ITEM 1. BUSINESS - ----------------
GENERAL
Any statements contained in this Annual Report on Form 10-K by Centocor, Inc. ("Centocor" or the "Company") that are forward looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward looking statements involve risks and uncertainties including economic, competitive, governmental, technological and other factors which may affect the Company's business and prospects.
Centocor is a biotechnology company whose mission is to develop and commercialize novel therapeutic and diagnostic products and services that solve critical needs in human health care. The Company concentrates on research and development, manufacturing and market development, with a primary technological focus on monoclonal antibodies and DNA-based products.
The Company has two therapeutic products approved for sale and several product candidates in various stages of development. ReoPro is marketed by Eli Lilly and Company ("Lilly") and sold in a number of markets including, but not limited to, the United States and Europe for the reduction of acute ischemic cardiac complications in patients undergoing angioplasty procedures who are at high risk for abrupt artery closure. Panorex is marketed by Glaxo Wellcome plc ("Glaxo Wellcome") and sold in Germany as an adjuvant therapy in the treatment of post- operative colorectal cancer. The Company also markets several diagnostic products for cancer and infectious disease in the United States, certain European countries and Japan.
At December 31, 1996, Centocor had approximately 545 full-time employees. To complement its own expertise in various fields, Centocor utilizes scientific consultants and other advisors, many of whom have formal consulting agreements with Centocor.
Centocor was incorporated in Pennsylvania in 1979 and maintains its principal executive offices at 200 Great Valley Parkway, Malvern, Pennsylvania, 19355. Its telephone number is (610) 651-6000. The Company also maintains facilities in Leiden, The Netherlands, and Guildford, the United Kingdom, and an office in Tokyo, Japan.
COMPANY STRATEGY
The Company's strategy is to identify proprietary high value-added product opportunities, and to commercialize those opportunities by focusing on clinical development, regulatory processes, manufacturing and market development. The Company seeks to license technology and product candidates from research institutions and other biotechnology companies, in addition to conducting selected basic research.
In an effort to reach the market in an expeditious manner, create competitive barriers and establish itself as the market leader, the Company's clinical development and regulatory strategy for its therapeutic products is to pursue initial approval for a narrowly defined indication. The Company then seeks to expand the indications for which the products may be marketed by conducting additional clinical trials. The Company maintains and seeks strategic alliances with major pharmaceutical companies for the commercialization and marketing of each of its therapeutic products, pursuant to which the Company and its respective partners jointly focus on the continued clinical and market development for the products, while the Company's partners primarily conduct the marketing, promotion and distribution of such products. With regard to the Company's CenTNF product (see "Therapeutic Products - CenTNF"), however, the Company is evaluating the possibility of directly participating in the promotion and marketing of such product in the United States.
In the diagnostics area, the Company seeks to expand the markets for its existing products while focusing on the development of unique assays that complement the automated diagnostic instruments developed by its
marketing partners. The Company believes that the experience it acquires in developing therapeutic products may help it define diagnostic product opportunities and vice versa. Based on this experience, the Company is seeking to develop diagnostic products that can increase the effectiveness, and thereby the utilization of, its therapeutic products. For instance, the Company has developed assays to evaluate platelet function. Such assays are currently being studied in conjunction with ReoPro clinical trials to target patients that can benefit from ReoPro therapy. Also, the Rapid Rare Event Detection (RRED) System allows the Company to perform tests on cells rather than circulating markers like tumor markers. Initial clinical applications include the detection of minimal residual disease in patients that may benefit from Panorex therapy. The Company maintains and seeks distribution agreements for its diagnostic products with companies having established positions and distribution networks in applicable market segments.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table summarizes Centocor's products and selected product candidates. This table is qualified in its entirety by reference to the more detailed descriptions included elsewhere in this Annual Report on Form 10-K.
(1) Phase III clinical trial indicates that the product is being tested in humans for safety and efficacy in an expanded patient population at multiple clinical sites. Phase I and Phase II clinical trials indicate that the product is being tested in humans to evaluate safety, dosage and, to some extent, efficacy, in a limited patient population.
THERAPEUTIC PRODUCTS
Sales of the Company's therapeutic products were approximately $90.7 million and $22.1 million for the years ended December 31, 1996 and 1995, respectively.
ReoPro. Antithrombotic agents such as ReoPro are used in the treatment of cardiovascular disease to prevent blood clots. The three main markets for these agents are angioplasty, unstable angina and myocardial infarction (heart attack). Effective platelet inhibiting treatment is needed in angioplasty to prevent abrupt reclosure and restenosis and in unstable angina to prevent resulting heart attacks and death. Abrupt reclosure, which occurs in about 5-8% of angioplasty cases and in 12-14% of more complicated high-risk cases, can result in death, myocardial infarction, the need for emergency coronary bypass surgery or repeat PTCA. Powerful agents are also needed to enhance treatment of myocardial infarction by effectively opening the clotted artery and preventing reocclusion following drug therapy. ReoPro is effective in inhibiting blood clotting by inhibiting the aggregation of platelets. When platelets are stimulated, a number of different types of surface receptors are exposed that cause further platelet aggregation, including the glycoprotein ("GP") IIb/IIIa receptors. ReoPro is a chimeric monoclonal antibody fragment that binds to GP IIb/IIIa receptors on the surface of platelets, thereby inhibiting platelet aggregation.
Following the successful completion of the EPIC Phase III clinical trial of ReoPro and subsequent U.S. Food and Drug Administration ("FDA") approval, the Company commenced commercial sales of ReoPro in January 1995 for patients who are at high risk for abrupt artery closure following angioplasty. ReoPro is currently marketed in a number of countries within North America, South America, and Europe as well as several other markets throughout the world. Under a Sales and Distribution Agreement between Lilly and the Company, Lilly is the exclusive worldwide distributor of ReoPro except in Japan where the product, if approved, will be exclusively
distributed by Fujisawa Pharmaceutical Co., Ltd. ("Fujisawa"). See "Business-- Marketing and Sales." Pursuant to those agreements, Lilly is assisting the Company in the regulatory filings and continuing development of ReoPro for additional clinical indications and Fujisawa is assisting the Company in the regulatory filings and development of ReoPro in Japan.
The following summarizes the two most recently completed Phase III clinical trials of ReoPro:
EPILOG Trial for All Angioplasty. The EPILOG trial was a randomized, double-blind, placebo-controlled trial, originally designed to enroll 4,800 patients at 65 sites in the United States and Canada, to evaluate 30-day and 6-month clinical outcomes in all patients following angioplasty procedures. This trial excluded the heart attack and unstable angina patient groups that were evaluated in the EPIC trial because ReoPro had already demonstrated efficacy in these patients and was already approved for use in these groups. Because an interim analysis of the first 1,500 patients enrolled in the trial revealed approximately a 70% reduction in death and heart attack rates within 30 days of the angioplasty procedure for patients receiving ReoPro, the EPILOG study was halted in December 1995 on the recommendation of the EPILOG independent Safety and Efficacy Monitoring Committee. This result was highly statistically significant (p less than.0001). Additionally, the EPILOG independent Safety and Efficacy Monitoring Committee concluded that major bleeding events in patients receiving ReoPro were at essentially the same level as patients receiving placebo. In October 1996 the Company announced that the EPILOG trial demonstrated that ReoPro achieved a statistically significant improvement versus placebo at six months in the primary composite end-point of death, heart attack and revascularization. The EPILOG results show ReoPro continues to have a positive impact for patients undergoing angioplasty six months after the operation. The number of deaths and heart attacks were reduced by 46 percent six months after angioplasty. Death rates were reduced by 6 for every 1,000 patients, while 49 fewer heart attacks occurred for every 1,000 patients. The Company filed for regulatory approvals in the United States for the expanded indication in February 1997 and expects to file for additional regulatory approvals in Europe in early 1997.
CAPTURE Trial for Unstable Angina. Unstable angina is a condition that commonly precedes a heart attack. It is caused by inadequate blood supply to the heart due to the build-up of atherosclerotic plaque in the coronary artery. The CAPTURE trial was a randomized, double-blind, placebo- controlled trial originally designed to enroll 1,400 patients at 75 sites in Europe, to evaluate ReoPro in patients scheduled for urgent angioplasty procedures due to refractory unstable angina. Because of positive findings after an analysis of the first 1,050 patients enrolled in the trial, the CAPTURE study was halted in December 1995 on the recommendation of the CAPTURE independent Safety and Efficacy Monitoring Committee. The CAPTURE independent Safety and Efficacy Monitoring Committee determined that efficacy exceeded the predetermined stopping point, (p less than.0072), on the trial's primary end-point, which was defined as a reduction in a composite of death, heart attacks and the need for urgent intervention within 30 days. Additionally, in patients receiving ReoPro, the rate of major bleeding was markedly lower than in the EPIC trial. The Company filed for regulatory approvals in the United States for the expanded indication in February 1997 and expects to file for additional regulatory approvals in Europe in early 1997. The expanded indication is for stabilization of unstable angina patients not responding to conventional therapy who may be candidates for PTCA.
The Company and Lilly are evaluating other potential indications for ReoPro, including acute myocardial infarction and thrombotic strokes. The Company and Lilly are conducting the RAPPORT Phase IV trial to study the effect of ReoPro in patients undergoing angioplasty procedures for acute myocardial infarction. The Company is also conducting a Phase II trial with ReoPro in combination with thrombolytic therapy for patients suffering acute myocardial infarction. Additionally, the Company and Lilly are conducting the EPILOG Stent Phase III trial and ERASER Phase IV trial to evaluate the effects of ReoPro in conjunction with stents. The Company and Fujisawa are currently conducting Phase II clinical trials of ReoPro in Japan.
The Company estimates that in the United States there were about 500,000 angioplasties performed last year. In addition, in the United States, the incidence of unstable angina is about 1 million, acute myocardial infarction (heart attack) 1 million, stroke 500,000 and peripheral vascular disease 500,000. All of these procedures and/or conditions are impacted by platelet activation and as a result, ReoPro may have utility.
In addition to conducting studies to test the efficacy of ReoPro, the Company has conducted a health economic study, based on the EPIC trial (high- risk angioplasty), which has been cleared for promotional use by the FDA and which indicates that the use of ReoPro is cost effective and may allow hospitals to manage their resources more effectively and reduce the amount of time patients spend in the hospital. In the EPILOG trial (all angioplasty), major bleeding events in patients receiving ReoPro were at essentially the same level as in patients receiving placebo. The decreased need for blood transfusions may result in additional cost savings to hospitals.
CenTNF. The Company is currently developing CenTNF, a chimeric monoclonal antibody that binds to tumor necrosis factor alpha, which is believed to be critical to the human body's reaction to inflammation. CenTNF is primarily targeted for the treatment of rheumatoid arthritis and inflammatory bowel diseases such as Crohn's disease.
The Company has completed a number of Phase II clinical trials of CenTNF in both moderate-to-severe Crohn's disease and severe rheumatoid arthritis patients. The Company is planning to initiate Phase III trials for these indications in 1997.
The Company has entered into an agreement with Tanabe Seiyaku Co., Ltd. ("Tanabe") under which Tanabe has commenced Phase II clinical testing and has the right to distribute CenTNF in Japan. Additionally, the Company is seeking to enter into an alliance arrangement with a partner regarding CenTNF for other parts of the world.
According to Company estimates, in the United States there are approximately one million patients with severe rheumatoid arthritis. The Company also believes that in the United States there are approximately 250,000 patients with Crohn's disease in its moderate-to-severe form.
Panorex. Panorex is a monoclonal antibody that targets metastatic colon cancer cells. The Panorex antibody binds to colon cancer cells and destroys them using various immunologic mechanisms including complement and/or antibody dependent cellular cytotoxicity. Both mechanisms result in the death of the cancer cells. In patients with colorectal cancer, it is thought that small numbers of cells break away from the primary tumor and spread to other sites such as bone marrow, where they can be detected as "micrometastatic cells" even after surgical removal of the primary tumor. It is thought that the Panorex antibody binds to these "micrometastatic cells" and destroys them, leading to the prolonged survival observed in patients treated with Panorex. Panorex is the first monoclonal antibody product approved for cancer. In December 1994, the Paul Ehrlich Institute, the German regulatory body for vaccines and antibodies, granted the Company marketing authorization for the use of Panorex as an adjuvant therapy in the treatment of post-operative colorectal cancer. During 1993, the Company and Glaxo Wellcome entered into an alliance agreement for the development and marketing of certain of the Company's monoclonal antibody-based cancer therapeutic products, including Panorex. Pursuant to that agreement Glaxo Wellcome is the worldwide distributor of Panorex. See "Business--Marketing and Sales." The Company commenced commercial sales of Panorex in Germany in February 1995.
