan insofar as our exclusive license
under the patent rights of Daiichi includes several Japanese patents of Daiichi
directed to BNP.
13
P38 KINASE INHIBITORS
We have filed a series of patent applications in the United States covering the
classes of p38 kinase inhibitors that we have identified. To date, we have been
issued three U.S. patents directed to certain of these p38 inhibitors. These
patents will expire in 2018, subject to possible extension for FDA regulatory
delays. While the classes of small molecule compounds identified by our
researchers appear to be unique, we are aware that other companies are also
working to develop p38 kinase inhibitor compounds, and have filed patent
applications on and received patents covering certain classes of compounds that
these competing companies have identified and covering various aspects of
identifying such compounds.
FGF
After an interference with The Salk Institute for Biological Studies, we were
awarded a U.S. patent on DNA sequences, expression vectors, and microorganisms
used in the recombinant production of human basic FGF. Our basic FGF U.S.
patent will expire in 2012, and it may be extended for FDA regulatory delays.
We also hold European and Japanese patents on human basic FGF. Synergen, now
owned by Amgen, has obtained patents directed to a form of FGF that we believe
is different from the form of FGF produced by us. A U.S. patent issued to Salk
contains claims directed to substantially pure mammalian basic FGF containing
the 146 amino acid sequence of bovine basic FGF or a naturally occurring
homologous sequence of another mammalian species. Although we have been advised
by counsel that the Salk patent would be invalid if read broadly enough to
cover our form of FGF, there is still risk that an assertion of this patent
could block our partners' ability to develop and market human basic FGF in the
absence of a license, or if such a license is granted, could reduce the royalty
income to us. We opposed Salk's European patent, which resulted in revocation
of the patent. Salk appealed the revocation. In February 2002, the Technical
Board of Appeal agreed with the grounds of appeal and entered its decision to
maintain the patent as granted. Our European patent was opposed by Chiron and
Pharmacia. Our patent was upheld and both opponents appealed. As a result of
our license to Chiron, Chiron, who is also a licensee of Salk, withdrew from
the opposition against our European patent, and we have withdrawn from our
opposition against the Salk patent.
In March 1994, we obtained a non-exclusive license to make, use and sell FGF
under a U.S. patent issued to Harvard University containing claims to purified
cationic (basic) FGF. The Harvard patent is based on a patent application
having a filing date earlier than the application, which formed the basis for
the Salk patent. Sublicense rights under this patent are included in the rights
granted by us to our FGF licensees, Kaken and Chiron.
VEGF\\121\\
Seven isoforms of human VEGF (hVEGF) are known, having 121, 145, 148, 165, 183,
189 and 206 amino acids, respectively. We believe that our researchers were the
first to identify, clone and produce by recombinant DNA technology the 121
amino acid form of hVEGF (hVEGF\\121\\). hVEGF\\121\\ is the only human VEGF
isoform known not to bind to heparin. We own two U.S. patents issued in 1993
covering hVEGF\\121\\, and in 1996 received a European patent covering this
VEGF isoform. Our U.S. patents on VEGF\\121\\ will expire 2010 but may be
extended for FDA regulatory delays. We have patent applications pending in
Canada and Japan. Other companies and institutions, including Genentech,
Pharmacia and the Regents of the University of California, hold patents and
pending patent applications claiming various isoforms of hVEGF and certain VEGF
variants.
COMPETITION
For patients treated with acute CHF, many therapeutic options are available.
Competing drugs fall into three main categories: vasodilators, inotropes and
diuretics. Natrecor, approved for marketing in August of 2001, competes against
both vasodilators and inotropes in the acute CHF market. Many of the currently
marketed drugs are available in generic formulation and have an associated low
cost. In addition, milrinone, an inotrope, is currently promoted by
Sanofi-Synthelabo and is expected to lose patent protection in May 2002.
Natrecor has been priced above the cost of these existing drugs, which may harm
our competitive position relative to these drugs. While early acceptance is
encouraging, the higher cost of Natrecor may prevent us from being able to
compete effectively with these long-standing existing forms of therapy.
New drugs in development for the treatment of acute CHF would compete with
Natrecor if approved by the FDA or other regulatory agencies. Veletri
(tezosentan), a non-selective endothelin receptor antagonist, is being
developed by Actelion but the drug did not meet its primary endpoints for heart
failure. It is not clear whether Actelion will continue the development of this
product. Abbott had previously submitted an NDA for Simdax, a calcium
sensitizer described as an inotrope, but withdrew the application in 2000.
Abbott appears to be moving forward with development of this product.
14
We are aware of several pharmaceutical and biotechnology companies that are
actively developing or have commercialized products addressing the same disease
indication as the p38 MAP kinase inhibitor. Current commercial competition for
rheumatoid arthritis treatments include generic methotrexate, the injectible
TNF inhibitors such as Centecor's Remicade and Immunex's Enbrel and the recent
launch of Amgen's (formally Immunex) interleukin-1 inhibitor, Anakinra. In
addition competition will result from the most often prescribed drugs to treat
rheumatoid arthritis, the non-steroidal anti-inflammatory drugs such as
ibuprofen and the COX-2 inhibitors such as Pharmacia's Celebrex and Merck's
Vioxx. These drugs are palliative and do not reverse or prevent the progression
of the disease.
In addition, we are aware of a few pharmaceutical and biotechnology companies
that are specifically developing a p38 MAP kinase inhibitors for treating
rheumatoid arthritis. In 2001, Vertex Pharmaceuticals (which recently merged
with Aurora Biosciences) suspended the development of its lead oral p38
compound indicated for rheumatoid arthritis. Vertex intends to initiate
clinical trials with two-second generation compounds in the first half of 2002.
These companies, including Beringer Ingleheim and Vertex may possess both
greater access to capital and research and development resources. We may be
unable to compete effectively with any of these development projects. If we are
successful in developing our own p38 kinase inhibitor compound we may face
intense competition.
We expect that competition for our products, when approved for sale, will be
based, among other things, on efficacy, reliability, product safety, price and
patent position. Our ability to compete effectively and develop products that
can be manufactured cost-effectively and marketed successfully will depend on
our ability to:
. advance our technology platforms;
. license additional technology;
. maintain a proprietary position in our technologies and products;
. obtain required government and other public and private approvals on a timely
basis;
. attract and retain key personnel; and
. enter into corporate partnerships.
Our failure to achieve any of the above goals could impair our business.
GOVERNMENT REGULATION
Pharmaceutical drugs are subject to extensive pre- and post-market regulation
by the FDA, including regulations that govern the testing, manufacturing,
safety, efficacy, labeling, storage, record keeping, advertising, and promotion
of the products. The process required by the FDA before a new drug may be
marketed in the United States generally involves the following: completion of
pre-clinical laboratory and animal testing; submission of an investigational
new drug application, which must become effective before clinical trials may
begin; performance of adequate and well controlled human clinical trials to
establish the safety and efficacy of the proposed drug products intended use;
and approval by the FDA of an NDA.
Human clinical trials are typically conducted in three sequential phases that
may overlap. These phases generally include the following: Phase I during which
the drug is introduced into healthy human subjects or, on occasion patients,
and is tested for safety, dose tolerance and metabolism; Phase II during which
the drug is introduced into a limited patient population to determine the
efficacy of the product of specific targeted diseases, to determine dosage
tolerance and optimal dosage and to identify possible adverse effects and
safety risks; and, Phase III during which the clinical trial is expanded to a
more diverse patient group in geographically dispersed clinical trial sites to
further evaluate clinical efficacy, optimal dosage and safety. The FDA, and the
Institutional Review Board at each institution at which a clinical trial is
being performed, may suspend a clinical trial at any time for various reasons,
including a belief that the subjects are being exposed to an unacceptable
health risk.
The results of product development, pre-clinical animal studies and human
studies are submitted to the FDA as part of the NDA. The NDA also must contain
extensive manufacturing information. FDA does allow under certain circumstances
for the joint manufacturing of drug products. The FDA may approve or disapprove
the NDA if applicable FDA regulatory criteria are not satisfied or it may
require additional clinical data. Once approved, the FDA may withdraw the
product approval if compliance with pre- and post-market regulatory standards
is not maintained or if problems occur after the product reaches the
marketplace. In addition, the FDA may require post-marketing studies, referred
to as Phase IV studies, to monitor the effect of approved products, and may
limit further marketing of the product based on the results of these
post-market studies.
15
The FDA has broad post-market regulatory and enforcement powers, including the
ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals.
With respect to post-market product advertising and promotion, the FDA imposes
a number of complex regulations on entities that advertise and promote
pharmaceuticals, which include, among others, off-label promotion, industry
sponsored scientific and educational activities, standards and regulations for
direct-to-consumer advertising, and promotional activities involving the
Internet. The FDA has very broad enforcement authority under the Federal Food
Drug and Cosmetic Act, and failure to abide by these regulations can result in
penalties including the issuance of a warning letter directing a company to
correct deviations from FDA standards, a requirement that future advertising
and promotional materials be pre-cleared by the FDA, and state and federal
civil and criminal investigations and prosecutions.
We are also subject to various laws and regulations regarding laboratory
practices, product manufacturing, including FDA's current Good Manufacturing
Practice requirements, the experimental use of animals, and the use and
disposal of hazardous or potentially hazardous substances in connection with
our research. In each of these areas, the FDA has broad regulatory and
enforcement powers, including the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw
approvals, any one or more of which could harm our business. Additionally,
before any of our products may be marketed in foreign countries, they are
subject to pre- and post-market regulation similar to that required in the
United States.
EMPLOYEES
We had 425 full-time employees as of December 31, 2001 as follows:
Sales Representatives and Management deployed in the field................ 188
Sales Operations and Marketing............................................ 11
Research and Development.................................................. 178
General and Administrative................................................ 48
---
Total..................................................................... 425
===
We believe our employee relations are good. None of our employees is subject to
a collective bargaining agreement.
16
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE HARMED BY ANY OF THESE RISKS. THE RISKS DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. THIS
DOCUMENT ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISKS FACED
BY US, INCLUDING THOSE DESCRIBED BELOW AND ELSEWHERE IN THIS DOCUMENT.
RISKS RELATED TO NATRECOR
IF NATRECOR DOES NOT GAIN MARKET ACCEPTANCE, OUR BUSINESS WILL SUFFER.
Natrecor may not gain market acceptance among physicians, patients, healthcare
payers and the medical community. We will need to educate doctors and other
healthcare advisors of the safety and clinical efficacy of Natrecor and its
potential advantages over other treatments. The degree of market acceptance of
Natrecor will also depend on a number of factors, including:
. the degree of clinical efficacy and safety;
. cost-effectiveness of Natrecor;
. its advantage over alternative treatment methods; and
. reimbursement policies of government and third party payers.
To the extent market acceptance of Natrecor is limited, our revenues may suffer.
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. Natrecor 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. If deficiencies are identified,
we may lose the ability to supply and sell Natrecor for an 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.
BioChemie GmbH is responsible for manufacturing Natrecor in bulk quantities and
Abbott Laboratories is responsible for blending, filling and packaging
Natrecor, and if they encounter problems in these processes, our revenues from
future sales of Natrecor could decrease. Natrecor is manufactured using
industry-accepted recombinant manufacturing techniques, which must be conducted
under strict controls and tight timelines. Natrecor 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. BioChemie depends on outside
vendors for the timely supply of raw materials used to produce Natrecor. 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 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 to meet market needs.
17
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.
Many therapeutic options are available for patients with acute CHF. Competing
drugs fall into three main categories: vasodilators, inotropes and diuretics.
Natrecor 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, Natrecor costs more than
many 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 if approved by the FDA or other regulatory agencies. Tezosentan, a
non-selective endothelin receptor antagonist, is being developed by Actelion
Ltd. and has been evaluated in Phase II clinical trials as a vasodilator for
the treatment of acute CHF.
In addition, Abbott had previously submitted an NDA for Simdax, a calcium
sensitizer described as an inotrope, but withdrew the application in 2000.
However, Abbott appears to be moving forward with development of this product.
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 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 or any
other product candidates in foreign countries, and we may not be able to obtain
any international regulatory approvals for Natrecor or any other product we
develop. If we fail to obtain those approvals or if such approvals are delayed,
the geographic market for Natrecor or our other product candidates would be
limited.
WE WILL REQUIRE A PARTNER TO MARKET AND COMMERCIALIZE NATRECOR AND OUR OTHER
PRODUCT CANDIDATES IN MARKETS OTHER THAN EUROPE.
We plan to partner with other companies for the sale of Natrecor and our other
product candidates outside of the United States. In December 2001, we entered
into an agreement with GSK in all European markets. Under the terms of the
agreement, GSK will have the rights to sell and distribute Natrecor for which
Scios will receive an up-front fee and milestone payments, in addition to
future royalties on European sales. Scios will manufacture and supply the bulk
product (active pharmaceutical ingredient) to GSK.
We also plan to partner Natrecor in markets other than European markets. 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 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.
THE SUCCESS OF NATRECOR IN THE EUROPEAN MARKET IS HIGHLY DEPENDENT ON OBTAINING
EUROPEAN APPROVAL AND OUR LICENSING AGREEMENT WITH GSK FOR MARKETING, PROMOTION
AND SALES ACTIVITIES.
In order to obtain European Approval for Natrecor, GSK expects to use the
extensive clinical data we submitted to obtain approval from the FDA in August
2001. If we receive the necessary approvals, we expect to launch Natrecor in
Europe in the first half of 2004. However, while the clinical data used to
support the FDA submission is expected to be adequate for European approval,
further clinical trials may be necessary and adverse results from such
additional trials could result in a failure to receive European approval. Even
if additional trials are successful, a requirement to conduct further clinical
trials would delay the launch of Natrecor in Europe, which may result in lower
than anticipated revenues for Scios.
Under the terms of the agreement, GSK will have the rights to sell and
distribute Natrecor for which Scios will receive an up-front fee and milestones
payments, in addition to future royalties on European sales. Accordingly, our
revenue from sales of Natrecor in Europe will be highly dependent on GSK's
ability to effectively market and sell Natrecor.
18
The companies intend to conduct a health outcomes trial, commencing in 2002,
which the companies will use to assess market acceptance of Natrecor in major
European countries. The health outcomes trial could affect the price at which
Natrecor will be sold. We cannot be assured that a preferred price for Natrecor
will be obtainable and that market acceptance of Natrecor will be achieved.
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, 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 for 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 for any
additional indications. In addition, even if Natrecor is approved by the FDA,
we cannot exclude the possibility that serious adverse events related to the
use of Natrecor might occur in the future, which could either limit its use or
cause the FDA to revoke our approval to market Natrecor.
OTHER RISKS RELATED TO SCIOS
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 December 31, 2001, we had an accumulated deficit of
approximately $473.9 million.
To date, nearly all of our revenues have come from:
. sales of Natrecor beginning in August 2001;
. one-time sales of bulk FGF product and royalties from Fiblast Spray sales by
Kaken in Japan;
. one-time signing fees from our corporate partners under agreements supporting
the research, development and commercialization of our product candidates;
. one-time payments from our corporate partners when we achieved regulatory or
development milestones;
. research funding from our corporate partners; and
. 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 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:
. our success in selling Natrecor;
. the timing and realization of milestone and other payments from our corporate
partners;
. the timing and amount of expenses relating to our research and development,
product development and manufacturing activities; and
. 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.
19
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
personnel or to attract additional highly qualified personnel could delay the
development of our product candidates and harm our business.
