ITEM 1. BUSINESS
COMPANY PROFILE
Medco Research, Inc. (the "Company") is a pharmaceutical company dedicated to being a leader in the global commercialization of cardiovascular medicines and adenosine-receptor technologies leading to superior growth in shareholder value.
The Company was incorporated in California in September 1978 and originally founded as a contract research organization offering clinical and regulatory support to the pharmaceutical industry. In 1984, the Company secured its own product rights, went public, raised approximately $4 million in the initial offering, and began its transition to a pharmaceutical company. In January 1992, it raised approximately $48 million in a secondary public offering. In May 1993, the Company relocated to Research Triangle Park, North Carolina, and in 1995 it completed its reincorporation in Delaware.
The Company's business approach has been to carefully evaluate and selectively acquire product candidates, thereby reducing the costs and risks associated with basic research and drug discovery. These product opportunities and the related intellectual property rights are typically obtained under license from academic or corporate sources who have received United States patents which, in the opinion of the Company's patent counsel, are valid and enforceable. See "Patents and Proprietary Rights" below. The Company then sponsors and directs any additional preclinical studies and clinical testing needed for product registration and marketing approval. These late-stage product development activities are outsourced to independent clinical research organizations to maximize efficiency and minimize internal overhead. Historically the Company has licensed the manufacturing and marketing rights to the product to a corporate partner in exchange for licensing fees and royalty payments on future product sales. A portion of formulation development, as well as microbiology, chemistry, manufacturing and controls information, are typically provided by the Company's licensed corporate partner, and the Company then submits to the United States Food and Drug Administration (the "FDA") a New Drug Application ("NDA") to obtain the FDA's clearance to market the drug. See "Government Regulation of Pharmaceuticals" below.
Using this royalty-based business model, which is relatively uncommon in the pharmaceutical industry, the Company has had two out of four NDAs approved, commercialized two drugs, and has other compounds proceeding through various stages of development, all with a relatively modest depletion of its cash. The Company's first product, ADENOCARD(R), was approved by the FDA in October 1989. Its second product, ADENOSCAN(R), was approved by the FDA in May 1995.
Substantially all of the Company's royalty income in the three year period ended December 31, 1997 resulted from sales of ADENOCARD and ADENOSCAN in the United States by Fujisawa-USA, Inc. ("Fujisawa"), the Company's corporate partner.
Statements contained in Item 1 of this report which are not historical facts are forward looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. Forward looking statements involve known and unknown risks that could
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cause the Company's actual results to differ materially from expected results. Factors that could cause actual results to differ materially include, among others, the high cost and uncertainty of the research, clinical trials and other development activities involving pharmaceutical products; the unpredictability of the duration and results of regulatory review of New Drug Applications; the possible impairment of, or inability to obtain, intellectual property rights and the cost of obtaining such rights from third parties; intense competition; the uncertainty of obtaining, and the Company's dependence on, third parties to manufacture and sell its products; results of pending or future litigation and other risk factors detailed from time to time in the Company's SEC filings.
STRATEGIC PLAN
Whereas large pharmaceutical companies often diversify into multiple diagnostic and therapeutic areas, small companies with more limited resources must concentrate their efforts to be competitive and successful. As such, the Company focuses primarily on the role of adenosine and its receptors in cardiovascular disease. The Company's expertise in adenosine drug development is well-recognized in the medical community.
To further concentrate its portfolio of products and development programs, the Company is engaged in efforts to divest products unrelated to adenosine. In 1997 the Company returned the rights to Tc99m GLUCARATE and Adenosine Triphosphate (ATP) to their respective licensors. NDAs for VIASCINT(TM) and BIDIL(R) were filed on April 25, 1996 and July 3, 1996, respectively. On February 27, 1997 the Cardio-Renal Advisory Committee ("Committee") of the FDA voted 9 to 3 not to recommend approval of BIDIL for treatment of congestive heart failure. On July 31, 1997 the FDA issued a letter stating that the NDA for VIASCINT was not approvable. Accordingly, in 1998 the Company may relinquish its rights to VIASCINT and BIDIL depending on the results of its outlicensing efforts.
PORTFOLIO
ADENOCARD(R) - a sterile formulation of adenosine for injection - indicated for the treatment of abnormally rapid heartbeats originating in the upper chambers of the heart, referred to as paroxysmal supraventricular tachycardia. Commercially available from Fujisawa in the U.S. and Canada since 1989 as ADENOCARD, the drug also is sold by the Company's corporate partner Sanofi Pharma ("Sanofi"), a multinational pharmaceutical company headquartered in France, in the United Kingdom and other countries of the world as ADENOCOR(R) and in Switzerland as KRENOSIN(R).
ADENOSCAN(R) - a sterile formulation of adenosine for infusion - indicated as an adjunct to thallium cardiac imaging for the evaluation of coronary artery disease in patients unable to exercise adequately, referred to as pharmacological stress. Commercially available from Fujisawa in the United States and Canada since 1995, the drug also is sold by Sanofi in the United Kingdom. During 1997 Sanofi received approval for the drug in 14 additional member countries of the European Community through the mutual recognition procedure.
ADENOSINE FOR CARDIOPROTECTION (formerly designated MEDR-640) - sterile formulations of adenosine for infusion - under development as a cardioprotective adjunct to early thrombolytic therapy or emergency angioplasty in the treatment of acute myocardial infarction and as an additive to standard cardioplegia during open-heart surgery. At the 1997 70th Scientific Sessions of the American Heart Association, positive
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clinical results of a Phase II multicenter trial were reported, supporting the Company's belief, although no assurance can be given, that the drug may prove to be an effective cardioprotective agent during acute myocardial infarction. Fujisawa is the Company's partner for this product.
ADENOSINE ANALOGS - chemical derivatives of adenosine, or adenosine analogs, have been developed by chemists to selectively effect a particular adenosine receptor subtype. These compounds are referred to as second-generation technology. By means of options agreements and a research agreement, the Company has rights to a number of adenosine analogs, including A2a-, and A3- agonists as well as A1-, and A3- antagonists. The lead A2a-agonist, designated MRE-0470, is under development as a potential follow-on to the Company's currently marketed product ADENOSCAN. No assurance can be given that any of the Company's analogs will result in the filing or approval of any NDA. See "Government Regulation of Pharmaceuticals" below.
ADENOSINE ALLOSTERIC MODULATORS - a new series of adenosine-based compounds, designated ADENOSINE ALLOSTERIC MODULATORS, with a novel mechanism of action were discovered and synthesized in 1997. The compounds are referred to as third-generation technology. No assurance can be given that any of these compounds will result in the filing or approval of any NDA. As of the end of 1997, the Company had filed patent applications on more than 20 ADENOSINE ALLOSTERIC MODULATORS. No assurance can be given that any patents will be issued or, if issued, that they will provide any competitive protection to the Company. See "Patents and Proprietary Rights" below.
PRODUCT AND COMPOUND SUMMARIES
ADENOCARD(R)
The Product: ADENOCARD is a sterile formulation of adenosine (3mg/ml) available in 2ml vials and 2-4ml prefilled syringes for intravenous injection to restore normal heart rhythm in patients with abnormally rapid heartbeats originating in the upper chambers of the heart, so-called paroxysmal supraventricular tachycardia (PSVT). Because of its very short half-life (less than 10 seconds), ADENOCARD works quickly and typically without prolonged side effects. It has been adopted by numerous medical organizations as the "drug-of-choice" for the treatment of PSVT.
Regulatory Status: In October 1988, the Company received FDA approval to market ADENOCARD in the United States, and the drug is commercially available from Fujisawa in the United States and Canada. In September 1991, Sanofi received marketing approval (under the trade name ADENOCOR) in the United Kingdom and, in May 1992, received marketing approval (under the trade name KRENOSIN) in Switzerland. Sanofi also sells the drug in Austria, Australia, Belgium, Bulgaria, Chile, the Czech Republic, Denmark, the Dominican Republic, Egypt, Finland, France, French Polynesia, Germany, Greece, Guatemala, Hungary, India, Indonesia, Ireland, Italy, Jordan, Kuwait, Latvia, Libya, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Qatar, Saudi Arabia, Singapore, Slovakia, South Africa, South Korea, Spain, Switzerland, Taiwan, Thailand, Ukraine, the United Arab Emirates and Uruguay.
Product License: In March 1985, the University of Virginia Alumni Patents Foundation ("UVAPF") granted to the Company an exclusive license to exploit in the United States and Canada the use of adenosine for the treatment of
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supraventricular tachycardia that is caused by re-entry in the A-V node or an accessory pathway of the human heart. (In November 1986, UVAPF received a United States Patent on such use.) For these rights, the Company paid a one-time, nonrefundable license fee and agreed to pay 10% of all net sales of ADENOCARD made directly by the Company and 50% of all royalties received by the Company from its sublicensees until the expiration of the term of the patent rights or until the license is terminated as provided in the agreement.
Competition: Intravenous calcium channel blockers and beta-blockers (generically available from numerous sources) are principal competitors. In addition, catheter-based ablation therapy is becoming more common and may compete for certain patient types.
Manufacturing and Marketing:
1. Agreement with Fujisawa. The Company granted Fujisawa an exclusive license to manufacture and market ADENOCARD in the United States and Canada. Fujisawa agreed to pay the Company a royalty equal to 25% of its net sales of ADENOCARD in each country for the duration of patent protection or any other exclusive marketing rights that may be granted to the Company by governmental agencies, whichever is longer. Fujisawa also agreed to pay the Company a royalty equal to 7% of Fujisawa's net sales of ADENOCARD during any subsequent term of the agreement, which will continue after the initial term until either party terminates the agreement by giving the other party 90 days written notice.