In a Phase III trial conducted in Germany, Panorex showed a five-year 30% mortality benefit and 27% reduction in tumor recurrences. Glaxo Wellcome is conducting additional Phase III trials for Panorex, with a three-year survival end-point, in North America, Europe and certain other countries, evaluating patients with colorectal cancer, and also is conducting earlier stage trials in Japan.
Corsevin M. The Company is developing Corsevin M, an anti-factor VII chimeric monoclonal antibody product intended to be used as an anticoagulant. Factor VII is one of the primary factors that play a role in the blood clotting process. The Company has completed a Phase I clinical trial and is evaluating protocols for additional clinical trials.
DNA-Based Products. The Company is developing genetic DNA-based products employing commonly available methods to direct the injected DNA to its target site. The Company has licensed GeneVax technology from a private company, in which the Company holds a significant equity investment. Under that license, the Company has certain rights to develop the GeneVax technology in the cancer field. The Company has supplemented this
technology license by acquiring complementary technologies from other institutions. The Company expects to initially focus its development efforts on vaccines for prostate, breast and colorectal cancer. In 1997, the Company commenced Phase I clinical trials to evaluate vaccines for colorectal cancer.
DIAGNOSTIC PRODUCTS
Sales of the Company's diagnostics products were approximately $41.4 million and $42.9 million for the years ended December 31, 1996 and 1995, respectively.
In-vitro diagnostic products are used to test patient blood samples outside the body to detect or monitor disease. In this area, the Company has focused principally on developing cancer diagnostic assays, and other invitro diagnostic products for infectious disease. In addition, the reclassification by the FDA in September, 1996 of tumor markers used for monitoring patients with previously diagnosed cancer may increase the likelihood and speed of approval for products within this classification in the United States. A number of the Company's diagnostic assays including CA 125 II, CA 15-3, CA 19-9, CA 72-4 and CYFRA 21-1 fall under this tumor marker classification. The Company currently manufactures and sells the following invitro diagnostic products:
CA 125 II Ovarian Cancer Test. CA 125 II, a second generation assay which aids in the detection of residual epithelial ovarian cancer following first-line therapy, is sold in the United States, certain European countries and Japan. CA 125 II is one of only six cancer diagnostics products approved for sale in the United States.
CA 19-9 Pancreatic Cancer Test. CA 19-9, which aids in the monitoring of pancreatic cancer, is sold in certain European countries and Japan.
CA 15-3 Breast Cancer Test. CA 15-3, which aids in the monitoring of breast cancer, is sold in certain European countries and Japan.
CA 72-4 Gastric Cancer Test. CA 72-4, which aids in the monitoring of gastrointestinal cancer, is sold in certain European countries and Japan.
P-glycoCHEK Multidrug Resistance Test. P-glycoCHEK, which detects a cellular protein associated with resistance to chemotherapeutic drugs, is sold for investigational use in certain European countries and Japan.
CYFRA 21-1 Non-Small Cell Lung Cancer Test. CYFRA 21-1, which aids in the monitoring of non-small cell lung cancer, is sold in certain European countries and Japan.
CAPTIA Syphilis G. CAPTIA Syphilis G, an infectious disease serology test for use as a primary screening method for the detection of Treponema pallidum antibodies in human serum or plasma, as performed in blood bank or plasma center testing laboratories, is offered for sale in the United States and certain European and South American countries.
CAPTIA CMV. CAPTIA CMV, an infectious serology test for use as a primary screening method for the detection of cytomegalovirus antibodies in human serum or plasma, as performed in blood bank or plasma center testing laboratories, is offered for sale in the United States and certain European countries.
The Company has developed techniques for modifying monoclonal antibodies so that they may be coupled with radioactive isotopes and used as contrast agents in diagnostic imaging procedures. After injection, antibodies labeled with a radioactive isotope travel to the disease site, allowing the site to be visualized or "imaged" with nuclear medicine equipment in a procedure similar to an X-ray. The Company's focus in this area is primarily on developing imaging agents for cardiovascular disease.
Myoscint. Myoscint is an anti-myosin monoclonal antibody that, when radio-labeled, may be useful in the detection of damage to heart tissue caused by transplantation, myocardial infarction, chemotherapy and viral infection. The Company has received marketing approvals for Myoscint in the United States, several European
countries and Japan. Revenues from the sale of Myoscint on a worldwide basis have not been significant. There can be no assurance that future Myoscint sales on a worldwide basis will be significant.
PLATELET FUNCTION DIAGNOSTICS
In connection with the development and marketing of ReoPro, the Company has recognized the importance of platelet function in cardiovascular disease. Based upon its knowledge in this area, the Company is developing assays intended to enable interventional cardiologists to rapidly assess platelet function and to better risk stratify patients with potentially serious cardiovascular disease. Additionally, the Company is collaborating in the development of devices which, if developed, may permit medical experts to monitor platelet activity and the effect of drugs such as ReoPro with the same precision with which they currently evaluate other aspects of blood coagulation and treatment. The Company believes that the availability of this type of monitoring may address currently unmet medical needs in the hospital emergency room, catheterization lab and coronary care unit. There can be no assurance that the Company will be able to complete the development of these programs or obtain the regulatory approvals necessary for the commercial sale of products.
CELLULAR DIAGNOSTICS
Based upon the Company's experience with Panorex, the Company believes that the ability to rapidly detect rare cancer cells in blood, bone marrow and other tissues could be useful to oncologists as a tool to enable them to select appropriate treatments for cancer patients and then monitor the effectiveness of those treatments. The Company is collaborating with a computer software company to develop a computer-driven high-powered microscope known as the Rapid Rare Event Detection ("RRED") System that utilizes reagents developed by the Company. The Company and its partner have developed a working prototype of the RRED System that has entered clinical trials for validation. In addition, the Company has commenced discussions with other diagnostic companies that may be interested in manufacturing and marketing the RRED System.
Although the Company's initial focus with respect to the RRED System is the oncology field, the Company believes that the RRED System technology may be equally useful in the fields of infectious disease and prenatal testing. There can be no assurances that the Company will be able to complete the development of the RRED System or obtain the regulatory approvals necessary for the sale of the RRED System.
MARKETING AND SALES
In the therapeutic area, the Company maintains separate strategic alliances with major pharmaceutical companies for each of its two commercialized products, pursuant to which, in each case, the Company and its respective partner jointly focus on the continued clinical and market development for the product, while the Company's partner primarily conducts the marketing, promotion and distribution of such product. With regard to the Company's CenTNF product, the Company is evaluating the possibility of directly participating in the promotion and marketing of such product in the United States. In the diagnostics area, the Company maintains distribution agreements with companies having established positions and distribution networks in applicable market segments for the Company's products. The Company is highly dependent upon the ability of its marketing partners to develop and expand markets for the Company's products.
Pursuant to the Sales and Distribution Agreement between Lilly and the Company, Lilly is the exclusive worldwide distributor of ReoPro except in Japan, where the product, if approved, will be exclusively distributed by Fujisawa. The Company sells ReoPro to Lilly for Lilly's further sale to the end market. The Company is principally responsible for developing and manufacturing ReoPro and for securing regulatory approvals. Lilly is principally responsible for the marketing, selling and distribution of ReoPro, except in Japan.
Pursuant to the Company's agreement with Fujisawa, consummated in August 1996, Fujisawa became the exclusive distributor of ReoPro in Japan. Following approval, if any, of ReoPro for sale in Japan, the Company will
sell ReoPro to Fujisawa for Fujisawa's further sale to the end market in Japan. Fujisawa and the Company are co-developing ReoPro in Japan and will seek to jointly secure regulatory approvals.
Pursuant to the Company's alliance agreement with Glaxo Wellcome, Glaxo Wellcome is the exclusive worldwide distributor for Panorex. The Company sells Panorex to Glaxo Wellcome for Glaxo Wellcome's further sale to the end market. Glaxo Wellcome is responsible for the continuing clinical development, marketing, sales and distribution of Panorex. The Company is principally responsible for manufacturing Panorex, providing limited clinical support and securing regulatory approvals.
During 1996, approximately 67% of the Company's total product sales were to one customer, Lilly. During 1995, approximately 50% of the Company's total product sales were to three customers as follows: 24% to Lilly, 11% to Glaxo Wellcome and 15% to Toray-Fuji Bionics, Inc. During 1994, approximately 60% of the Company's total product sales were to four customers, as follows: 10% to Abbott Laboratories, 12% to Boehringer Mannheim GmbH, 13% to CIS bio International and 25% to Toray-Fuji Bionics, Inc.
Certain financial information by geographic area as well as major customer information is set forth in Part II, Item 8. "Financial Statements and Supplementary Data", Note 11 - Geographic and Customer Information.
The Company has no significant product backlog.
RESEARCH AND DEVELOPMENT
Centocor's research and development activities focus primarily on monoclonal antibody technology and proprietary techniques to modify monoclonal antibodies in search of optimal therapeutic agents. Centocor believes that there is significant potential for using monoclonal antibodies to develop human health care products. While the specificity of monoclonal antibodies makes them attractive candidates for therapeutic product development, antibody-based products generally must be administered by injection, usually in a hospital setting, and are therefore used principally to treat acute diseases. The Company's ability to select effective hybridomas and to produce antibodies from them is central to its business. An understanding of the structure and function of antibodies is necessary in order to modify them for incorporation into diagnostic or therapeutic products. The Company has developed techniques for characterizing an antibody with respect to its structure, specificity and binding ability which are used in an effort to select the best antibody for a particular application.
The Company carries out research efforts in the use of recombinant DNA techniques to manipulate the genetic structure of antibody-producing cells. These efforts are intended to create re-engineered antibodies that combine the desired properties of more than one antibody, or the desired properties of antibodies and other system-regulating biochemicals such as enzymes.
The Company has also expanded its research platform to include the field of DNA-based products for both therapeutic and diagnostic applications.
For the three years ended December 31, 1996, 1995 and 1994, the Company's research and development expenses were $56,787,000, $66,235,000 and $70,003,000, respectively.
PATENTS AND LICENSING ARRANGEMENTS
Products currently being marketed, developed or considered for development by the Company are in the area of biotechnology, an area in which there are extensive patent filings. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that patent applications owned or licensed by the Company will result in patents being issued or that, if issued, such patents will afford protection against competitors with similar technology. In addition, there can be no assurance that products covered by such patents, or any other products developed by the Company or subject to licenses
acquired by the Company, will not be covered by third party patents, in which case continued development and marketing of such products would require a license under such patents. There can be no assurance that such required licenses will be available to the Company or its licensees on acceptable terms.
Other entities have filed applications for or have been issued patents and are expected to obtain additional patents to which the Company may need to acquire rights. The extent to which the Company may need to obtain rights to any such patents or to contest their scope or validity will depend on final product formulation and other factors. The ability to license any such patents and the likelihood of successfully contesting the scope or validity of such patents are uncertain and the costs associated therewith may be significant. If the Company is required to acquire rights to valid and enforceable patents but cannot do so at a reasonable cost, the Company's ability to manufacture or market its products in the country of issuance of any such patent may be materially adversely affected.
There has been substantial litigation regarding patent and other intellectual property rights in the biotechnology industry. Litigation may be necessary to enforce certain intellectual property rights of the Company. Any such litigation could result in substantial cost to and diversion of effort by the Company.
Centocor currently licenses the majority of the cell lines used to produce its monoclonal antibodies from research institutions pursuant to long-term licenses for which it is generally obligated to pay royalties based upon sales of products incorporating such antibodies. There can be no assurance that others will not acquire rights to such cell lines in the future.
The Company organized Centocor Partners III, L.P. ("CPIII") and other entities to fund the research and development of certain products and/or technology. Under agreements with each of these entities, Centocor licensed certain technology to the entity and performed research and development in such technology areas on behalf of the entity. The Company purchased the ownership interests of all of these entities prior to 1995, with the exception of CPIII, which Class A and Class C interests the Company purchased in January, 1997.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of the Company's products and in ongoing research and product development activities. All of the Company's therapeutic products and most of the Company's diagnostic products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other premarket approval requirements by the FDA and regulatory authorities in other countries. Various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, recordkeeping and marketing of such products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. The Company believes it is currently in compliance with such statutes and regulations. Any failure by the Company to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect the Company and the Company's marketing partners' ability to market the Company's products.
The activities required before a pharmaceutical product may be marketed in the United States begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug application, which must be reviewed by the FDA before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specified disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and safety of the product, as required by the FDA. The results of the preclinical and clinical testing of a chemical pharmaceutical product are then submitted to the FDA in the form of a New Drug Application ("NDA"), or for a biological pharmaceutical product
in the form of a Biological License Application ("BLA"), for approval to commence commercial sales. In responding to an NDA or BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. There can be no assurance that any approval required by the FDA will be obtained on a timely basis, if at all.