The success of our present and future operations will also depend to a
significant extent on the experience, abilities and continued services of
certain executive officers of Scios. In this regard, Dick Brewer, our President
and Chief Executive Officer, was diagnosed in mid-2001 with early-stage
Multiple Myeloma, a form of blood cancer. He continues to undergo treatment and
in February 2002 moved into the next phase of his treatment program. During
this phase, which is expected to last approximately two months, the Company has
expanded the role of Dr. Donald Rice, the Chairman of the Board, and
established an Office of the Chairman, composed of Dr. Rice and our senior
management team. A loss of the services of Mr. Brewer or other key management
personnel could have a material adverse effect on the Company.
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.
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, including SCIO-469 and our
inhibitors of TGF-beta, 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 PRE-CLINICAL 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 pre-clinical 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. In
the first quarter of 2002, we began 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 pre-clinical studies and
early clinical trials are often not accurate indicators of results of
later-stage clinical trials that involve larger human populations.
20
OUR PRODUCTS USE NOVEL ALTERNATIVE TECHNOLOGIES AND THERAPEUTIC APPROACHES,
WHICH HAVE NOT BEEN WIDELY STUDIED.
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:
. develop products that are safer or more effective than our product candidates;
. obtain FDA and other regulatory approvals or reach the market with their
products more rapidly than we can, reducing the potential sales of our
product candidates;
. devote greater resources to market or sell their products;
. adapt more quickly to new technologies and scientific advances;
. initiate or withstand substantial price competition more successfully than we
can;
. have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
. more effectively negotiate third-party licensing and collaboration
arrangements; and
. 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.
21
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 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.
22
RISKS RELATED TO OUR INDUSTRY
WE FACE UNCERTAINTIES OVER REIMBURSEMENT AND HEALTHCARE REFORM.
In both domestic and foreign markets, future sales of our potential products,
if any, will depend in part on the availability of reimbursement from
third-party payers such as government health administration authorities,
private health insurers and other organizations. Third-party payers are
increasingly challenging the price and cost- effectiveness of medical products
and services. Significant uncertainty exists as to the reimbursement status of
newly approved health care products. Even if we were to obtain regulatory
approval, our product candidates may not be considered cost-effective and
adequate third-party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an appropriate return on our
investments in product development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before any of our product candidates is
approved for marketing. Adoption of such legislation and regulations could
further limit reimbursement for medical products and services. If the
government and third party payers fail to provide adequate coverage and
reimbursement rates for our potential products, the market acceptance of our
products may be adversely affected.
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:
. variations in our quarterly operating results;
. changes in securities analysts' estimates of our financial performance;
. changes in market valuations of similar companies;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. future sales of common stock;
. announcements by us or our competitors of technological innovations of new
therapeutic products, clinical trial results and developments in patent or
other proprietary rights;
. announcements regarding government regulations, public concern as to the
safety of drugs developed by us or others or changes in reimbursement
policies; and
23
. 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 subjects 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:
. prohibit holders of less than ten percent of our outstanding capital stock
from calling special meetings of stockholders;
. prohibit stockholder action by written consent, thereby requiring stockholder
actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that 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 December 31,
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.
24
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and their ages at February 28, 2002 are as follows:
- ------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------
Richard B. Brewer...................... 50 President, Chief Executive Officer and Director
George F. Schreiner, M.D., Ph.D........ 52 Chief Scientific Officer
David W. Gryska........................ 45 Senior Vice President, Finance and Chief Financial Officer
Patricia A. Baldwin, Ph.D.............. 46 Vice President, Quality and Product Development
Thomas L. Feldman...................... 51 Vice President, Sales and Marketing
M. Allison Herd........................ 41 Vice President, Human Resources
Matthew R. Hooper...................... 44 Vice President and General Counsel
Darlene P. Horton, M.D................. 40 Vice President, Medical Affairs
Jane A. Moffitt........................ 49 Vice President, Regulatory Affairs
RICHARD B. BREWER joined us in September 1998 as President, Chief Executive
Officer and Director. From February 1996 to June 1998, he served as the
Executive Vice President of Operations and then as Chief Operating Officer of
Heartport, Inc., a medical device company. From 1984 to 1995, Mr. Brewer served
in various capacities for Genentech Europe Ltd., Genentech Canada, Inc. and
Genentech, Inc., most recently as Senior Vice President, U.S. Sales and
Marketing. Mr. Brewer received a B.S. from Virginia Polytechnic Institute and
an M.B.A. from Northwestern University.
GEORGE F. SCHREINER, M.D., PH.D., joined us in January 1997 as Vice President,
Cardiorenal Research. He became our Chief Scientific Officer in August 2000,
responsible for leading our research group. From 1992 until January 1997, Dr.
Schreiner was with CV Therapeutics, Inc., a biopharmaceutical company, as Vice
President, Medical Science and Pre-clinical Research. From 1980 to 1992, Dr.
Schreiner served on the faculties of Harvard Medical School and Washington
University School of Medicine. Dr. Schreiner received an A.B. in
Psychology/Sociology from Harvard College, an M.D. from Harvard Medical School
and a Ph.D. in Immunology from Harvard University.
DAVID W. GRYSKA joined us in December 1998 as Vice President of Finance and
Chief Financial Officer and became our Senior Vice President of Finance in
November 2000. From 1993 to December 1998, Mr. Gryska was Vice President,
Finance and Chief Financial Officer of Cardiac Pathways Corporation, a medical
device company. Mr. Gryska was with Ernst & Young LLP from 1982 to 1993 and
served as a partner from 1989 to 1993. Mr. Gryska received a B.A. in Accounting
and a B.A. in Finance from Loyola University of Chicago and an M.B.A. from
Golden Gate University.
PATRICIA A. BALDWIN, PH.D., joined us in 1986 as a Scientist in the Novel Drug
Delivery Department. In 1990, she moved to the Pharmaceutical Research and
Development Department and in 1995, Dr. Baldwin became our Director of
Analytical Chemistry. In September 1999, she became our Senior Director of
Analytical Methods and Quality Control and in March 2000, Dr. Baldwin was
promoted to our Vice President, Quality and Product Development. Dr. Baldwin
received a B.S. in Chemistry from Stanford University and a Ph.D. in Chemistry
from the University of California, Berkeley.
THOMAS L. FELDMAN joined us in 1995 as Vice President of Commercial Operations
and in November 1999, became our Vice President, Sales and Marketing. From 1973
to 1995, Mr. Feldman held various sales and marketing positions at
pharmaceutical companies affiliated with Johnson & Johnson, including National
Sales Manager at Ortho Pharmaceutical Corporation (1993 to 1994) and National
Sales Manager at McNeil Pharmaceutical (1990 to 1993). Mr. Feldman received a
B.A. in Business and Speech from North Dakota State University.
M. ALLISON HERD joined us in March 2001 as Vice President of Human Resources.
From February 2000 to March 2001, she was Director of Human Resources with
Network ICE Corporation, a software company. From March 1998 to February 2000,
Ms. Herd was Director of Human Resources with Cardiac Pathways, a medical
device company. From November 1996 to March 1998, she was Human Resources
Manager with Progressive Angioplasty Systems, a medical device company. From
April 1996 to November 1996, Ms. Herd was Senior Human Resources Generalist
with CLONTECH Laboratories, Inc., a biotechnology company. Ms. Herd holds a
B.A. in Sociology from San Jose State University and an M.A. in Human Resources
from Golden Gate University.
MATTHEW R. HOOPER joined us in October 2000 as Senior Patent Counsel in which
he handled all intellectual property matters for the Company. In October 2001,
Mr. Hooper became Vice President, General Counsel of Scios and currently
oversees all
25
legal aspects of the Company's operations. From November 1999 to September
2000, Mr. Hooper was senior counsel in the litigation group of Jones Day Reavis
and Pogue in Chicago. From 1994 to 1999, he held the position of counsel at
Abbott Laboratories in its patent and trademark department. Before joining
Abbott, Mr. Hooper served as a patent attorney at Amoco Corporation from 1985
through 1994, and an associate attorney in private practice in Chicago from
1982 through 1985. He received his J.D. from Northwestern University Law School
and his B.S. degree in Chemistry from LaSalle University.
DARLENE P. HORTON, M.D., joined us in July 1996 and is responsible for
directing and managing our clinical research programs. In August 2000, Dr.
Horton was appointed our Vice President, Medical Affairs. Prior to joining
Scios, she was a Pediatric Cardiology Fellow at UCSF's Cardiovascular Research
Institute, and she remains on the clinical faculty at the University of
California, San Francisco. Dr. Horton received a B.S. in Microbiology and an
M.D. from the University of Florida in Gainesville.
JANE A. MOFFITT joined Scios in August, 2001 as Vice President of Regulatory
Affairs and is responsible for overseeing all aspects of the Company's
regulatory operations. In her previous position with Cygnus, Inc., a medical
device company, she served as Vice President, Regulatory Affairs and Quality
Assurance. Prior to Cygnus, Ms. Moffitt ran her own consulting business,
advising numerous medical device and biotechnology companies on regulatory
affairs and quality assurance. Before that, she served as Vice President,
Worldwide Regulatory Affairs, at Collagen Corporation and as Vice President,
Regulatory Affairs/Quality Assurance at Amsco International, Inc. in
Pittsburgh. She came to Amsco from Allergan, Inc., where she was Assistant
General Counsel and Director of Regulatory Affairs. She received her B.S.
degree from Dickinson College in Carlisle, Pa., and her J.D. from the Dickinson
School of Law. She earned her LL.M. in Trade Regulation from the New York
University School of Law through the Food & Drug Law Institute Fellowship
Program.
ITEM 2. PROPERTIES
We lease a 52,000 square foot office building in Sunnyvale, California pursuant
to two leases which both expire on August 31, 2008. We also lease two
neighboring 33,600 and 7,200 square foot office buildings, which both expire on
December 31, 2003. Our annual lease payments for the Sunnyvale facilities are
approximately $1.9 million. In addition, we lease a warehouse in Mountain View,
California that expires on December 31, 2003. We believe our facilities are
sufficient for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On November 29, 1995, we were notified by the United States Environmental
Protection Agency, or EPA, that we may have a liability in connection with the
clean-up of a toxic waste site arising out of the alleged disposal of hazardous
substances by a subcontractor of Nova Pharmaceutical Corporation, the Company
acquired in 1992. We are one of many potentially responsible parties that have
been identified as associated with this specific site. We held discussions with
the EPA and expected a settlement agreement pursuant to which we agreed to
contribute to site clean-up costs. We reserved $90,000 at December 31, 2000 as
provision for the settlement thereof. During 2001, we settled the liability
with a final settlement payment of $81,264.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
26
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
PRICE RANGE OF COMMON STOCK
Since our initial public offering in 1983, our Common Stock has traded on the
NASDAQ National Market under the symbol "SCIO". The table below sets forth the
high and low sales prices (converted to decimals and rounded to the nearest
whole cent) as reported by NASDAQ for the Common Stock during the last eight
quarters. The prices appearing in the tables below reflect over the counter
market quotations, which reflect inter-dealer prices, without retail markups,
markdowns or commissions, and may not represent actual transactions.
--------------------------
COMMON STOCK
--------------------------
FY 2001 FY 2000
------------- ------------
HIGH LOW HIGH LOW
------ ------ ------ -----
Q1............................................... $23.81 $15.31 $ 8.63 $4.84
Q2............................................... 29.33 20.25 5.88 4.00
Q3............................................... 23.01 14.94 11.00 5.44
Q4............................................... $28.70 $16.58 $23.06 $9.13
DIVIDEND POLICY
We have not paid any cash and do not anticipate paying cash dividends in the
foreseeable future.
HOLDERS OF COMMON STOCK
As of December 31, 2001, there were 3,835 record owners of our common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated historical information has been derived
from the audited consolidated financial statements of the Company. The
financial information as of December 31, 2001, 2000, 1999, 1998, and 1997 and
for each of the five years in the period ended December 31, 2001 are derived
from audited consolidated financial statements and are included elsewhere in
this Annual Report on Form 10-K. The following Selected Consolidated Financial
Data should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8.
Consolidated Financial Statements and Supplementary Data" included elsewhere in
this Annual Report on Form 10-K. The historical results are not necessarily
indicative of the results of operations to be expected in the future.
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999 1998 1997
STATEMENT OF OPERATIONS DATA: -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues (1)........................... $ 47,345 $ 12,624 $ 28,355 $ 44,668 $ 14,459
Loss from operations................... (65,176) (42,372) (24,333) (11,991) (39,737)
Other income (expense) net............. 3,006 (147) 4,283 11,102 2,254
Net loss............................... (62,497) (42,522) (20,064) (2,363) (38,667)
Net loss per common share and per
common share assuming dilution....... $ (1.47) $ (1.12) $ (0.53) $ (0.06) $ (1.07)
Pro forma effect of adopting SAB 101:
Net loss............................. N/A N/A $ (916) $(21,511) $(38,667)
Basic and diluted loss per share..... N/A N/A $ (0.02) $ (0.57) $ (1.07)
------------------------------------------------
DECEMBER 31,
------------------------------------------------
2001 2000 1999 1998 1997
BALANCE SHEET DATA: -------- -------- -------- -------- --------
(IN THOUSANDS)
Cash and securities.................... $129,316 $ 71,531 $100,712 $ 97,311 $ 64,700
Working capital........................ 18,411 13,057 1,706 8,083 4,524
Total assets........................... 156,178 88,669 118,272 138,829 116,871
Long term obligations.................. 15,479 39,095 42,866 34,573 31,919
Stockholders' equity................... $ 81,148 $ 18,045 $ 42,787 $ 74,926 $ 60,142
- --------
(1)as reclassified for EITF 99-19
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES, CONTAINED ELSEWHERE IN THIS
REPORT ON FORM 10-K. THE FOLLOWING DISCUSSION ALSO CONTAINS FORWARD-LOOKING
STATEMENTS ABOUT OUR PLANS, OBJECTIVES AND FUTURE RESULTS. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS, AND WE ASSUME
NO OBLIGATION TO UPDATE THIS INFORMATION. REALIZATION OF THESE PLANS AND
RESULTS INVOLVES RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE LIMITED TO THOSE SET FORTH UNDER "RISK
FACTORS" IN THIS REPORT ON FORM 10-K.
OVERVIEW
We are a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory diseases. Our disease-based technology platform
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets and rationally design small molecule
compounds for large markets with unmet medical needs. We launched Natrecor
following U.S. Food and Drug Administration, or FDA, approval of Natrecor for
the treatment of acute congestive heart failure, or CHF, on August 13, 2001,
and recorded sales of $14.1 million for the year ended December 31, 2001.
We are focused on the development of three product candidates, Natrecor for the
treatment of acute congestive heart failure; SCIO-469, an oral, small molecule
inhibitor of p38 kinase for the treatment of rheumatoid arthritis (RA); and
novel small molecule inhibitors of the receptor for TGF-beta, a cytokine that
has been implicated in diseases characterized by chronic scar formation, or
fibrosis.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
REVENUES
PRODUCT SALES. Total product sales were $30.0 million for the year ended
December 31, 2001, and none for the years ended December 31, 2000 and 1999. In
2001, $15.9 million of product sales were derived from one-time sales of bulk
FGF to Kaken following the product approval of Fiblast Spray in Japan. These
sales are not expected to recur. The remaining product sales resulted from the
launch of Natrecor following FDA approval in August 2001 and recorded $14.1
million of product sales in 2001.