2. Agreement with Sanofi Pharma. The Company granted Sanofi the rights to exclusively manufacture and market ADENOCARD in Europe and countries other than the United States and Canada. Sanofi agreed to use its best efforts to commercialize ADENOCARD in such territories subsequent to receiving governmental marketing approvals and to pay the Company royalties equal to 5% of its net sales of ADENOCARD. Royalties will be paid on a country by country basis for the longer of six years or the period of any marketing exclusivity.
ADENOSCAN(R)
The Product: ADENOSCAN is a sterile formulation of adenosine (3mg/ml) available in 30ml or 20ml vials for infusion indicated as an adjunct to thallium cardiac imaging in the evaluation of coronary artery disease in patients unable to exercise adequately. The procedure is called pharmacological stress, since in many ways the effects of adenosine simulate those of exercise. ADENOSCAN is administered by brief intravenous infusion, and thallium (a radioactive agent) is injected during the procedure. Cardiac images are subsequently acquired (with gamma cameras) which visually display the presence and severity of underlying coronary artery disease. Because of its very short half-life, side effects are generally very brief.
Regulatory Status: In October 1992, the Company received approval to market ADENOSCAN in Canada; and in May 1995, the Company received from the FDA marketing clearance for ADENOSCAN in the United States. In June 1995, Sanofi received marketing approval for ADENOSCAN in the United Kingdom and in February 1997, Sanofi registered ADENOSCAN in 14 additional member countries of the European Community through the mutual recognition procedure. The final administrative procedure involving the granting of a National Marketing License authorizing the sale of the product is currently being sought from the health authorities in each of the member countries. ADENOSCAN is currently marketed in the United States, Canada, the United Kingdom, Australia, Ireland, and Germany.
Product License: The Company owns the product as it is the exclusive assignee of patents issued in the U.S. and Canada, with counterpart applications pending approval in other countries of the world, covering the use of adenosine as a
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pharmacological stressor in cardiac imaging. In addition, in the U.S. the product received three years of exclusivity from the date of NDA approval under the Hatch-Waxman Act.
Competition: Intravenous dipyridamole, manufactured and marketed by DuPont Radiopharmaceuticals under the brand name IV Persantine(R), is the principal competitor and has been available in the U.S. since 1990. Intravenous dipyridamole is generically manufactured and marketed by Lederle. In addition, other drugs and procedures currently available or under development may be useful in determining the presence or severity of coronary artery disease and may compete directly with ADENOSCAN.
Manufacturing and Marketing:
Agreement with Fujisawa. The Company granted Fujisawa an exclusive license in the United States and Canada to manufacture and market ADENOSCAN. As amended in May 1995 by an agreement settling a litigation among the parties and Abbott Laboratories, Inc. related to the manufacturing and marketing rights to this drug, Fujisawa agreed to pay the Company royalties of 29% of ADENOSCAN net sales for the first five years after the commencement of commercial sales in each territory, i.e., until July 2000 for U.S. sales, and thereafter royalties of 25% of net sales until June 10, 2007, at which time Fujisawa would have a paid-up license.
Fujisawa also agreed to pay royalties to the Company in respect of periods of more than thirty days in which it is unable to fulfill ADENOSCAN orders for reasons other than force majeure and other specified events, such royalties to be at the then prevailing rate based on the average daily sales of ADENOSCAN during the preceding 12 months. Fujisawa also agreed generally to maintain an inventory of at least six months of ADENOSCAN finished product and work-in-process, to be stored at multiple locations and to use its best efforts to identify and provide data to the Company to qualify with the FDA an alternate supplier of the adenosine raw material necessary for the manufacture of ADENOSCAN. In October 1996, Fujisawa's Melrose Park, Illinois plant was qualified by the FDA as an alternate manufacturing facility for ADENOSCAN in 30ml. vials.
Agreement with Sanofi. The Company granted Sanofi the exclusive rights to manufacture and market ADENOSCAN worldwide except in the United States, Canada, Japan, Korea and Taiwan. In June 1995, Sanofi received marketing approval for ADENOSCAN in the United Kingdom and in February 1997, Sanofi registered ADENOSCAN in 14 additional member countries of the European Community through the mutual recognition procedure. The final administrative procedure involving the granting of a National Marketing License authorizing the sale of the product is being sought from the health authorities in each of the member countries. Sanofi pays the Company a royalty of 6 to 8 percent, based on the level of annual sales, for the longer of ten years or the period of any marketing exclusivity for ADENOSCAN in each country of the territory.
Agreement with Suntory. The Company signed a development and marketing agreement with Suntory Limited for cardiovascular uses of adenosine in Japan. During 1997 Suntory initiated a Phase III trial to pursue the use of adenosine for pharmacologic stress for use with thallium perfusion imaging to detect coronary artery disease. The Japanese equivalent of an NDA has not been filed for any product covered by the agreement. The Company received a $1 million license fee upon signing, a $300,000 fee in 1995 when the FDA granted marketing clearance in the U.S. for ADENOSCAN and a payment of $400,000 following Suntory's initiation of a Phase III trial in Japan in 1997.
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ADENOSINE FOR CARDIOPROTECTION
The Product: The Company's development program with a sterile formulation of adenosine (3mg/ml) as an adjunct to early reperfusion with thrombolytic therapy or emergency angioplasty in the treatment of acute myocardial infarction and as an additive to standard cardioplegia during open-heart surgery now is referred to as "ADENOSINE FOR CARDIOPROTECTION" (formerly designated MEDR-640). Each year in the U.S. over one million patients suffer acute myocardial infarction and, despite the benefits of early reperfusion, permanent injury and disability are not uncommon. In addition, over 300,000 patients a year undergo coronary artery bypass graft (CABG) surgery and, despite standard cardioprotective measures, significant cardiac support is often required during the early postoperative period.
Development Background: Substantial preclinical data and limited human testing suggest, although no assurance can be given, that adenosine may be beneficial in these acute ischemic settings. The results of a single-center pilot investigation (i.e., significantly reduced injury measured six weeks after the procedure compared to measurements made at the time of hospital discharge), suggest that adenosine, as an adjunct to emergency angioplasty, may further limit the damage associated with acute myocardial infarction. The preliminary results from another single-center pilot study (i.e., statistically significant reductions in the cumulative amount of inotropes such as dopamine and dobutamine, and vasodilators such as nitroglycerin, required in the 24-hour period following surgery), suggest that adenosine, as an additive to standard cold-blood cardioplegia, may also limit the amount of cardiac support required during the early postoperative period following CABG surgery. These preliminary findings supported the initiation of three Phase II multicenter trials, including a placebo-controlled trial in CABG surgery (so-called AB-02 trial), a placebo-controlled trial using emergency (primary) angioplasty in acute myocardial infarction (so-called ALIVE trial), and a placebo-controlled trial using thrombolytic therapy in acute myocardial infarction (so-called AMISTAD trial). Patient enrollment for the AB-02 trial was completed during 1997 and the results of the study should be available by mid 1998. Due to difficulty in recruiting patients in a timely manner, the ALIVE trial has been terminated. Patient enrollment for the AMISTAD trial was completed in July and results of the study were presented by Dr. Kenneth Mahaffey, Duke Clinical Research Institute, at the 70th Scientific Sessions of the American Heart Association on November 10, 1997.
The AMISTAD trial revealed that patients with anterior MI who were treated with adenosine plus thrombolysis experienced median final infarct size of 15.0% (n=39) as compared to 45.5% (n=38) for patients treated with thrombolysis alone. For patients with non-anterior MI, infarct size was similar (11.5% (n=72) vs. 11.5% (n=72)) regardless of the addition of adenosine. Statistical analysis of the primary endpoint was carried out for the intent-to-treat population using protocol-specified methods and predetermined variables. As expected, MI location was the most significant variable related to the final infarct size, since anterior MI is typically much larger than non-anterior MI. But more importantly, for those patients with anterior MI, i.e., those at greatest risk, the use of adenosine resulted in significantly smaller final infarct size (p=0.014).
In a subset of patients, cardiac images were obtained at the time of hospital admission as well as at time of discharge in order to measure the amount of heart muscle at risk of irreversible injury prior to treatment. For patients with anterior MI, the amount of myocardium at risk was similar in the adenosine and non-adenosine groups, 49.5% (n=12) vs. 51.0% (n=9), respectively. However, the amount of heart muscle "saved", as a percentage of myocardium at risk, was greater with adenosine plus thrombolysis (62.3%) vs. thrombolysis alone (15.0%).
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Overall, at any time during hospitalization, cardiogenic shock (5.0% vs. 3.4%), congestive heart failure (10.1% vs. 6.8%), death (8.4% vs. 5.1%), and reinfarction (5.0% vs. 2.6%) were more common in the adenosine group compared to placebo. These differences were less apparent in the anterior MI subgroup and, overall, these event rates were far too low to draw any conclusions about clinical risk or benefit.
The study results (i.e., myocardial infarct size, as measured by nuclear imaging, is reduced by treatment with adenosine), are consistent with the basic literature describing the cardioprotective effects of adenosine in multiple animal models from various laboratories around the world. Subsequent clinical trials are necessary in order to establish the clinical benefit and overall safety profile of adenosine in this setting. The Company is currently in discussions with the FDA; its commercial partner, Fujisawa; and other third parties to determine the next development steps, including the possibility of a Phase III clinical program.
Regulatory Status: The original IND for Phase I studies was filed in November 1988. The Company has conducted three multicenter Phase II clinical trials in the U.S., Canada and Argentina under this IND.
Product License: The Company has a patent application pending in the U.S. and abroad for the use of adenosine to prevent further injury during acute myocardial infarction, and the Company is the sublicensee of Fujisawa, which is the exclusive licensee of a U.S. patent issued in 1989. (No assurance can be given that any pending application will result in any issued patent, or that any issued patent will provide any competitive protection to the Company or Fujisawa.) See "Patent and Proprietary Rights" below. See "Manufacturing and Marketing" below.