Among the conditions for NDA or BLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with Good Manufacturing Practices ("GMP"). Before approval of the BLA, the FDA will perform a prelicensing inspection of the facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any product, it is subject to periodic inspections by the FDA.
The requirements such as those described above which the Company must satisfy to obtain regulatory approval by governmental agencies in other countries prior to commercialization of its products in such countries can be rigorous, costly and uncertain.
The Company is also subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research. The Company believes it is currently in compliance with all such laws and regulations. The extent of additional governmental regulation that might result from any legislative or administrative action cannot be accurately predicted.
The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on the Company. In addition, in both the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging the prices charged for medical products and services. There can be no assurance that either of the therapeutic products the Company has brought to market or any therapeutic product candidates the Company may bring to market in the future will be considered cost effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company to sell its products on a competitive and profitable basis.
SIGNIFICANT COMPETITION AND TECHNOLOGICAL CHANGE
Monoclonal antibody, genetic vaccine, peptide technology and other innovations in biotechnology are being examined, evaluated and practiced in biology research laboratories throughout the United States and in many other countries, including laboratories of other biotechnology companies and major pharmaceutical firms, many of which have greater resources than Centocor.
Several established pharmaceutical companies have internal research and development groups, and alliances with other biotechnology companies, and are seeking to develop monoclonal antibody-based, genetic vaccine-based, peptide- based and other biological products. In addition, a number of companies have recently entered the biological products field, some through acquisition or merger, and more may be expected to do so in the future. As a result, Centocor anticipates that new biological products will be developed by others.
Centocor's management believes that its ability to compete in its targeted markets will depend upon, among other things, its ability to develop, produce and market innovative products. Centocor's management also believes that significant competition will come from established pharmaceutical companies that have greater capital
resources, manufacturing and marketing experience, research and development staffs, sales forces and production facilities than Centocor. Such competition is expected to be in the form of a variety of therapeutic products, which may include monoclonal antibody-based, genetic vaccine-based and peptide-based products. There can be no assurance that the activities of others will not render Centocor's products or technologies obsolete or uncompetitive.
ITEM 2.
ITEM 2. PROPERTIES - ------------------
The Company owns four buildings in Malvern, Pennsylvania, and leases one other building at this location. These buildings contain Centocor's corporate offices, research and development laboratories, marketing offices, and certain manufacturing facilities. Space is available in these buildings for future expansion.
The Company owns a biopharmaceutical manufacturing facility in Leiden, The Netherlands, for the production of monoclonal antibody-based products using a proprietary cell-culture system. This facility has been inspected and approved by the FDA and the equivalent European regulatory agencies. The Company also leases research and development laboratories and office space at this location. The Company manufactures diagnostics products at its facilities in Malvern, Pennsylvania and at a facility it leases in Guildford, England. Each of the Company's diagnostic manufacturing facilities has received ISO-9001 certification.
Each of the Company's lease agreements with respect to its leased facilities is a triple net lease with a remaining term of at least 8 years, under which the Company is responsible for all operating expenses of the facility.
At the Company's current level of operations, portions of the Company's facilities and equipment in Malvern are idle. The Company continually evaluates the future needs for its facilities and equipment and is currently evaluating potential needs for expansion in its Leiden facility to accommodate growth in its therapeutic product production activities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
In October 1992, the Company was served with a complaint filed by the Velos Group, a Maryland partnership ("Velos") in the U.S. District Court for the District of Maryland. The complaint primarily alleged that the Company breached certain provisions of a license agreement between Velos and the Company pursuant to which the Company has exclusive rights to U.S. Patent No. 5,057,598, as well as various patent applications and foreign patents. The complaint sought declaratory relief and monetary relief in excess of $100,000,000, and requested that the Company place in escrow one-half of the amounts received by the Company in 1992 pursuant to its agreements with Lilly. Over the course of the litigation, plaintiff asserted eleven different claims for relief and the Company asserted affirmative defenses and a counterclaim against Velos with respect to the license agreement. After rulings on motions for summary judgment filed by both sides, the majority of plaintiff's claims were dismissed. The case proceeded to trial on February 18, 1997 on plaintiff's four remaining claims under the license agreement and on the Company's affirmative defenses and counterclaim. The parties agreed that plaintiff's claim for attorneys fees under the license agreement would be severed to await the outcome of the trial. On March 4, 1997, the jury returned a verdict which, if it were to become the judgement of the Court, would render the Company liable to pay plaintiff approximately $4,000,000 plus interest fees and expenses pursuant to the license agreement. The Company and its counsel believe the jury's findings are not supported by the evidence and law and will file post-trial motions, and, if necessary, an appeal. Accordingly, no provision has been made in the accompanying financial statements for this matter. The Company believes that the allegations of Velos are without merit and intends to continue vigorously to defend this suit.
On December 23, 1993, a purported class action captioned Peter Cordaro v. Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden, Centocor and Tocor II Inc. ("Tocor II") was filed in the Court of Common Pleas of Chester County, Pennsylvania. The complaint alleges that the defendants breached their fiduciary duties to Tocor II Unitholders by, among other things, making an offer to exchange shares of the Company's Common Stock for Tocor II Units, recommending acceptance of the exchange offer, and failing to maximize shareholder value. The complaint sought, among other relief, an injunction against consummation of the exchange offer, the establishment of a "truly independent" special committee and the retention of a financial advisor to consider the exchange offer, and award of damages (including rescissionary damages), costs and plaintiff's counsel fees. Plaintiff took no additional action to obtain an injunction and the exchange offer was made and consummated. Plaintiff's motion for class certification has been denied and plaintiff has petitioned for rehearing. No trial date has
been fixed. The Company believes that the allegations set forth in the complaint are without merit and intends to vigorously defend this suit.
In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary of Paine Webber Group Inc., caused suits to be filed against the Company by two research and development partnerships formed in the mid-1980s by PaineWebber and managed by it since then. The two PaineWebber partnerships (PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively, investors in Centocor Partners II, L.P. ("CPII") and CPIII, research partnerships for which PaineWebber acted as the sales agent and in other capacities. The Company purchased the limited partners' interests in CPII in February 1992 and that partnership was then dissolved.
The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court of the State of New York, County of New York, and purports to be a class action on behalf of all former limited partners of CPII. The complaint charges that some portion of the $100 million paid by Lilly to the Company in July 1992 constituted revenues to the Company for the licensing, sublicensing or sale of HA-1A(Centoxin) and that the Company is obligated to pay a percentage thereof to the former limited partners of CPII, in addition to amounts already paid. The Company moved to dismiss the New York suit on the ground that it was brought in an inconvenient forum and that motion was granted. The suit has been refiled in the Delaware Superior Court. Discovery is beginning and plaintiff has moved for certification of a class of all former limited partners of CPII, which the Company has opposed. Prior to the dismissal of the New York action, a similar suit was filed by another former CPII partner, Jerome J. Petrisko, in the Court of Common Pleas of Chester County, Pennsylvania. That suit is in its earliest stage. The Company believes that the allegations regarding Centocor in these actions are without merit and intends to vigorously defend them.
The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of Chancery of the State of Delaware. In the complaint in this action, the plaintiff seeks to sue derivatively on behalf of CPIII. CPIII is named as a nominal defendant and the Company and Centocor Development Corporation III ("CDCIII"), a wholly owned subsidiary of the Company which acts as the general partner of CPIII, are named as defendants against whom relief is sought. The claim in this case is that at least $25 million of the money paid by Lilly to the Company in 1992 represented profits from the marketing of ReoPro, obligating the Company to pay a portion thereof to CPIII, and that the Company is obligated to pay an increased percentage of the profits from ReoPro to CPIII going forward. The Company answered the complaint in the Delaware action and filed a cross-claim against nominal defendant CPIII and a third-party complaint against PaineWebber Group Inc. and PaineWebber Development Corporation. The cross-claim seeks an offset against any damages awarded the partners based on theories of unjust enrichment and quasi contract. The third-party claims (since amended to add additional theories of liability and to make PaineWebber, Inc. an additional third-party defendant) seek to hold the PaineWebber entities liable for some or all of any alleged injury to the partnership. On November 1, 1995, an additional suit was commenced in the Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII, against the Company, CDCIII and certain of their officers and directors. The complaint, filed derivatively on behalf of CPIII, asserts claims, inter alia, for breach of contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding and abetting. The Company answered this complaint and also filed a cross-claim against nominal defendant CPIII and a third party complaint against PaineWebber Group Inc. and PaineWebber Development Corporation, since amended to add additional theories of liability and to name PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his complaint to assert claims against the persons appointed by PaineWebber to the CDCIII Board of Directors. That motion was granted. Motions to disqualify PWR&DII from serving as the derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No decision has been issued on those motions. The parties in these suits are considering ways and means to resolve the issues without further litigation.
While it is not possible to predict with certainty the eventual outcome of these matters, the Company believes that the foregoing proceedings will not have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
Not applicable.
Part II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------
The Company's Common Stock is traded publicly on the Nasdaq National Market under the trading symbol CNTO. The table below sets forth the high and low sale prices for the Company's Common Stock for the periods indicated as reported by the Nasdaq National Market.
HIGH LOW ---- ---
Year ended December 31, 1995 First Quarter......................... $21 $14 1/2 Second Quarter........................ 16 3/8 12 1/8 Third Quarter......................... 14 35/64 10 7/8 Fourth Quarter........................ 33 1/8 9 5/8
Year ended December 31, 1996 First Quarter......................... 40 27 5/8 Second Quarter........................ 40 7/8 28 Third Quarter......................... 37 7/8 23 Fourth Quarter........................ 37 3/8 25 1/2
On February 18, 1997, there were approximately 3,534 holders of record of the Common Stock.
In June 1996, the Company and Lilly amended its Sales and Distribution Agreement. In July 1996, in consideration of the amendment and other activities in connection with the commercialization and market development of ReoPro, the Company issued 920,716 shares of its common stock in a private-placement transaction under Section 4(2) of the Securities Act of 1933.
The Company has never declared or paid any dividends on its Common Stock. The Company does not anticipate paying any dividends in the foreseeable future and intends to retain future earnings for the development and expansion of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
No dividends have been declared or paid during any of the periods presented.
(1) Costs and expenses include the following: (a) charges for acquired research and development of $36,966 in 1994, (b) charges of $64,877 and $3,500 in 1992 and 1993, respectively, related to HA-1A inventory, (c) restructuring charges of $15,266, $9,387 and $1,642 in 1992, 1993 and 1995, respectively, (d) a royalty buyout of $17,098 in 1994 and (e) a write-down of facilities and equipment of $7,870 in 1994. (2) Other income (expenses) include charges of $11,245, $1,275 and $3,750 in 1992, 1994 and 1995, respectively, related to the settlement of certain litigation. (3) No shares of Common Stock issuable upon the exercise of stock options or warrants or the vesting of restricted stock awards have been included as their inclusion would have an antidilutive effect because the Company has incurred a net loss in each period presented. (4) Cash and investments at December 31, 1996 include equity investments classified as available for sale of $9,502, and $7,260 of investments maintained at certain banks as collateral for certain debt outstanding at December 31, 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND - ------------------------------------------------------------------------- FINANCIAL CONDITION - -------------------
RESULTS OF OPERATIONS
General
Any statements contained in this Management's Discussion and Analysis of Results of Operations and Financial Condition that are forward looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward looking statements involve risks and uncertainties including economic, competitive, governmental, technological and other factors which may affect the Company's business and prospects.
Centocor is a biotechnology company whose mission is to develop and commercialize novel therapeutic and diagnostic products and services that solve critical needs in human health care. The Company concentrates on research and development, manufacturing and market development, with a primary technological focus on monoclonal antibodies and DNA-based products.
The Company, since inception, has incurred significant operating expenses developing therapeutic and diagnostic products. The Company has also incurred significant special charges. To date, product sales have not produced sufficient revenues to cover the Company's operating expenses. Consequently, the Company has experienced substantial operating losses. The Company's financial results have progressively improved throughout 1996 culminating with the Company achieving profitability in the fourth quarter. The Company expects that its sales of therapeutic and diagnostic products in 1997 will provide sufficient revenues to cover operating expenses and provide net income for the year.
The Company commenced commercial sales of two therapeutic products in 1995: ReoPro in January 1995 and Panorex in February 1995. Because of positive findings at interim analyses, in December 1995 the Company halted two clinical trials of ReoPro designed to expand its authorized use. The Company filed for regulatory approvals in the United States for the expanded indications in February 1997 and expects to file for additional regulatory approvals in Europe in early 1997. The level of the Company's research and development expenses has been primarily dependent upon the extent of clinical trial activity. Further, the impact on the level of future ReoPro sales based upon the early termination of these two trials will depend upon the timing and extent of any future regulatory approvals and the degree of market acceptance of ReoPro.