RESEARCH AND DEVELOPMENT CONTRACT REVENUES AND ROYALTIES. Research and
development contract revenues and royalties were $4.8 million, $5.7 million,
and $18.4 million for the years ended December 31, 2001, 2000, and 1999,
respectively. In 2001, contract revenues primarily reflect our research
collaboration agreements with Eli Lilly & Company of $3.0 million. In addition,
we received royalty payments totaling $1.8 million from sales of Fiblast Spray
in Japan by Kaken, and from sales of diagnostic BNP testing by Biosite and
Abbott Laboratories. The decrease from 2000 to 2001 of $0.9 million was
primarily due to the end of our research collaboration agreement with DuPont
Pharmaceutical Company, effective November 2000. The $12.7 million decrease
from 1999 to 2000 was primarily attributable to $9.0 million in one-time
milestone payments received in 1999 from corporate partners Chiron Corporation
and Novo Nordisk A/S, $2.3 million in clinical research funding from Bayer AG
and $1.4 million in royalty payments from GenVec, Guilford Pharmaceuticals and
other research collaboration agreements. Research and development contract
revenues tend to fluctuate based on the amount of research services performed,
the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenues, results in
any one-year are not necessarily indicative of results to be achieved in the
future. The Company's ability to generate additional collaborative agreement
revenues may depend, in part, on its ability to initiate and maintain
relationships with potential and current collaborative partners. There can be
no assurance that such relationships will be established or that current
research and development contract revenues will not decline.
PSYCHIATRIC PRODUCT SALES AND CO-PROMOTION COMMISSIONS. Psychiatric product
sales and co-promotion commissions for the years ended December 31, 2001, 2000,
and 1999 were $3.1 million, $6.9 million, and $10.0 million. The decrease of
$3.8 million from 2000 to 2001 was primarily due to the sale of marketing
rights for certain psychiatric products to GSK and the termination of the
license agreement in March 2001. At the same time, the Company dissolved its
Psychiatric Sales and Marketing Division, and deployment of the PSMD sales
force. The decline in product sales from 1999 to 2000 of $3.0 million was
largely the result of reduced distributor inventories caused by manufacturing
and product shelf life issues of Eskalith CR (one of five products manufactured
by GSK that were sold by the Company), coupled with the erosion of sales as a
result of new market entrants and generic drugs.
28
GAIN ON SALE OF MARKETING RIGHTS. Commencing in the fourth quarter of 2000, we
solicited and received bids regarding the sale of our exclusive marketing
rights for certain GSK psychiatric products sold by us. The marketing rights
were eventually sold to GSK. The marketing rights were originally licensed from
GSK under a 1990 licensing agreement. In order to effect the sale, the
licensing agreement was terminated effective March 31, 2001, and we received
from GSK $4.0 million in 2001 and $3.0 million in 2002 and expect to receive a
final payment of $2.4 million in 2003. We recognized a gain on the sale of the
marketing rights of $9.4 million related to the sale in 2001.
COSTS AND EXPENSES
COST OF PRODUCT SALES. Cost of product sales were $1.9 million for the year
ended December 31, 2001 and none for the years ended December 31, 2000 and
1999. The expenses were mainly due to the cost to manufacture and distribute
Natrecor and royalty on a cross license agreement. In addition, we classified
in cost of product sales royalty payments to the limited partners of
Biotechnology Research Partners, Ltd. on revenues generated from the one-time
sales of bulk FGF shipments to Kaken, and the cost of shipping bulk FGF to
Kaken in Japan. All costs associated with the manufacture of Natrecor bulk drug
product and finished products to which title transferred to us prior to FDA
approval, on August 13, 2001, was expensed as research and development.
RESEARCH AND DEVELOPMENT. Research and development expenses were $48.1
million, $39.3 million, and $34.3 million for the years ended December 31,
2001, 2000 and 1999, respectively. The $8.8 million increase from 2000 to 2001
was primarily due to increased expenses related to our p38 kinase inhibitor,
TGF-beta, and Natrecor programs. The $5.0 million increase from 1999 to 2000
was primarily attributable to the increased clinical expenses related to
Natrecor and increased research expenses related to our p38 kinase inhibitor
program.
During 2001, 2000, and 1999, we spent $48.1 million, $39.3 million, and $34.3
million, respectively on research and development. Below is a summary of these
costs by major project (in millions).
-----------------
2001 2000 1999
----- ----- -----
Natrecor................................................... $22.5 $19.2 $14.1
SCIO-469................................................... 17.5 11.8 3.8
TGF-beta................................................... 3.7 2.8 1.6
Alzheimer's................................................ 1.9 2.3 2.4
FGF........................................................ -- 0.2 2.9
Other research............................................. 2.5 3.0 9.5
----- ----- -----
Total Research and Development............................. $48.1 $39.3 $34.3
===== ===== =====
We spent $22.5 million on Natrecor in 2001. The cost in 2001 was primarily for
the development of Natrecor for the treatment of CHF for new indications and
costs to approve the drug with the FDA. Future costs are unknown, as we will
continuously develop other therapeutic uses of Natrecor for CHF and FDA
approval of clinical study programs is difficult to estimate. If we are not
successful we will not be able to expand the market potential for Natrecor. We
have spent approximately $130 million in research and development expenses on
the development of Natrecor since the program began in 1988.
We spent $17.5 million on the SCIO-469 program in 2001. The cost to complete
the research for SCIO-469 is unknown because it is a new clinical candidate.
This program is highly dependent on FDA approval of the clinical study programs
and ultimate FDA approval to market the drug. We recently started Phase IIa
trials and have spent approximately $33.9 million in research and development
expenses since the program began in 1998. If we are not successful we will not
be able to expand into the rheumatoid arthritis market.
We spent $3.7 million in the TGF-beta program in 2001. The cost to complete the
research for TGF-beta is unknown because it is a new clinical candidate and we
have spent approximately $8.8 million in research and development expenses
since the program began in 1998. We have not commenced human clinical trials
and this program is highly dependent on FDA approval for clinical studies and
ultimate FDA approval to market the drug.
We spent $1.9 million on the Alzheimer's program in 2001. The Alzheimer's
program, which included a research collaboration with Eli Lilly, ended on
December 31, 2001. There were severance costs of approximately $295,000 related
to the termination of certain scientific personnel, which were incurred in
fiscal year 2002. We expect no other future expenses in this program.
29
We spent $2.5 million in 2001 in other research expenses. Other research
expenses represent costs associated with general research that is not directly
chargeable to a project. We expect these costs to continue as we identify new
candidates to enter clinical trials.
We expect substantial expenses in the Research and Development area during the
next several years. We are unable to predict the level of spending until near
the end of the various programs because of the uncertainty of FDA approval of
clinical study programs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $62.5 million, $16.7 million, and $12.0 million for the years
ended December 31, 2001, 2000, and 1999, respectively. The increase of $45.8
million from 2000 to 2001 was primarily due to sales and marketing expenses to
launch Natrecor and the addition of general and administrative staff to support
the increase in overall headcount. These sales and marketing expenses include
the building of a marketing infrastructure, the cost of a 188-person sales
force and management team, the commissions to the sales force on Natrecor
sales, and the expenses of promotional and marketing programs. The $4.7 million
increase from 1999 to 2000 was primarily the result of Natrecor pre-launch
activities, a proxy contest in early 2000, outside consulting expenses relating
to strategic planning, increased headcount and bonuses paid during the period.
RESTRUCTURING CHARGES. We incurred a restructuring charge in 1999 of $6.4
million resulting from a corporate reorganization, which included the closure
of our Mountain View manufacturing facility and a 30% reduction in our
workforce. All restructuring activities were complete by the end of the second
quarter of 2000, leaving a remaining balance of $1.0 million in the
restructuring reserve. This unused reserve primarily resulted from changes in
the estimates of the cost of workforce reductions and the gain on the sale of
excess capital assets that were unanticipated. The reserve was credited to
restructure expense in the second quarter of 2000.
OTHER INCOME (EXPENSE). Net other income (expense) was $3.0 million, $(0.1)
million, and $4.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The $3.1 million increase from 2000 to 2001 was largely due to
lower interest expense of $1.0 million, realized gains on securities of $1.0
million and a decrease in other expense of $1.1 million. Interest expense was
lower in 2001 due to a lower debt balance and lower interest rates on the
Genentech debt. The decrease in other expense was largely due to the write off
and investment value adjustments for securities in Neurocine and GenVec in
2000. The $4.4 million decrease from 1999 to 2000 was primarily attributable to
the 1999 net gain on the sales of securities in Guilford.
LIQUIDITY AND CAPITAL RESOURCES
To date, our operations and capital requirements have been financed primarily
with the proceeds of public and private sales of common stock and preferred
stock, research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. At December 31,
2001, our combined cash, cash equivalents and marketable securities (both
current and non-current) totaled $129.3 million.
In January 2001, we entered into a sale and marketing alliance with Innovex, a
subsidiary of Quintiles Transnational Corp. As part of the original three and
one half year agreement, PharmaBio Development, Inc., an affiliate of Innovex,
agreed to fund $30.0 million of our costs to launch Natrecor over the first 24
months of the commercialization of Natrecor and to loan us up to $5.0 million.
In December 2001, Scios, Innovex and PharmaBio amended the January 2001
agreement. The amendment will enable Scios, at its option, to assume control of
the Natrecor sales force in June 2003, one year ahead of schedule, and we
eliminated the $5.0 million line of credit provided by PharmaBio to Scios. Of
the $30.0 million funding from PharmaBio, we received $10.0 million in the
fourth quarter of 2001, and will receive the remaining $20.0 million over the
next 17 months. As part of the funding agreement, we will pay PharmaBio a
declining royalty rate on net sales of Natrecor through early 2008. We also
granted PharmaBio a fully vested warrant to purchase 700,000 shares of our
common stock at an exercise price of $20.00 per share. These warrants are
exercisable over the next 17 months beginning December 2001 through May 2003.
In December 2001, we entered into a binding summary of terms with Glaxo Group
Ltd., an affiliate of GlaxoSmithKline, or GSK, in which we will license
Natrecor to GSK in all European markets. Under the terms of the agreement, GSK
will have the rights to sell and distribute the product for which we will
receive an up-front fee and milestone payments totaling (Pounds)15.0 million
British Pounds (which at December 31, 2001 equaled approximately $22 million
U.S. Dollars), in addition to future royalties in the identified countries. We
will manufacture and supply the bulk product to GSK. Both companies will work
together to continue clinical development of Natrecor in Europe. In order to
obtain European approval for Natrecor, GSK expects to use the extensive
clinical data we submitted to obtain approval from the FDA in August 2001. The
companies expect to launch Natrecor in Europe in the first half of 2004. No
revenue has been recognized related to this agreement through December 31, 2001.
30
We have $33.0 million due to Genentech at December 31, 2002 of which $20.0
million can be repayable in the Company's Series B preferred stock at anytime
through December 31, 2002. In addition, if the Company should decide to convert
the loan to preferred stock, a portion of the loan that is not convertible will
become due and payable before December 31, 2002. The amount of the loan that is
due before the maturity date is based on a formula that considers the amount of
loan converted to stock and the outstanding loan balance.
Net cash used in operating activities of $68.5 million in 2001 was primarily
attributable to the loss of $62.5 million and decreases in net operating assets
and liabilities of $13.1 million, partially offset by non-cash expenses of $7.1
million. For 2000, net cash used by operating activities amounted to $34.8
million. This was primarily attributable to the net loss for the year of $42.5
million, partially offset by non-cash charges related to depreciation, and
amortization of deferred compensation totaling $8.0 million, and $0.3 million
of cash used by changes in operating assets and liabilities. For 1999, net cash
used in operating activities of $8.5 million was primarily attributable to
funding net operating losses, partially offset by non-cash expenses and
increases in operating assets and liabilities. Cash provided by changes in
operating assets and liabilities is primarily a function of an increase in
accounts payable and accrued liabilities.
Net cash used in investing activities of $8.4 million in 2001 consisted of
purchases of property and equipment of $5.4 million, and net purchases of
marketable securities of $3.0 million. Net cash provided in investing
activities was $20.8 million in 2000 and consisted of net sales of marketable
securities of $22.1 million, partially offset by purchases of fixed assets of
$1.3 million. Net cash provided by investing activities of $5.7 million in 1999
consisted of net purchases of marketable securities of $11.1 million and
purchases of fixed assets of $5.0 million, offset by proceeds from the sales of
facilities and equipment of $21.8 million.
Net cash provided by financing activities of $131.9 million in 2001 was due to
the proceeds from the issuance of common stock of $122.0 million, a payment
from PharmBio of $10.0 million under the Innovex agreement, the collection of
stockholders notes receivable of $0.4 million, partially offset by repurchase
of Scios stock of $0.4 million. Net cash provided by financing activities of
$5.7 million for 2000 was mainly due to the proceeds from the issuance of
common stock and collection of notes receivables from stockholders of $10.3
million, partially offset by the payment of notes payable of $4.6 million. Net
cash provided by financing activities of $7.7 million in 1999 was largely due
to proceeds from notes payable of $7.5 million and proceeds from the issuance
of common stock of $1.2 million, partially offset by the purchase of treasury
stock of $1.0 million.
We expect that the net proceeds from the issuance of common stock in June 2001,
together with our existing cash, cash equivalents and marketable securities,
proceeds from existing collaborations, including our agreement with PharmaBio,
and revenues from the sales of Natrecor will enable us to maintain our current
and planned operations for at least the next twelve months. In the event we
will need additional financing for the operation of our business, including the
commercialization of our products currently under development, we will consider
collaborative arrangements and additional public or private financing,
including additional equity financing. Factors influencing the availability of
additional financing include our progress in product development, investor
perception of our prospects and the general condition of the financial markets.
INCOME TAXES
At December 31, 2001, we had federal and state net operating loss carryforwards
of approximately $436.2 million and $61.0 million, respectively. We also had
federal and state research tax credit carry-forwards of approximately $13.2
million and $7.4 million, respectively. The federal net operating loss and
other tax credit carry-forwards will expire at various dates beginning in the
year 2002 through 2021, if not used. Our state net operating loss and other tax
credit carry-forwards will expire at various dates beginning in the year 2002
through 2006, if not used. These net operating loss and other tax credit
carry-forwards provide an additional source of liquidity only to the extent
that profitable operations are achieved prior to the expiration of the
carry-forward periods. The use of losses generated through the date of our 1992
merger with Nova Pharmaceuticals Corporation may be subject to substantial
annual limitations due to the "ownership change" provisions of the Internal
Revenue Code of 1986.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenue and expenses and disclosures at the date of the
financial statements. On
31
an on-going basis, we evaluate our estimates, including those related to
accounts receivable, inventories and income taxes. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making estimates. Actual results could differ from those estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue from product sales when there is
pervasive evidence that an arrangement exists, delivery has occurred, the price
is fixed and determinable, and collection is reasonably assured. Provisions for
discounts and rebates to customers, and returns and other adjustments are
provided for in the same period that the related product sales are recorded
based upon analyses of historical discounts, rebates and returns. We maintain
an accounts receivable allowance for an estimated amount of losses that may
result from customer's inability to pay for product purchased. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. We have
established a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. We account for income taxes
under the provisions of Statement of Financial Accounting Standards, or SFAS,
No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using the enacted tax rates
in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. Scios did not have any business
combination transactions in the year ended December 31, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 (SFAS 142), "Goodwill and Other Intangible Assets," which in Scios' case is
effective for fiscal years beginning after December 15, 2001. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company does not currently have any goodwill or intangible assets, and does not
believe that the implementation of SFAS 142 will have any significant impact on
its financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets to be Disposed Of." SFAS 144 addresses financial accounting and
reporting of impairment of long-lived assets to be disposed of. However, SFAS
144 retains the fundamental provisions of SFAS 121 for: (1) recognition and
measurement of the impairment of long-lived assets to be held and used; and (2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal year beginning after December 15, 2001. We believe
SFAS 144 has no impact on Scios' financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
32
hypothetical interest rate increase of 10%, the fair value of our total
investment portfolio as of December 31, 2001 would have potentially incurred a
loss of $248,000.