Competition: A wide variety of agents currently available or under investigation may be useful in these acute ischemic settings, including antiplatelet and anticoagulant agents, cardiosuppressants, perfluorochemicals, free radical scavengers, and adenosine analogs or modulators, which may compete directly with ADENOSINE FOR CARDIOPROTECTION.
Manufacturing and Marketing: ADENOSINE FOR CARDIOPROTECTION was included in the Company's 1988 exclusive license agreement with Fujisawa relating to ADENOSCAN. Pursuant to the May 1995 agreement with Fujisawa settling the litigation over the manufacturing and marketing of ADENOSCAN, all references to ADENOSINE FOR CARDIOPROTECTION in such license agreement were eliminated, and in May 1996, the parties entered into an agreement to jointly develop ADENOSINE FOR CARDIOPROTECTION. Under that agreement Fujisawa granted to the Company an exclusive sublicense under a U.S. patent under which Fujisawa is the exclusive licensee. Fujisawa has exclusive manufacturing and marketing rights in the U.S., Canada, Mexico and other territories, and it agreed to pay the Company 25% of net sales within the territories. The companies share equally all costs of development and any royalties due to third parties. Either the Company or Fujisawa may terminate the agreement and proceed alone providing it pays the other party, in twenty-four equal monthly installments, 100% of the money invested by the other party in the cardioprotective product, treated as an advance royalty, and an 8% royalty. If both parties decide to terminate the agreement then the parties shall share equally in the expenses and proceeds derived from the sale of the rights to such cardioprotective product to a third party.
ADENOSINE ANALOGS
The Compounds: Chemical derivatives, or analogs, of adenosine have been developed in an effort to improve the therapeutic utility of adenosine. The actions of adenosine are controlled or mediated through receptors, or specific recognition sites, on the surface of cells. Four adenosine receptor subtypes are known to exist (A1-, A2a-, A2b-, and A3-) and each is responsible for a different function. Intravenous adenosine, or first-generation technology
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(commercially available as ADENOCARD or ADENOSCAN), is a non-selective agonist, i.e., it stimulates all receptor subtypes. Adenosine analogs, or second-generation technology, theoretically may be selective, i.e., may act through a specific receptor subtype. In addition, certain analogs may exhibit activity by oral administration.
Development Background: Theoretical rationale and preclinical data support the investigation of several A2a-agonists for a variety of applications including: diagnosis of coronary artery disease, promotion of wound healing, treatment of coronary artery disease, prevention of restenosis, and treatment of congestive heart failure. The Company's lead A2a-receptor agonist, MRE-0470, should theoretically produce coronary vasodilation (via stimulation of the A2a-receptor) while not producing transient heart block and arrhythmias (the effects of A1-receptor stimulation). Hence, the compound may hold potential as a second-generation pharmacologic stressor. With respect to MRE-0470, necessary animal toxicology and pharmacoloy studies are underway. In addition to these A2a-agonists, a lead A1-antagonist has been selected for pre clinical development (refer to Biomedica Foscama in "Product License" below), and an A3-agonist has been identified (refer to University of Ferrara in "Product License" below).
Regulatory Status: Work is in progress to file an IND.
Competition: ADENOCARD, ADENOSCAN, generic dipyridamole
Product License: The Company has an exclusive worldwide license to multiple U.S. patents and foreign counterparts held by Discovery Therapeutics, Inc. (DTI) related to A2a-agonists. The Company has an exclusive option through January 1999 to acquire New York University's worldwide rights for the use of adenosine A2a-receptor agonists for the promotion of wound healing. The Company has an option agreement with the University of Massachusetts to acquire exclusive rights to its patents issued and pending worldwide for the use of adenosine A2a-receptor agonists for the promotion of positive inotrophic effects in compromised myocardium. The Company also has an option agreement with Biomedica Foscama to acquire exclusive rights to its library of adenosine A1-antagonists patents issued and pending worldwide. The Company has expanded its research agreement with the University of Ferrara to include agonists and antagonists which exert their actions at the adenosine A1- and A3- receptor subtypes. A Provisional Patent Application has been filed with the United States Patent and Trademark office on a lead A3-agonist. (No assurance can be given that any pending application will result in any issued patent, or that any issued patent will provide any competitive protection to the Company or Fujisawa.)
ADENOSINE ALLOSTERIC MODULATORS
The Compounds: ADENOSINE ALLOSTERIC MODULATORS affect the action of endogenous adenosine in the form of enhancement or inhibition by binding at sites distinct from, but functionally linked to, the primary recognition site of a receptor. Binding site studies and functional assays have shown that the enhancers "amplify" the effects of adenosine. Research is underway to establish the exact molecular mechanisms of this class of compounds. Allosteric enhancers may increase the actual number of adenosine receptors in the "active" or high-affinity state. Accordingly, although no assurance can be given, allosteric enhancers may be therapeutically useful when internal adenosine signals are weak.
Development Background: This new series of compounds was discovered and synthesized in the laboratories of Professor Giovanni Baraldi at the University of Ferrara, Italy as part of a basic research collaboration agreement between
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the Company and the University of Ferrara. The agreement grants the Company exclusive ownership of all intellectual properties relating to allosteric modulators derived from the collaboration.
Product License: The Company has filed patent applications with the U.S. Patent and Trademark Office and intends to file companion applications overseas for the first series of compounds synthesized and tested by Dr. Baraldi and colleagues. (No assurance can be given that any pending application will result in any issued patent, or that any issued patent will provide any competitive protection to the Company or Fujisawa.)
Regulatory Status: The subject compounds are in the research/discovery stage, and the Company therefore has no need to commence regulatory work.
Competition: The Company has no knowledge of the existence of any additional adenosine allosteric inhibitors.
GOVERNMENT REGULATION OF PHARMACEUTICALS
The Company is engaged in a business in which strict federal regulation through the FDA is a significant factor. Such regulations relate primarily to the safety and efficacy, but also govern manufacturing, labeling, advertising and marketing, of pharmaceutical products.
In order to test clinically and later market pharmaceutical products, a company must obtain marketing clearance from the FDA in the United States and comparable governmental agencies in other countries. The FDA requires substantial evidence of the safety and efficacy of new drugs and the approval process involves several steps. Each of these steps can be time consuming and expensive, and regulatory approval can never be predicted nor assured.
The first step includes the period from the discovery of the compound, including laboratory and animal experimentation, to the filing of an IND. The IND submission must contain data from the preclinical drug research, including biochemistry, animal toxicological and pharmacological studies, and any other available information on the drug and must also outline a plan of clinical investigation. INDs must be sought for particular formulations of a drug, such as oral, injectable and topical, and these formulations must be tested in the treatment of human disease only in accordance with protocols (specific treatment regimens) submitted in connection with the IND.
Once an IND has been allowed to become effective by the FDA, clinical trials on humans may be undertaken in accordance with the approved protocols. During clinical investigation, the sponsor is required to monitor all studies, to submit progress reports to the FDA at intervals not exceeding one year, and to report promptly serious adverse reactions pertinent to the safety of the drug.
There are usually three phases in the clinical development of a new drug. Phase I concerns the testing of the drug in a small number of healthy subjects to determine primarily a number of safety parameters and to obtain other basic experience with the drug in humans. Phase II concerns the testing of the drug under well-controlled conditions in a larger population to obtain information on
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the drug's safety and efficacy in patients for the claim or claims being made by the sponsor. Phase III concerns the testing of the drug in a still larger patient population and for a longer period of time under well-controlled conditions to confirm the safety and efficacy results obtained in Phase II. Phase III is usually considered the last phase in the clinical testing of the drug.
If the sponsor elects to proceed beyond clinical development to commercialization of the drug, it submits to the FDA an NDA which contains a written summary of all data reflecting the total research experience with the drug and a section regarding its manufacture. When the FDA has reviewed the NDA and all additional information which it may have required to be submitted during the review process, it decides whether, and under what labeling conditions, it will permit the product to be marketed. The FDA may require post-marketing testing and surveillance of adverse reactions as a condition of its approval to monitor the drug's effect during marketing.
Although health registration requirements are generally more rigidly applied in the United States than elsewhere, the regulatory pattern in the United States is now being followed by most industrialized countries.
ORPHAN DRUG ACT
As the sponsor of an orphan drug for a particular indication, the Company would be entitled to receive seven years exclusive marketing rights for this indication, but only if it proceeds to sponsor the first NDA approved for the drug for this indication. Thus, unlike patent protection, the designation of a drug for a particular indication as an orphan drug would not, by itself, prevent other manufacturers or sponsors from obtaining orphan drug status for the same drug for the same indication if they obtained a prior NDA, or from obtaining FDA approval prior to approval of the Company's NDA.
The Company also is entitled to certain federal income tax credits with respect to certain clinical expenses related to its orphan drugs.
As is the case with FDA approval generally, the grant of orphan drug status for one or more of the Company's drugs would not prevent the FDA from approving the same drug or drugs for a different indication, and medical practitioners may prescribe an approved drug for non-indicated (i.e., off-label) uses. The marketing potential of the Company's orphan drugs could be adversely affected by FDA approval of another company's NDA for the same drug for different uses.
The Company intends, where applicable, to obtain orphan drug designation for any drugs licensed or acquired by it in the future. There can be no assurance, therefore, that the scope of protection currently afforded by orphan drug status or the federal income tax credits currently available to sponsors of orphan drugs will continue to be available in the future.
HATCH-WAXMAN ACT
The Hatch-Waxman Act provides for limited marketing exclusivity for pharmaceutical products which receive NDA approval from the FDA, independent of any issued patents which may apply. If a pharmaceutical product receives NDA approval, and the FDA has not previously approved any other product containing the same active ingredient, including any salt or ester of the active ingredient, then the Hatch-Waxman Act does not permit any abbreviated generic NDA ("ANDA") to be submitted by another company for that drug product for five years from the date of NDA approval. If an NDA approval is received for a
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pharmaceutical product containing an active ingredient or salt or ester of an active ingredient that has been previously approved by the FDA, and if that NDA approval was secured in part through the submission to the FDA of new clinical investigations other than bioavailability studies, then the Hatch-Waxman Act prohibits the FDA from making effective the approval of an ANDA for that product by another company for a period of three years from the date of NDA approval. This limited exclusivity provision is automatically granted upon NDA approval as applicable and does not require special consideration. Within the Company's current portfolio of products, ADENOSCAN and ADENOSINE FOR CARDIOPROTECTION qualify for three years of exclusivity, under this provision.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are extremely important to the Company's business. However, the patent positions of biopharmaceutical firms, including the Company, are uncertain and involve complex legal and factual questions which can be difficult to resolve.