In June 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of ("Statement 121"), which requires companies to review long-lived assets and certain identifiable intangibles to be held, used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company adopted Statement 121 in 1996 which did not have a significant effect on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which was effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company adopted Statement 123 in 1996 and elected to continue to measure stock based compensation using the intrinsic value based method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued to Employees and accordingly, the Company did not recognize compensation cost in the consolidated financial statements for options granted. The Company discloses pro forma financial information valuing stock based compensation using the fair value based method of accounting. See Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONT'D.)
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
CENTOCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 1 DESCRIPTION OF BUSINESS
Centocor, Inc.("Centocor" or the "Company") is a biotechnology company whose mission is to develop and commercialize novel therapeutic and diagnostic products and services that solve critical needs in human health care. The Company concentrates on research and development, manufacturing and market development, with a primary technological focus on monoclonal antibodies and DNA-based products.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation ---------------------
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and a 75% interest in a joint venture. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Investments -----------
The Company classifies investments with original maturities of three months or less as cash equivalents. Investments with maturities of one year or less are classified as short-term.
Short-term marketable securities are carried at cost, which approximates market value. Long-term debt securities which the Company has the ability and intent to hold until maturity are carried at amortized cost. The equity investments classified as available for sale are carried at estimated fair value with unrealized gains and losses recorded as a component of shareholders' equity. The Company also classifies certain investments as trading securities which are carried at fair value with the unrealized gains and losses reported in earnings.
Inventory ---------
Inventory is stated at the lower of cost or market value using the first- in, first-out method for diagnostic and pharmaceutical product inventories.
Inventories have various expiration dates. Reserves are provided for inventories which are likely to expire prior to sale or are likely to otherwise not be available for sale.
Property, plant and equipment and depreciation ----------------------------------------------
Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, the depreciable lives are as follows:
Equipment, furniture and fixtures 3-5 years Land improvements 10 years Leasehold improvements 10 years Building and building improvements 31.5 years
Notes to Consolidated Financial Statements
Leasehold improvements are amortized over the applicable lease period or their estimated useful lives, whichever is shorter. Maintenance and repairs are charged to expense, and major renewals and improvements are capitalized.
Intangible and Other Assets ---------------------------
Intangible and other assets are stated at cost, net of accumulated amortization. Amortization is provided using either the straight-line method or more applicable methods over the estimated useful lives of the assets, generally 3 to 20 years. Licensing agreements, goodwill and other assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is evaluated by using identified or expected cash flows.
Revenue Recognition -------------------
For contracts under which the Company is reimbursed for expenses, revenue is recognized as the related expenses are incurred. Non-refundable fees or milestone payments in connection with research and development or commercialization agreements are recognized when they are earned in accordance with the applicable performance requirements and contractual terms. Payments received which are related to future performance are deferred and recognized as revenue over the specified future performance periods.
Sales revenues are recognized at the time the goods are shipped or when title to the goods passes to the buyer.
Income Taxes ------------
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." The Company has net operating loss carryforwards for tax purposes that begin to expire in 2005. Since realization of the tax benefit associated with these carryforwards is not assured, a valuation allowance was recorded against this tax benefit. In addition, pursuant to the Tax Reform Act of 1986, the annual utilization of these losses may be limited. The Company believes that any such limitation will not have a material impact on the utilization of these carryforwards.
Per Share Data --------------
Per share data are calculated using the weighted average number of outstanding shares of Common Stock. Common Stock issuable upon the exercise of stock options or warrants and upon the vesting of restricted stock awards are included in the per share calculations only to the extent their inclusion would have an aggregate dilutive effect. Common Stock issuable upon conversion of convertible debt securities are included only in the fully diluted per share calculations to the extent their inclusion would have a dilutive effect.
Foreign Currency Translation ----------------------------
Assets and liabilities of subsidiaries denominated in foreign currencies are translated at rates in effect at the appropriate year-end. Revenues and expenses of such subsidiaries are translated at average rates of exchange for the period of operation. The differences resulting from such translation as compared to the equity of such subsidiaries translated at historical rates are included in cumulative foreign currency translation adjustments, a separate component of shareholders' equity. The Company believes that the aggregate foreign currency transaction gains/losses do not have a significant effect on its financial statements.
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments -----------------------------------
The FASB issued Statement of Financial Standards No.107, Disclosures About Fair Value of Financial Instruments, which defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash and cash equivalents, accounts and contracts receivable, prepaid expenses, interest receivable, other current assets, accounts payable, and accrued expenses reported in the consolidated balance sheets equal or approximate fair value due to their short maturities. See Note 9 for information regarding the fair value of the Company's long-term debt and notes payable.
New Accounting Standards ------------------------
In June 1995, the FASB issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of ("Statement 121"), which requires companies to review long-lived assets and certain identifiable intangibles to be held, used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company adopted Statement 121 in 1996 which did not have a significant effect on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which was effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company adopted Statement 123 in 1996 and elected to continue to measure stock based compensation using the intrinsic value based method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued to Employees and accordingly, the Company did not recognize compensation cost in the consolidated financial statements for options granted. The Company disclosed pro forma financial information valuing stock based compensation using the fair value based method of accounting. See Note 10 - Shareholders' Equity.
Note 3 COMMITMENTS AND CONTINGENCIES
Liquidity and Capital Resources -------------------------------
The Company has incurred significant operating expenses attempting to develop therapeutic and diagnostic products. To date, the Company's product sales have not produced sufficient revenues to cover the Company's operating costs. Consequently, the Company has experienced substantial net cash outflows, which have been only partially offset by significant contract revenues received through collaborative alliances with pharmaceutical companies and the Company's financing activities. The Company's financial results have progressively improved throughout 1996 culminating with the Company achieving profitability in the fourth quarter.
The Company's future financial condition is dependent upon the reduction of the Company's rate of net cash outflows and, ultimately, upon the achievement of significant and sustained levels of therapeutic product sales. For the year ended December 31, 1996, sales of the Company's products, including ReoPro and Panorex, did not alone generate sufficient revenue to result in positive cash flow for the year. Under the Company's strategy of entering into collaborative alliances with established pharmaceutical companies, the Company generally shares sales revenues from products covered by such arrangements with its partners. The level of future sales of both diagnostic and therapeutic products will be dependent upon several factors, including, but not limited to, the timing and extent of future regulatory approvals of the Company's products, approval and commercialization of competitive products and the degree of acceptance of the Company's products in the marketplace. There can be no assurance that FDA or other regulatory approvals expanding the authorized use of ReoPro and Panorex or permitting the commercial sale of any of the Company's product candidates under development will be obtained. Failure to obtain additional timely FDA or other regulatory approvals for the use of ReoPro and Panorex or other product candidates will have a material adverse effect on the Company.
Notes to Consolidated Financial Statements
Legal Proceedings -----------------
In October 1992, the Company was served with a complaint filed by the Velos Group, a Maryland partnership ("Velos") in the U.S. District Court for the District of Maryland. The complaint primarily alleged that the Company breached certain provisions of a license agreement between Velos and the Company pursuant to which the Company has exclusive rights to U.S. Patent No. 5,057,598, as well as various patent application and foreign patents. The complaint sought declaratory relief and monetary relief in excess of $100,000,000, and requested that the Company place in escrow one-half of the amounts received by the Company in 1992 pursuant to its agreements with Lilly. Over the course of the litigation, plaintiff asserted eleven different claims for relief and the Company asserted affirmative defenses and a counterclaim against Velos with respect to the license agreement. After rulings on motions for summary judgment filed by both sides, the majority of plaintiff's claims were dismissed. The case proceeded to trial on February 18, 1997 on plaintiff's four remaining claims under the license agreement and on the Company's affirmative defenses and counterclaim. The parties agreed that plaintiff's claim for attorneys fees under the license agreement would be severed to await the outcome of the trial. On March 4, 1997, the jury returned a verdict which, if it were to become the judgement of the Court, would render the Company liable to pay plaintiff approximately $4,000,000 plus interest fees and expenses pursuant to the license agreement. The Company and its counsel believe the jury's findings are not supported by the evidence and law and will file post-trial motions, and, if necessary, an appeal. Accordingly, no provision has been made in the accompanying financial statements for this matter. The Company believes that the allegations of Velos are without merit and intends to continue vigorously to defend this suit.
On December 23, 1993, a purported class action captioned Peter Cordaro v. Hubert J.P. Schoemaker, Stelios Papadopoulos, Marc Feldmann, David Golden, Centocor and Tocor II Inc. ("Tocor II") was filed in the Court of Common Pleas of Chester County, Pennsylvania. The complaint alleges that the defendants breached their fiduciary duties to Tocor II Unitholders by, among other things, making an offer to exchange shares of the Company's Common Stock for Tocor II Units, recommending acceptance of the exchange offer, and failing to maximize shareholder value. The complaint sought, among other relief, an injunction against consummation of the exchange offer, the establishment of a "truly independent" special committee and the retention of a financial advisor to consider the exchange offer, and award of damages (including rescissionary damages), costs and plaintiff's counsel fees. Plaintiff took no additional action to obtain an injunction and the exchange offer was made and consummated. Plaintiff's motion for class certification has been denied and plaintiff has petitioned for rehearing. No trial date has been fixed. The Company believes that the allegations set forth in the complaint are without merit and intends to vigorously defend this suit.
In July 1995, PaineWebber Development Corporation, a wholly-owned subsidiary of Paine Webber Group Inc., caused suits to be filed against the Company by two research and development partnerships formed in the mid-1980s by PaineWebber and managed by it since then. The two PaineWebber partnerships (PaineWebber R&D Partners, L.P. and PaineWebber R&D Partners II, L.P.) were, respectively, investors in Centocor Partners II, L.P. ("CPII") and CPIII, research partnerships for which PaineWebber acted as the sales agent and in other capacities. The Company purchased the limited partners' interests in CPII in February 1992 and that partnership was then dissolved.
The suit by PaineWebber R&D Partners, L.P., was filed in the Supreme Court of the State of New York, County of New York, and purports to be a class action on behalf of all former limited partners of CPII. The complaint charges that some portion of the $100 million paid by Lilly to the Company in July 1992 constituted revenues to the Company for the licensing, sublicensing or sale of HA-1A (Centoxin) and that the Company is obligated to pay a percentage thereof to the former limited partners of CPII, in addition to amounts already paid. The Company moved to dismiss the New York suit on the ground that it was brought in an inconvenient forum and that motion was granted. The suit has been refiled in the Delaware Superior Court. Discovery is beginning and plaintiff has moved for certification of a class of all former limited partners of CPII, which the Company has opposed. Prior to the dismissal of the New York action, a similar suit was filed by another former CPII partner, Jerome J. Petrisko, in the Court of Common Pleas of Chester County, Pennsylvania. That suit is in its earliest stage. The Company believes that the allegations regarding Centocor in these actions are without merit and intends to vigorously defend them.
The suit by PaineWebber R&D II, L.P. ("PWR&DII") was filed in the Court of Chancery of the State of Delaware. In the complaint in this action, the plaintiff seeks to sue derivatively on behalf of CPIII. CPIII is named as a nominal defendant and the Company and Centocor Development Corporation III ("CDCIII"), a wholly owned
Notes to Consolidated Financial Statements
subsidiary of the Company which acts as the general partner of CPIII, are named as defendants against whom relief is sought. The claim in this case is that at least $25 million of the money paid by Lilly to the Company in 1992 represented profits from the marketing of ReoPro, obligating the Company to pay a portion thereof to CPIII, and that the Company is obligated to pay an increased percentage of the profits from ReoPro to CPIII going forward. The Company answered the complaint in the Delaware action and filed a cross-claim against nominal defendant CPIII and a third-party complaint against PaineWebber Group Inc. and PaineWebber Development Corporation. The cross-claim seeks an offset against any damages awarded the partners based on theories of unjust enrichment and quasi contract. The third-party claims (since amended to add additional theories of liability and to make PaineWebber, Inc. an additional third-party defendant) seek to hold the PaineWebber entities liable for some or all of any alleged injury to the partnership. On November 1, 1995, an additional suit was commenced in the Delaware Court of Chancery by John E. Abdo, a limited partner of CPIII, against the Company, CDCIII and certain of their officers and directors. The complaint, filed derivatively on behalf of CPIII, asserts claims, inter alia, for breach of contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding and abetting. The Company answered this complaint and also filed a cross-claim against nominal defendant CPIII and a third party complaint against PaineWebber Group Inc. and PaineWebber Development Corporation, since amended to add additional theories of liability and to name PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his complaint to assert claims against the persons appointed by PaineWebber to the CDCIII Board of Directors. That motion was granted. Motions to disqualify PWR&DII from serving as the derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No decision has been issued on those motions. The parties in these suits are considering ways and means to resolve the issues without further litigation.