Our exposure to foreign currency fluctuations is limited to our supply contract
for Natrecor, which is denominated in the Euro, and license and milestone
payments from GSK, which are denominated in the British Pound. Changes in the
exchange rate between the Euro and the U.S. dollar payments could adversely
affect our manufacturing costs. Changes in the exchange rate between the
British Pound and U.S. dollar could adversely effect our earnings performance.
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.
Our long-term debt with Genentech of $33.0 million has a variable interest rate
at the prime interest rate. Our exposure is the fluctuation in the prime
interest rate over the next 12 months. An increase in prime interest rate will
increase our interest expense on the debt.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements appearing on page 34 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS. The information required by Item 10 of Form 10-K
with respect to identification of directors is incorporated by reference to the
information contained in the sections captioned "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act" of our definitive Proxy
Statement for the 2002 Annual Meeting of Stockholders.
IDENTIFICATION OF EXECUTIVE OFFICERS. See "Executive Officers of the Company"
above under Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the sections captioned "Executive
Compensation," "Stock Option Grants and Exercises," "Employment and Severance
Agreements," Information About the Board of Directors and Committees of the
Board: Compensation of Directors--Standard Arrangements" and "Compensation
Committee Interlocks and Insider Participation" of our definitive Proxy
Statement for the 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference
to the information contained in the section captioned "Security Ownership of
Management and Principal Stockholders" of our definitive Proxy Statement for
the 2002 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference
to the information contained in the section captioned "Certain Relationships
and Transactions" of the our definitive Proxy Statement for the 2002 Annual
Meeting of the Stockholders.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements.
PAGE
----
Report of Independent Accountants.................................... F-1
Consolidated Balance Sheets, December 31, 2001 and 2000.............. F-2
Consolidated Statements of Operations and Comprehensive Loss, years
ended December 31, 2001, 2000, and 1999............................ F-3
Consolidated Statements of Cash Flows, years ended December 31, 2001,
2000, and 1999..................................................... F-4
Consolidated Statements of Stockholders' Equity, years ended December
31, 2001, 2000, and 1999........................................... F-5
Notes to Consolidated Financial Statements........................... F-6
(2) Financial Statement Schedules.
Omitted because they are not required, are not applicable, or the information
is included in the consolidated financial statements or notes thereto.
(3) Exhibits.
See Exhibit Index at page 36 of this Form 10-K.
(b) Reports on Form 8-K.
None.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCIOS INC.
Date: March 12, 2002
/S/ RICHARD B. BREWER
By: _______________________________________
Richard B. Brewer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard B. Brewer and Donald B. Rice, or either of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Annual Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that the said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ RICHARD B. BREWER President, Chief Executive Officer and March 12, 2002
- ----------------------------- Director (Principal Executive Officer)
Richard B. Brewer
/S/ DAVID W. GRYSKA Chief Financial Officer (Principal Financial March 12, 2002
- ----------------------------- and Accounting Officer)
David W. Gryska
/S/ DONALD B. RICE, PH.D. Chairman of the Board March 12, 2002
- -----------------------------
Donald B. Rice, Ph.D.
/S/ SAMUEL H. ARMACOST Director March 12, 2002
- -----------------------------
Samuel H. Armacost
/S/ RANDAL J. KIRK Director March 12, 2002
- -----------------------------
Randal J. Kirk
/S/ CHARLES A. SANDERS, M.D. Director March 12, 2002
- -----------------------------
Charles A. Sanders, M.D.
/S/ SOLOMON H. SNYDER, M.D. Director March 12, 2002
- -----------------------------
Solomon H. Snyder, M.D.
/s/ Burton E. Sobel, M.D. Director March 12, 2002
- -----------------------------
Burton E. Sobel, M.D.
/S/ EUGENE L. STEP Director March 12, 2002
- -----------------------------
Eugene L. Step
35
EXHIBIT INDEX
EXHIBIT
NUMBER REFERENCE
- ------ ---------
3.1 Certificate of Incorporation......................................................................... Q
3.1(a) Certificate of Amendment of Certificate of Incorporation.............................................
3.2 Bylaws............................................................................................... J
4.1 Certificate of Designation of Series B Preferred Stock of Scios Inc..................................
4.2 For a discussion of certain registration rights in favor of Genetech, Inc., see Exhibits 10.33, 10.34
and 10.41............................................................................................ Q,V
10.1 Biotechnology Research Partners, Ltd. Agreement of Limited Partnership dated October 29, 1982;
Development Contract, Technology License Agreement and Joint Venture Agreement between
Biotechnology Research Partners, Ltd. and the Registrant dated December 29, 1982; Promissory
Note dated December 29, 1982; and Memorandum of Understanding between Battery Park Credit
Company and Biotechnology Research Partners, Ltd. dated December 28, 1982............................ A
10.2* 1983 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory
Note and Pledge Agreement............................................................................ E
10.3 Common Stock Purchase Agreement dated April 15, 1985 between the Registrant and American
Home Products Corporation............................................................................ B
10.5* 1986 Supplemental Stock Option Plan, as amended, and form of Stock Option Agreement,
Promissory Note and Pledge Agreement................................................................. E
10.6 Rights Exercise Agreement between the Registrant and American Home Products Corporation dated
February 28, 1986 and Letter of March 26 and May 16, 1986............................................ B
10.11* 1992 Equity Incentive Plan........................................................................... H
10.18 Form of Purchase Option Agreement between each of the limited partners of Nova Technology
Limited Partnership and Nova......................................................................... I
10.19* Non employee Director Stock Option Plan.............................................................. G
10.29 CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline Beecham
Corporation and Nova................................................................................. N
10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between the Registrant and
Genentech, Inc....................................................................................... Q
10.34 Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc. (See Exhibit
Number 10.41 below amending the Note Agreement)...................................................... Q
10.35 Assignment of Lease dated March 22, 1995 for premises located at 820 West Maude Avenue,
Sunnyvale, California................................................................................ R
10.38* Employment Letter dated September 8, 1998 between the Registrant and Richard B. Brewer............... T
10.39 Purchase and Sale Agreement and Joint Escrow Instructions (Mountain View Real Estate Sale) dated
May 24, 1999 between Alexandria Real Estate Equities, Inc. and Registrant's wholly owned
Subsidiary Bio-Shore Holdings, Ltd. Portions of the exhibit have been omitted pursuant to a request
for confidential treatment........................................................................... U
10.41 First Amendment to Note Agreement and Preferred Stock dated November 3, 1999 between the
Registrant and Genentech, Inc. (See Exhibit 10.34 above)............................................. V
10.42 Promissory Note dated December 27, 1999 by the Registrant to Chiron Corporation...................... V
10.43* Change of Control Severance Plans with Employees, Officers and Chief Executive Officer............... V
10.44 Alliance Agreement dated January 10, 2001 between the Registrant, Innovex L.P. and PharmaBio
Development Inc. (including a Warrant Agreement between the Registrant and PharmaBio
Development Inc. attached thereto as Exhibit B). Portions of the exhibit have been granted
confidential treatment............................................................................... W
36
EXHIBIT
NUMBER REFERENCE
- ------ ---------
10.45 Amendment No. 4 to Lease dated January 22, 1993 for the premises located at 820 West Maude
Avenue, Sunnyvale, California (See Exhibit 10.35 above)................................................ Y
10.46 Lease Agreement dated November 17, 1995 for premises located at 820 West Maude Avenue,
Sunnyvale, California.................................................................................. Z
10.47 Sublease Agreement dated March 24, 1999 for premises located at 749 North Mary Avenue,
Sunnyvale, California.................................................................................. Z
10.48 First Amendment dated May 28, 2001 to Sublease dated May 24, 1999 for premises located at
749 North Mary Avenue, Sunnyvale, California........................................................... aa
10.49 Amendment No. 5 dated July 24, 2001 to Lease Agreement dated January 22, 1993 for premises
located at 820 Maude Avenue, Sunnyvale, California..................................................... aa
10.50 Letter dated June 10, 2001 to extend leases for premises located at 820 West Maude Avenue,
Sunnyvale, California.................................................................................. aa
10.51 Amended and Restated Alliance Agreement dated November 1, 2001 between the Registrant,
Innovex L.P., Innovex Support Services Limited Partnership and PharmaBio Development Inc.
(including a Warrant Agreement between the Registrant and Pharmabio Development Inc. attached
thereto as Exhibit B). Portions of the exhibit have been omitted pursuant to a request for confidential
treatment..............................................................................................
10.52 Binding Summary of Terms between the Registrant and Glaxo Group Ltd. dated December 20, 2001.
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.............
21.2 Subsidiaries of the Registrant.........................................................................
23.1 Consent of PricewaterhouseCoopers LLP..................................................................
24.1 Powers of Attorney. Reference is made to page 35.......................................................
- --------
* Management contract or compensatory plan or arrangement.
A Filed as an exhibit to Form S-1 Registration Statement (File No. 2-86086),
as amended, and incorporated herein by reference.
B Filed as an exhibit to Form S-1 Registration Statement (File No. 33-3186),
as amended, and incorporated herein by reference.
E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988 and
incorporated herein by reference.
G Filed as an exhibit to Form S-8 Registration Statement (File No. 33-39878)
filed on April 8, 1991 and incorporated herein by reference.
H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 and
incorporated herein by reference.
I Filed as an exhibit to Form S-1 Registration Statement (File No. 33-14937)
filed on behalf of Nova Technology Limited Partnership and incorporated
herein by reference.
J Filed as an exhibit to Form S-4 Registration Statement (File No. 33-49846)
filed on July 22, 1992 and incorporated herein by reference.
N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1990 and incorporated herein by reference
Q Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994 and
incorporated herein by reference.
R Filed as an exhibit to Quarterly Report on Form 10-Q for quarter ended March
31, 1995 and incorporated herein by reference.
T Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1998 and
incorporated herein by reference.
U Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.
V Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1999 and
incorporated herein by reference.
W Filed as an exhibit to Report on Form 8-K dated January 24, 2000 and
incorporated herein by reference.
Y Filed as an exhibit to Annual Report on Form 10-K for fiscal year 2000 and
incorporated herein by reference.
Z Filed as an exhibit to Annual Report on Form 10-K/A (Amendment No. 2) for
fiscal year 2000 and incorporated herein by reference.
aa Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Scios Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) on page 34 present fairly, in all material respects,
the financial position of Scios Inc. and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and comprehensive loss and their
cash flows for each of the three years in the period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 8, 2002
F-1
SCIOS INC.
CONSOLIDATED BALANCE SHEETS
--------------------
DECEMBER 31,
--------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 58,296 $ 3,291
Marketable securities..................................... 7,351 35,356
Accounts receivable, net of allowance for doubtful
accounts of $146 at December 31, 2001, and none at
December 31, 2000, respectively.......................... 6,943 5,217
Inventory................................................. 1,158 --
Prepaid expenses and other assets......................... 4,214 722
--------- ---------
Total current assets................................. 77,962 44,586
Marketable securities, non-current.......................... 63,669 32,884
Property and equipment, net................................. 10,424 8,910
Other assets................................................ 4,123 2,289
--------- ---------
Total assets......................................... $ 156,178 $ 88,669
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,625 $ 4,587
Accrued employee compensation............................. 9,685 4,021
Other accrued liabilities................................. 7,206 6,728
Deferred contract revenue................................. -- 16,193
Current portion of long-term debt......................... 33,035 --
--------- ---------
Total current liabilities............................ 59,551 31,529
Long-term debt.............................................. 15,479 39,095
--------- ---------
Total liabilities.................................... 75,030 70,624
--------- ---------
Commitments and contingencies (Notes 10, 11, and 12)
Stockholders' equity:
Preferred stock; $.001 par value; 20,000,000 shares
authorized; 4,991 issued and outstanding................. -- --
Common stock; $.001 par value; 150,000,000 shares
authorized; issued and outstanding 46,015,167 and
39,166,373 shares, respectively.......................... 46 39
Additional paid-in capital................................ 561,352 428,987
Treasury stock; 30,000 and none shares, respectively...... (445) --
Deferred warrant costs.................................... (6,794) --
Notes receivable from stockholders........................ -- (352)
Deferred compensation..................................... (106) (417)
Accumulated other comprehensive income.................... 999 1,195
Accumulated deficit....................................... (473,904) (411,407)
--------- ---------
Total stockholders' equity........................... 81,148 18,045
--------- ---------
Total liabilities and stockholders' equity........... $ 156,178 $ 88,669
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
SCIOS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
Product sales........................................ $ 30,052 $ -- $ --
Research and development contracts and royalties..... 4,788 5,710 18,402
Psychiatric product sales and co-promotion
commissions, net of expenses........................ 3,142 6,914 9,953
Gain on sale of marketing rights..................... 9,363 -- --
----------- ----------- -----------
47,345 12,624 28,355
----------- ----------- -----------
Costs and expenses:
Cost of product sales................................ 1,916 -- --
Research and development............................. 48,130 39,278 34,305
Selling, general and administration.................. 62,475 16,711 11,983
Restructuring charges (credits)...................... -- (993) 6,400
----------- ----------- -----------
112,521 54,996 52,688
----------- ----------- -----------
Loss from operations................................... (65,176) (42,372) (24,333)
----------- ----------- -----------
Other income (expense):
Interest income...................................... 4,869 4,774 4,828
Interest expense..................................... (2,818) (3,796) (2,793)
Realized gains (losses) on securities................ 849 (152) 4,933
Other income (expense)............................... 106 (973) (2,685)
----------- ----------- -----------
3,006 (147) 4,283
----------- ----------- -----------
Loss before provision for income taxes............... (62,170) (42,519) (20,050)
Provision for income taxes........................... (327) (3) (14)
----------- ----------- -----------
Net loss............................................. (62,497) (42,522) (20,064)
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities.... (196) 2,255 (12,472)
----------- ----------- -----------
Comprehensive loss..................................... $ (62,693) $ (40,267) $ (32,536)
=========== =========== ===========
Loss per common share:
Basic and diluted.................................... $ (1.47) $ (1.12) $ (0.53)
=========== =========== ===========
Weighted average number of common shares outstanding
used in calculation of:
Basic and diluted.................................... 42,623,093 37,997,872 37,730,048
Pro forma effect of adopting SAB 101:
Net loss............................................. N/A N/A $ (916)
=========== =========== ===========
Basic and diluted loss per share..................... N/A N/A $ (0.02)
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
SCIOS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss................................................. $ (62,497) $ (42,522) $ (20,064)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization........................... 3,580 3,717 3,473
Accrued interest payable................................ 2,818 3,791 2,793
Loss on disposal of property and equipment.............. 365 253 429
Amortization of deferred compensation................... 311 234 317
Allowance for bad debt.................................. (146) -- --
Valuation of stock option issued to non-employee
for services rendered................................. 176 -- --
Change in assets and liabilities:
Accounts receivable................................... (1,580) (2,149) 3,700
Inventory............................................. (1,158) -- --
Prepaid expenses and other assets..................... (5,326) 963 (422)
Accounts payable...................................... 5,038 3,015 (754)
Accrued employee compensation......................... 5,664 1,402 (947)
Other accrued liabilities............................. 478 (755) 945
Deferred contract revenue............................. (16,193) (1,697) 994
Restructuring charges (credits)....................... -- (1,052) 1,052
--------- --------- ---------
Net cash used in operating activities............... (68,470) (34,800) (8,484)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment...................... (5,459) (1,346) (4,975)
Proceeds from sale of facilities and equipment........... -- -- 21,754
Sales/maturities of marketable securities................ 398,180 63,971 105,240
Purchases of marketable securities....................... (401,158) (41,845) (116,368)
--------- --------- ---------
Net cash provided by (used in) investing
activities........................................ (8,437) 20,780 5,651
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock................................. 122,005 10,535 1,243
Purchase of treasury stock............................... (445) -- (1,048)
Proceeds/payments from stockholders notes receivable..... 352 (244) 37
Payment of note payable.................................. -- (4,562) --
Proceeds from commercialization agreement................ 10,000 -- 7,500
--------- --------- ---------
Net cash provided by financing activities........... 131,912 5,729 7,732
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 55,005 (8,291) 4,899
Cash and cash equivalents at beginning of year............. 3,291 11,582 6,683
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 58,296 $ 3,291 $ 11,582
========= ========= =========
Supplemental cash flow data:
Cash paid during the period for interest................. -- $ 4,562 --
Converted Genetech notes payable into preferred stock.... -- $ 5,000 --
Change in net unrealized gains (losses) on securities.... $ (196) $ 2,255 $ (12,472)
Write off of fully depreciated assets.................... -- $ 904 $ 13,407
Notes receivable from stockholders....................... -- $ 423 --
Deferred compensation.................................... -- $ 311 $ 152
Discount on commercialization obligation................. $ 3,397 -- --
Deferred warrant costs................................... $ 6,794 -- --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
SCIOS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
COMMON STOCK
----------------- ADDITIONAL DEFERRED
PREFERRED PAR PAID-IN TREASURY WARRANT
SHARES SHARES VALUE CAPITAL STOCK COSTS
--------- ---------- ----- ---------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)...........................