The Company's general policy is to license the right to manufacture and sell pharmaceutical products the use of which for the particular indication is covered by an issued United States patent which the Company's patent counsel believes is valid and enforceable. The Company believes that licensing issued patents represents the best step the Company can take to protect the technology, inventions, and improvements that it considers important to the development of its business, and the Company's financial investment therein. However, on occasion the Company may acquire product opportunities without issued patents or without patent applications pending, such as, for example, when in Management's opinion, the invention would expand the Company's adenosine portfolio. The Company also relies upon trade secrets, know-how, continuing technological innovations and subsequent licensing opportunities to develop and maintain its competitive position.
The patent application and issuance process may take several years and involves considerable expense, and there is no assurance that any patent sought by the Company or its licensors will issue. The coverage claimed in a patent application can be significantly reduced before a patent is issued. Consequently, neither the applicant nor the licensee knows whether any claim contained in a patent application will be allowed and result in the issuance of a patent or, if any patent is issued, whether it will provide meaningful proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy, until foreign counterparts, if any, are published, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be absolutely certain that it or any licensor was the first inventor of the subject matter covered by the patent application or that it or such licensor was the first to file a patent application therefor or that it would obtain the freedom to practice the claimed inventions. Moreover, priority in filing a patent application for an invention can be overcome by a different party who first practiced the invention. Accordingly, the Company might have to participate in extensive proceedings in U.S. and/or foreign patent offices or courts, including interference proceedings declared by the U.S. Patent and Trademark Office ("Patent Office"), to determine priority and/or patent validity. Any such proceeding would be costly and consuming of Management's time. There can be no assurance either that the Company's owned or licensed patents would be held valid or that the Company's products would not be found to infringe patents owned by others. In the event of a determination that the Company is infringing a third party's patent, the Company likely would be required to pay royalties, which could be substantial, to such third party. It is even possible that the third party could refuse a license to the Company in order to keep the Company's product off the market.
Medco Research, Inc.
There can be no assurance that any patent rights held by the Company will provide any actual competitive advantage to the Company. Competitors might be able to develop similar and competitive products outside the scope of the Company's patents. For example, should third parties patent or otherwise develop and receive governmental clearance to commercialize an adenosine product for a use not covered by the Company's patents, physicians could use those third party products in place of the Company's adenosine products even though such third party products were not approved by the FDA for the same indications as the Company's products. Any such off-label use of third party products could have a material adverse effect on sales of the Company's products and the amount of royalty revenues received by the Company.
In the case of ADENOSCAN, one such third party with potential claims has been identified. In 1987, such third party filed broad patent applications relating to uses of adenosine. The third party has told the Company that its applications make certain claims which may be relevant to the development and commercialization of the Company's adenosine products, including ADENOSCAN and ADENOSINE FOR CARDIOPROTECTION. This third party also has an issued Canadian patent which appears to have priority over the Company's Canadian patent for ADENOSCAN. The third party already has told the Company and Fujisawa that it would like to enter into a license agreement covering its pending claims, and negotiations are on-going. However, there can be no assurance either that any license can be negotiated with this third party on mutually acceptable, or commercially reasonable, terms or that the owner of this patent application will not seek to enforce against the Company's products, or against its development activities, any patent that may issue.
The Company also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary technology and techniques or otherwise gain access to the Company's trade secrets or disclose such technology or that the Company can meaningfully protect its trade secrets.
The Company has registered various trademarks in the Patent Office and has other trademarks which have acquired both national and international recognition. The Company has trademark registrations or pending applications in a number of foreign countries.
PRODUCT AND CLINICAL STUDIES LIABILITY
Administration of any drug to humans involves the risk of allergic or other adverse reactions in certain individuals. Accordingly, it is possible that claims might be successfully asserted against the Company for liability with respect to injuries that may arise from the administration or use of its products during clinical trials or following marketing. However, no claim involving a material liability has ever been brought against the Company. The Company presently carries, and contractually requires its marketing partners to carry, what it believes to be adequate product and clinical studies liability insurance coverage.
RESEARCH AND DEVELOPMENT
The Company expended for research and development $6,902,092, $5,839,278, and $8,535,187 during the years ended December 31, 1997, 1996 and 1995, respectively.
Medco Research, Inc.
EMPLOYEES
As of March 11, 1998 the Company employed twenty-three persons on a full-time basis. None of the Company's employees are represented by a labor union, and the Company considers its employee relations to be good. The Company will need to hire additional scientific and support personnel as it expands its operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 11,900 square feet of office space, in Research Triangle Park, North Carolina, for its corporate offices under a lease that expires in July 1998. The Company extended this lease through November 30, 1998 with the Company's sole discretion to extend for an additional 30 days until December 31, 1998. The Company has entered into a letter of intent to lease a facility no later than December 31, 1998 which will be adequate for the Company's present and future operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company prevailed in the liability claims pending against it as reported in its 1996 Form 10-K: In November 1997, the American Arbitration Association denied, in its entirety, the damage claims of Dr. Eliezer Rapaport; and in May 1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed the dismissal of the class action litigation alleging the Company had violated federal securities laws. Both decisions are final and binding on the parties.
There are no material legal proceedings pending against the Company. However, on October 3, 1997, Richard A. Wilson, Debra A. Angello, and Paul S. Angello ("Plaintiffs") filed a complaint against Fujisawa, USA, Inc. in the United States District Court, District of Oregon, alleging that Fujisawa's sale of ADENOSCAN in the United States induces, or contributes to, the infringement of plaintiffs' U.S. Patent No. 4,824,660 ("the `660 patent"), entitled "Method of Determining the Viability of Tissue in an Organism." which the Patent Office issued on April 25, 1989. According to plaintiffs, the `660 patent claims a specific technique for more reliably locating viable or nonviable regions of heart tissue, namely using an adenosine triphosphate repleting agent such as ribose or adenosine as an adjunct to radioactive isotope (e.g., thallium-201) myocardial perfusion scintigraphy, where regions of heart tissue in which the scan images show no radioactivity indicate the presence of nonviable heart tissue. In its Answer and Counterclaim, Fujisawa denied that it infringed any of the claims of the `660 patent and alleged that the `660 patent was invalid. Fujisawa further alleged that plaintiffs' claims of patent infringement were barred by the doctrines of laches and estoppel. In its Counterclaim, Fujisawa requested a declaratory judgment that it did not infringe the claims of the `660 patent and that such patent is invalid.
This action is in the pre-discovery motion stage. Fujisawa has advised the Company that Fujisawa intends to vigorously defend this action and believes it has no merit. Under the terms of its ADENOSCAN exclusive license agreement with Fujisawa, the Company will reimburse Fujisawa for 50% of the cost of defending this action.
The Company also believes the action has no merit. The Company has long been aware of the `660 patent, and as part of its normal operating procedures the Company has received the written opinions of separate patent counsel that the manufacture and sale of ADENOSCAN for use in myocardial imaging does not infringe any valid claim of the `660 patent. The Company disclosed its receipt of its patent counsel non-infringement opinion in its 1993 Form 10-K Report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Medco Research, Inc.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under the symbol MRE. The following table sets forth the high and low sales prices of the Company's Common Stock on the American Stock Exchange during the applicable periods.
Quarter Ended High Low ------------- ---- ---
Calendar 1997:
March 31, 1997 $13 3/8 $7 3/4 June 30, 1997 9 13/16 7 3/4 September 30, 1997 14 9 5/8 December 31, 1997 17 1/8 12 3/4
Calendar 1996:
March 31, 1996 $12 1/8 $ 9 June 30, 1996 11 1/2 8 7/8 September 30, 1996 10 1/4 8 December 31, 1996 11 5/8 8 3/4
The Company had 237 owners of record and in excess of 4,911 beneficial owners of its Common Stock as of March 11, 1998, based upon information provided by the Company's transfer agent.
DIVIDENDS
The Company has not paid any cash dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no cash dividends on its Common Stock will be declared in the foreseeable future. Any future cash dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements and general business conditions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five years ended December 31, 1997, 1996, 1995, 1994 and 1993 has been derived from the audited financial statements of the Company and should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial information included elsewhere in this report.
Medco Research, Inc.
Summary Consolidated Statement of Operations Data:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
For calendar 1997, adenosine royalties (ADENOCARD and ADENOSCAN) increased 49% and operating expenses increased 5% which resulted in a net income of $10,213,128 for 1997, or $0.97 basic earnings per share, compared to $4,321,645, or $0.40 basic earnings per share, for 1996. Earnings per share on a diluted basis for 1997 and 1996 were $0.96 and $0.40, respectively. Two-thirds of all royalty income in the two-year period ended December 31, 1997 resulted from Fujisawa sales of ADENOSCAN in the United States.
In February 1997, Sanofi successfully registered ADENOSCAN in 14 member countries of the European Community through the mutual recognition procedure. In March 1997, the Company formed a basic research collaboration with Professor Giovanni Baraldi, Department of Pharmaceutical Chemistry, University of Ferrara, Italy, to discover novel adenosine-receptor compounds. In June 1997, the Company's development and commercial partner for adenosine in Japan, Suntory Limited, announced plans to initiate Phase III clinical trials of ADENOSCAN for use with thallium perfusion imaging to detect coronary artery disease in patients unable to exercise adequately. Also in June, the Company obtained an option from NYU to exclusively license worldwide rights for the development, manufacturing, use and sale of adenosine A2a-receptor agonists in the field of wound healing. In August 1997, the Company and Discovery Therapeutics, Inc.