While it is not possible to predict with certainty the eventual outcome of these matters, the Company believes that the foregoing proceedings will not have a material adverse effect on the Company.
Royalties ---------
The Company is required to make certain future payments to the former limited partners of CCIP and CPII based on sales of products developed by each of the respective partnerships. Subsequent to the exercise by the Company of its option to acquire the limited partnership interests in CPIII in January 1997, the Company is required to make future payments to the former limited partners of CPIII which include payments based on future sales of ReoPro.
Centocor had an exclusive option to purchase the limited partnership interests in CPIII. In January 1997, the Company exercised this option and made an advance payment of approximately $13,598,000 in cash to the Class A and Class C limited partners of CPIII. The Company recorded the $13.6 million payment to the partners of CPIII as a prepaid royalty in January 1997. In addition, the Company is required to make future royalty payments to the former limited partners of CPIII.
The Company has entered into agreements to support research at certain research institutions. These agreements, which grant the Company licenses and/or options to license certain technology resulting from the research, generally require the Company to pay royalties to such institutions on the sales of any products that utilize the licensed technology. Further, the Company has licenses under certain patents, patent applications and technology and pays the licensors or their licensees royalties under such agreements.
All royalties are reflected in cost of sales as incurred. Royalty costs represent a significant percentage of sales.
Product Liability -----------------
The testing and marketing of medical products entails an inherent risk of product liability. The Company maintains limited product liability insurance coverage. Centocor's business may be materially adversely affected
Notes to Consolidated Financial Statements
by a successful product liability claim in excess of any insurance coverage. There can be no assurance that product liability insurance coverage will continue to be available to Centocor in the future on reasonable terms or at all.
Note 4 COLLABORATIVE ARRANGEMENTS
Relationship with Eli Lilly and Company - ---------------------------------------
In July 1992, Centocor and Lilly entered into a Sales and Distribution Agreement later amended in June 1993. Under that Agreement, as amended in June 1993, Centocor is principally responsible for developing and manufacturing ReoPro, and Lilly will assist Centocor in the regulatory filings and continued development of ReoPro for various clinical indications. Also, in the event Centocor cannot manufacture ReoPro or under certain other circumstances, such as material breach of the agreement by or the bankruptcy of Centocor, Lilly has the option to assume the manufacture of ReoPro and assure the continued supply of the product, even to the extent of acquiring Centocor's related manufacturing assets at their independently appraised values.
In June 1996, the Company and Lilly amended its Sales and Distribution Agreement. Under the amendment, Lilly no longer has the right to buy ReoPro for resale in Japan, however, Lilly will maintain its exclusive right to buy and resell ReoPro in the rest of the world. In July 1996, in consideration of the amendment and other activities in connection with the commercialization and market development of ReoPro, the Company issued 920,716 shares of its Common Stock to Lilly.
Relationship with Fujisawa Pharmaceutical Co., Ltd. ---------------------------------------------------
In August 1996, Centocor entered into an agreement with Fujisawa Pharmaceutical Co., Ltd., appointing Fujisawa as the exclusive distributor of ReoPro in Japan. As compensation for its appointment as exclusive distributor in Japan, Fujisawa made a nonrefundable $15,000,000 payment to the Company, and may make future milestone payments.
The Company and Fujisawa will co-develop ReoPro in Japan and jointly file for Japanese product approval. Fujisawa shall bear all external costs associated with the clinical development of ReoPro in Japan.
Relationship with Glaxo Wellcome plc ------------------------------------
In November 1993, Centocor and Glaxo Wellcome entered into an alliance agreement for the development and marketing of certain of Centocor's monoclonal antibody-based cancer therapeutic products, including Panorex. In November 1994, Centocor and Glaxo Wellcome amended their alliance agreement and Glaxo Wellcome became the exclusive worldwide distributor for Panorex. Under the agreement, Glaxo Wellcome is responsible principally for the continuing clinical development of Panorex, and Centocor is responsible principally for manufacturing Panorex and securing regulatory approvals.
Note 5 CASH EQUIVALENTS AND INVESTMENTS
Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities that the Company has both the intent and ability to hold to maturity are carried at amortized cost. Securities that the Company does not intend to hold to maturity are classified either as "available for sale" or as "trading" and are carried at fair value. Unrealized gains and losses on securities classified as available for sale are carried as a separate component of shareholders' equity. Unrealized gains and losses on specific securities classified as trading are reported in earnings.
Notes to Consolidated Financial Statements
At December 31, 1996, securities classified as trading, available for sale and held to maturity are summarized below (in thousands).
At December 31, 1996, these securities were classified as follows (in thousands):
Cash equivalents $ 32,563 Short-term investments 120,362 Long-term investments 9,502 -------- $162,427 ========
The Company has agreed to maintain investments with fair values of $7,260,000 as of December 31, 1996 at certain banks as collateral for loans from those banks. See Note 9 - Debt.
At December 31, 1995, securities classified as available for sale and held to maturity are summarized below (in thousands).
Notes to Consolidated Financial Statements
At December 31, 1995, these securities were classified as follows (in thousands):
Cash equivalents $ 12,248 Short-term investments 115,435 Long-term investments 5,769 -------- $133,452 ========
Note 6 INVENTORY
Inventory consists of the following (in thousands):
December 31, 1996 1995 -------- -------
Raw materials $ 5,824 $ 4,965 Work in process 7,948 9,382 Finished goods 10,043 6,436 -------- ------- $ 23,815 $20,783 ======== =======
Inventories have various expiration dates. The Company continually evaluates the extent of inventory reserves considered necessary based upon the future regulatory and commercial status of such products. There can be no assurance that reserves for inventories will not be required in the future.
Notes to Consolidated Financial Statements
Note 7 INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following, net of accumulated amortization of $10,804,000 and $7,282,000 at December 31, 1996 and 1995, respectively, (in thousands):
December 31, 1996 1995 ------- -------
Licenses $ 5,378 $4,126 Goodwill 5,158 5,502 Debt issuance costs 755 3,854 Deferred charges 23,026 1,697 Other 1,017 2,230 ------- ------- $35,334 $17,409 ======= =======
Deferred charges at December 31, 1996 include a prepayment of future royalties amounting to $11.4 million, and a prepayment of $10.0 million associated with the commercialization and market development of ReoPro.
Licensing agreements, goodwill and other assets are reviewed for impairment whenever events or circumstances provide evidence that suggest that the carrying amount of the asset may not be recoverable. Impairment is evaluated by using identified or expected cashflows.
Note 8 ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31, 1996 1995 ------- -------
Compensation $ 7,320 $ 3,191 Interest 823 5,473 Research 5,496 4,942 Royalties 7,973 1,836 Other 7,328 10,697 ------- ------- $28,940 $26,139 ======= =======
Note 9 DEBT
Notes Payable
Notes payable at December 31, 1996 and 1995 consists of $6,897,000 and $7,500,000, respectively, of borrowings under short-term notes at an interest rate of 3.23 percent per annum at December 31, 1996, payable in Dutch guilders no later than March 28, 1997. These borrowings are secured by investments at the lending bank of $7,260,000 (see "Loan Covenants").
Notes to Consolidated Financial Statements
Long-term debt
Long-term debt consists of the following (in thousands):
December 31, 1996 1995 -------- ---------
7 1/4% Convertible Notes $ - $106,640 6 3/4% Convertible Debentures 54,765 125,000 Mortgage Debt - 9,101 Long-term Note - 9,188 ------- -------- 54,765 249,929 Current Portion - (18,289) ------- -------- $54,765 $231,640 ======= ========
7 1/4% Percent Notes
In March 1996, the Company called for redemption of the 7 1/4% Convertible Notes at a redemption price of 103.222 percent of the outstanding principal amount. The outstanding principal amount of the 7 1/4% Convertible Notes was $106,640,000 at December 31, 1995. The Company issued approximately 3,831,000 shares of Common Stock upon conversion of approximately $106,302,000 principal amount of the 7 1/4% Convertible Notes and paid $338,000 in cash to redeem the remaining 7 1/4% Convertible Notes outstanding which were not converted.
6 3/4% Convertible Debentures
On October 16, 1991, the Company issued $125,000,000 principal amount of 6 3/4% Convertible Debentures due October 16, 2001. The 6 3/4% Convertible Debentures were initially convertible by the holders into approximately 2,049,000 shares of the Company's Common Stock at a conversion price of $61.00 per share at any time prior to redemption or maturity. The 6 3/4% Convertible Debentures are redeemable by the Company for cash in whole or in part until October 16, 2001 at amounts ranging up to 102 percent of the principal amount of the 6 3/4% Convertible Debentures. The Company may be required to redeem the 6 3/4% Convertible Debentures at their principal amount at the option of the holders of the 6 3/4% Convertible Debentures in certain limited circumstances, including a change in control of the Company.
In the second quarter of 1996, the Company purchased $70,235,000 of its 6 3/4% Convertible Debentures which were subsequently retired. At December 31, 1996, $54,765,000 of the 6 3/4% Convertible Debentures remain outstanding and are convertible into approximately 898,000 shares of the Company's Common Stock.
The fair value of the Company's long-term debt at December 31, 1996, principally determined by quoted market prices, was $52,027,000 as compared to its carrying value of $54,765,000. The carrying amount of the Company's notes payable at December 31, 1996 approximates their fair value.
Mortgage Debt
Mortgage loans have been used to finance a portion of the acquisition and expansion of certain of the Company's facilities in the United States and The Netherlands. These loans are generally secured by the related land and buildings. These Netherlands loans, which at December 31, 1995 were payable in Dutch guilders and classified as short-term debt, were repaid in full in October 1996. The 6 3/4% Convertible Debentures were purchased at less than face value resulting in an extraordinary gain of $3,475,000. Partially offsetting the extraordinary gain are charges of $2,770,000 relating to the write-off of debt issuance costs.
Notes to Consolidated Financial Statements
Long-term Notes
At December 31, 1995 the Company's 9 1/2% percent long-term notes which were payable in Dutch guilders were classified as short-term debt. In October 1996, the Company repaid these long-term notes.
Loan Covenants
The Company was required to maintain certain investments at the lending bank, which at December 31, 1995 totaled $20,000,000. At December 31, 1995 the Company classified the $18,289,000 of debt secured by such investments as short- term. In October 1996, the Company repaid the remaining balance of such debt to the lending bank to eliminate all of the long-term notes and mortgage debt. Additionally, $6,897,000 of the Company's notes payable are secured by investments at the lending bank of $7,260,000.
Note 10 SHAREHOLDERS' EQUITY
Capital Stock
In 1996 the Company issued 1,596,000 shares of its Common Stock par value $.01 per share in connection with the exercise of options and warrants. In March 1996, the Company completed a public offering of 4,025,000 shares, in April 1996 the Company issued 3,450,000 shares as a result of conversion of the Company's 7 1/4% Convertible Notes and in July 1996, the Company issued 920,716 shares in connection with its agreements with Lilly. In 1995, the Company issued 1,388,000 shares of its Common Stock in connection with the exercise of options and warrants. In 1994, the Company issued 7,014,000 shares of its Common Stock pursuant to the terms of an exchange offer as described in Note 13, 6,151,000 shares of its Common Stock in connection with the exercise of options and warrants and 140,000 shares pursuant to the terms of the extension of the alliance agreement with Glaxo Wellcome. At December 31, 1996, approximately 7,768,000 shares of Common Stock were reserved for issuance upon exercise of warrants and stock options, pursuant to employee retirement savings and stock award plans and agreements, and upon conversion of convertible debt securities. Additionally, at December 31, 1996, approximately 385,000 shares of preferred stock were reserved for issuance under a shareholder rights plan which is further described below.
Warrants
At December 31, 1996, warrants to purchase approximately 127,000 shares of the Company's Common Stock were outstanding at an exercise price of $49.75, exercisable to December 31, 1997.
Stock Option and Restricted Stock Award Plans
The Company maintains stock option plans pursuant to which options to purchase a total of approximately 9,050,000 shares of its Common Stock have been authorized for grant to the Company's employees and to its non-employee directors. Under the terms of these plans, the option exercise price may not be less than the fair market value of the underlying stock at the time the option is granted. The options granted under these plans generally expire upon the earlier of the termination of the optionee's employment or service or ten years from the date of the grant. Additionally, non-qualified stock options have been granted to certain directors and employees of, and certain consultants to, the Company pursuant to non-qualified stock option agreements with terms similar to those set forth in the plans.