BALANCES AT JANUARY 1, 1999................................. -- 38,468,652 $38 $416,428 $(3,481) $ --
Purchase of treasury stock.................................. (1,048)
Options exercised........................................... 185,163 1,243
Treasury stock reissued..................................... (225,163) (1,223) 1,071
Notes receivable from stockholders..........................
Deferred compensation....................................... 40,000 152
Amortization of deferred compensation.......................
Changes in unrealized gains on available-for-sale securities
Net loss....................................................
----- ---------- --- -------- ------- -------
BALANCES AT DECEMBER 31, 1999............................... -- 38,468,652 38 416,600 (3,458) --
Preferred stock issued to retire debt....................... 4,991 5,000
Options exercised........................................... 1,432,757 1 10,534
Treasury stock reissued..................................... (735,036) (3,458) 3,458
Notes receivable from stockholders..........................
Deferred compensation....................................... 311
Amortization of deferred compensation.......................
Changes in unrealized gains on available-for-sale securities
Unrealized gain on GenVec common stock......................
Net loss....................................................
----- ---------- --- -------- ------- -------
BALANCES AT DECEMBER 31, 2000............................... 4,991 39,166,373 39 428,987 -- --
Common stock issued......................................... 5,750,000 6 112,757
Purchase of treasury stock.................................. (445)
Options exercised........................................... 1,061,590 1 8,379
Employee stock purchase plan shares issued.................. 37,204 862
Valuation of stock option issued to non-employee for
services rendered.......................................... 176
Warrants issued in connection with commercialization
agreement.................................................. 10,191 (6,794)
Notes receivable from stockholders..........................
Amortization of deferred compensation.......................
Changes in unrealized gains on available-for-sale securities
Net loss....................................................
----- ---------- --- -------- ------- -------
BALANCES AT DECEMBER 31, 2001............................... 4,991 46,015,167 $46 $561,352 $ (445) $(6,794)
===== ========== === ======== ======= =======
NOTES ACCUMULATED
RECEIVABLE OTHER
FROM DEFERRED COMPREHENSIVE ACCUMULATED
STOCKHOLDERS COMPENSATION INCOME (LOSS) DEFICIT TOTAL
------------ ------------ ------------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)...........................
BALANCES AT JANUARY 1, 1999................................. $(145) $(505) $ 11,412 $(348,821) $ 74,926
Purchase of treasury stock.................................. (1,048)
Options exercised........................................... 1,243
Treasury stock reissued..................................... (152)
Notes receivable from stockholders.......................... 37 37
Deferred compensation....................................... (152) --
Amortization of deferred compensation....................... 317 317
Changes in unrealized gains on available-for-sale securities (12,472) (12,472)
Net loss.................................................... (20,064) (20,064)
----- ----- -------- --------- --------
BALANCES AT DECEMBER 31, 1999............................... (108) (340) (1,060) (368,885) 42,787
Preferred stock issued to retire debt....................... 5,000
Options exercised........................................... 10,535
Treasury stock reissued..................................... --
Notes receivable from stockholders.......................... (244) (244)
Deferred compensation....................................... (311) --
Amortization of deferred compensation....................... 234 234
Changes in unrealized gains on available-for-sale securities 1,236 1,236
Unrealized gain on GenVec common stock...................... 1,019 1,019
Net loss.................................................... (42,522) (42,522)
----- ----- -------- --------- --------
BALANCES AT DECEMBER 31, 2000............................... (352) (417) 1,195 (411,407) 18,045
Common stock issued......................................... 112,763
Purchase of treasury stock.................................. (445)
Options exercised........................................... 8,380
Employee stock purchase plan shares issued.................. 862
Valuation of stock option issued to non-employee for
services rendered.......................................... 176
Warrants issued in connection with commercialization
agreement.................................................. 3,397
Notes receivable from stockholders.......................... 352 352
Amortization of deferred compensation....................... 311 311
Changes in unrealized gains on available-for-sale securities (196) (196)
Net loss.................................................... (62,497) (62,497)
----- ----- -------- --------- --------
BALANCES AT DECEMBER 31, 2001............................... $ -- $(106) $ 999 $(473,904) $ 81,148
===== ===== ======== ========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Scios Inc. (the "Company", "we" or "our") is a biopharmaceutical company
developing novel treatments for cardiovascular and inflammatory diseases. The
Company is distinguished by its disease-based technology platform, which
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets, and rationally design small molecule
compounds.
On August 13, 2001, we received final approval from the U.S. Food and Drug
Administration, or FDA, to market Natrecor for the intravenous treatment of
patients with acutely decompensated congestive heart failure. We launched
Natrecor in that same month and recorded $14.1 in revenue for the year ended
December 31, 2001.
During 2001, we recorded $15.9 million of one-time sales of bulk FGF to Kaken
Pharmaceutical Co, Ltd. of Japan or Kaken (see Note 4e). Kaken will manufacture
future needs of FGF to meet their requirements and accordingly sales of FGF
will not repeat in future years.
Our psychiatric sales and marketing division marketed seven products in the
United States in cooperation with the Company's partners (see Note 4c). In
March 2001, GSK and the Company agreed to sell the marketing rights to those
products to GSK and terminate the license agreement relating to certain GSK
psychiatric products effective March 31, 2001. In addition, the Company ended
the deployment of the Psychiatric Sales and Marketing Division sales force.
Effective March 31, 2001, we discontinued the sale of these products.
During the second quarter of 2001, we raised approximately $113.0 million, net
of expenses, through the issuance of 5,750,000 shares of common stock at $21
per share.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue at least through fiscal
year 2003.
2. RESTRUCTURING CHARGES AND EXPENSES
In 1999, the Company recorded a restructuring charge of approximately $6.4
million for the disposal of certain excess assets and severance costs. All
restructuring activities were complete by the end of the second quarter of
2000, leaving a remaining balance of $1.0 million in the reserve. The remaining
reserve was credited to restructure expense in the second quarter of 2000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority-owned subsidiaries. Intercompany transactions and
balances are eliminated on consolidation.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with the
current period presentation. These reclassifications had no impact on
previously reported results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of less
than 90 days, at the time acquired, to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value.
MARKETABLE SECURITIES
All marketable securities at December 31, 2001 and December 31, 2000 were
deemed by management to be available-for-sale and are carried at fair value
with the resulting net unrealized gains or losses, reported as a component of
accumulated other comprehensive income (loss). Premium and discount on debt
securities recorded at the date of purchase are amortized and accreted,
respectively, to interest income using the effective interest method.
Short-term marketable securities are those with remaining maturities at the
balance sheet date of one year or less. Long-term marketable securities have
remaining maturities at the balance sheet date of greater than one year.
Realized gains and losses on sales of all such securities are reported in
earnings and computed using the specific identification cost method.
The Company assesses the value of its available-for-sale marketable securities
on a regular basis to assess whether an other-than-temporary decline in the
fair value has occurred. Factors which the Company uses to assess whether an
other than temporary decline has occurred include, but are not limited to, the
period of time which the fair value is below original cost, significant changes
in the operating performance, financial condition or business model, and
changes in market conditions. Any "other than temporary decline" in value is
reported in earnings and a new cost basis for the marketable security
established.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined using a
weighted-average approach, which approximates the first-in, first-out method.
All costs associated with the manufacture of Natrecor bulk drug product and
finished products to which title transferred to us prior to FDA approval was
expensed as research and development. On August 13, 2001, we received FDA
approval for Natrecor and any Natrecor bulk drug product and finished goods to
which we took title after that date was recorded as inventory.
BUSINESS RISK AND CREDIT CONCENTRATION
Approximately 63% of our total revenues in 2001 were derived from product
sales. These product sales consisted of one-time sales of bulk FGF to Kaken in
Japan of $15.9 million, and Natrecor sales of $14.1 million. Bulk sales of FGF
are not expected to repeat in future years. About 10% or $4.8 million of our
total revenues were from our research and development collaborations, licenses,
royalties, and milestone payments. The majority of this revenue was from Eli
Lilly and Company ("Eli Lilly") which accounted for $3.0 million of the total
$4.8 million for the development of drugs to prevent or retard the progression
of Alzheimer's disease. At the end of December 31, 2001, Eli Lilly and we
jointly terminated the collaboration. The remaining balance of $1.8 million was
from royalties from Biosite and Kaken and licensing payments from Abbot
Laboratories. In addition, 7% or $3.1 million of our total revenues in 2001
came from psychiatric product sales and co-promotion commissions, net of
expenses. As explained in Note 4c, we sold the marketing rights to GSK and
discontinued the sales of these products effective March 31, 2001.
Our revenues from Natrecor are all sold through wholesalers. The Company's top
four wholesalers typically represent approximately 90% of net revenue. These
four wholesalers accounted for approximately $12.8 million or 91% of our net
revenue of Natrecor for the year ended December 31, 2001. As a percent of net
revenue, the four wholesalers accounted for 28%, 26%, 24% and 13%, respectively.
At December 31, 2001 wholesalers accounted for $4.2 million of the $6.9 million
in accounts receivable. As a percent of the $4.2 million, four wholesalers
accounted for 32.7%, 23.3%, 23.3% and 13.3%, respectively.
Approximately 40% of our total revenues in 2000 were derived from psychiatric
product sales, which consists entirely of sales in the United States under a
license agreement with GSK.
F-7
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999 license revenues from Chiron Corporation ("Chiron") accounted for 27%,
milestone payments from Novo Nordisk accounted for 22%, and Alzheimer's
research reimbursement with Eli Lilly accounted for 22% of total research and
development contract revenues. Approximately 11% of 1999 research and
development contract revenues were from the agreement with Bayer AG ("Bayer")
for commercialization of Natrecor (nesiritide). The agreement with Bayer was
terminated in May 1999.
At December 31, 2001, the $6.9 million in accounts receivable included
approximately $4.2 million from product sales of Natrecor, and $3.0 million
from GSK, and $0.1 million of other receivable, less reserves of $0.4 million.
At December 31, 2000, the $5.2 million in accounts receivable included $3.5
million from GSK, and $1.0 million from Janssen Pharmaceutica Inc. ("Janssen").
The Company's excess cash is invested in a diversified portfolio of securities
consisting of United States Treasury Notes, deposits with major banks and
financial institutions, and investment-grade interest-bearing corporate
securities issued by companies in a variety of industries. In addition, the
Company owned 100,871 shares of GenVec Corporation (NASDAQ--GNVC) common stock,
with a fair market value of $499,311, at the end of December 31, 2001.
The Company relies on a third party to manufacture its product. Reliance on
third-party manufacturers involves a number of risks, including the lack of
control over the manufacturing process and the potential absence or
unavailability of adequate capacity. If the Company's third party manufacturer
cannot or will not manufacture its products in required volumes, on a
cost-effective basis, in a timely manner, or at all, the Company will have to
secure additional manufacturing capacity. Even if this additional capacity is
available at commercially acceptable terms, the qualification process could be
lengthy and could cause interruptions in product shipments.
Certain Company products require approval from the FDA and foreign regulatory
agencies prior to commercialized sales and are subject to continued regulations
once approved. There can be no assurances that the Company's new products will
receive any of these required approvals. If the Company was denied such
approvals or such approvals were delayed, it could have a materially adverse
impact on the Company.
DEPRECIATION AND AMORTIZATION
Leasehold improvements and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the assets (3
to 7 years for equipment). Leasehold improvements are amortized on a
straight-line basis over the shorter of the asset life or fixed-lease term.
Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization is removed from the balance sheet, and the
resulting gain or loss is reflected in operations. Repairs and maintenance are
charged to expenses when incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of identifiable intangibles and fixed
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors considered important which could trigger
an impairment review include, but are not limited to, significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of use of the acquired assets or the
strategy for the Company's overall business, significant negative industry or
economic trends, significant decline in the Company's stock price for a
sustained period, and the Company's market capitalization relative to net book
value. When the Company determines that the carrying value of long-lived assets
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in the Company's current business model.
TREASURY STOCK
Treasury stock of 30,000 shares at December 31, 2001 was stated at cost and was
considered issued and outstanding. During September 2001, the Board of
Directors authorized the repurchase of up to $10 million of Scios common stock.
The
F-8
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repurchases are to be made through open-market transactions at the discretion
of management as market conditions warrant. As of December 31, 2001, we had
repurchased 30,000 shares of our common stock at an average purchase price
of $14.83 per share.
REVENUE RECOGNITION
We recognize revenue from product sales when there is pervasive evidence that
an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collection is reasonably assured. Provisions for discounts
and rebates to customers, and returns and other adjustments are provided for in
the same period that the related product sales are recorded based upon analyses
of historical discounts, rebates and returns. Shipping and distribution costs
are expensed to cost of product sales.
RESEARCH AND DEVELOPMENT CONTRACTS AND ROYALTIES
Research and development contract revenue from cost-reimbursement agreements
with collaboration partners is recorded as the related expenses are incurred,
up to contractual limits. Payments received that are related to future
performance are deferred and recorded as revenue as they are earned over
specified future performance periods. Charges to these collaboration partners
are based upon negotiated rates for full time equivalent employees of the
Company and such rates are intended to approximate the Company's anticipated
costs. All revenues recognized to date are not refundable if the relevant
research effort is not successful. Research and development expenses in 2001,
2000, and 1999 include approximately $1.9 million, $2.3 million, and $2.4
million respectively, incurred in connection with programs subject to cost
reimbursement, collaborative or other performance agreements.