Medco Research, Inc.
entered into an alliance dedicated to the discovery, development and commercialization of compounds that stimulate the A2a subfamily of adenosine receptors ("A2a-agonists"). In October 1997, the Company announced the discovery of ADENOSINE ALLOSTERIC MODULATORS. In November 1997, the Company's results from the AMISTAD multi-center trial (Acute Myocardial Infarction Study of Adenosine) and the use of adenosine combined with heparin in the treatment of chronic stable angina were reported at the 70th Scientific Sessions of the American Heart Association in Orlando, Florida. In December 1997, the Company obtained an option from Biomedica Foscama to exclusively license its library of adenosine A1-antagonists.
RESULTS OF OPERATIONS
The accompanying consolidated financial statements and certain selected financial data have been presented for the calendar years ended December 31, 1997, 1996 and 1995. The Company's presentation of the Consolidated Statements of Operations reflect gross margin related to royalty revenues followed by operating expenses and other income (expense).
Calendar Year 1997 Compared to Calendar Year 1996
Royalty Revenues. The Company's 1997 royalty revenue increased from $13,453,958 to $20,000,366, an increase of 49%, primarily due to continued quarter-to-quarter increases in unit sales of ADENOSCAN by Fujisawa, the Company's North American licensee. Fujisawa is responsible for substantially all of the royalty revenue of the Company.
Gross Margin. The Company's 1997 gross margin from adenosine revenues increased from $10,880,081 to $17,015,292, an increase of 56% due to the continued shift in the product sales mix to ADENOSCAN and continued quarter-to-quarter increases in unit sales of ADENOSCAN, a drug for which the Company owns the underlying patent and therefore pays no third party royalty. Royalty expense, which is payable to the University of Virginia Alumni Patents Foundation from whom the Company acquired exclusive rights to ADENOCARD, and represents one-half of royalty revenue earned by the Company from ADENOCARD sales, increased from $2,573,877 to $2,985,074, an increase of 16%.
Operating Expenses. Total operating expenses increased from $8,841,551 to $9,295,693, an increase of 5% due to an increase in research and development expenditures for ADENOSINE FOR CARDIOPROTECTION and ADENOSINE ANALOGS.
Research and development costs increased from $5,839,278 to $6,902,092, an increase of 18%. Research and development expenditures were higher during 1997 primarily due to nearing the completion of the Company's three multi-center Phase II trials associated with ADENOSINE FOR CARDIOPROTECTION and pursuing the filing of an IND for MRE-0470, an adenosine A2a-receptor agonist for the diagnosis of coronary artery disease.
General and administrative expenses decreased from $3,002,273 to $2,393,601, a decrease of 20%. This reduction is primarily the result of lower overall spending in 1997 and one-time employee related charges incurred in 1996.
Medco Research, Inc.
Other Income. Interest income increased from $2,020,115 to $2,099,550, an increase of 4%. Investment income was higher in 1997 mainly due to higher investment balances. Other income increased from $350,000 to $682,389, an increase of 95%. This increase is related to non-royalty receipts under licensing agreements, such as license fees or milestone payments, and the timing in which these receipts can be recognized as revenues. Such receipts are not recognized as revenues prior to the completion of the related milestones.
Basic Earnings Per Share. Basic earnings per share increased from $0.40 per share in 1996 to $0.97 per share in 1997 on weighted average common shares outstanding of 10,917,920 and 10,545,533, respectively. The basic earnings per share reflects net income of $4,321,645 and $10,213,128 in 1996 and 1997, respectively.
Calendar Year 1996 Compared to Calendar Year 1995
Royalty Revenues. The Company's 1996 royalty revenue increased from $9,770,124 to $13,453,958, an increase of 38%, due to quarter-to-quarter increases since its July 31, 1995 launch in unit sales of ADENOSCAN by Fujisawa, the Company's North American licensee. Fujisawa is responsible for substantially all of the royalty revenue of the Company.
Gross Margin. The Company's 1996 gross margin from adenosine revenues increased from $5,814,573 to $10,880,081, an increase of 87% due to the continued shift in the product sales mix to ADENOSCAN, a drug for which the Company owns the underlying patent and therefore pays no third party royalty. Royalty expense, which is payable to the University of Virginia Alumni Patents Foundation from whom the Company acquired exclusive rights to ADENOCARD, and represents one-half of royalty revenue earned by the Company from ADENOCARD sales, decreased from $3,955,551 to $2,573,877, a decrease of 35%.
Operating Expenses. Total operating expenses decreased from $12,484,625 to $8,841,551, a decrease of 29% due to a substantial decrease in research and development expenditures for VIASCINT and BIDIL and a significant decrease in general and administrative expenditures for legal services.
Research and development costs decreased from $8,535,187 to $5,839,278, a decrease of 32%, and returned to historical levels. Research and development expenditures were higher during 1995 principally due to the Company's pivotal trial work associated with VIASCINT and BIDIL, for which NDAs were filed in 1996. Expenditures in 1996 reflect activities associated with a product portfolio in earlier stages of development, including joint development with Fujisawa of ADENOSINE FOR CARDIOPROTECTION.
General and administrative expenses decreased from $3,949,438 to $3,002,273, a decrease of 24%. This improvement in general and administrative expenses is mainly attributed to lower legal expenses during 1996 related to the pending class action litigation.
Other Income. Interest income decreased from $2,237,610 to $2,020,115, a decrease of 10%. Investment income was lower in 1996 mainly due to slightly higher yields and higher investment balances in 1995. Other income decreased from $1,000,000 to $350,000, a decrease of 65%. This decrease is related to non-royalty receipts under licensing agreements, such as license fees or
Medco Research, Inc.
milestone payments, and the timing in which these receipts can be recognized as revenues. Such receipts are not recognized as revenues prior to the completion of the related milestones and must be refunded in part or completely if the related milestones are not met.
Basic Earnings (Loss) Per Share. Basic earnings/loss per share improved from a loss of $0.32 per share in 1995 to income of $0.40 per share in 1996 on weighted average common shares outstanding of 11,023,921 and 10,917,920, respectively. The basic earnings/loss per share reflects a net loss of $3,532,442 and income of $4,321,645 in 1995 and 1996, respectively.
FINANCIAL CONDITION
As of December 31, 1997, the Company had total cash and investments of $40,529,469 comprised of $2,726,486 of cash and cash equivalents and $37,802,983 of investments in U.S. Treasury Notes, debt securities of various federal governmental agencies and high quality corporate debt securities. The Company's working capital as of December 31, 1997 was $20,158,833 compared to $18,372,970 as of December 31, 1996.
Included in liabilities at December 31, 1997 is an accrued liability (current and non-current portion) of $1.5 million relating to the balance of the Company's guaranteed royalty obligation to Abbott Laboratories pursuant to the terms of the Company's settlement of a litigation relating to the manufacturing and marketing rights to ADENOSCAN. See Note 6 to the Company's Financial Statements included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Medco Research, Inc. are included in this report:
Page 22 Report of Independent Accountants
Page 23 Independent Auditors' Report
Page 24 Consolidated Balance Sheets--December 31, 1997 and 1996
Page 25 Consolidated Statements of Operations--Years Ended December 31, 1997, 1996 and 1995
Page 26 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1997, 1996 and 1995
Page 27 Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995
Page 29 Notes to Consolidated Financial Statements
Medco Research, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders Medco Research, Inc.:
We have audited the accompanying consolidated balance sheet of Medco Research, Inc. and subsidiary as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medco Research, Inc. and subsidiary as of December 31, 1997 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina January 22, 1998
Medco Research, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Medco Research, Inc.:
We have audited the accompanying consolidated balance sheet of Medco Research, Inc. and subsidiary as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medco Research, Inc. and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, the Company is party to certain claims and litigation. The ultimate outcome of these matters cannot presently be determined. Accordingly, no provisions for liability, if any, that may result from the resolution of such matters have been recognized in the accompanying consolidated financial statements.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina January 28, 1997
Medco Research, Inc.
Medco Research, Inc.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
1. Summary of Significant Accounting Policies
Company Operations
Medco Research, Inc. is an emerging pharmaceutical company engaged in the global commercialization of cardiovascular medicines and adenosine-based products.
The Company's business approach has been to carefully evaluate and selectively acquire product candidates, thereby reducing the costs and risks associated with basic research and drug discovery. These product opportunities and the related intellectual property rights are typically obtained under license from academic or corporate sources who have received United States patents which, in the opinion of the Company's patent counsel, are enforceable. The Company then sponsors and directs any additional pre clinical studies and clinical testing needed for product registration and marketing approval. These late-stage product development activities are outsourced to independent clinical research organizations to maximize efficiency and minimize internal overhead. Historically the Company has licensed the manufacturing and marketing rights to the product to a corporate partner in exchange for licensing fees and royalty payments on future product sales. A portion of formulation development, as well as microbiology, chemistry, manufacturing and controls information, are typically provided by the Company's licensed corporate partner, and the Company then submits to the United States Food and Drug Administration (the "FDA") a New Drug Application ("NDA") to obtain the FDA's clearance to market the drug.
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about the Fair Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not readily available, fair values are based on quoted
Medco Research, Inc.
market prices of comparable instruments. SFAS No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts are not intended to represent the underlying value of the Company. The carrying amount of cash and equivalents, accounts receivable and payable, and accrued royalties approximates fair value because of the short maturity of those instruments. The fair value of investments was based primarily on quoted market prices. If quoted market prices are not readily available, fair values are based on quoted market prices of comparable instruments.
Investments
The Company's investments include primarily investments in marketable debt securities which are recorded at cost, net of amortization of premiums and discounts. All premiums and/or discounts are amortized over the remaining term of the related security using the straight-line method which does not differ significantly from the level-yield method. The Company's investments are accounted for in accordance with SFAS No.115, "Accounting for Certain Investments in Debt and Equity Securities". This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are classified in three categories and are accounted for as follows: (1) debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held-to-maturity and reported at cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of equity. The Company's investments are accounted for as held-to-maturity securities as of December 31, 1997 and 1996. The classification of investments is determined on the date of acquisition. The Company reviews its investment portfolio as deemed necessary and, where appropriate, adjusts individual investments for other-than-temporary impairments.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over five years.
Trademark and Distribution Rights
The cost of acquiring trademark and distribution rights is amortized over 15 years using the straight-line method. Periodically, these costs are reviewed and adjusted based on the estimated future financial benefits of the underlying product.
Patent Costs
The Company capitalizes certain costs, principally acquisition costs, incurred in connection with the application for and procurement of patents. Costs are capitalized on a case by case basis relating to those territories where the Company anticipates receiving significant future benefits from the patent, and are amortized over the life of the patent beginning at the date of grant. Periodically, these costs are reviewed and the amortization adjusted based on the estimated future benefits remaining.
Medco Research, Inc.
1. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Statement of Financial Accounting Standard No. 105 requires disclosure of information about financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk. Financial instruments which subject the Company to concentrations of credit risk consist principally of accounts receivable and investments.
The Company invests its excess cash primarily in U.S. Government and high-quality corporate debt securities and commercial paper. The commercial paper securities are highly liquid and the governmental securities typically mature within one to three years (although there is an established secondary market for sales at any given time). The majority of the accounts receivable balance relates to one customer (See Note 5). Based on the nature of the financial instruments and/or historical realization of these financial instruments, management believes they bear minimal risk.
Deferred Revenue
Revenues derived from license agreements are recorded as earned based on the performance requirements of the related contract.
Research and Development
All research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Medco Research, Inc.
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires the Company to change its method of computing, presenting and disclosing earnings per share information. The Company is now required to report both basic and diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares outstanding during a period. Diluted earnings per share is computed using the weighted average number of common shares and dilutive common share equivalents, primarily stock options, outstanding during a period. Upon adoption, all prior period data has been restated to conform to the provisions of SFAS No. 128.
The net income (loss) used for both basic and dilutive earnings per share for each of the years ended December 31, 1997, 1996, and 1995 was the same. The following is a reconciliation of the weighted average number of common shares and common share equivalents used to determine diluted earnings (loss) per share for each of the years ended December 31, 1997, 1996, and 1995:
Adoption of New Accounting Pronouncements
The Company will adopt Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") for its fiscal year ending December 31, 1998. SFAS No. 131 requires the Company to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Preliminary analysis of this pronouncement by the Company indicates that the pronouncement will not have a material impact on the Company.
The Company will adopt Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") for its fiscal year ending December 31, 1998. SFAS No. 130 requires the Company to display an amount
Medco Research, Inc.
representing the total comprehensive income for the period in a financial statement which is displayed with the same prominence as other financial statements. Upon adoption, all prior period data presented will be restated to conform to the provisions of SFAS No. 130. Preliminary analysis of this pronouncement by the Company indicates that the pronouncement will not have a material impact on the Company.
2. Investments
The aggregate values of investment securities at December 31, 1997 and 1996 along with unrealized gains and losses determined on an individual security basis are as follows:
There were no realized gains or losses in 1997. Net realized gains in 1996 were $49,258 as a result of the sale of the Pimco Fund. Net realized gains in 1995 were $7,302 as a result of the sale of the Preferred Dividend Fund.
The following represents the contractual maturities of investments held as of December 31, 1997.
Less than 1 year $14,272,791 1 to 5 years 23,530,192 =========== Total $37,802,983 ===========
3. Property and Equipment
December 31, 1997 1996 -----------------------------------
Property and equipment $717,675 $785,269 Accumulated depreciation (473,679) (477,748) =================================== $243,996 $307,521 ===================================
Medco Research, Inc.
4. Leases
The Company leases office space under an operating lease which expires in July 1998. Lease expense approximated $210,800, $206,100, and $203,700 in 1997, 1996 and 1995, respectively. The Company extended this lease through November 30, 1998 with the Company's sole discretion to extend for an additional 30 days until December 31, 1998. Future minimum lease payments under this lease agreement and its extension through December 31, 1998 are approximately $220,000.
5. Patent, Trademark and Distribution Rights
The Company is engaged in the development of new prescription drugs in pursuit of obtaining governmental marketing approvals in the United States and other countries. The Company acquires from third parties exclusive rights to develop and market various drugs, including related patents and trademarks (where applicable), and develops drugs and seeks patents and trademarks for its products on a proprietary basis. The costs of acquiring rights from third parties and major costs associated with the perfection and protection of patents and trademarks are capitalized by the Company. Agreements under which the Company acquires such rights from third parties generally require the Company to finance the costs of clinical trials and the filing of New Drug Applications ("NDAs") with the United States Food and Drug Administration ("FDA") and, in some instances, comparable applications with appropriate regulatory agencies in other countries. The Company is also typically required to pay royalties to such third parties based on sales of the applicable approved drugs. The Company also may be obligated to pay to third parties advance royalties or license fees, some of which may be based on the attainment of specified milestones.
Under present agreements with third parties, the Company has obligations as of December 31, 1997 to pay $550,000 in nonrefundable payments which are payable in quarterly installments of $50,000 through July 1, 2000. The Company may also be required to pay a maximum of $6,500,000 in nonrefundable payments generally upon the completion of development milestones and the FDA's approvals of the applicable NDAs.
In October 1989, the Company received FDA approval to market ADENOCARD in the United States. The Company entered into agreements with Fujisawa USA, Inc. (Fujisawa) for the manufacture and marketing of ADENOCARD in the United States and Canada and is receiving and will receive royalties from Fujisawa based on a percentage of ADENOCARD net sales. The Company has also entered into an agreement with Sanofi Pharma (France) (Sanofi) for the manufacture and marketing
Medco Research, Inc.
of ADENOCARD in all countries other than the United States and Canada. In September 1991, Sanofi received marketing approval (under the trade name ADENOCOR) in the United Kingdom and, in May 1992, received marketing approval (under the trade name KRENOSIN) in Switzerland. The Company is receiving and will receive royalties from Sanofi based on a percentage of ADENOCOR and KRENOSIN sales. One half of all royalties received from ADENOCARD, ADENOCOR and KRENOSIN sales are payable by the Company to the University of Virginia Alumni Patents Foundation from whom the Company acquired rights to ADENOCARD. Substantially all royalty income and expenses in the period ended December 31, 1995 resulted from Fujisawa sales of ADENOCARD in the United States.
In 1988, the Company entered into a Development and License Agreement (the "Agreement") with Fujisawa that provides for Fujisawa to fund one-half of the development costs (as incurred) of ADENOSCAN, and other products. Under the agreement, Fujisawa will have manufacturing and marketing rights to these drugs in the United States and Canada upon the Company's receipt of the required regulatory approvals, and will pay the Company royalties based on sales of these drugs. Royalties received by the Company from sales of these drugs outside of the United States and Canada will be shared equally with Fujisawa. In May 1995, the FDA granted marketing clearance for ADENOSCAN in the United States. In May 1996, the parties entered into an agreement to jointly develop adenosine-based products having indications as cardioprotective agents. Under that agreement, Fujisawa granted to the Company an exclusive sublicense under a U.S. patent under which Fujisawa is the exclusive licensee. Fujisawa has exclusive manufacturing and marketing rights in the U.S., Canada, Mexico and other territories, and it agreed to pay the Company 29% of net sales for the first five years and 25% thereafter within the territories. The companies share equally all costs of development and any royalties due to third parties. Two-thirds of all royalty income in the two-year period ended December 31, 1997 resulted from Fujisawa sales of ADENOSCAN in the United States. In June 1995, Sanofi received marketing approval for ADENOSCAN in the United Kingdom and in February 1997, Sanofi registered ADENOSCAN in 14 member countries of the European Community through the mutual recognition procedure. The final administrative procedure involving the granting of a National Marketing License authorizing the sale of the product will be sought from the health authorities in each of the member countries.
In 1997 the Company entered into a Development and Commercialization Agreement (the "Agreement") with Discovery Therapeutics, Inc. ("DTI") dedicated to the discovery, development and commercialization of compounds that stimulate the A2a subfamily of adenosine receptors ("A2a-agonists"). Under the terms of the Agreement, DTI granted to the Company an exclusive worldwide license to DTI's current intellectual property related to A2a-agonists. The Company has exclusive worldwide rights to market and sell developed compounds, either directly or through sublicense. In exchange for these rights, the Company agreed to pay DTI certain licensing fees, development milestones and royalties on future sales of A2a-agonists.
6. Deferred Asset and Royalty Payment
In May 1995, the litigation pending between Fujisawa USA, Inc. (Fujisawa) and the Company, regarding the rights to manufacture and market ADENOSCAN in the United States and Canada, was settled and the Company and Abbott Laboratories, Inc. (Abbott) terminated their manufacturing and marketing agreements regarding the ADENOSCAN drug and settled Medco's outstanding obligations thereunder. Pursuant to the settlement agreement with Fujisawa, the December 21, 1988 Joint Development and License Agreement between the parties remains in full force and effect except as expressly amended and Fujisawa remains the Company's exclusive licensee to manufacture and market ADENOSCAN in the United States and Canada. Fujisawa agreed to pay the Company within fifteen days after FDA marketing clearance of ADENOSCAN the sum of $2 million, representing certain research and development expenses incurred by the Company, and to pay the Company royalties of 29 percent of ADENOSCAN net sales in the United States and Canada for the first five years after the commencement of commercial sales in each territory. Thereafter Fujisawa would pay the Company royalties of 25% of sales until June 10, 2007 at which time Fujisawa would have a paid-up license within such territories.