Notes to Consolidated Financial Statements
The following table summarizes the activity and value with respect to the Company's stock options (in thousands except per share amounts):
Options Exercise Price
Outstanding, December 31, 1993 5,770 $ 6.500-53.500 Granted 726 $ 9.130-17.940 Lapsed or canceled (685) $ 6.880-16.000 Exercised (853) $ 6.880-51.750 ------ --------------
Outstanding, December 31, 1994 4,958 $ 6.500-53.500 Granted 713 $ 9.875-24.000 Lapsed or canceled (678) $ 6.875-31.750 Exercised (336) $ 6.500-53.500 ------ --------------
Outstanding, December 31, 1995 4,657 $ 6.875-51.750 Granted 749 $14.125-39.375 Lapsed or canceled (278) $ 6.875-51.750 Exercised (1,162) $ 6.875-22.625 ------ --------------
Outstanding, December 31, 1996 3,966 $ 6.875-51.750 ====== ==============
At December 31, 1996, the weighted-average remaining contractual life of outstanding options was 7.19 years. The weighted-average exercise price of the options outstanding as of December 31, 1996 and 1995 was $17.50 and $12.98, respectively.
At December 31, 1996, options to purchase a total of approximately 2,181,000 shares of Common Stock were exercisable, and approximately 1,785,000 options become exercisable as follows (in thousands):
Years ending December 31, Shares ------------------------ ------
1997 808 1998 450 1999 317 2000 210
The Company maintains a Restricted Common Stock Award Plan, pursuant to which a total of approximately 2,000,000 shares of the Company's Common Stock have been authorized for award to eligible employees. The number of shares awarded in each year and the terms under which such shares vest are determined by the Board of Directors at the time of the award. Generally, a portion of the shares awarded vests annually over a period of five years from the date of the award. As of December 31, 1996, awards of approximately 292,000 shares of the Company's Common Stock were outstanding and are scheduled to vest in the following periods (in thousands):
Years ending December 31, Shares ------------------------- ------
1997 96 1998 92 1999 66 2000 38
Notes to Consolidated Financial Statements
The terms of options unexercisable as of December 31, 1996 for an aggregate of approximately 1,242,000 shares and restricted stock awards unvested as of December 31, 1996 for an aggregate of approximately 257,000 shares provide for the acceleration of the exercisability of such options and the vesting of such restricted stock awards upon the occurrence of certain events constituting a change in control of the Company. Further, in such event, the holders of approximately 2,991,000 options may then choose to receive cash through the exercise of a limited stock appreciation right in lieu of exercising their options.
The Company has adopted Statement 123 which was issued in October 1995 and is effective for transactions entered into in fiscal years beginning after December 15, 1995. In accordance with the provisions of Statement 123, which allows the Company to apply APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, the Company does not recognize compensation cost for options granted. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by Statement 123, net loss and loss per share would have been reduced to the pro forma amounts indicated in the table below (in thousands except per share amounts):
1996 1995 --------- --------- Net loss - as reported $(12,763) $(57,132) Net loss - pro forma $(17,791) $(58,932)
Loss per share - as reported $ (0.19) $ (0.98) Loss per share - pro forma $ (0.27) $ (1.01)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following average assumptions for the years ended December 31,
1996 1995 ----- ----- Risk free interest rate 5.6% 7.8% Expected life of option (years) 9.2 9.2 Expected dividend of option (1) - - Volatility of stock price 70.3% 70.3%
(1) The Company has never declared or paid any dividends on its Common Stock. The Company does not anticipate paying any dividends in the foreseeable future and intends to retain future earnings for the development and expansion of its business.
Qualified Savings and Retirement Plan
The Company maintains a Qualified Savings and Retirement Plan for the benefit of its employees. Employees' benefits are based solely on the employees' discretionary contributions and the Company's discretionary matching contributions which, for the year ended December 31, 1996 totaled $551,000. The Company generally makes its discretionary matching contributions in its Common Stock. Employee contributions to the Plan may be invested in various instruments, including the Company's Common Stock, at the discretion of the employee.
Shareholder Rights Plan
The Company maintains a Shareholder Rights Plan ("Rights Plan"). Under the Rights Plan, each common shareholder receives one-half of one Right (a "Right") for each share of Common Stock held. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at an exercise price of $170. The Rights will become exercisable and will detach from the Common Stock in the event any individual or group acquires 20 percent or more of the Common Stock, or announces a tender or exchange offer
Notes to Consolidated Financial Statements
which, if consummated, would result in the ownership by that person or group of at least 30 percent of the Common Stock.
If, following an acquisition of 20 percent or more of the Common Stock, the Company is acquired by any person in a merger or other business combination transaction or sells more than 50 percent of its assets or earning power to any person, each Right will entitle the holder to purchase, for the exercise price, common stock of the acquiring company with a value of twice the exercise price. In addition, if any person acquires 30 percent or more of the Common Stock, each Right will entitle the holder, other than an acquiring person, to purchase Common Stock of the Company with a value of twice the exercise price. The Rights also provide for protection against self-dealing transactions by a 20 percent shareholder.
The Company may redeem the Rights at $.02 per Right at any time until the tenth day after the acquisition by a person or group beneficially owning 20 percent or more of its Common Stock. The Rights will expire on September 26, 1998 unless earlier redeemed.
Note 11 GEOGRAPHIC AND CUSTOMER INFORMATION
Geographic Information (in thousands)
Income Identifiable Years ended December 31, Revenue (Loss) assets
United States $ 86,743 $ (23,125) $243,182 Europe 36,194 10,333 97,450 Other 12,548 29 489 -------- --------- -------- $135,485 $ (12,763) $341,121 ======== ========= ========
United States $ 35,272 $ (61,208) $160,094 Europe 43,466 4,076 100,190 Other 178 - - -------- --------- -------- $ 78,916 $ (57,132) $260,284 ======== ========= ========
United States $ 59,294 $(112,266) $233,208 Europe 7,932 (14,392) 72,707 -------- --------- -------- $ 67,226 $(126,658) $305,915 ======== ========= ========
Revenues from unaffiliated customers is based on the location of the customers. Income (loss) by geographic area consists of the related income (loss) of the Company's subsidiaries based upon the location of their respective operations. Identifiable assets by geographic area are those assets used in the Company's operations in those areas.
Customer Information
During 1996, approximately 67% of the Company's total product sales were to one customer, Lilly. During 1995, approximately 50% of the Company's total product sales were to three customers, as follows: 24% to Lilly, 11% to Glaxo Wellcome and 15% to Toray-Fuji Bionics, Inc. During 1994, approximately 60% of the Company's total product sales were to four customers, as follows: 10% to Abbott Laboratories, 12% to Boehringer Mannheim GmbH, 13% to CIS bio International and 25% to Toray-Fuji Bionics, Inc.
Notes to Consolidated Financial Statements
Note 12 CONTRACT REVENUES
Lilly Related
Pursuant to the Company's agreements with Lilly, the Company recognized revenues of $10,000,000 and $9,500,000 for the years ended December 31, 1995 and 1994, respectively, related to the achievement of ReoPro milestones.
Glaxo Wellcome Related
Pursuant to the Company's agreements with Glaxo Wellcome, the Company recognized revenues of $14,000,000 for the year ended December 31, 1994 principally related to the reimbursement of prior expenses and achievement of milestones associated with Panorex. Glaxo Wellcome may make certain future payments to the Company based on the achievement of certain milestones related to Panorex.
Related Party Research & Development
During 1994, the Company conducted research and development under a contract with Tocor II. Under the contract, the Company received reimbursement of its costs plus a management fee. Such revenues were recorded net of amortization of deferred costs resulting from the issuance of warrants to Tocor II Unitholders. See Note 13 for a discussion of an exchange offer which resulted in the termination of the research and development contract and services agreement.
For the year ended December 31, 1994, revenues related to the Tocor II research program were $1,652,000. Expenses incurred, including general and administrative expenses for the year ended December 31, 1994 were $1,915,000.
Additionally, the Company incurred expenses of approximately $29,121,000, $29,900,000 and $22,850,000 for the years ended December 31, 1996, 1995 and 1994, respectively, representing aggregate CPIII research costs funded by the Company in order to continue the progress of the research program and to preserve the value of its purchase option which it exercised in January 1997.
Other
The Company has entered into various commercialization agreements under which it has recognized revenues from non-refundable fees or milestone payments in support of its research and development efforts. Revenues recorded under these agreements amounted to $3,355,000, $3,915,000 and $2,090,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Note 13 CHARGE FOR ACQUIRED RESEARCH AND DEVELOPMENT
In February 1994, the Company initiated the exchange offer pursuant to which the Company offered to exchange 3.2 shares of its Common Stock for each of the 2,250,000 outstanding Tocor II Units tendered. Each Unit consisted of one share of callable common stock of Tocor II, one callable warrant to purchase one share of Centocor Common Stock and one Series T warrant to purchase one share of Centocor Common Stock (the "Warrants"). The
Notes to Consolidated Financial Statements
exchange offer expired at the close of business on March 11, 1994, at which time the Company accepted all of the 94 percent of the Tocor II Units tendered in exchange for approximately 6,793,000 shares of its Common Stock, thereby increasing shareholders equity by $81,607,000. The transaction was accounted for as a purchase and the Company allocated the excess of the consideration paid over the net assets of Tocor II to the value of the acquired research and development. The Company recorded a charge to earnings in the first quarter of 1994 of $36,966,000 representing principally the cost allocated to the acquired research and development. In connection with the transaction, the Company acquired $50,124,000 of cash and short-term investments and warrants with a value of $8,492,000 which were retired. The unaudited comparative statement of operations data excluding the charge for acquired research and development, assuming the exchange offer was consummated as of January 1, 1993, would have been as follows (in thousands except per share amounts):
Statements of For the twelve months ended December 31, Operations Data 1994 --------------- ----
Revenues $ 65,574 Loss $(90,963) Loss per share $(1.78)
Effective March 30, 1994, each remaining share of Tocor II callable Common Stock ("Tocor II Shares") was converted into 2.88 shares of the Company's Common Stock through a merger of Tocor II into a wholly-owned subsidiary of the Company. Pursuant to the terms of the merger, holders of Tocor II Shares at the time of the merger were required to surrender the certificates representing Tocor II Shares to an exchange agent in exchange for certificates representing Common Stock of the Company. Through December 31, 1996, stock certificates representing 357,000 shares of the Company's Common Stock had been delivered by the exchange agent in connection with the merger. If all of the remaining Tocor II Shares are surrendered to the exchange agent, stock certificates representing an additional 10,000 shares of the Company's Common Stock will be delivered. Shares of the Company's Common Stock into which the Tocor II Shares were converted by the merger are not classified as issued and outstanding until the delivery by the exchange agent of the stock certificate representing such shares. Warrants not tendered as part of Units in the exchange offer remain outstanding.
Note 14 OTHER INCOME (EXPENSES)
The Company recorded a charge to earnings of $3,750,000 and $1,275,000 for the years ended December 31, 1995 and December 31, 1994, respectively, in connection with the settlement of certain litigation. During 1994 the Company recorded a charge to earnings of $3,649,000 representing an unrealized loss due to the other than temporary decline in the market value of marketable equity investments below the Company's cost for such investments. Other income (expenses) also includes the Company's equity share of the gain and/or losses of an investee company.
Notes to Consolidated Financial Statements
Note 15 INCOME TAXES
The components of the deferred tax assets are as follows as of December 31, 1996 and 1995 (in thousands):
1996 1995 ---------- ----------
Tax credits $ 7,216 $ 5,424 Loss carryforwards 237,401 229,855 Acquired research 25,499 30,357 Deferred R&D expense 16,385 - Facilities and equipment 2,207 2,326 Depreciation 1,050 977 Investments 1,553 1,553 --------- --------- Total 291,311 270,492 Valuation reserve (291,311) (270,492) --------- --------- Net deferred tax assets $ - $ - ========= =========
At December 31, 1996, the Company had research and development, orphan drug and other tax credits of approximately $6,835,000 substantially all with expiration dates ranging from 1999 to 2011, and minimum tax credits of approximately $381,000 which do not expire.
Realization of net deferred tax assets related to these items is dependent on future earnings, which are uncertain. Accordingly, a valuation reserve was recorded by the Company and, therefore, the Company had no net deferred tax assets at December 31, 1996.
Of the $291 million valuation allowance at December 31, 1996, $14.5 million relating to deductions for non-qualified stock options will be credited to paid- in-capital if realized. Included in loss carryforwards at December 31, 1996 are unused foreign tax subsidies that may be used to offset foreign taxable income of approximately $23 million. The Company had net operating loss carryforwards available in the United States for federal income tax purposes of approximately $609 million which will begin to expire at various dates from the year 2005 to 2011. Net operating loss carryforwards may also be subject to various annual and other limitations on the amounts to be utilized.
Note 16 LEASES
The Company is lessee under various non-cancelable operating leases, covering certain of the Company's facilities and equipment. The facility leases generally provide for the Company to pay all taxes and operating costs associated with the facility.