Royalty income from licensing agreements is recognized when the royalty
payments are received and earned.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred. Certain
research and development projects are funded under agreement with collaboration
partners, and the costs related to these activities are included in research
and development expense. The charges to collaboration partners are based upon
negotiated rates for full-time equivalent employees of the Company, and such
rates are intended to approximate the Company's anticipated costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of notes payable approximates fair value. Estimated
fair values for marketable securities, which are separately disclosed
elsewhere, are based on quoted market prices for the same or similar
instruments.
F-9
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is calculated using the weighted average number of
vested common shares outstanding for the period. Diluted net loss is calculated
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. The outstanding options to purchase
common stock and the affect of converting preferred stock to common stock were
excluded from diluted earnings calculations because the effect would be
anti-dilutive.
For the year ended December 31, 2001, the following items were not included in
the calculation of diluted net loss per share because to do so would be
anti-dilutive for the period:
-----------------------------
2001 2000 1999
--------- --------- ---------
PharmaBio warrants, 700,000 total warrants with
an exercise price of $20.00. Warrants are
exercisable pro rata over the next 17 months
and will expire in ten years................... 175,000 -- --
Option to issue preferred stock to repay debt for
a maximum of $20 million. Shares are computed
based on the year end stock price. Actual
number of preferred shares will depend upon the
price and dollar value used toward payment of
Genentech debt (see Note 4f) (*)............... 841,396 499,100 --
Company stock option plans....................... 6,872,775 4,517,328 5,571,861
--------- --------- ---------
7,889,171 5,016,428 5,571,861
========= ========= =========
(*)None of the shares shall be exercised, sold, assigned or transferred prior
to December 30, 2002, except with the prior written approval of the Company.
COMPREHENSIVE INCOME (LOSS)
The Company's unrealized gains (losses) on marketable securities represent the
only component of comprehensive income (loss) that is excluded from the
Company's net loss. The Company's comprehensive income (loss) has been
presented in the consolidated financial statements. As the Company is in a loss
position, tax effects have not been allocated to the components of other
comprehensive income (loss).
PATENT COSTS
Costs related to patent prosecution are expensed as incurred, as recoverability
of such expenditures is uncertain.
SEGMENT REPORTING
Management has determined that the Company operates in one business segment. We
currently sell and market Natrecor in the United States for the treatment of
patients with acutely decompensated congestive heart failure.
ADVERTISING COSTS
We expense advertising costs as incurred. Advertising costs for Natrecor were
approximately $0.9 million for the year ended December 31, 2001 and none in
prior years.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes," which prescribes the use of
the liability method whereby deferred tax asset or liability account balances
are calculated at the balance sheet date using current tax laws and rates in
effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
F-10
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. Scios did not have any business
combination transactions in the year ended December 31, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 (SFAS 142), "Goodwill and Other Intangible Assets," which in Scios' case is
effective for fiscal years beginning after December 15, 2001. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. The
Company does not currently have any goodwill or intangible assets, and does not
believe that the implementation of SFAS 142 will have any significant impact on
its financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets to be Disposed Of." SFAS 144 addresses financial accounting and
reporting of impairment of long-lived assets to be disposed of. However, SFAS
144 retains the fundamental provisions of SFAS 121 for: (1) recognition and
measurement of the impairment of long-lived assets to be held and used; and (2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We believe SFAS
144 will have no impact on Scios' financial position and results of operations.
SAB 101
Effective January 1, 2001, the Company adopted 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 as earned 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 cumulative effect of adoption as of January 1, 2000 was immaterial to the
results of the Company's operations and financial position. However, certain
revenue recognized in periods prior to January 1, 2000 would have been
recognized in different periods in accordance with the provisions of SAB 101.
In the year ended December 31, 1998, the Company recorded a $20.0 million
license fee in connection with the Natrecor commercialization agreement with
Bayer AG. Under SAB 101, $19.1 million of this license fee would have been
reallocated from 1998 to the year ended December 31, 1999, the year in which
the Bayer commercialization agreement was terminated. As a result, the loss for
the year ended December 31, 1998 would have increased by $19.1 million and the
loss for the year ended December 31, 1999 decreased by $19.1 million. In
accordance with the implementation provisions of SAB 101, the accompanying
financial data for periods prior to January 1, 2000, the date of adoption, have
not been restated.
The pro forma effects of implementing SAB 101 on the results previously
reported for the year ended December 31, 1999 are presented below:
----------------------------
YEAR ENDED DECEMBER 31, 1999
----------------------------
BASIC AND
DILUTED
LOSS PER
REVENUES NET LOSS SHARE
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As Reported...................................... $28,355 $(20,064) $(0.53)
Pro-forma........................................ $47,503 $ (916) $(0.02)
Concurrent with the implementation of SAB 101, the Company implemented the
consensus reached in EITF 99-19 "Reporting Revenue Gross as a Principal Versus
Net as an Agent." The effect of this EITF results in netting the revenues
F-11
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
received from the Psychiatric Sales and Marketing Division (PSMD) with related
direct costs, as such it had no effect on previously reported operating
results. All periods presented reflect retroactive application of this EITF
consensus.
4. JOINT BUSINESS ARRANGEMENTS
A. AGREEMENT WITH CHIRON CORPORATION
In November 1999, the Company signed a license agreement with Chiron for the
rights to Fiblast (trafermin) ("Fiblast"). Fiblast is a human basic fibroblast
growth factor. The Company received $5.0 million in license and technology
transfer fees and $7.5 million from a Promissory Note due on December 31, 2006.
The note and related interest will be forgiven if Fiblast is approved in the
United States before December 31, 2006. The Company will also receive royalties
based on future sales of Fiblast products.
B. AGREEMENT WITH JANSSEN PHARMACEUTICA INC.
The Company entered into a three-year agreement, effective April 1998, with
Janssen to jointly promote the anti-psychotic drug, Risperdal, in the United
States. Under the agreement, the Company receives base payments plus incentive
compensation on achieving specified sales levels over a contract year beginning
in April and ending in March. Janssen manufactures and distributes the product.
This agreement ended on March 31, 2001.
C. AGREEMENTS WITH GLAXOSMITHKLINE CORPORATION
Under the terms of an agreement with GSK, the Company has the exclusive rights
to market certain GSK psychiatric products in the United States. GSK is fully
responsible for ancillary matters relating to product sales, including various
administrative tasks and maintenance of all New Drug Applications with respect
to the GSK Products, and certain product liability insurance. The Company pays
GSK 40% of net profits, as defined in the agreement, from sales of the GSK
Products.
In September 1998, the Company entered into an agreement with GSK to co-promote
Paxil in the United States. Under the agreement, the Company receives base
payments plus incentive compensation on achieving specified sales levels during
a specified term. Although the agreement ended in December 2000, the companies
had agreed to extend the agreement through March 31, 2001.
Commencing in the fourth quarter of 2000, the Company solicited and received
bids in connection with selling its marketing rights for certain psychiatric
products sold by the Company. The marketing rights were sold to GSK. In order
to effect the sale, the licensing agreement was terminated effective March 31,
2001, and the Company received from GSK $4.0 million in 2001, and will receive
$3.0 million in 2002, and will receive $2.4 million in 2003.
The Company recognized a one-time gain on the sale of $9.4 million, which has
been classified, on the statement of operations under the caption GAIN ON SALE
OF MARKETING RIGHTS. In addition, the Company ended the deployment of the
Psychiatric Sales Marketing Division sales force and terminated certain
full-time support personnel. Severance payments for these personnel amounted to
approximately $0.8 million.
In December 2001, we entered into a binding summary of terms with Glaxo Group
Ltd., an affiliate of GlaxoSmithKline, or GSK, in which we will license
Natrecor to GSK in all European markets. Under the terms of the agreement, GSK
will have the rights to sell and distribute the product for which we will
receive an up-front fee and milestone payments totaling (Pounds)15.0 million
British Pounds (which at December 31, 2001 equaled approximately $22 million
U.S. Dollars) in addition to future royalties in the identified countries. We
will manufacture and supply the bulk product to GSK. Both companies will work
together to continue clinical development of Natrecor in Europe. In order to
obtain European approval for Natrecor, GSK expects to use the extensive
clinical data we submitted to obtain approval from the FDA in August 2001. The
companies expect to launch Natrecor in Europe in the first half of 2004. No
revenue has been recognized related to this agreement through December 31, 2001.
F-12
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. AGREEMENT WITH ELI LILLY AND COMPANY
In April 1997, the Company entered into a research collaboration with Eli Lilly
and Company ("Eli Lilly") for the development of drugs to prevent or retard the
progression of Alzheimer's disease. Under the terms of the agreement, Eli Lilly
will fund research and will have the first opportunity to develop products from
the collaboration. The Company may elect to develop other products from the
collaboration. The commercialization partner will make milestone and royalty
payments to the other partner. In 2000, the existing agreement was amended to
decrease the number of dedicated and non-dedicated employees that work on the
project, and at that time the program was further extended to December 31,
2001. At the end of December 31, 2001, we and Eli Lilly terminated the
collaboration.
E. AGREEMENTS WITH KAKEN PHARMACEUTICAL CO., LTD.
In September 1994, the Company entered into a series of agreements with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), to expand a previous agreement signed in
1988 for Fiblast. Under the 1994 agreements, the Company will collaborate with
Kaken to further develop the Fiblast manufacturing process, provide Kaken a
license to the Company's Fiblast manufacturing technology and supply a
specified amount of Fiblast product. In return, the Company has received
milestone payments, which are contingent on Kaken's continuing development of
the product. At December 31, 2000, $15.9 million of the Company's deferred
revenue consisted of payments received for the supply of Fiblast material.
Prior to closing its Mountain View manufacturing facility in May 1999, the
Company produced the amount of Fiblast due to Kaken and the Company held it for
delivery to Kaken upon regulatory approval of the product in Japan. In April
2001, Kaken Pharmaceuticals Co., Ltd. received notice from the Japanese
Ministry of Health and Welfare that they have been granted marketing approval
for Fiblast Spray as a treatment for dermal ulcers. During 2001, we shipped all
of the bulk FGF to Kaken in Japan and recognized $15.9 million of previously
deferred revenue. We also received royalty payments from the sale of Fiblast of
$0.2 million during 2001.
F. AGREEMENT WITH GENENTECH, INC.
In December 1994, the Company entered into a collaboration agreement with
Genentech, Inc. ("Genentech") for the development and commercialization of
Auriculin (anaritide) ("Auriculin") for the treatment of acute renal failure.
Concurrent with the collaboration agreement, Genentech purchased $20.0 million
of the Company's preferred stock and provided a $30.0 million loan to the
Company in the form of a letter of credit (see Note 10), which the Company drew
down in March of 1997. As of December 31, 1997, Genentech had converted all
shares of preferred stock into 2.1 million shares of common stock. In 1997, the
Company and Genentech discontinued development of Auriculin based upon the
negative results of an interim study. In 1999 the terms of the loan were
amended. The loan is repayable in the Company's preferred stock up to a maximum
of $25.0 million at the Company's option at any time through December 31, 2002.
In the event the Company converts the loan to preferred stock, the stock cannot
be sold or registered until December 30, 2002 without the Company's approval.
In addition, if the Company should decide to convert the loan to preferred
stock, a portion of the loan that is not convertible will become due and
payable before December 31, 2002. The amount of the loan that is due before the
maturity date is based on a formula that considers the amount of loan converted
to stock and the outstanding loan balance.
In the first quarter of 2000, the Company paid down $2.0 million of the
Genentech loan. In the third quarter of 2000, the Company paid down the
Genentech loan by $7.6 million, which consisted of a cash payment of $2.6
million, and 4,991 shares of Series B preferred stock. The preferred shares
convert to 499,100 shares of common stock.
G. AGREEMENT WITH QUINTILES INTERNATIONAL CORP.
In January 2001, we entered into a sale and marketing alliance with Innovex, a
subsidiary of Quintiles Transnational Corp. Innovex supported Scios with a wide
range of sales and marketing solutions. This included the hiring and training
of a dedicated sales force to launch Natrecor. As part of the original three
and one half year agreement, Quintiles, through its corporate venture group
PharmaBio Development agreed to fund $30.0 million of our costs to launch
Natrecor over the first 24 months of the commercialization of Natrecor and to
loan us up to $5.0 million. In December 2001, Scios, Innovex and
F-13
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PharmaBio, amended the January 2001 agreement. The amendment allowed Scios, at
its option, to assume control of the Natrecor sales force in June 2003, one
year ahead of schedule, and eliminated the $5.0 million line of credit provided
by PharmaBio to Scios. Of the $30.0 million funding agreement, we received
$10.0 million in the fourth quarter of 2001, and will receive the remaining
$20.0 million in six payments over the following 17 months. As part of the
funding agreement, we will pay PharmaBio a declining royalty rate on net sales
of Natrecor through early 2008. We also granted PharmaBio a fully vested
warrant to purchase 700,000 shares of our common stock at an exercise price of
$20.00 per share. These warrants are exercisable over 17 months beginning
December 2001 through May 2003 (see Note 10).
5. MARKETABLE SECURITIES
Unrealized gains and losses on marketable securities at December 31, 2001 by
classification were as follows:
--------------------------------------------
UNREALIZED UNREALIZED
COST BASIS GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Debt securities:
U.S. Government & Government Agency $20,878 $193 $ (85) $20,986
Corporate Bonds.................... 49,623 469 (58) 50,034
------- ---- ----- -------
Total............................ $70,501 $662 $(143) $71,020
======= ==== ===== =======
Unrealized gains and losses on marketable securities at December 31, 2000 by
classification were as follows:
--------------------------------------------
UNREALIZED UNREALIZED
COST BASIS GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Debt securities:
U.S. Government & Government Agency $36,256 $191 $ (85) $36,362
Corporate Bonds.................... 31,808 102 (32) 31,878
------- ---- ----- -------
Total............................ $68,064 $293 $(117) $68,240
======= ==== ===== =======
The scheduled maturities for marketable securities at December 31, 2001 by
classification were as follows:
-------------------------------------------
MATURITY MATURITY
1 YEAR MATURITY MATURITY 4 YEARS
OR LESS 2 YEAR 3 YEAR OR MORE TOTAL
-------- -------- -------- -------- -------
(IN THOUSANDS)
Debt securities:
U.S. Government & Government
Agency Securities............. $ -- $13,943 $ 5,461 $1,582 $20,986
Corporate Bonds................ 7,351 18,418 17,090 7,175 50,034
------ ------- ------- ------ -------
Total......................... $7,351 $32,361 $22,551 $8,757 $71,020
====== ======= ======= ====== =======
The Company realized gains of $1.1 million and losses of $0.3 million on the
disposal of marketable securities in 2001, gains of $0.1 million and losses of
$0.3 million on the disposal of marketable securities in 2000, and gains of
$5.2 million and losses of $0.3 million on the disposal of marketable
securities during 1999.