Fujisawa also agreed to pay royalties to the Company in respect of periods of more than thirty days in which it is unable to fulfill ADENOSCAN orders for reasons other than force majeure and other specified events, such royalties to be at the then prevailing rate based on the average daily sales of ADENOSCAN during the preceding twelve months. Fujisawa also agreed generally to maintain an inventory of at least six months of ADENOSCAN finished product and work-in-process, to be stored at multiple locations, to provide the Company within one year with data necessary to qualify Fujisawa's Melrose Park, Illinois
Medco Research, Inc.
plant as an alternate ADENOSCAN manufacturing facility and to use its best efforts to identify and provide data to the Company to qualify with the FDA an alternate supplier of the adenosine raw material necessary for the manufacture of ADENOSCAN. The parties also agreed as soon as practicable to enter into an agreement to jointly develop adenosine-based products having indications as cardioprotective agents, such as MEDR-640, and for that purpose Fujisawa would grant to the Company an exclusive sublicense under U.S. patent 4,880,783 under which Fujisawa is the exclusive licensee. Fujisawa would have exclusive manufacturing and marketing rights in the U.S., Canada, Mexico and other territories to be agreed upon and it would pay the Company 25% of net sales within the territories. The companies would share equally all costs of development and any royalties due to third parties.
The Company agreed to pay Abbott a royalty of two percent of net sales of ADENOSCAN for the first five years of commercial sales, up to a maximum of $5.35 million, of which $2 million was payable within fifteen days after FDA marketing clearance of ADENOSCAN as an advance royalty payment and the remainder payable based upon actual sales of ADENOSCAN. The Company also agreed that if at the conclusion of the five-year period Abbott had not received an aggregate of $5.35 million, including the $2 million advance, Medco would pay Abbott any deficiency. Abbott relinquished all claims to royalty payments in excess of that amount. Finally, the Company agreed to pay Abbott $330,560 for the reimbursement of research and development and other expenses incurred in connection with ADENOSCAN. The Company expensed $330,560 in the first quarter of 1995.
Included in liabilities for years ended December 31, 1997 and 1996 was an accrued liability (current and non-current portion) of approximately $1.5 million and $2.5 million, respectively, relating to the balance of the Company's guaranteed royalty obligation to Abbott. Included in assets at December 31, 1996 was a deferred asset (current and non-current portion) of $1.7 million relating to royalties to be received by the Company from Fujisawa and paid by the Company to Abbott. The Company received a 29% royalty from ADENOSCAN net sales of which 4% was applied to the deferred asset and 25% was recognized as royalty revenue. At such time during the first five years that the deferred asset is fully recovered, the Company thereafter will recognize royalty revenue of 29% through the end of the five-year period. As of December 31, 1997 the deferred asset was fully recovered and the Company will recognize royalty revenue of 29% through July 2000.
7. Deferred Revenue
Receipts related to various licensing agreements are not recognized as revenues prior to the completion of the related milestones and must be refunded in part or completely if the related milestones are not met. In 1994, the Company received from Suntory Limited ("Suntory"), the Company's development and marketing partner for adenosine in Japan, a $1,000,000 licensing fee which became non-refundable upon satisfactory pre clinical and toxicology accomplishments. During 1995, the Company substantially satisfied pre clinical and toxicology accomplishments and accordingly recognized $1,000,000 as other income and received an additional $300,000 licensing fee upon the NDA approval of ADENOSCAN which became non-refundable upon Suntory's initiation of Phase III clinical trials. During 1997, the Company recognized the $300,000 licensing fee as income and also received and recognized a $400,000 payment as other income following Suntory's announcement of the initiation of Phase III clinical trials of ADENOSCAN in Japan.
During 1993, the Company received $1,000,000 from Boehringer Mannheim Pharmaceutical Company ("BMPC") upon the execution of a marketing and back-up manufacturing licensing agreement related to BIDIL. The Company and BMPC
Medco Research, Inc.
mutually agreed effective April 1, 1996 to terminate the November 1993 license in which the Company granted to BMPC marketing and back-up manufacturing rights to BIDIL. The Company retained $350,000 of BMPC's $1 million license fee, which the Company accounted for as income in the second quarter of 1996.
During third quarter 1996, the Company deferred $248,202 of royalty revenue associated with the purchase of a multi-month supply of ADENOSCAN by a major radiopharmacy as a result of back-end loaded incentives. During 1997, the Company recognized the $248,202 of deferred revenue as royalty revenue for back-end loaded incentives which were recognized during 1997.
8. Employee Benefits Plans
The Company sponsors an IRS-approved 401(K) retirement plan. Employees become eligible to participate in the plan beginning on the enrollment date coinciding with or following 90 days of employment. Enrollment periods are limited to January 1, April 1, July 1 and October 1 of each year. The 401(K) plan allows employees to contribute a portion of their pre-tax earnings into their own retirement account. Eligible employees may contribute between 2% and 15% of their annual income up to the annual limits established by the IRS yearly. The Board of Directors authorized the Company, for those years in which it achieves the performance goals established in advance by the Compensation Committee, to match 50% of each employee's annual plan contribution up to a maximum of 2% of the salary of such employee, and such Company contributions to vest equally over the first four years of service. Following the fourth year of service, all matching contributions are fully vested. In 1997 and 1996, the Company accrued approximately $28,000 and $22,000, respectively, for the match of 50% of each employee's annual plan contribution up to a maximum of 2% of the salary of such employee based on achievement of Company performance goals. The Company did not have a 401(K) match plan for fiscal year 1995; therefore, no match was made in 1995.
The Company currently has two stock option plans in operation, the 1983 Stock Option plan and the 1989 Stock Option and Stock Appreciation Rights Plan. Options to purchase up to 1,200,000 shares and up to 1,500,000 shares, respectively, of the Company's common stock may be granted to officers, directors, employees of the Company and to other persons who provide important services to the Company. Under the Plans, both incentive and non-qualified stock options, as well as stock appreciation rights under the 1989 Plan, can be granted. No incentive stock options are currently outstanding and no stock appreciation rights have been granted. Non-qualified stock options generally can be exercised one year after the date of grant. The exercise price may not be less than 100% of the fair market value of the common stock on the date of grant (110% with respect to incentive stock options granted to optionees who are 10% or more stockholders of the Company). Option holders may, with the consent of the Compensation Committee of the Board of Directors, pay for the exercise of the options in whole or in part by tendering shares of common stock of the Company, in lieu of cash.
During the year ended December 31, 1995, options covering 25,000 shares with an aggregate market value of $259,375 were exercised by the tendering of 16,415 shares with a market value of $170,306 and minimal cash payments. During the year ended December 31, 1997, 27,000 shares were exercised. During the year ended December 31, 1996 there were no options exercised.
Medco Research, Inc.
Changes in the status of options are summarized as follows:
As of December 31, 1997, the Company had a warrant outstanding allowing the holder to purchase 40,000 shares of the Company's common stock on or before November 16, 2000 at an exercise price of $13.50 per share. The Company has reserved 1,080,513 shares of common stock for future exercise of stock options and warrants.
The Company reviewed the provisions of SFAS No.123 and did not adopt the new fair value based method for the options granted to employees; rather, it continued to use the APB Opinion No. 25 method. However, the Company is required to disclose the pro forma effects on net income regarding the new fair value based method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997, 1996 and 1995: dividend yield zero (all years); expected volatility of 37% (1997) and 35% (1996 and 1995); risk-free
Medco Research, Inc.
interest rate of 6% (all years); and expected life of 5 years for all options. Had compensation cost for the Company's stock-based compensation plans, as described above, been determined consistent with SFAS No.123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The compensation costs disclosed here may not be representative of the effects of pro forma net income in future years.
9. Income Taxes
The components of income tax expense consisted of the following:
The Company will recognize a full valuation allowance for its deferred tax asset due to the uncertainty surrounding timing of partnering arrangements and the uncertainty surrounding the ultimate cost of the research, clinical trials and other development of pharmaceutical products that potentially could adversely affect future operations and profit levels.
The actual income tax expense for 1997, 1996 and 1995 differs from the "expected" amount (computed by applying the statutory federal income tax rate of 34% to the earnings before income taxes) as follows:
At December 31, 1997, the Company had Federal net operating loss carryforwards of approximately $8,500,000 and $9,000,000 for regular tax and alternative
Medco Research, Inc.
minimum tax purposes, respectively. The net operating loss carryforwards expire in various amounts from 2008 to 2010. Additionally, the Company has net operating loss carryforwards of approximately $6,000,000 for state income tax purposes which expire between 1998 and 2000.
The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss, capital loss, and various tax credit carryforwards in the case of certain events including significant changes in ownership interests. If the Company's tax carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss carryforward, the Company would incur a federal income tax liability even though these loss carryforwards would be available in future years.
At December 31, 1997, the Company had available approximately $1,332,000, $289,000 and $4,000 of research and development credit, alternative minimum tax credit and investment credit, respectively. Except for the alternative minimum tax credit, these credits expire in varying amounts from 1998 through 2011.
The Company has a capital loss carryover of $974,000 at December 31, 1997, of which $47,000 will expire in 1999 and the remainder will expire in 2000.
The Company made income tax payments of $528,750 and $87,000 for the years ended December 31, 1997 and 1996, respectively. There were no income tax payments made during the year ended December 31, 1995.
10. Related Party Transactions
Fees of $144,000 as well as related travel expenses were paid in 1997, 1996, and 1995 to an individual director for consulting with the Company on matters such as acquisitions, financial public relations and pending litigation.