Notes to Consolidated Financial Statements
The aggregate minimum rental commitments of leases are as follows:
Years ending December 31,
1997 $2,677,000 1998 1,909,000 1999 1,459,000 2000 750,000 2001 709,000 Thereafter 3,446,000
Rent expense was $3,162,000, $3,308,000 and $3,189,000, for the years ended December 31, 1996, 1995, and 1994, respectively.
Note 17 SUPPLEMENTAL INFORMATION ON CASH FLOWS
Interest paid was $12,615,000, $18,358,000 and $19,192,000, in 1996, 1995, and 1994, respectively.
Income tax payments of $13,000, $9,000 and $19,000 were made in 1996, 1995 and 1994, respectively.
In 1996, in consideration of the amendment to the Sales and Distribution Agreement and other activities in connection with commercialization and market development of ReoPro, Centocor issued 920,716 common shares to Lilly.
In 1996 and 1995, the Company had unrealized gains on its equity investments of $2,342,000.
In 1994, the Company issued 7,014,000 shares of Common Stock, resulting in a noncash increase to additional paid-in capital of $25,643,000 and acquired cash and short-term investments of $50,124,000 in connection with an exchange offer more fully described in Note 13.
Note 18 QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands except per share data)
Three Months Ended March 31 June 30 September 30 December 31 -------- ------- ------------ -----------
Total revenues $21,882 $ 30,586 $ 39,179 $ 43,838 Sales 21,710 29,526 38,309 42,585 Gross profit from sales 11,156 14,972 20,657 24,251 Net income (loss) (1) (9,698) (4,323) (1,635) 2,893 Net income (loss) per share (2) $ (.16) $ (.06) $ (.02) $ .04
Notes to Consolidated Financial Statements
Three Months Ended March 31 June 30 September 30 December 31 -------- ------- ------------ -----------
Total revenues $23,995 $ 20,754 $ 19,155 $ 15,012 Sales 19,319 17,754 15,860 12,068 Gross profit from sales 10,694 9,683 8,589 6,869 Net loss (3) and (4) (8,242) (17,309) (12,155) (19,426) Net loss per share (2) $ (.14) $ (.30) $ (.21) $ (.33)
(1) During the second quarter of 1996, the Company recorded a net gain on the extinguishment of debt of $705,000. (2) The computation of earnings or loss per share in each period is based on the weighted average number of common shares outstanding. When dilutive, stock options and warrants are included as share equivalents using the treasury stock method. Fully diluted net income or loss per share is not materially different from primary net income or loss per share. (3) During the second quarter of 1995, the Company recorded a reserve of $3,750,000 relating to the settlement of litigation. (4) During the fourth quarter of 1995, the Company recorded charges of $1,642,000 relating to severance costs.
Note 19 OTHER CHARGES
In 1995, the Company recorded a charge of $1,642,000 representing severance costs in connection with the downsizing of its workforce. In 1994, the Company elected to buyout a future royalty obligation and, as a result, recorded a charge of $17,098,000 representing such buyout. Additionally in 1994, the Company recorded a charge of $7,870,000 in connection with the write-down of certain facilities and equipment. At the Company's present level of operations, the Company currently maintains idle facilities and equipment at its Malvern location. The Company continually evaluates the future needs for its facilities and equipment. There can be no assurance that reserves to further reduce the carrying value of certain fixed assets, other royalty buyout arrangements, or other charges will not be required in the future.
REPORT OF MANAGEMENT
The consolidated financial statements presented in this report have been prepared by the Company's management in conformity with generally accepted accounting principles from the Company's financial records. The Company's management is responsible for all information and representations made in those financial statements and for their integrity and objectivity. In those cases where judgment and best estimates are necessary, appropriate consideration is given to materiality in the preparation of the financial statements. The Company's management has also prepared the other information in this report and is responsible for its accuracy and consistency with the financial statements.
The Company's management has designed systems of internal accounting controls to provide reasonable, but not absolute, assurance that assets are safeguarded from unauthorized use or disposition, and that transactions are recorded according to management's policies and procedures. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the costs of such systems should not exceed the benefits to be derived. These systems are continually reviewed and modified, where appropriate, to maintain such assurance. Additionally, in connection with their annual audit, independent auditors perform examinations in accordance with generally accepted auditing standards, which include a review of the system of internal accounting controls to the extent necessary in order to determine the nature, timing, and extent of audit tests to be applied on the financial statements. The Company's management believes that the Company's system of internal accounting controls is adequate to accomplish the objectives discussed herein.
The selection of the Company's independent auditors, KPMG Peat Marwick LLP, has been approved by the Company's Board of Directors. An Audit Committee of the Board of Directors, composed of three non-management directors, meets with, and reviews the activities of, corporate financial management and the independent auditors to ascertain that each is properly discharging its responsibilities. The independent auditors also meet separately with the Audit Committee without management present, to discuss the results of their work, the adequacy of internal accounting controls, and the quality of financial reporting.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Centocor, Inc.:
We have audited the accompanying consolidated balance sheets of Centocor, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centocor, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania January 31, 1997 except for paragraph 3 of Note 3 which is as of March 4, 1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------
Not Applicable
Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------
In accordance with General Instruction G(3), the information called for by Items 10, 11, 12 and 13 of Part III are incorporated herein by reference from the Company's definitive Proxy Statement for the Centocor Annual Meeting of Shareholders to be held on May 14, 1997, which definitive Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
Part IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
a. Documents filed as part of the Report:
i. Financial Statements of Centocor Partners III, L.P.:
Balance Sheets, December 31, 1996 and 1995.
Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994.
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.
Statements of Partners' Capital for the Years Ended December 31, 1996, 1995 and 1994.
Notes to Financial Statements.
Independent Auditors' Report.
ii. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Schedules, other than those listed above, have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
iii. Exhibits:
3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form S-1 Registration Statement, File No. 2-80098).
3.2 Statement of Reduction of Authorized Shares filed September 19, 1983 (incorporated by reference to Exhibit 3.2 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1986).
3.3 Statement of Reduction of Authorized Shares filed January 19, 1984 (incorporated by reference to Exhibit 3.3 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1986).
3.4 Articles of Amendment filed April 18, 1984 (incorporated by reference to Exhibit 3.4 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.5 Statement of Reduction of Authorized Shares filed February 25, 1985 (incorporated by reference to Exhibit 3.5 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1986).
3.6 Statement of Reduction of Authorized Shares filed May 6, 1985 (incorporated by reference to Exhibit 3.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
3.7 Statement of Reduction of Authorized Shares filed October 23, 1985 (incorporated by reference to Exhibit 3.7 to Registrant's Annual Report on Form 10- K for the year ended December 31, 1986).
3.8 Articles of Amendment filed April 16, 1987 (incorporated by reference to Exhibit 3.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
3.9 Articles of Amendment filed April 21, 1988 (incorporated by reference to Exhibit 3.9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988) .
3.10 Articles of Amendment filed April 26, 1988 (incorporated by reference to Exhibit 3.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
3.11 Statement Re Series A Preferred Stock filed October 11, 1988 (incorporated by reference to Exhibit 3.11 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
3.12 Articles of Amendment filed April 13, 1990 (incorporated by reference to Exhibit 3.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.13 Articles of Amendment filed April 26, 1991 (incorporated by reference to Exhibit 3.13 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
3.14 Statement of Correction filed October 16, 1991 to Articles of Amendment filed April 26, 1991 (incorporated by reference to Exhibit 3.14 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991).
3.15 By-Laws of Centocor, Inc. as amended October 30, 1992 (incorporated by reference to Exhibit 3.15 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
4.1 Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-1 Registration Statement, File No. 2-80098).
4.2 Rights Agreement between Centocor, Inc. and the First National Bank of Boston as Rights Agent dated September 26, 1988 (incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K dated September 26, 1988).
4.3 Form of Indenture between Centocor, Inc. and Chase Manhattan Trustees Limited as Trustee Dated as of October 16, 1991 (incorporated by reference to Exhibit 4.3 to Form S-3 Registration Statement, Reg. No. 33-44231).
4.4 Form of Debenture Issued to Purchasers of 6 3/4% Convertible Subordinated Debentures Due October 16, 2001 (included in Exhibit 4.9) (incorporated by reference to Exhibit 4.3 to Form S-3 Registration Statement, Reg. No. 33-44231).
4.5 Form of Series T Warrant Issued to Purchasers of Units, each Unit consisting of one share of Tocor II Callable Common Stock, one Series T warrant to purchase one share of Centocor Common Stock, and one Callable warrant to purchase one share of Centocor Common Stock (incorporated by reference to Exhibit 4.2 to Amendment No. 4 to Form S-1/S-3 Registration Statement of Tocor II and Centocor, Reg. No. 33- 44072).
4.6 Form of Callable Warrant Issued to Purchasers of Units, each Unit consisting of one share of Tocor II Callable Common Stock, one Series T warrant to purchase one share of Centocor Common Stock, and one Callable warrant to purchase one share of Centocor Common Stock (incorporated by reference to Exhibit 4.3 to Amendment No. 4 to Form S-1/S-3 Registration Statement of Tocor II and Centocor, Reg. No. 33- 44072).
10.1* Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.01 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.2* Incentive Stock Option Plan, as amended (incorporated by reference to Exhibit 10.03 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.3* 1983 Incentive Stock Option Plan, as amended (incorporated by reference to Exhibit 10.04 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.4* 1983 Restricted Common Stock Award Plan, as amended and restated (incorporated by reference to Exhibit 10.04 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.5* 1987 Non-Qualified Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.05 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.6* 1989 Non-Employee Directors' Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.06 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.7 Lease Agreement for property located at Great Valley Parkway, Malvern, PA 19355 (incorporated by reference to Exhibit 10.07 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.8 Partnership Purchase Option Agreement among Centocor, Inc., CCIP, Centocor Development Corporation I, each Class A limited partner and the Class B limited partner, dated September 12, 1985 (incorporated by reference to Exhibit 10.53 to Registrant's Post Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 2-95057).
10.9 Indemnity Agreement between Centocor, Inc. and CCIP, dated September 12, 1985 (incorporated by reference to Exhibit 10.71 to Registrant's Post Effective Amendment No. 1 to Form S-1 Registration Statement, File No. 2-95057).
10.10* Qualified Savings and Retirement Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).
10.11 Partnership Purchase Option Agreement among Centocor, Inc., CPII, Centocor Development Corporation II, each Class A limited partner and the Class B limited partner, dated December 17, 1986 (incorporated by reference to Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.12 Indemnity Agreement between Centocor, Inc. and CPII, dated December 17, 1986 (incorporated by reference to Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986).
10.13 Indemnity Agreement between CPIII and Centocor, Inc., dated December 23, 1987 (incorporated by reference to Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.14 Partnership Purchase Option Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III, and the Class C limited partner, dated December 23, 1987 (incorporated by reference to Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
10.15 Amendment dated March 23, 1988 to Partnership Purchase Option Agreement among Centocor, Inc., CPIII, Centocor Development Corporation III and the Class C limited partner dated December 23, 1987 (incorporated by reference to Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988).
10.16 Series E, F and G Preferred Stock Purchase Agreement dated as of November 20, 1991 between Centocor Delaware, Inc. and Corvas International, Inc. (incorporated by reference to Exhibit 10.28 to Form S-1 Registration Statement of Corvas International, Inc. Reg. No. 33-44555).
10.17 Sales and Distribution Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.18 Reimbursement Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.19 Investment Agreement between Centocor, Inc. and Eli Lilly and Company dated July 15, 1992. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992).
10.20 Amendment to Sales and Distribution Agreement among Centocor, Inc., Centocor B.V. and Eli Lilly and Company dated June 27, 1993. (The Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.21 Option Agreement between Centocor B.V. and Eli Lilly Nederland B.V. dated August 20, 1993. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.22 Deed of Mortgage from Centocor B.V. to Eli Lilly Nederland B.V. dated August 26, 1993 (incorporated by reference to Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.23 Deed of Pledge from Centocor B.V. to Eli Lilly Nederland B.V. dated August 26, 1993 (incorporated by reference to Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
10.24 Amendment to Sales and Distribution Agreement among Centocor, Inc., Centocor B. V. and Eli Lilly and Company dated July 26, 1996. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement).
10.25 Stock Purchase Agreement made as of December 16, 1993 by and between Centocor, Inc. and The Wellcome Foundation Limited (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.26 Supply, Distribution and Sales Agreement dated December 16, 1993 by and among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.27 Clinical and Regulatory Development Agreement dated December 16, 1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(c) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.28 Centocor Technology License Agreement dated as of December 16, 1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of
this Agreement.) (incorporated by reference to Exhibit 10(e) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.29 Relicense Agreement dated as of December 16, 1993 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (incorporated by reference to Exhibit 10(f) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.30 Appendix A - Glossary of Terms to each of the Agreements dated as of December 16, 1993 by and among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(g) to the Registrant's Current Report on Form 8-K dated December 16, 1993).