F-14
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORY
------------
DECEMBER 31,
------------
2001 2000
------ -----
(IN THOUSANDS)
Finished goods.................................................. $1,134 $ --
Work-in-process................................................. 24 --
------ -----
Total........................................................ $1,158 $ --
====== =====
7. PROPERTY AND EQUIPMENT
------------------
DECEMBER 31,
------------------
2001 2000
-------- --------
(IN THOUSANDS)
Laboratory equipment..................................... $ 7,901 $ 6,085
Computer and related equipment........................... 5,221 3,256
Furniture and other...................................... 2,064 1,370
Leasehold improvements................................... 10,035 8,977
-------- --------
25,221 19,688
Accumulated depreciation and amortization................ (14,797) (11,366)
-------- --------
10,424 8,322
Construction-in-progress................................. -- 588
-------- --------
Total................................................. $ 10,424 $ 8,910
======== ========
8. OTHER ASSETS
-------------
DECEMBER 31,
-------------
2001 2000
------ ------
(IN THOUSANDS)
Deposits......................................................... $ 332 $ 348
Receivable from GSK.............................................. 2,363 --
Other assets..................................................... 499 1,255
Employee notes receivable........................................ 929 686
------ ------
Total......................................................... $4,123 $2,289
====== ======
9. OTHER ACCRUED LIABILITIES
-------------
DECEMBER 31,
-------------
2001 2000
------ ------
(IN THOUSANDS)
Accrued Medicaid rebates........................................ $ 865 $1,532
Profit distribution to third parties............................ -- 1,139
Accrued clinical trial expenses................................. 995 598
Accrued selling and marketing expenses.......................... 1,498 --
Accrued R&D contract payable.................................... 737 737
Accrued research partnership distribution....................... 689 44
Other........................................................... 2,422 2,678
------ ------
Total........................................................ $7,206 $6,728
====== ======
F-15
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASE AND DEBT COMMITMENTS
A. OPERATING LEASES
The Company leases three facilities in Sunnyvale, California. The leases for
these facilities expire during various periods from December 31, 2003 to August
31, 2008. We also lease a warehouse in Mountain View, California that expires
in 2003. In addition, the Company has entered into operating leases covering
certain laboratory and computer equipment.
At December 31, 2001, future minimum payments under these leases are as follows:
--------------------
EQUIPMENT
FACILITIES OPERATING
LEASES LEASES
---------- ---------
(IN THOUSANDS)
2002..................................................... $1,930 $198
2003..................................................... 2,069 105
2004..................................................... 917 --
2005..................................................... 948 --
2006..................................................... 979 --
Thereafter............................................... 1,879 --
------ ----
Total................................................. $8,722 $303
====== ====
Rent expenses for all facility leases were approximately $1.9 million, $1.6
million, and $2.2 million in 2001, 2000, and 1999, respectively.
B. LONG-TERM DEBT
-----------------
DECEMBER 31,
-----------------
2001 2000
-------- -------
(IN THOUSANDS)
Note payable to Genentech, interest at the prime rate of
(4.75% at December 31, 2001). The loan is repayable in
the Company's preferred stock up to a maximum of $20
million at anytime through December 31, 2002. If the
Company should decide to convert the loan to preferred
stock, the portion of the loan that is not convertible
($13,035 at December 31, 2001) will become due and
payable before December 31, 2002......................... $ 33,035 $30,927
Note payable to Chiron, interest at 8.5% and is due
December 31, 2006........................................ 8,876 8,168
Obligation to Quintiles--PharmaBio, amortized based on the
royalty payments made on Natrecor sales until 2008....... 10,000 --
Discount on Qunitiles--PharmaBio obligation................ (3,397) --
-------- -------
Total long-term debt.................................... 48,514 39,095
Less current portion of long-term debt.................. (33,035) --
-------- -------
Long-term debt, net of current portion.................. $ 15,479 $39,095
======== =======
GENENTECH--As part of the Auriculin agreement, Genentech committed to loan the
Company up to $30.0 million. The $30.0 million was drawn down in March of 1997,
and bears interest at the prime rate (4.75% at December 31, 2001). In 1999 the
terms of the loan were amended. The loan is repayable in the Company's
preferred stock up to a maximum of $25.0 million at the Company's option at any
time through December 31, 2002. In the event the Company converts the loan to
preferred stock, the stock cannot be sold or registered until December 30,
2002. In addition, if the Company should decide to convert the loan to
preferred stock, the portion of the loan that is not converted will become due
and payable before December 31, 2002. The amount of the loan that is
convertible before the maturity date is based on a formula that considers the
amount of the loan converted to stock and the outstanding loan balance.
F-16
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 2000, the Company paid down $2.0 million of the
Genentech loan. In the third quarter of 2000, the Company paid down the
Genentech loan by $7.6 million, which consisted of a cash payment of $2.6
million and 4,991 shares of Series B preferred stock. (For rights and features
of Series B preferred stock see Note 13a). Each share of Series B preferred
stock converts at a rate of 100:1 of common stock at Genentech's option. The
Series B preferred stock is convertible after December 30, 2002 and at
Genentech's option before January 20, 2003.
CHIRON--As part of the Fiblast agreement, Chiron loaned the Company $7.5
million in December 1999. The Promissory Note bears interest at the rate of
8.5% compounded annually, and is due December 31, 2006. The note and related
interest will be forgiven if Fiblast is approved in the United States before
December 31, 2006.
QUINTILES--PHARMABIO--In January 2001, we entered into a commercialization
agreement with Quintiles, through its corporate venture group PharmaBio
Development to fund $30.0 million of our costs to launch Natrecor over 24
months and to loan us up to $5.0 million. In addition, we granted PharmaBio
700,000 warrants to purchase Scios stock at $20.00 per share. In December 2001,
Scios and PharmaBio amended the January 2001 agreement. The amendment
eliminated the $5.0 million line of credit. All of the 700,000 warrants vested
in December 2001 are exercisable over seven installments beginning December
2001 through May 2003. Of the $30.0 million funding commitment, we received
$10.0 million in the fourth quarter of 2001, and will receive the remaining
$20.0 million in six payments over the following 17 months. As part of the
funding agreement, we will pay PharmaBio a declining royalty rate on net sales
of Natrecor through early 2008.
The accounting treatment of the commercialization payments of $30.0 million
from PharmaBio falls under the guidance of EITF 88-18, "Sales of Future
Revenues." EITF-88-18 addresses the accounting treatment when an enterprise
(Scios) receives cash from an investor (PharmaBio) and agrees to pay to the
investor for a defined period a specified percentage or amount of the revenue
or a measure of income of a particular product line, business segment,
trademark, patent, or contractual right. The Task Force reached a consensus on
six independent factors that would require reclassification of the proceeds as
debt. As the Company meets one of the factors whereby the Company has
significant continuing involvement in the generation of the cash flows due to
the investor. We have recorded the proceeds from PharmaBio of $10.0 million in
2001 as Long-term Debt and will reduce the debt principal and accrued interest
as the royalty payments are made. Interest on the debt (net of the discount)
will accrue monthly using the effective interest method beginning January 2002
and total interest will be adjusted based on the periodic adjustments made on
the overall expected royalty.
The accounting treatment for the 700,000 warrants is under APB 14, "Accounting
for Convertible Debt issued With Stock Purchase Warrants." Under APB 14, the
total expected net proceeds received of $30 million were allocated between the
debt and the warrant based upon the relative fair value of the two components.
The relative fair value of the warrants related to the debt, using the
Black-Scholes model at December 2001, was $10.2 million. Of this total fair
value, $3.4 million was recognized as a discount related to the debt based on
the portion of the cash funding received from PharmaBio in 2001. The remaining
balance of $6.8 million is recorded as Deferred Warrant Costs in the
Stockholder's Equity section. The $6.8 million in Deferred Warrant Costs will
be recorded as discount on debt as the remaining $20.0 million in funding is
received from PharmaBio over the next 17 months. The total value of the
warrants of $10.2 million will be amortized to interest expense using the
effective interest method over the life of the royalty payment stream.
D. NATRECOR SUPPLY CONTRACT
The Company has entered into a long-term supply agreement with a manufacturer
for the supply of bulk Natrecor. The contract provides for the purchase of at
least 25 kg of bulk solution over an eight-year period after the first delivery
of commercialized quantities, at a maximum price of 24.5 million Euro (United
States equivalent at December 31, 2001, $21.5 million).
11. LITIGATION
On November 29, 1995, the Company was notified by the United States
Environmental Protection Agency, or EPA, that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the alleged
disposal of hazardous substances by a subcontractor of Nova Pharmaceutical
Corporation, which the we acquired in 1992. We were one of many potentially
responsible parties that were identified as associated with this specific site.
We held discussions with the EPA
F-17
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and finalized the amount of potential liability. We reserved $90,000 at
December 31, 2000 as provision for the settlement thereof. During 2001, we
settled the liability with a final settlement payment of $81,264.
12. RESEARCH AND DEVELOPMENT COMMITMENTS
A. COMMITMENTS TO RESEARCH PARTNERSHIPS
In 1988, the Company purchased the interests of Biotechnology Research
Partners, a limited partnership in a joint venture, and made a down payment of
$0.6 million. The balance of the purchase price is to be paid in quarterly
installments in accordance with the following formula: (i) until the minority
partners have received payments of approximately $22.8 million, the Company
will pay approximately 37% of the royalty income from third-party licenses and
approximately 4% of the Company's gross sales of Partnership products; (ii)
thereafter, until the minority partners have received aggregate payments of
approximately $34.1 million, the Company will pay approximately 31% of the
royalty income and approximately 3% of the Company's gross sales of Partnership
products; and (iii) thereafter, until the earlier of 20 years from the date of
exercise of the option or the time all patents relating to the Partnership's
technology expire and all information relating to that technology becomes part
of the public domain, the Company will pay to the minority partners
approximately 21% of the royalty income and approximately 2% of the Company's
gross sales of Partnership products. Partnership products for which minority
partners will receive payments include Fiblast. The Company accrued no amounts
at December 31, 2000 and accrued $0.6 million at December 31, 2001 as the
minority partners' share of royalty payments received from Fiblast in 2001.
In December 1992, the Company exercised its option to acquire all interests in
Nova Technology Limited Partnership for $20.4 million. The Company also issued
contingent payment rights to all limited partners of the partnership, pursuant
to which the Company is obligated until January 15, 2008 to pay royalties on
the sale or license of certain products that were under development by the
partnership. The Company had accrued $44,000 at December 31, 2001 as a result
of royalties associated with the commercialization of Guilford's Gliadel wafer.
B. RESEARCH COLLABORATIONS WITH PARTNERS
As part of the Joint Business Arrangements described in Note 4 above, the
Company from time to time agrees to provide and receive resources and support
as part of its collaborations with other companies. In the course of such
collaborations, issues may arise concerning the ownership of technology that is
developed and the fulfillment of each party's obligations to the other.
Generally these have been resolved by the parties without resorting to
litigation.
13. STOCKHOLDERS' EQUITY
A. SERIES B PREFERRED STOCK
The Company's preferred stock may be issued in series that have such rights as
may be designated by the Board of Directors from time to time. In February
2000, the Company's Board authorized the designation of 50,000 shares of Series
B preferred stock. At December 31, 2000 and December 31, 2001 there were 4,991
shares outstanding. As discussed in Note 10b, the Company paid down the
Genentech loan by $7.6 million which consisted of a cash payment of $2.6
million and 4,991 shares of Series B preferred stock. Each share of Series B
preferred stock converts at a rate of 100:1 of common and will not have voting
rights until converted into shares of Scios common stock. In addition, the
holders of the Series B preferred stock are entitled to receive dividends as
payable on each share of common stock into which such shares could then be
converted, when and if declared by the Board of Directors. In the event of any
liquidation, dissolution or winding up of the Company, after payment of debts
and other liabilities, the holders of the Series B preferred stock (on an as
converted basis) and the holders of the common stock shall be entitled to share
ratably in the remaining assets of the Company.
B. DEFERRED COMPENSATION
In August 2000, the Company granted shares of restricted stock to an officer.
The shares vest over a six-month period provided that the recipient is still
employed by the Company. The market value of these shares was $0.3 million and
has been recorded as a separate component of stockholders' equity. In August
1999, the Company granted shares of restricted stock to an officer.
F-18
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The shares vest over a three-year period provided that the recipient is still
employed by the Company. The market value of the shares awarded was $0.2
million and has been recorded as a separate component of stockholders' equity.
In September 1998, the Company granted shares of restricted stock to an officer
and director. The shares vest over a two-year period provided that the
recipient is still employed by the Company. The market value of the shares
awarded was $0.6 million and has been recorded as a separate component of
stockholders' equity. Deferred compensation for these share grants is being
amortized over the applicable period of the vesting. The restricted stock was
granted under the 1992 Incentive Stock Plan.
14. EMPLOYEE 401(K) BENEFIT PLAN
The Company has a qualified profit sharing plan and trust under Internal
Revenue Service Code sections 401(a) and 401(k). Employees are eligible to
participate in the plan the first day of the month after hire and can elect to
contribute to the plan up to 15% of their salary subject to current statutory
limits. In 2001, 2000, and 1999, the Company matched employee contributions at
a rate of 100% to a maximum of $3,000 per employee, except as restricted by
statutory limits. The Company contribution is 100% vested at the end of an
employee's third year of employment. Company contributions to the plan totaled
approximately $0.7 million in 2001, $0.6 million in 2000, and $0.8 million in
1999.
15. STOCK OPTION PLANS
Under the Company's stock option plans, the Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the vesting period and the exercise price (which cannot be less than fair
market value ("FMV") at date of grant for incentive stock options or 85% of FMV
for non-statutory options). The options are exercisable at times and in
increments as specified by the Board of Directors, generally expire ten years
from date of grant and fully vest over periods from three to five years. The
following shares are authorized and available for grant as of December 31, 2001:
---------------------------------------------------------
SHARES OPTIONS AVAILABLE
PLAN TITLE AUTHORIZED OUTSTANDING FOR GRANT OPTION PRICE
- ---------- ---------- ----------- --------- ------------------------
1983/86............... 2,200,000 18,765 -- Not less than 85% of FMV
1989.................. 170,000 10,000 -- FMV
1992.................. 6,057,665 1,983,646 1,640,405 Not less than 85% of FMV
1996.................. 6,795,000 4,860,168 1,361,267 Not less than 85% of FMV
NQ.................... 443,161 -- -- Not less than 85% of FMV
1992 NC............... 442,335 196 Not less than 85% of FMV
SA.................... 542,000 -- -- Not less than 85% of FMV
---------- --------- ---------
Total................. 16,650,161 6,872,775 3,001,672
========== ========= =========
Additional information with respect to the activity of outstanding options and
restricted common stock is summarized in the following table:
-----------------------------------------
NUMBER OF AGGREGATE PRICE
SHARES OPTION PRICE (IN THOUSANDS)
---------- ------------- ---------------
Balances at January 1, 1999........... 4,505,835 $ 3.69-$21.13 $ 35,562
Granted............................. 2,119,200 $ 3.81-$ 8.75 12,638
Exercised........................... (185,163) $ 5.13-$ 9.63 (1,243)
Canceled............................ (868,011) $ 3.81-$15.06 (6,592)
---------- ------------- --------
Balances at December 31, 1999......... 5,571,861 $ 3.69-$21.13 40,365
Granted............................. 1,190,922 $0.001-$15.19 10,912
Exercised........................... (1,432,757) $0.001-$12.00 (10,535)
Canceled............................ (812,698) $ 3.81-$21.13 (7,190)
---------- ------------- --------
Balances at December 31, 2000......... 4,517,328 $0.001-$21.13 33,552
Granted............................. 3,748,500 $15.18-$27.60 81,210
Exercised........................... (1,061,590) $0.001-$26.35 (8,379)
Canceled............................ (331,463) $ 3.81-$26.35 (4,378)
---------- ------------- --------
Balances at December 31, 2001......... 6,872,775 $0.001-$27.60 $102,005
========== ============= ========
F-19
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options outstanding by range of exercise price at December 31, 2001 are as
follows:
-----------------------------------------------------------
WEIGHTED OUTSTANDING EXERCISABLE
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- ----------- ----------- -----------
$ 3.81-$ 3.94...... 683,617 7.57 $ 3.67 219,718 $ 3.86
$ 3.97-$ 5.97...... 747,612 6.89 $ 5.15 582,014 $ 5.25
$ 6.06-$ 8.75...... 800,594 6.04 $ 7.42 652,825 $ 7.33
$ 8.88-$15.18...... 812,459 6.94 $10.73 574,398 $10.23
$15.19-$19.10...... 666,534 9.31 $17.48 70,992 $15.26
$19.11-$20.37...... 809,605 9.15 $20.28 162,497 $20.37
$20.47-$21.85...... 924,917 9.43 $21.43 271 $20.85
$21.98-$22.41...... 765,000 9.48 $22.35 -- $ 0.00
$22.54-$26.90...... 572,437 9.44 $25.42 48,394 $26.46
$27.60-$27.60...... 60,000 9.32 $27.60 -- $ 0.00
--------- ---- ------ --------- ------
$3.81-$27.60....... 6,842,775 8.23 $14.89 2,311,109 $ 8.76
========= ==== ====== ========= ======
At December 31, 2001, approximately 2,311,109 options to purchase common stock
of the Company were exercisable at an average exercise price of $8.76. At
December 31, 2000, approximately 2,407,480 options to purchase common stock of
the Company were exercisable at an average exercise price of $7.37. In 2000,
the Company issued 735,036 shares of treasury stock to fulfill employee option
exercises.
On February 5, 2001, the 1996 Equity Incentive Plan was amended to add 1.3
million shares of common stock to this plan. On May 7, 2001, the 1996 Equity
Incentive Plan was amended to add 1.8 million shares of common stock to this
plan. On May 8, 2001, the stockholders approved an amendment to the 1992 Equity
Incentive Plan adding 1.5 million shares of common stock to this plan and
approved an Employee Stock Purchase Plan with an initial allocation of 175,000
shares of common stock. On November 5, 2001, the 1996 Equity Incentive Plan was
amended to add 1.2 million shares of common stock to this plan.
RESTRICTED COMMON STOCK
At December 31, 2001 there were 30,000 shares of restricted common stock
granted to an officer that were outstanding. The shares vest on August 9, 2002,
and at December 31, 2001 none of these shares were vested.
STOCK BASED COMPENSATION
The Company is required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"), to disclose pro
forma information regarding option grants and the employee stock purchase
program made to its employees based on specified valuation techniques that
produce estimated compensation charges. These amounts have not been reflected
in the Company's Consolidated Statements of Operations because no compensation
charge arises when the price of the employees' stock options equals the market
value of the underlying stock at the grant date, as in the case of options
granted to the Company's employees. Pro forma information under SFAS 123 is as
follows:
The following pro forma information has been prepared following the provisions
of SFAS No. 123:
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss--as reported............................ $(62,497) $(42,522) $(20,064)
Net loss--pro forma.............................. $(77,646) $(48,148) $(25,449)
Net loss per common share basic and diluted--as
reported....................................... $ (1.47) $ (1.12) $ (0.53)
Net loss per common share basic and diluted--pro
forma.......................................... $ (1.82) $ (1.27) $ (0.67)
F-20
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes single option pricing method assuming the following assumptions:
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
2001 2000 1999
------- ------- -------
Risk free interest rate............................... 4.50% 5.01% 5.50%
Expected life (years)................................. 5.71 6.1 5.4
Volatility............................................ 0.8097 0.8573 0.9121
Dividend yield........................................ -- -- --
Weighted average per share fair value of options
granted............................................. $ 15.34 $ 7.73 $ 4.11
The fair value of the employee stock purchase program or ESPP is estimated on
the date of the exercise using the Black-Scholes single option pricing method
assuming the following assumptions:
-----------------------
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
------- ---- ----
Risk free interest rate.................................... 4.50% N/A N/A
Expected life (years)...................................... 0.5 N/A N/A
Volatility................................................. 0.8097 N/A N/A
Dividend yield............................................. -- -- --
Weighted average per share fair value of ESPP exercised.... $ 8.33 N/A N/A
TREASURY STOCK
During September 2001, the Board of Directors authorized the repurchase of up
to $10 million of Scios common stock. The repurchases are to be made through
open-market transactions at the discretion of management as market conditions
warrant. As of December 31, 2001, we purchased 30,000 shares of Scios common
stock for an aggregate purchase price of $445,000. These shares are classified
as Treasury Stock on the balance sheet at December 31, 2001.
16. INCOME TAXES
The Company's deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
The Company has federal and state income tax net operating loss ("NOL") and
research credit carry-forwards at December 31, 2001 for tax purposes available
as follows:
Federal NOL..................................................... $436,236,000
State NOL....................................................... $ 61,041,000
Federal Research Credit......................................... $ 13,204,000
State Research Credit........................................... $ 7,370,000
These federal and state NOL carry-forwards expire in the years 2002 through
2021 and 2002 through 2006, respectively. The federal and state research credit
carry-forwards expire in the years 2002 through 2021.
Due to a change in the ownership of the Company, as defined, a portion of the
federal and state NOL carryover is subject to an annual utilization limitation.
Should another change in ownership occur, future utilization of the Company's
NOL carry-forwards may be subject to additional limitations.
F-21
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
--------------------
DECEMBER 31,
--------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Net operating loss carryforwards........................... $ 151,882 $ 121,069
Credits.................................................... 18,182 16,632
Assets subject to depreciation and amortization............ 12,569 11,700
Deferred revenue........................................... -- 6,744
Other accrued liabilities.................................. 5,856 7,685
--------- ---------
Total deferred tax assets.................................. 188,489 163,830
Valuation allowance........................................ (188,489) (163,830)
--------- ---------
Net deferred tax assets................................. $ -- $ --
========= =========
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
17. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one business segment, using one measurement of
profitability for its business. All long-lived assets are maintained in the
United States. The Company receives revenue from product sales and from
licensing and development of products. The Company received licensing revenue
from partners in the United States, Europe and Asia Pacific.
Revenue by geographic area is as follows:
--------
REVENUES
--------
(IN THOUSANDS)
December 31, 2001:
United States...................................................... $31,241
International...................................................... 16,104
-------
Total............................................................. $47,345
=======
December 31, 2000:
United States...................................................... $12,624
International...................................................... --
-------
Total............................................................. $12,624
=======
December 31, 1999:
United States...................................................... $22,002
International...................................................... 6,353
-------
Total............................................................. $28,355
=======
18. RELATED PARTY TRANSACTIONS
At December 31, 2001, we had notes receivable from three officers. The first
note is in the amount of $280,040 with interest at 5.18% per annum, due and
payable on February 28, 2002. The maturity date of the note agreement was
amended to February 28, 2003. 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 as Other Assets on the balance sheet at December 31, 2001.
F-22
SCIOS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The second note is in the amount of $16,666 with interest at 5.82% per annum.
This loan will be forgiven in 2002 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 loan is classified as Other Assets on the balance sheet at December 31,
2001.
The third note is in the amount of $150,000 with interest at 10.0% per annum.
This loan will be forgiven in 2006 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 loan is classified as Other Assets on the balance sheet at December 31,
2001.
We also have loans to four senior managers in the amount of $482,698 with
interest rates from 4.83% to 10%. These loans were granted in connection with
housing subsidies for the individuals to live in California. These loans are
classified as Other Assets on the balance sheet at December 31, 2001.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize the quarterly financial data for the last two
fiscal years:
------------------------------------------------
FISCAL 2001 QUARTER ENDED
------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total revenues.................... $11,943 $ 5,241 $ 19,614 $ 10,547
Loss from operations.............. (4,017) (18,121) (12,869) (30,169)
Net loss.......................... (4,223) (18,273) (11,167) (28,834)
Basic and diluted net loss per
share........................... $ (0.11) $ (0.46) $ (0.25) $ (0.63)
------------------------------------------------
FISCAL 2000 QUARTER ENDED
------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total revenues.................... $ 3,225 $ 3,066 $ 2,816 $ 3,517
Loss from operations.............. (9,535) (9,991) (10,374) (12,472)
Net loss.......................... (9,525) (10,309) (10,484) (12,204)
Basic and diluted net loss per
share........................... $ (0.25) $ (0.27) $ (0.28) $ (0.32)
F-23
EXHIBIT INDEX
EXHIBIT
NUMBER REFERENCE
- ------ ---------
3.1 Certificate of Incorporation......................................................................... Q
3.1(a) Certificate of Amendment of Certificate of Incorporation.............................................
3.2 Bylaws............................................................................................... J
4.1 Certificate of Designation of Series B Preferred Stock of Scios Inc..................................
4.2 For a discussion of certain registration rights in favor of Genetech, Inc., see Exhibits 10.33, 10.34
and 10.41............................................................................................ Q,V
10.1 Biotechnology Research Partners, Ltd. Agreement of Limited Partnership dated October 29, 1982;
Development Contract, Technology License Agreement and Joint Venture Agreement between
Biotechnology Research Partners, Ltd. and the Registrant dated December 29, 1982; Promissory
Note dated December 29, 1982; and Memorandum of Understanding between Battery Park Credit
Company and Biotechnology Research Partners, Ltd. dated December 28, 1982............................ A
10.2* 1983 Incentive Stock Option Plan, as amended, and form of Stock Option Agreement, Promissory
Note and Pledge Agreement............................................................................ E
10.3 Common Stock Purchase Agreement dated April 15, 1985 between the Registrant and American
Home Products Corporation............................................................................ B
10.5* 1986 Supplemental Stock Option Plan, as amended, and form of Stock Option Agreement,
Promissory Note and Pledge Agreement................................................................. E
10.6 Rights Exercise Agreement between the Registrant and American Home Products Corporation dated
February 28, 1986 and Letter of March 26 and May 16, 1986............................................ B
10.11* 1992 Equity Incentive Plan........................................................................... H
10.18 Form of Purchase Option Agreement between each of the limited partners of Nova Technology
Limited Partnership and Nova......................................................................... I
10.19* Non employee Director Stock Option Plan.............................................................. G
10.29 CNS Psychiatric Products Agreement dated June 30, 1990 between SmithKline Beecham
Corporation and Nova................................................................................. N
10.33 Preferred Stock Purchase Agreement dated December 30, 1994 between the Registrant and
Genentech, Inc....................................................................................... Q
10.34 Note Agreement dated December 30, 1994 between the Registrant and Genentech, Inc. (See Exhibit
Number 10.41 below amending the Note Agreement)...................................................... Q
10.35 Assignment of Lease dated March 22, 1995 for premises located at 820 West Maude Avenue,
Sunnyvale, California................................................................................ R
10.38* Employment Letter dated September 8, 1998 between the Registrant and Richard B. Brewer............... T
10.39 Purchase and Sale Agreement and Joint Escrow Instructions (Mountain View Real Estate Sale) dated
May 24, 1999 between Alexandria Real Estate Equities, Inc. and Registrant's wholly owned
Subsidiary Bio-Shore Holdings, Ltd. Portions of the exhibit have been omitted pursuant to a request
for confidential treatment........................................................................... U
10.41 First Amendment to Note Agreement and Preferred Stock dated November 3, 1999 between the
Registrant and Genentech, Inc. (See Exhibit 10.34 above)............................................. V
10.42 Promissory Note dated December 27, 1999 by the Registrant to Chiron Corporation...................... V
10.43* Change of Control Severance Plans with Employees, Officers and Chief Executive Officer............... V
10.44 Alliance Agreement dated January 10, 2001 between the Registrant, Innovex L.P. and PharmaBio
Development Inc. (including a Warrant Agreement between the Registrant and PharmaBio
Development Inc. attached thereto as Exhibit B). Portions of the exhibit have been granted
confidential treatment............................................................................... W
EXHIBIT
NUMBER REFERENCE
- ------ ---------
10.45 Amendment No. 4 to Lease dated January 22, 1993 for the premises located at 820 West Maude
Avenue, Sunnyvale, California (See Exhibit 10.35 above)................................................ Y
10.46 Lease Agreement dated November 17, 1995 for premises located at 820 West Maude Avenue,
Sunnyvale, California.................................................................................. Z
10.47 Sublease Agreement dated March 24, 1999 for premises located at 749 North Mary Avenue,
Sunnyvale, California.................................................................................. Z
10.48 First Amendment dated May 28, 2001 to Sublease dated May 24, 1999 for premises located at
749 North Mary Avenue, Sunnyvale, California........................................................... aa
10.49 Amendment No. 5 dated July 24, 2001 to Lease Agreement dated January 22, 1993 for premises
located at 820 Maude Avenue, Sunnyvale, California..................................................... aa
10.50 Letter dated June 10, 2001 to extend leases for premises located at 820 West Maude Avenue,
Sunnyvale, California.................................................................................. aa
10.51 Amended and Restated Alliance Agreement dated November 1, 2001 between the Registrant,
Innovex L.P., Innovex Support Services Limited Partnership and PharmaBio Development Inc.
(including a Warrant Agreement between the Registrant and Pharmabio Development Inc. attached
thereto as Exhibit B). Portions of the exhibit have been omitted pursuant to a request for confidential
treatment..............................................................................................
10.52 Binding Summary of Terms between the Registrant and Glaxo Group Ltd. dated December 20, 2001.
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.............
21.2 Subsidiaries of the Registrant.........................................................................
23.1 Consent of PricewaterhouseCoopers LLP..................................................................
24.1 Powers of Attorney. Reference is made to page 35.......................................................
- --------
* Management contract or compensatory plan or arrangement.
A Filed as an exhibit to Form S-1 Registration Statement (File No. 2-86086),
as amended, and incorporated herein by reference.
B Filed as an exhibit to Form S-1 Registration Statement (File No. 33-3186),
as amended, and incorporated herein by reference.
E Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1988 and
incorporated herein by reference.
G Filed as an exhibit to Form S-8 Registration Statement (File No. 33-39878)
filed on April 8, 1991 and incorporated herein by reference.
H Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1991 and
incorporated herein by reference.
I Filed as an exhibit to Form S-1 Registration Statement (File No. 33-14937)
filed on behalf of Nova Technology Limited Partnership and incorporated
herein by reference.
J Filed as an exhibit to Form S-4 Registration Statement (File No. 33-49846)
filed on July 22, 1992 and incorporated herein by reference.
N Filed as an exhibit to Nova's Annual Report on Form 10-K for fiscal year
1990 and incorporated herein by reference
Q Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1994 and
incorporated herein by reference.
R Filed as an exhibit to Quarterly Report on Form 10-Q for quarter ended March
31, 1995 and incorporated herein by reference.
T Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1998 and
incorporated herein by reference.
U Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference.
V Filed as an exhibit to Annual Report on Form 10-K for fiscal year 1999 and
incorporated herein by reference.
W Filed as an exhibit to Report on Form 8-K dated January 24, 2000 and
incorporated herein by reference.
Y Filed as an exhibit to Annual Report on Form 10-K for fiscal year 2000 and
incorporated herein by reference.
Z Filed as an exhibit to Annual Report on Form 10-K/A (Amendment No. 2) for
fiscal year 2000 and incorporated herein by reference.
aa Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.