11. Contingencies
There are no material legal proceedings pending against the Company. However, on October 3, 1997, Richard A. Wilson, Debra A. Angello, and Paul S. Angello ("Plaintiffs") filed a complaint against Fujisawa, USA, Inc. in the United States District Court, District of Oregon, alleging that Fujisawa's sale of ADENOSCAN in the United States induces, or contributes to, the infringement of plaintiffs' U.S. Patent No. 4,824,660 ("the `660 patent"), entitled "Method of Determining the Viability of Tissue in an Organism." which the Patent Office issued on April 25, 1989. According to plaintiffs, the `660 patent claims a specific technique for more reliably locating viable or nonviable regions of heart tissue, namely using an adenosine triphosphate repleting agent such as ribose or adenosine as an adjunct to radioactive isotope (e.g., thallium-201) myocardial perfusion scintigraphy, where regions of heart tissue in which the scan images show no radioactivity indicate the presence of nonviable heart tissue. In its Answer and Counterclaim, Fujisawa denied that it infringed any of the claims of the `660 patent and alleged that the `660 patent was invalid. Fujisawa further alleged that plaintiffs' claims of patent infringement were barred by the doctrines of laches and estoppel. In its Counterclaim, Fujisawa requested a declaratory judgment that it did not infringe the claims of the `660 patent and that such patent is invalid.
This action is in the pre-discovery motion stage. Fujisawa has advised the Company that Fujisawa intends to vigorously defend this action and believes it
Medco Research, Inc.
has no merit. Under the terms of its ADENOSCAN exclusive license agreement with Fujisawa, the Company will reimburse Fujisawa for 50% of the cost of defending this action.
The Company also believes the action has no merit. The Company has long been aware of the `660 patent, and as part of its normal operating procedures the Company has received the written opinions of separate patent counsel that the manufacture and sale of ADENOSCAN for use in myocardial imaging does not infringe any valid claim of the `660 patent. The Company disclosed its receipt of its patent counsel non-infringement opinion in its 1993 Form 10-K Report.
The Company prevailed in the liability claims pending against it as reported in its 1996 Form 10-K: In November 1997, the American Arbitration Association denied, in its entirety, the damage claims of Dr. Eliezer Rapaport; and in May 1997 the United States Court of Appeals for the 7th Circuit unanimously affirmed the dismissal of the class action litigation alleging the Company had violated federal securities laws. Both decisions are final and binding on the parties.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No information is required by this Item; however, information pertaining to this Item is required and contained in the Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption "Ratification of the Appointment of Independent Accountants".
Medco Research, Inc.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
All of the information required by this Item is contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions "Election of Directors," "Board of Directors" and "Executive Officers" and is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
All of the information required by this Item is contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders under the caption "Executive Compensation" and is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the information required by this Item is contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders under the caption "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the information required by this Item is contained in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders under the caption "Certain Transactions" and is incorporated herein by this reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Medco Research, Inc. are included in Item 8:
Independent Accountants' Report
Independent Auditors' Report
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Operations--Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1997, 1996 and 1995
Medco Research, Inc.
Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting regulation of the Securities Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1997.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant for the State of California, as amended to date.(6)
3.2 Bylaws of the Registrant for the State of California, as amended to date.(5)
3.3 Articles of Incorporation of the Registrant for the State of Delaware.(8)
3.4 Bylaws of the Registrant for the State of Delaware.(8)
10.1 1983 Stock Option Plan, as amended to date.(1)
10.2 Form of Indemnity Agreement by and between Registrant and Registrant's directors and officers.(5)
10.3 Agreement dated March 16, 1988 by and among Registrant, Pharmatec, Inc. and the University of Florida Research Foundation, Inc.(1)
10.4 Development and License Agreement dated December 21, 1988 by and between Registrant and LyphoMed, Inc.(2)
10.5 Letter Agreement dated March 3, 1989 by and between Registrant and the University of Virginia Alumni Patents Foundation.(3)
10.6 First Amendment dated March 17, 1989 to Development and License Agreement dated November 7, 1985 by and between Registrant and LyphoMed, Inc.(3)
10.7 1989 Stock Option and Stock Appreciation Rights Plan, as amended to date.(4)
10.8 Employment Agreement dated January 8, 1992 by and between Registrant and Archie W. Prestayko. (6)
10.9 Second Amendment to Lease dated February 18, 1992 relative to Registrant's facilities at 8455 Beverly Boulevard, Los Angeles, California. (6)
10.10 License Agreement dated April 21, 1992 by and between Registrant and Nordion International Inc. (6)
Medco Research, Inc.
10.11 Employment Agreement dated June 9, 1992 by and between Registrant and Donald B. Siegel. (6)
10.12 Employment Agreement dated June 9, 1992 by and between Registrant and Sam L. Teichman.(6)
10.13 Third Amendment to Lease dated August 10, 1992 relative to Registrant's facilities located at 8455 Beverly Boulevard, Los Angeles, California.(6)
10.14 Consulting Agreement dated September 15, 1992 by and between Registrant and William M. Bartlett.(6)
10.15 Employment Agreement dated October 16, 1992 by and between Registrant and Roger D. Blevins.(7)
10.16 Employment Agreement dated January 8, 1993 by and between Registrant and Archie W. Prestayko.(7)
10.17 Lease Agreement effective June 25, 1993 relative to Registrant's facilities at 85 T.W. Alexander Drive, Research Triangle Park, North Carolina.(7)
10.18 Consulting Agreement dated July 1, 1993 by and between Registrant and Richard C. Williams.(7)
10.19 Employment Agreement dated October 16, 1993 by and between Registrant and Roger D. Blevins.(7)
10.20 Employment Agreement dated February 24, 1994 by and between Registrant and Archie W. Prestayko.(7)
10.21 Consulting Agreement dated December 1, 1994 by and between Registrant and Richard C. Williams. (8)
10.22 Medco Research and Fujisawa, USA Mutual Release and Settlement Agreement, dated May 22, 1995. (9)
10.23 Amendment to Consulting Agreement dated December 1, 1994 by and between Registrant and Richard C. Williams. (10)
10.24 Employment Agreement dated September 26, 1996 by and between Registrant and Roger D. Blevins. (11)
10.25 Amendment to Consulting Agreement dated December 1, 1994 by and between Richard C. Williams. (11)
10.26 Amendment to Consulting Agreement dated December 1, 1994 by and between Richard C. Williams.
23.1 Consent of Independent Accountants.
23.2 Accountants' Consent.
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(1) The referenced exhibits are incorporated herein by reference to Exhibits 10.1 and 10.6 to the Registrant's Form 10-K for the fiscal year ended August 31, 1988 filed with the Securities and Exchange Commission on November 29, 1988.
(2) The referenced exhibit is incorporated herein by reference to Exhibit 10.02 to the Registrant's Form 8-K dated December 21, 1988 filed with the Securities and Exchange Commission.
(3) The referenced exhibits are incorporated herein by reference to Exhibits 10.01 and 10.02 to the Registrant's Form 8-K dated March 3, 1989 filed with the Securities and Exchange Commission.
(4) The referenced exhibit is incorporated herein by reference to Exhibit 10.20 to the Registrant's Form 10-K for this fiscal year ended August 31, 1989 filed with the Securities and Exchange Commission on November 29, 1989.
(5) The referenced exhibits are incorporated herein by reference to Exhibits 3.2 and 10.4 to the Registrant's Form 10-K for the fiscal year ended August 31, 1990 filed with the Securities and Exchange Commission on December 14, 1990.
(6) The referenced exhibits are incorporated herein by reference to Exhibits 10.18, 10.19, 10.20, 10.21, 10.22, 10.23, and 10.24 to the Registrant's Form 10-K for the fiscal year ended August 31, 1992 filed with the Securities and Exchange Commission on November 27, 1992.
(7) The referenced exhibits are incorporated herein by reference to Exhibits 10.23, 10.24, 10.25, 10.26, 10.27, and 10.28 to the Registrant's Form 10-K for the Transition period of September 1, 1992 through December 31, 1992 and calendar year ended December 31, 1993 filed with the Securities and Exchange Commission on March 28, 1994.
(8) The referenced exhibits are incorporated herein by reference to Exhibits 3.3, 3.4, and 10.21 to the Registrant's Form 10-K for the calendar year ended December 31, 1994 filed with the Securities and Exchange Commission on March 29, 1996.
(9) The referenced exhibit is incorporated herein by reference to Exhibit 10.01 to the Registrant's Form 10Q for the period ended June 30, 1995 filed with the Securities and Exchange Commission on August 11, 1995.
(10) The referenced exhibit is incorporated herein by reference to Exhibit 10.23 to the Registrant's Form 10-K for the calendar year ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996.
(11) The referenced exhibits are incorporated herein by reference to Exhibits 10.24 and 10.25 to the Registrant's Form 10-K for the calendar year ended December 31, 1996 filed with the Securities and Exchange Commission on March 27, 1997.
Medco Research, Inc.
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. MEDCO RESEARCH, INC.
By: /s/ Roger D. Blevins Roger D. Blevins, Pharm. D., President and Chief Executive Officer
Date: March 24, 1998
By: /s/ Glenn C. Andrews Glenn C. Andrews Vice President, Finance and Administration and Chief Financial Officer
Date: March 24, 1998
By: /s/ Adam C. Derbyshire Adam C. Derbyshire Corporate Controller and Secretary
Date: March 24, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Richard C. Williams Date: March 24, 1998 -------------------------------------------- Richard C. Williams, Chairman of the Board
By: /s/ Albert D. Angel Date: March 24, 1998 ------------------------------------------- Albert D. Angel, Director
By: /s/ William M. Bartlett Date: March 24, 1998 ----------------------------------- William M. Bartlett, Director
Medco Research, Inc.
By: /s/ Jay N. Cohn Date: March 24, 1998 ----------------------------------- Jay N. Cohn, M.D., Director
By: /s/ Marvin S. Hausman Date: March 24, 1998 ----------------------------------- Marvin S. Hausman, M.D., Director
By: /s/ Mark B. Hirsch Date: March 24, 1998 ----------------------------------- Mark B. Hirsch, Director
By: /s/ Eugene L. Step Date: March 24, 1998 ----------------------------------- Eugene L. Step, Director