10.31 First Supplemental Agreement dated as of November 15, 1994 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated November 15, 1994).
10.32 Wellcome Clinical Development Agreement dated as of November 15, 1994 among Centocor, Inc., Centocor B.V., The Wellcome Foundation Limited and Burroughs Wellcome Co. (The Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement.) (incorporated by reference to Exhibit 10(b) to the Registrant's Current Report on Form 8-K dated November 15, 1994).
10.33 Distribution Agreement between Centocor, Inc. and Fujisawa Pharmaceutical Co. Ltd dated August 15, 1996. (Registrant has requested confidential treatment from the Securities and Exchange Commission for portions of this Agreement).
11 Computation of Earnings (Loss) per Common Share.
12 Statement re: Computation of Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
*These exhibits constitute compensatory plans.
b. The Registrant has filed the following reports on Form 8-K since the beginning of the quarter ended December 31, 1996:
None
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8, Nos. 2-86486, 33-16285, 33-00167, 33-35731, 33-23480, 33-16284, and 33-35730.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Centocor Partners III, L.P. Balance Sheets - -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
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Centocor Partners III, L.P. Statements of Operations - -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
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Centocor Partners III, L.P. Statements of Cash Flows - --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
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Centocor Partners III, L.P. Statements of Partners' Capital - -------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
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Centocor Partners III, L.P. Notes to Financial Statements - --------------------------------------------------------------------------------
1. Basis of Presentation ---------------------
Centocor Partners III, L.P. ("CPIII" or the "Partnership"), was formed in December 1987, and is managed by its general partner, Centocor Development Corporation III, a wholly owned subsidiary of Centocor, Inc. ("Centocor"), a Pennsylvania corporation, which is subject to the reporting requirements of the Securities Exchange Act of 1934. The Partnership was organized to develop and derive income from the sale of one therapeutic product (ReoPro) and one imaging product (Capiscint) which are expected to be used in the treatment and diagnosis, respectively, of two different types of cardiovascular disease.
In 1987 and 1988, the Partnership and Centocor sold (a) 542.25 units, consisting of 111 Class C limited partnership interests and 431.25 Class A limited partnership interests each together with warrants to purchase shares of Centocor common stock, and (b) one Class B limited partnership interest, together with warrants to purchase shares of Centocor common stock. The purchase prices were $90,000 for the Class C interests, $100,000 for the Class A interests and $150,000 for the Class B interest.
The net proceeds from the sale of limited partnership interests were used primarily to pay expenses incurred under the Partnership's agreement with Centocor (the "Development Agreement") to perform research and development for the Partnership (see Note 7).
The Partnership also entered into a Cross License Agreement pursuant to which Centocor granted to the Partnership an exclusive license to use all patent rights, know-how, technical information and biological materials owned or controlled by Centocor within the Partnership's field of activity. Under the Cross License Agreement, the Partnership agreed to grant to Centocor an exclusive royalty-free license to all patent rights, know-how, technical information and biological materials arising from research and development conducted under the Development Agreement for all purposes outside of the Partnership's field of activity.
Centocor entered into a Partnership Purchase Option Agreement with each of the limited partners. On January 31, 1997, Centocor exercised its option to acquire the Class A and Class C limited partnership interests. In connection therewith, the general partner has terminated the research program and after the acquisition of the Class B limited partnership interests, which is expected to occur on or about May 1, 1997, the partnership is expected to dissolve. (See Note 5)
2. Summary of Significant Accounting Policies ------------------------------------------
Investment in Joint Venture ---------------------------
The Partnership accounts for its investment in the joint venture (see Note 6) under the equity method of accounting. The joint venture is expected to terminate in 1997 upon the occurrence of certain events. (See Note 5)
Centocor Partners III, L.P. Notes to Financial Statements - --------------------------------------------------------------------------------
Income Taxes ------------
The Partnership's distributable income or loss is reportable for income tax purposes by the partners; therefore, no provision for income taxes has been made in the accompanying financial statements. The Partnership's tax returns are subject to examination by federal and state taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, certain amounts may be subject to change at a later date upon final determination by the respective taxing authorities.
3. Contingencies -------------
In July 1995, PaineWebber Development Corporation ("PaineWebber"), a wholly-owned subsidiary of PaineWebber Group, Inc., caused suit to be filed against Centocor and Centocor Development Corporation III ("CDCIII", the general partner of the Partnership and a wholly-owned subsidiary of Centocor) by a development partnership formed in the mid 1980s by PaineWebber and managed by it since then. The PaineWebber partnership, PaineWebber R&D Partners II, L.P.("PWR&DII"), an investor in the Partnership, filed suit in the Court of Chancery of the State of Delaware. In the complaint, the plaintiff seeks to sue derivatively on behalf of CPIII. The Partnership is named as a nominal defendant and Centocor and CDCIII are named as defendants against whom relief is sought. The claim is that at least $25 million of the money paid by Eli Lilly and Company ("Lilly") to Centocor in 1992 represented profits from the marketing of ReoPro, obligating Centocor to pay a portion thereof to the Partnership, and that Centocor is obligated to pay an increased percentage of the profits from ReoPro to the Partnership going forward. Centocor answered the complaint in the Delaware action and filed a cross-claim against nominal defendant CPIII and a third party complaint against PaineWebber Group Inc. and PaineWebber Development Corporation. The cross-claim seeks an offset against any damages awarded the partners based on theories of unjust enrichment and quasi contract. The third- party claims (since amended to add additional theories of liability and to make PaineWebber, Inc. an additional third-party defendant) seek to hold the PaineWebber entities liable for some or all of any alleged injury to the partnership. On November 1, 1995, an additional suit was commenced in the Delaware Court of Chancery by a limited partner, John E. Abdo, against Centocor and CDCIII and certain of their officers and directors. The complaint, filed derivatively on behalf of the Partnership, asserts claims, inter alia, for breach of contract, breach of fiduciary duty, common law fraud, and conspiracy and aiding and abetting. Centocor answered this complaint and also filed a cross-claim against nominal defendant CPIII and a third-party complaint against PaineWebber Group, Inc., and PaineWebber, since amended to add additional theories of liability and to name PaineWebber, Inc. as a further third-party defendant. Abdo moved to amend his complaint to assert claims against the persons appointed by PaineWebber to the CDCIII Board of Directors. That motion was granted. Motions to disqualify PWR&DII from serving as the derivative plaintiff were filed in July 1996 by CPIII and in August 1996 by Centocor and CDCIII. Abdo joined those motions. No decision has been issued on those motions. The parties in the PWR&DII suit have considered ways and means to resolve the issues without further litigation. The Partnership incurred approximately $131,794 in legal expenses related to these suits in 1996 and cumulative legal expenses to date of approximately $155,000 as a result of being named a nominal defendant in the above suits.
Under paragraph 7.8 of the Agreement of Limited Partnership, the Partnership is obligated, under certain conditions, to indemnify CDCIII and its officers and directors in respect of all fees,
Centocor Partners III, L.P. Notes to Financial Statements - --------------------------------------------------------------------------------
costs and expenses incurred in connection with or resulting from any claim against CDCIII and its officers and directors that arises out of or in any way relates to the Partnership or its properties, business or affairs including any losses or damages resulting from such claims and amounts paid in settlement or compromise. Therefore, the Partnership may incur legal expenses and other costs pertaining to the suits described above.
CPIII is expected to terminate in 1997 pursuant to the purchase by Centocor of all limited partner interests. (See Note 5)
4. Partners' Capital -----------------
Profits and losses of the Partnership are generally allocated 1 percent to the general partner and 99 percent to the limited partners. Losses resulting from research and development expenditures in excess of the limited partners' capital contributions are allocated to the general partner (see Note 7).
5. Partnership Purchase Option ---------------------------
On January 31, 1997, Centocor exercised its purchase option and made an advance payment to the Class A and Class C limited partners of $13,598,000 in the aggregate. Centocor plans to exercise its option to purchase the Class B limited Partnership interest by making a payment of $41,500 in the aggregate on or about May 1, 1997 at which time the joint venture will terminate.
CPIII is expected to terminate on or around July 30, 1997 pursuant to the transfer of all limited partner interests to Centocor. Pursuant to the terms of the Partnership Purchase Agreement, Centocor will make future quarterly royalty payments to the former limited partners. For each quarter beginning with the first quarter of the year 2000, Centocor's payments to the former limited partners will be reduced by 25 percent of the amount otherwise payable to the former limited partners until Centocor has recouped the amount of the advance payment.
6. Joint Venture -------------
The Partnership and Centocor formed a joint venture for the purpose of commercializing any products developed within the Partnership's field of activity. The Joint Venture Agreement provided that Centocor manufacture the products on behalf of the joint venture for its actual costs of manufacturing. Under the Joint Venture Agreement, Centocor also provided marketing services for the joint venture for a commission of 17 percent of joint venture sales and received 10 percent of joint venture sales as reimbursement for its management and administrative services. The profits and losses of the joint venture are to be allocated approximately 75 percent to Centocor and 25 percent to the Partnership.
The joint venture will terminate upon Centocor's exercise of the option to purchase the Class B limited Partnership interest.
In July 1992, Centocor and Lilly entered into a Sales and Distribution Agreement later amended in June 1993. Under that Agreement, as amended in June 1993, Centocor is principally responsible for developing and manufacturing ReoPro, and Lilly will assist Centocor in the
Centocor Partners III, L.P. Notes to Financial Statements - --------------------------------------------------------------------------------
regulatory filings and continued development of ReoPro for various clinical indications. Also, in the event Centocor cannot manufacture ReoPro or under certain other circumstances, such as material breach of the agreement by or the bankruptcy of Centocor, Lilly has the option to assume the manufacture of ReoPro and assure the continued supply of the product, even to the extent of acquiring Centocor's related manufacturing assets at their independently appraised values.
In June 1996, Centocor and Lilly amended the Sales and Distribution Agreement. Under this amendment, Lilly no longer has the right to buy ReoPro for resale in Japan; however, Lilly will maintain its exclusive right to buy and resell ReoPro in the rest of the world.
In August 1996, Centocor entered into an agreement with Fujisawa Pharmaceutical Co., Ltd., appointing Fujisawa as the exclusive distributor of ReoPro in Japan. Centocor and Fujisawa will co-develop ReoPro in Japan and jointly file for Japanese product approval. Fujisawa shall bear all external costs associated with the clinical development of ReoPro in Japan.
Through the joint venture, Centocor commenced sales of ReoPro to Lilly in January 1995. ReoPro sales to Lilly for the twelve months ended December 31, 1996 were $88,669,000. The level of sales of ReoPro will depend upon a number of factors, including the timing and extent of additional regulatory approvals for ReoPro, approval and commercialization of competitive products, the degree of acceptance of ReoPro in the marketplace, and the strength of Centocor's patent position and that of others.
7. Research Funding ----------------
The initial funding by the limited partners for the Partnership's research program pursuant to the Development Agreement with Centocor was exhausted in 1990. In order to continue the research program, the Partnership extended the terms of the Development Agreement with Centocor. Approximately $143,383,000 of the Partnership's research costs through December 31, 1996 were funded by the general partner. At December 31, 1996 and 1995, approximately $6,801,000 and $7,955,000, respectively, were due to Centocor for expenditures under the Development Agreement. Pursuant to Centocor's purchase of the Class A and Class C limited partner interests as per Note 5, the General Partner has terminated the research program in accordance with the Development Agreement.
INDEPENDENT AUDITORS' REPORT
The Partners of Centocor Partners III, L.P.:
We have audited the accompanying balance sheets of Centocor Partners III, L.P. ("the Partnership") as of December 31, 1996 and 1995, and the related statements of operations, cash flows and partners' capital for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As disclosed in Notes 1 and 5 to the financial statements, on January 31, 1997, Centocor exercised its option to acquire the Class A and Class C limited Partnership interests. In connection therewith, the general partner has terminated the research program and after the acquisition of the Class B limited Partnership interests, which is expected to occur on or about May 1, 1997, the Partnership is expected to dissolve.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Centocor Partners III, L.P. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania January 31, 1997
Schedule II CENTOCOR, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
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.
CENTOCOR, INC.
February 28, 1997 By: /s/ David P. Holveck -------------------------------- David P. Holveck, President and Chief Executive Officer
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 in the capacities and on the dates indicated.
EXHIBIT INDEX
Exhibit Number - ------
10.24 AMENDMENT TO SALES AND DISTRIBUTION AGREEMENT
10.33 DISTRIBUTION AGREEMENT
11 Computation of Earnings Per Common Share
12 Statement re: Computation of Ratios
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule