Filed pursuant to Rule 424(b)(5)
Registration Statement No. 333-53928
Prospectus Supplement
(To prospectus dated February 13, 2001)
5,000,000 Shares
[SCIOS INC. LOGO APPEARS HERE]
Common Stock
Scios Inc. is selling all of the shares of common stock in this offering. Our
common stock is listed on the Nasdaq National Market under the symbol "SCIO."
On June 18, 2001, the last sale price of our common stock on the Nasdaq
National Market was $22.42 per share.
Investing in our common stock involves risks. Please read "Risk Factors"
beginning on page S-5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or accompanying prospectus.
Any representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Price to Underwriting Proceeds
Public Discount to Scios
----------------------------------------------------
Per Share $21.00 $1.20 $19.80
----------------------------------------------------
Total $105,000,000 $6,000,000 $99,000,000
----------------------------------------------------
We have granted the underwriters the right to purchase up to an additional
750,000 shares of common stock to cover over-allotments.
JPMorgan
Lehman Brothers
SG Cowen
June 18, 2001
[SCIOS LOGO]
FOCUSING SCIENCE TO ADVANCE MEDICINE
Scios is a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory diseases. We conduct research using a
disease-based technology platform, integrating expertise in protein biology with
computational and medicinal chemistry. Our goal is to identify and rationally
design small molecule compounds for large markets with unmet medical needs.
Scios is currently focused on the development of two product candidates,
Natrecor(R) (nesiritide) and SCIO-469.
Our Lead Development Projects
PRECLINICAL PHASE I PHASE II PHASE III REGULATORY MARKETED
NATRECOR =========== =========== =========== =========== =======
ACUTE CONGESTIVE HEART FAILURE
SCIO-469 =========== ===========
RHEUMATOID ARTHRITIS
Natrecor and SCIO-469 have not been approved for sale.
BNP: The Body's Response
to Acute Congestive Heart Failure
BNP: Physiological Effects in Acute Congestive Heart Failure
[Graphic depicting the physiological effects of B-type natriuretic peptide (BNP)
in acute congestive heart failure, including the increase in natriuresis and
diuresis, and the decrease in preload, afterload, shortness of breath, PCWP and
aldosterone.]
Natrecor is a recombinant form of B-type natriuretic peptide (BNP). BNP is a
naturally occurring cardiac hormone secreted by the ventricles as part of the
body's response to acute congestive heart failure. Scios discovered BNP in 1988
and began evaluating Natrecor in clinical trials in 1994. To date, nearly 1,000
patients hospitalized with acute congestive heart failure have been treated with
Natrecor in clinical trials. On May 25, 2001 the Cardiovascular and Renal Drugs
Advisory Committee recommended that the U.S. Food and Drug Administration (FDA)
approve Natrecor. Natrecor is currently under review by the FDA, and the FDA is
expected to complete its review of Natrecor in July 2001.
Nearly 1 million U.S. hospitalizations each year are for acute congestive heart
failure.
Source: Archives of Internal Medicine, January 22, 2001
SCIO-469: A Novel Oral, Small
Molecule Inhibitor of p38 Kinase
p38 Kinase Activation in Inflammatory Disease
[Graphic depicting p38 kinase activation in inflammatory disease in a target
cell, resulting in pain and swelling and tissue inflammation.]
SCIO-469 is a novel oral, small molecule compound under development for the
treatment of inflammatory diseases. In preclinical studies, SCIO-469 inhibited
p38 kinase. p38 kinase is an intracellular signaling enzyme that modulates
pro-inflammatory factors including tumor necrosis factor (TNF), interleukin-1
(IL-1), and products of cyclooxygenase-2 (COX-2), which are known to contribute
to both symptoms and disease progression in patients with Rheumatoid Arthritis
(RA). Two Phase I safety and pharmacokinetic trials have been completed with
SCIO-469, and a Phase II clinical trial in RA patients is expected to begin in
the fourth quarter of 2001.
Rheumatoid Arthritis affects more than 2 million Americans.
Source: Arthritis Foundation 2001
Table of Contents
Prospectus Supplement
Page
----
Prospectus Supplement Summary............................................ S-1
Risk Factors............................................................. S-5
Special Note Regarding Forward-Looking Statements........................ S-13
Use of Proceeds.......................................................... S-14
Price Range of Common Stock and Dividend Policy.......................... S-14
Capitalization........................................................... S-15
Dilution................................................................. S-16
Selected Consolidated Financial Data..................................... S-17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-18
Business................................................................. S-22
Management............................................................... S-35
Underwriting............................................................. S-38
Legal Matters............................................................ S-40
Experts.................................................................. S-40
Index to Consolidated Financial Statements............................... F-1
Prospectus
Page
----
About this Prospectus...................................................... 2
Where You Can Find More Information........................................ 2
The Company................................................................ 3
Risk Factors............................................................... 4
Recent Developments........................................................ 5
Special Note Regarding Forward-Looking Information......................... 5
Use of Proceeds............................................................ 6
Dilution................................................................... 6
Description of Capital Stock............................................... 6
Plan of Distribution....................................................... 7
New Accounting Pronouncements.............................................. 7
Legal Matters.............................................................. 8
Experts.................................................................... 8
i
Important Notice about Information Presented in this
Prospectus Supplement and the Accompanying Prospectus
In this prospectus supplement and the accompanying prospectus, the terms
"Scios," "we," "us" and "our" refer to Scios Inc.
We provide information to you about the common stock in two separate documents:
(a) the accompanying prospectus, which provides general information, and (b)
this prospectus supplement, which describes the specific details regarding this
offering. If information in this prospectus supplement is inconsistent with the
prospectus, you should rely on this prospectus supplement.
You should also read and consider the information in the documents we have
referred you to in "Where You Can Find More Information" on page 2 of the
accompanying prospectus.
Except as otherwise indicated, the information in this prospectus supplement
and the accompanying prospectus assumes no exercise of the underwriter's over-
allotment option to purchase additional shares of common stock.
---------------
You should rely only on the information incorporated by reference or provided
in this prospectus supplement and the accompanying prospectus. We have not, and
the underwriters have not, authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are not, making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the date on the
front of those documents.
ii
Prospectus Supplement Summary
This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. This summary does not contain all
of the information that you should consider before deciding to invest in our
common stock. We urge you to read this entire prospectus supplement and the
accompanying prospectus carefully, including the "Risk Factors" section and the
documents identified under "Where You Can Find More Information" in the
accompanying prospectus.
Scios Inc.
We are a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory disease. Our disease-based technology platform
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets and rationally design small molecule
compounds for large markets with unmet medical needs. We are primarily focused
on the development of two product candidates -- Natrecor for the treatment
acute congestive heart failure, or acute CHF, and SCIO-469, an oral, small
molecule inhibitor of p38 kinase, for the treatment of rheumatoid arthritis. We
submitted an amendment to our New Drug Application, or NDA, for Natrecor to the
U.S. Food and Drug Administration, or FDA, in January 2001. We expect the FDA
to respond to our amended NDA in July 2001. We completed a Phase Ib clinical
trial on SCIO-469 in April 2001, and we expect to begin a Phase II clinical
trial in the fourth quarter of 2001.
Natrecor--For the Treatment of Acute Congestive Heart Failure
On May 25, 2001, the Cardiovascular and Renal Drugs Advisory Committee to the
FDA met with our lead clinical investigators to discuss our January 2001
amended NDA for Natrecor. The advisory committee unanimously recommended that
Natrecor be approved by the FDA for sale in the United States for the treatment
of acute CHF. We expect the FDA to announce its decision on whether to approve
Natrecor in July 2001. FDA decisions regarding the approval or non-approval of
an NDA sometimes differ from an advisory committee recommendation, and there
can be no assurance that the FDA will decide to approve Natrecor.
Chronic CHF is characterized by a progressive loss in the heart's ability to
pump blood. According to the American Heart Association's 2001 Heart and Stroke
Statistical Update, approximately 4.7 million Americans currently suffer from
chronic CHF and 550,000 new cases of CHF will be diagnosed in the United States
this year. Annual expenditures for CHF are estimated to be $21.0 billion,
including $15.8 billion for inpatient care.
Many CHF patients will eventually experience a rapid deterioration, or
decompensation, and require urgent treatment in the hospital. This condition is
called acute CHF. Acute CHF accounts for approximately one million hospital
admissions each year in the United States. Acute CHF is the most frequent cause
of hospitalization among Medicare patients. In addition, patients suffering
from chronic CHF have a five-year mortality rate of approximately 50%. For more
than a decade, there have been no new FDA-approved drugs to treat acute CHF.
Natrecor is a recombinant form of human B-type natriuretic peptide, or BNP, a
naturally occurring hormone in the body that aids in the healthy functioning of
the heart. BNP is secreted by the ventricles of the heart as a response to CHF.
We believe that the advantage of Natrecor, compared to existing forms of
therapy for acute CHF, is that it works on multiple components of the acute CHF
disease pathway.
In clinical trials, Natrecor has been shown to significantly improve blood
circulation and patient symptoms compared to intravenously administered
nitroglycerin, a common treatment for acute CHF, without the need for labor-
intensive monitoring, and its method of administration does not require
frequent dosing adjustment. In addition, in clinical trials, Natrecor has not
been associated with an increase in the incidence of cardiac arrhythmias, or
irregular heartbeats, and has demonstrated no evidence of drug interactions
with other agents used concurrently in the treatment of acute CHF.
In January 2001, we entered into a marketing alliance with Innovex, a division
of Quintiles, to commercialize Natrecor in North America. Innovex will deliver
a wide range of sales and marketing solutions for us, including hiring,
training and deploying a dedicated cardiology and emergency medicine sales
force of approximately 180 salespeople at our cost.
In March 2001, we initiated the PROACTION trial aimed at investigating the
potential pharmaco-economic impact of Natrecor in improving treatment and
outcomes for acute CHF patients. We expect to complete an interim data analysis
in the third quarter of 2001 and to complete this study in the fourth quarter
of 2001.
S-1
In May 2001, we expanded our existing research collaboration with Medtronic to
initiate a clinical study to evaluate the hemodynamic, endrocrine and clinical
effects of Natrecor using information collected by Medtronic's Chronicle
Implantable Hemodynamic Monitor both during and after infusions of Natrecor.
This study is expected to begin in July 2001 at the Karolinska Hospital in
Stockholm. Our research collaboration also covers the feasibility of infusing
patients with Natrecor using Medtronic's infusion products.
p38 Kinase Inhibitor Program--SCIO-469 for the Treatment of Inflammatory
Diseases
Autoimmune diseases occur when the immune system is abnormally activated
against its own body. In the case of rheumatoid arthritis, the immune system is
activated against joint tissues. White blood cells then invade the joint space,
and, when activated, produce proteins such as IL-1, TNF and COX-2, which result
in pain, swelling and eventual destruction of the affected joints. We believe
that patients treated with an oral p38 kinase inhibitor could experience a
reduction in both the symptoms and the progression of inflammatory diseases
since it could inhibit the production of IL-1, TNF and COX-2. Oral
administration allows for careful dosage adjustment, which may permit the
physician to inhibit TNF sufficiently to obtain a useful therapeutic effect
without subjecting the patient to the risk of infection associated with
complete TNF inhibition.
The Arthritis Foundation estimates that approximately 2.1 million Americans
currently suffer from rheumatoid arthritis. Decision Resources, an independent
market research group, suggests that the global market for rheumatoid arthritis
therapies will be approximately $6.6 billion by 2009, up from almost $1.5
billion in 1999. Two new protein therapeutics for this disease, Enbrel and
Remicade, have been introduced to inhibit the effects of TNF. Combined U.S.
sales of these agents totaled approximately $956.0 million in 2000. These
treatments have been shown to be effective at arresting the progression of the
disease; however, they must be given by injection or infusion on a repeated
basis and, when taken on a chronic basis, increased rates of infections have
been reported.
SCIO-469 is a novel oral, small molecule compound under development for the
treatment of inflammatory diseases. In preclinical studies, SCIO-469 inhibited
p38 kinase. In January 2001, we completed a Phase Ia clinical trial of SCIO-469
evaluating single doses in healthy volunteers. In April 2001, we completed a
Phase Ib clinical trial in 20 healthy volunteers in which we evaluated the
safety and tolerability of multiple doses of SCIO-469 over a two-week period.
Based on the results of these trials, we plan to begin a Phase II clinical
trial in the fourth quarter of 2001.
Our Strategy
Our goal is to become a leading biopharmaceutical company focused on developing
and commercializing novel pharmaceutical products that address large market
opportunities with unmet medical needs, initially in the areas of
cardiovascular and inflammatory disease. Key elements of our strategy include
the following:
. Maximizing the Near-Term Commercial Opportunities for Natrecor
. Expanding the Commercial Opportunities for Natrecor
. Advancing the Development of Our Small Molecule Therapeutics Program
. Broadening our Product Portfolio through License or Acquisition
. Collaborating Selectively with Biotechnology and Pharmaceutical Companies
Corporate Information
We were incorporated in California in 1981 under the name California
Biotechnology Inc. and reincorporated in Delaware in 1988. We changed our name
to Scios Inc. in February 1992, and to Scios Nova Inc. in September 1992
following our acquisition of Nova Pharmaceuticals, Inc. We returned to using
the name Scios Inc. in March 1996. Our principal executive offices are located
at 820 West Maude Avenue, Sunnyvale, California 94085. Our telephone number is
(408) 616-8200.
Our website is located at www.sciosinc.com. Information contained on our
website does not constitute part of this prospectus supplement or the
accompanying prospectus.
--------------
We own various copyrights, trademarks and trade names used in our business
including the following: Natrecor(R) and Fiblast(R). This prospectus supplement
and the accompanying prospectus also include trademarks, service marks and
trade names of other companies, including the following: Veletri(TM),
Chronicle(TM), BIOBYPASS(R), Gliadel(R), Biodel(R), Enbrel(R), Remicade(R),
Celebrex(R), Vioxx(R), Risperdal(R), Simdax(R), Paxil(R), Eskalith(R), Eskalith
CR(R), Stelazine(R), Thorazine(R) and Parnate(R).
S-2
The Offering
Common stock offered.......... 5,000,000 shares
Common stock to be outstanding
after the offering........... 44,623,271 shares
Use of proceeds............... We intend to use the net proceeds of this
offering for operating costs, capital
expenditures and working capital needs,
including costs associated with Natrecor and
research and development of other developmental
products. See "Use of Proceeds."
Nasdaq National Market
Symbol....................... "SCIO"
The information set forth above is based on 39,623,271 shares of our common
stock outstanding as of May 21, 2001 and excludes:
. 5,579,761 shares of common stock issuable as of May 21, 2001 upon the
exercise of outstanding options at a weighted average exercise price of
$12.11 per share;
. 700,000 shares of common stock issuable as of May 21, 2001 upon exercise of
outstanding warrants at a weighted average exercise price of $20.00 per
share;
. 499,100 shares of common stock issuable as of May 21, 2001 upon conversion of
4,991 shares of Series B convertible preferred stock;
. 1,839,476 shares of common stock reserved for future issuance as of May 21,
2001 under our stock option plans;
. 375,000 shares of common stock reserved for future issuance as of May 21,
2001 under our employee stock purchase plan; and
. 30,000 shares of unvested restricted common stock outstanding as of May 21,
2001.
S-3
Summary Consolidated Financial Data
The summary consolidated financial data set forth below should be read in
conjunction with the sections of this prospectus supplement entitled "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes thereto contained elsewhere in this prospectus
supplement. The following consolidated statement of operations data for the
years ended December 31, 1998, 1999 and 2000 are derived from our audited
consolidated financial statements. Our audited consolidated financial
statements as of December 31, 1999 and 2000 and for each of the three years in
the period ended December 31, 2000 are included elsewhere in this prospectus
supplement. The consolidated financial data as of March 31, 2001 and for the
three months ended March 31, 2000 and March 31, 2001 are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus supplement. The as adjusted balance sheet data reflects the net
proceeds from the sale of 5,000,000 shares of common stock in this offering at
a public offering price of $21.00 per share, after deducting underwriting
discounts and commissions and our estimated offering expenses.
----------------------------------------------------------
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
In thousands, except
share and per share
data (Unaudited)
Consolidated Statements of
Operations Data
Revenues:
Product sales and co-
promotion
commissions, net of
expenses............ $ 6,567 $ 9,953 $ 6,914 $ 1,331 $ 1,483
Research and
development
contracts........... 38,101 18,402 5,710 1,894 1,097
Gain on sale of
marketing rights.... -- -- -- -- 9,363
---------- ---------- ---------- ---------- ----------
44,668 28,355 12,624 3,225 11,943
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Research and
development......... 46,637 34,305 39,278 9,284 9,480
Marketing, general
and administrative.. 10,022 11,983 16,711 3,476 6,480
Restructuring charges
(credits)........... -- 6,400 (993) -- --
---------- ---------- ---------- ---------- ----------
56,659 52,688 54,996 12,760 15,960
---------- ---------- ---------- ---------- ----------
Loss from operations... (11,991) (24,333) (42,372) (9,535) (4,017)
Other income (expense),
net................... 11,102 4,283 (147) 10 (206)
Equity in net loss of
affiliate............. (1,343) -- -- -- --
Provision for income
taxes................. (131) (14) (3) -- --
---------- ---------- ---------- ---------- ----------
Net loss............... $ (2,363) $ (20,064) $ (42,522) $ (9,525) $ (4,223)
========== ========== ========== ========== ==========
Loss per common share,
basic and diluted..... $ (0.06) $ (0.53) $ (1.12) $ (0.25) $ (0.11)
========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding used in
calculation of net
loss per share, basic
and diluted........... 37,694,358 37,730,048 37,997,872 37,780,077 39,290,982
----------------------
As of March 31, 2001
----------------------
Actual As Adjusted
--------- ------------
In thousands (Unaudited)
Consolidated Balance Sheet Data
Cash and cash equivalents, and marketable securities
(current and non-current)............................ $ 62,179 $ 160,629
Working capital....................................... 11,795 110,245
Total assets.......................................... 86,087 184,537
Long-term debt........................................ 39,944 39,944
Total stockholders' equity............................ 15,616 114,066
S-4
Risk Factors
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk and you may lose
part or all of your investment. Please read "Special Note Regarding Forward-
Looking Statements."
Risks Related to Natrecor
If the FDA finds that our amended NDA for Natrecor does not support approval
for marketing, the commercialization of Natrecor may be delayed or prevented
In April 1999, the FDA issued us a non-approval letter for Natrecor. To address
the FDA's concerns, we conducted a Phase III clinical trial, and in January
2001, we submitted an amendment to our NDA seeking approval to market Natrecor
in the United States. We are initially seeking FDA approval for use of Natrecor
as a treatment for acute CHF. The FDA may not find our clinical data adequate
to support Natrecor as a treatment for acute CHF or any other disease.
Moreover, the FDA may require us to commence and complete additional clinical
trials to generate additional data to support product approval for the
treatment of acute CHF, which may lead to a substantial delay in its approval
of Natrecor or prevent Natrecor from being approved for any medical use.
On May 25, 2001, the Cardiovascular and Renal Drugs Advisory Committee to the
FDA met with our lead clinical investigators to discuss our January 2001
amended NDA for Natrecor. The advisory committee unanimously recommended that
Natrecor be approved by the FDA for sale in the United States for the treatment
of acute CHF. FDA decisions regarding the approval or non-approval of an NDA
sometimes differ from an advisory committee recommendation. For example, in
April 1999, the FDA issued a non-approval letter for Natrecor even though in
January 1999, the Cardiovascular and Renal Drugs Advisory Committee to the FDA
had recommended approval of Natrecor. There can be no assurance that the FDA
will decide to approve Natrecor for sale in the United States. Even if Natrecor
is approved by the FDA, we cannot exclude the possibility that serious adverse
events related to the use of Natrecor might occur in the future, which could
either limit its use or cause the FDA to revoke our approval to market
Natrecor.
If Natrecor does not gain market acceptance, our business will suffer
Even if clinical trials demonstrate the safety and efficacy of Natrecor and the
necessary regulatory approvals are obtained, Natrecor may not gain market
acceptance among physicians, patients, healthcare payors and the medical
community. We will need to educate doctors and other healthcare advisors of the
safety and clinical efficacy of Natrecor and its potential advantages over
other treatments. The degree of market acceptance of Natrecor will also depend
on a number of factors, including:
. the degree of clinical efficacy and safety;
. cost-effectiveness of Natrecor;
. its advantage over alternative treatment methods; and
. reimbursement policies of government and third-party payors.
To the extent market acceptance of Natrecor is limited, our revenues may
suffer.
If the FDA determines that our third-party manufacturing facilities are not
adequate, either before or after receipt of FDA marketing approval, we may lose
the ability to manufacture and sell Natrecor
As part of the NDA approval process and periodically thereafter, the FDA is
likely to inspect each of the facilities involved in manufacturing Natrecor.
Natrecor is manufactured for us by Biochemie GmbH, a subsidiary of Novartis, in
Austria and is shipped in powder form to Abbott Laboratories in McPherson,
Kansas, where it is blended, filled and packaged for shipment. Although each
facility has previously passed FDA inspections, future inspections may find
deficiencies in the facilities or processes that may delay or prevent the
manufacture or sale of Natrecor. Even if the FDA approves Natrecor for
marketing, the FDA will subsequently conduct periodic inspections of these
manufacturing facilities and, if deficiencies are identified, we may lose the
ability to supply and sell Natrecor for extended periods of time.
S-5
We rely on third-party manufacturers, and if they experience any difficulties
with their manufacturing processes, we may not obtain sufficient quantities of
Natrecor to assure availability
We rely on third parties for the manufacture of bulk drug substances and final
drug product for clinical and commercial purposes relating to Natrecor.
Biochemie GmbH is responsible for manufacturing Natrecor in bulk quantities and
Abbott Laboratories is responsible for blending, filling and packaging
Natrecor, and if they encounter problems in these processes, our revenues from
future sales of Natrecor could decrease. Natrecor is manufactured using
industry accepted recombinant manufacturing techniques which must be conducted
under strict controls and tight timelines. Natrecor is subject to strict
quality control testing during all phases of production and prior to its
release to the market. Any quality control testing failures could lead to a
reduction in the available supply of Natrecor. Biochemie depends on outside
vendors for the timely supply of raw materials used to produce our products,
including Natrecor. Once a supplier's materials have been selected for use in
Biochemie's manufacturing process, the supplier in effect becomes a sole or
limited source of that raw material due to regulatory compliance procedures. We
depend on these third parties to perform their obligations effectively and on a
timely basis. If these third parties fail to perform as required, our ability
to deliver Natrecor on a timely basis would be impaired.
In addition, in the event of a natural disaster, equipment failure, power
failure, strike or other difficulty, we may be unable to replace our third
party manufacturers in a timely manner and would be unable to manufacture
Natrecor to meet market needs.
The success of Natrecor is highly dependent on our partner, Innovex, a division
of Quintiles, for marketing, promotion and sales activities
We believe that for Natrecor to be widely adopted, the efforts of an
experienced sales force are needed. If approved, Natrecor will be the first
FDA-approved drug internally developed and launched by us. Accordingly, we have
entered into an exclusive agreement with Innovex to co-promote, sell and
distribute Natrecor in the United States. As part of our agreement with
Innovex, we intend to build a sales force of approximately 180 people solely
dedicated to the sale of Natrecor. If Innovex and we fail to devote appropriate
resources to promote, sell and distribute Natrecor, sales of Natrecor could be
reduced. If Innovex breaches or terminates its agreement with us or otherwise
fails to conduct its Natrecor-related activities in a timely manner or if there
is a dispute about its obligations, we may need to seek another partner. In
that event, we cannot assure you that we will be able to obtain another partner
on favorable terms, if at all.
The failure of PharmaBio Development, an affiliate of Innovex, to fulfill its
obligation to partially fund the commercialization of Natrecor may affect our
ability to successfully market Natrecor
PharmaBio has agreed to fund $30.0 million of our costs to launch Natrecor over
the first 24 months of Natrecor's commercialization and to loan us up to $5.0
million. Of the $30.0 million, we anticipate that $10.0 million will be paid to
us in 2001 following FDA approval of Natrecor. If PharmaBio breaches or
terminates its agreement with us or otherwise fails to fulfill its financial
obligations under the agreement and we are unable to secure alternative
funding, we may lose our ability to successfully market Natrecor.
In the area of acute CHF, we face competition from companies with substantial
financial, technical and marketing resources, which could limit our future
revenues from Natrecor
Many therapeutic options are available for patients with acute CHF. Currently
used drugs fall into three main categories: vasodilators, inotropes and
diuretics. Natrecor would compete against both vasodilators and inotropes in
the acute CHF market. Many of these drugs are available in generic formulation
with an associated low cost. In addition, milrinone, an inotrope, is currently
promoted by Sanofi-Synthelabo. We may not be able to compete effectively with
these long-standing current forms of therapy. In addition, we will price
Natrecor above the cost of these existing drugs, which may harm our competitive
position relative to these drugs.
New drugs in development for the treatment of acute CHF would also compete with
Natrecor if approved by the FDA or other regulatory agencies. Veletri
(tezosentan), a non-selective endothelin receptor antagonist, is being
developed by Actelion and is in late-stage clinical trials as a vasodilator for
the treatment of acute CHF. In addition, Abbott had previously submitted an NDA
for Simdax, a calcium sensitizer described as an inotrope, but withdrew the
application in 2000. To our knowledge, Abbott has not announced its intent to
refile an NDA for Simdax. If any such new drug in development is approved by
the FDA or other regulatory agencies, we may not be able to compete effectively
with these new forms of therapy.
S-6
If we fail to gain approval for Natrecor and our other product candidates in
international markets, our market opportunities will be limited
We have not yet filed for marketing clearance for the use of Natrecor or any
other product candidates in foreign countries, and we may not be able to obtain
any international regulatory approvals for Natrecor or any other product we
develop. If we fail to obtain those approvals or if such approvals are delayed,
the geographic market for Natrecor or our other product candidates would be
limited.
We will require a partner to market and commercialize Natrecor and our other
product candidates in international markets
We plan to partner with other companies for the sale of Natrecor and our other
product candidates outside of the United States. We cannot assure you that we
will be able to enter into such arrangements on favorable terms or at all. In
addition, partnering arrangements could result in lower levels of income to us
than if we marketed our products entirely on our own. In the event that we are
unable to enter into a partnering arrangement for Natrecor or our other product
candidates in international markets, we cannot assure you we will be able to
develop an effective international sales force to successfully market and
commercialize those products. If we fail to enter into partnering arrangements
for our products and are unable to develop an effective international sales
force, our revenues would be limited.
If we fail to obtain additional marketing approvals from the FDA for the use of
Natrecor for additional therapeutic indications, our revenues from Natrecor
will suffer
In order to expand the medical uses, or therapeutic indications, for which we
may market Natrecor, we must successfully complete additional clinical trials
which could be lengthy and expensive and will require the allocation of both
substantial management and financial resources. Thereafter, we will have to
apply separately to the FDA for clearance to market Natrecor for other
indications. We cannot assure you that we will be able to successfully complete
the required clinical trials or that the FDA will approve Natrecor for any
additional indications.
Other Risks Related to Scios
We have a history of losses, expect to operate at a loss for the foreseeable
future and may never be profitable
We may not be able to achieve or earn a profit in the future. We began
operations in December 1981, and since that time, with the sole exception of
1983, we have not earned a profit on a full-year basis. Our losses have
historically resulted primarily from our investments in research and
development. As of March 31, 2001, we had an accumulated deficit of
approximately $415.6 million.
To date, nearly all of our revenues have come from:
. one-time signing fees from our corporate partners under agreements supporting
the research, development and commercialization of our product candidates;
. one-time payments from our corporate partners when we achieved regulatory or
development milestones;
. research funding from our corporate partners;
. the sale of marketing rights; and
. our psychiatric sales and marketing division.
We expect that our research, development and clinical trial activities and
regulatory approvals, together with future general and administrative
activities and the costs associated with launching and commercializing our
product candidates and launching and commercializing Natrecor in the United
States will result in significant expenses for the foreseeable future.
If we fail to obtain additional capital necessary to fund our operations, we
may have to delay or scale back some of our programs or grant rights to third
parties to develop and market our products
We will continue to expend substantial resources developing new and existing
product candidates, including costs associated with research and development,
acquiring new technologies, conducting preclinical studies and clinical trials,
obtaining regulatory approvals and manufacturing products. We believe that the
net proceeds of this offering and our
S-7
current working capital and future payments, if any, from our collaboration
arrangements will be sufficient to meet our operating and capital requirements
for at least the next 12 months. Our need for additional funding depends on a
number of factors including:
. higher costs and slower progress than expected in developing product
candidates and obtaining regulatory approvals, particularly for Natrecor;
. acquisition of technologies and other business opportunities that require
financial commitments; or
. lower revenues than expected from the commercialization of our potential
products.
Additional funding may not be available to us on favorable terms, if at all. We
may raise funds through public or private financings, collaborative
arrangements or other arrangements. Debt financing, if available, may involve
covenants which could restrict our business activities. If we are unable to
raise additional funds through equity or debt financing when needed, we may be
required to delay, scale back or eliminate expenditures for some of our
development programs or grant rights to develop and market product candidates
that we would otherwise prefer to develop and market internally. If we are
required to grant such rights, the ultimate value of these product candidates
to us may be reduced.
Our operating results are subject to fluctuations that may cause our stock
price to decline
Our revenues and expenses have fluctuated significantly in the past. This
fluctuation has in turn caused our operating results to vary significantly from
quarter to quarter and year to year. We expect the fluctuations in our revenues
and expenses to continue, and thus, our operating results should also continue
to vary significantly. These fluctuations may be due to a variety of factors
including:
. the timing and realization of milestone and other payments from our corporate
partners;
. the timing and amount of expenses relating to our research and development,
product development and manufacturing activities; and
. the extent and timing of costs related to our activities to obtain patents on
our inventions and to extend, enforce and/or defend our patents and other
rights to our intellectual property.
Because of these fluctuations, it is possible that our operating results for a
particular quarter or quarters will not meet the expectations of public market
analysts and investors, causing the market price of our common stock to
decline. We believe that period-to-period comparisons of our operating results
are not a good indication of our future performance, and you should not rely on
those comparisons to predict our future operating or share price performance.
We depend on our key personnel and we must continue to attract and retain key
employees and consultants
We depend on our key scientific and management personnel. Our ability to pursue
the development of our current and future product candidates depends largely on
retaining the services of our existing personnel and hiring additional
qualified scientific personnel to perform research and development. We also
rely on personnel with expertise in clinical testing, government regulation,
manufacturing and marketing. Attracting and retaining qualified personnel will
be critical to our success. We may not be able to attract and retain personnel
on acceptable terms given the competition for such personnel among
biotechnology, pharmaceutical and healthcare companies, universities and non-
profit research institutions. Failure to retain our key scientific and
management personnel or to attract additional highly-qualified personnel could
delay the development of our product candidates and harm our business.
Other than Natrecor, our product candidates are at early stages of development,
and if we are unable to develop and commercialize these product candidates
successfully, we will not generate revenues from these products
To date, none of our product candidates has been commercialized. Other than
Natrecor, all of our product candidates are in early stages of development. We
face the risk of failure normally found in developing biotechnology products
based on new technologies. Successfully developing, manufacturing, introducing
and marketing our early-stage product candidates will require several years and
substantial additional capital.
S-8
Our operations depend on compliance with complex FDA and comparable
international regulations. If we fail to obtain approvals on a timely basis or
to achieve continued compliance, the commercialization of our products could be
delayed
We cannot assure you that we will receive the regulatory approvals necessary to
commercialize our product candidates, which could cause our business to fail.
Our product candidates are subject to extensive and rigorous government
regulation by the FDA and comparable agencies in other countries. The FDA
regulates, among other things, the development, testing, manufacture, safety,
efficacy, record-keeping, labeling, storage, approval, advertising, promotion,
sale and distribution of biopharmaceutical products. If our potential products
are marketed abroad, they will also be subject to extensive regulation by
foreign governments. None of our lead product candidates has been approved for
sale in the United States or any foreign market. In addition, we have only
limited experience in filing and pursuing applications necessary to gain
regulatory approvals, which may impede our ability to obtain such approvals.
The results of preclinical studies and clinical trials of our products may not
be favorable
In order to obtain regulatory approval for the commercial sale of any of our
product candidates, we must conduct both preclinical studies and human clinical
trials. These studies and trials must demonstrate that the product is safe and
effective for the clinical use for which we are seeking approval. We expect to
begin a Phase II clinical trial of SCIO-469 in the fourth quarter of 2001. The
results of this trial or other clinical trials that we may conduct in the
future may not be successful. Adverse results from our current or any future
trials would harm our business.
We also face the risk that we will not be permitted to undertake or continue
clinical trials for any of our product candidates in the future. Even if we are
able to conduct such trials, we may not be able to satisfactorily demonstrate
that the products are safe and effective and thus qualify for the regulatory
approvals needed to market and sell them. Results from preclinical studies and
early clinical trials are often not accurate indicators of results of later-
stage clinical trials that involve larger human populations.
Our products use novel alternative technologies and therapeutic approaches
which have not been widely studied
Many of our product development efforts focus on novel alternative therapeutic
approaches and new technologies that have not been widely studied. These
approaches and technologies may not be successful. We are applying these
approaches and technologies in our attempt to discover new treatments for
conditions that are also the subject of research and development efforts of
many other companies.
Rapid changes in technology and industry standards could render our potential
products unmarketable
We are engaged in a field characterized by extensive research efforts and rapid
technological development. New drug discoveries and developments in our field
and other drug discovery technologies are accelerating. Our competitors may
develop technologies and products that are more effective than any we develop
or that render our technology and potential products obsolete or
noncompetitive. In addition, our potential products could become unmarketable
if new industry standards emerge. To be successful, we will need to enhance our
product candidates and design, develop and market new product candidates that
keep pace with new technological and industry developments.
Many other companies are targeting the same diseases and conditions as we are.
Competitive products from other companies could significantly reduce the market
acceptance of our products
The markets in which we compete are well-established and intensely competitive.
We may be unable to compete successfully against our current and future
competitors. Our failure to compete successfully may result in pricing
reductions, reduced gross margins and failure to achieve market acceptance for
our potential products. Our competitors include pharmaceutical companies,
biotechnology companies, chemical companies, academic and research institutions
and government agencies.
For example, many pharmaceutical and biotechnology companies have initiated
research programs similar to ours. Many of these organizations have
substantially more experience and more capital, research and development,
regulatory, manufacturing, sales, marketing, human and other resources than we
do. As a result, they may:
. develop products that are safer or more effective than our product
candidates;
S-9
. obtain FDA and other regulatory approvals or reach the market with their
products more rapidly than we can, reducing the potential sales of our
product candidates;
. devote greater resources to market or sell their products;
. adapt more quickly to new technologies and scientific advances;
. initiate or withstand substantial price competition more successfully than we
can;
. have greater success in recruiting skilled scientific workers from the
limited pool of available talent;
. more effectively negotiate third-party licensing and collaboration
arrangements; and
. take advantage of acquisition or other opportunities more readily than we
can.
In addition, our product candidates, if approved and commercialized, will
compete against well-established existing therapeutic products that are
currently reimbursed by government health administration authorities, private
health insurers and health maintenance organizations. We face and will continue
to face intense competition from other companies for collaborative arrangements
with pharmaceutical and biotechnology companies, for relationships with
academic and research institutions and for licenses to proprietary technology.
In addition, we anticipate that we will face increased competition in the
future as new companies enter our markets and as scientific developments
continue to expand the understanding of various diseases. While we will seek to
expand our technological capabilities to remain competitive, research and
development by others may render our technology or product candidates obsolete
or noncompetitive or result in treatments or cures superior to any therapy
developed by us.
If we are unable to protect our intellectual property rights adequately, the
value of our potential products could be diminished
Our success is dependent in part on obtaining, maintaining and enforcing our
patents and other proprietary rights. Patent law relating to the scope of
claims in the biotechnology field in which we operate is still evolving and
surrounded by a great deal of uncertainty. Accordingly, we cannot assure you
that our pending patent applications will result in issued patents. Because
certain U.S. patent applications may be maintained in secrecy until a patent
issues, we cannot assure you that others have not filed patent applications for
technology covered by our pending applications or that we were the first to
invent the technology.
Other companies, universities and research institutions have or may obtain
patents and patent applications that could limit our ability to use,
manufacture, market or sell our product candidates or impair our competitive
position. As a result, we may have to obtain licenses from other parties before
we could continue using, manufacturing, marketing or selling our potential
products. Any such licenses may not be available on commercially acceptable
terms, if at all. If we do not obtain required licenses, we may not be able to
market our potential products at all or we may encounter significant delays in
product development while we redesign potentially infringing products or
methods.
In addition, although we own a number of patents, including issued patents and
patent applications relating to Natrecor and certain of our p38 kinase
inhibitors, the issuance of a patent is not conclusive as to its validity or
enforceability, and third parties may challenge the validity or enforceability
of our patents. We cannot assure you how much protection, if any, will be given
to our patents if we attempt to enforce them and they are challenged in court
or in other proceedings. It is possible that a competitor may successfully
challenge our patents or that challenges will result in limitations of their
coverage. In addition, the cost of litigation to uphold the validity of patents
can be substantial. If we are unsuccessful in such litigation, third parties
may be able to use our patented technologies without paying licensing fees or
royalties to us.
Moreover, competitors may infringe our patents or successfully avoid them
through design innovation. To prevent infringement or unauthorized use, we may
need to file infringement claims, which are expensive and time-consuming. In
addition, in an infringement proceeding, a court may decide that a patent of
ours is not valid or may refuse to stop the other party from using the
technology at issue on the grounds that its technology is not covered by our
patents. Policing unauthorized use of our intellectual property is difficult,
and we cannot assure you that we will be able to prevent misappropriation of
our proprietary rights, particularly in countries where the laws may not
protect such rights as fully as in the United States.
In addition to our patented technology, we also rely on unpatented technology,
trade secrets and confidential information. We may not be able to effectively
protect our rights to this technology or information. Other parties may
independently develop substantially equivalent information and techniques or
otherwise gain access to or disclose our technology. We
S-10
require each of our employees, consultants and corporate partners to execute a
confidentiality agreement at the commencement of an employment, consulting or
collaborative relationship with us. However, these agreements may not provide
effective protection of our technology or information or, in the event of
unauthorized use or disclosure, they may not provide adequate remedies.
If we fail to negotiate or maintain successful arrangements with third parties,
our development and marketing activities may be delayed or reduced
We have entered into, and we expect to enter into in the future, arrangements
with third parties to perform research, development, regulatory compliance,
manufacturing or marketing activities relating to some or all of our product
candidates. If we fail to secure or maintain successful collaborative
arrangements, our development and marketing activities may be delayed or
reduced. We may be unable to negotiate favorable collaborative arrangements
that, if necessary, modify our existing arrangements on acceptable terms.
Most of our agreements can be terminated under certain conditions by our
partners. In addition, our partners may separately pursue competing products,
therapeutic approaches or technologies to develop treatments for the diseases
targeted by us or our efforts. Even if our partners continue their
contributions to the collaborative arrangements, they may nevertheless
determine not to actively pursue the development or commercialization of any
resulting products. Also, our partners may fail to perform their obligations
under the collaborative arrangements or may be slow in performing their
obligations. In these circumstances, our ability to develop and market
potential products could be severely limited.
Risks Related to Our Industry
We face uncertainties over reimbursement and healthcare reform
In both domestic and foreign markets, future sales of our potential products,
if any, will depend in part on the availability of reimbursement from third-
party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly-approved
health care products. Even if we were to obtain regulatory approval, our
product candidates may not be considered cost-effective and adequate third-
party reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investments in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before any of our product candidates is approved for
marketing. Adoption of such legislation and regulations could further limit
reimbursement for medical products and services. If the government and third-
party payors fail to provide adequate coverage and reimbursement rates for our
potential products, the market acceptance of our products may be adversely
affected.
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our product candidates
We face an inherent business risk of exposure to product liability claims in
the event that the use of our product candidates is alleged to have resulted in
harm to others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits
against us are successful. Although we maintain product liability insurance, we
cannot be sure that this coverage is adequate or that it will continue to be
available to us on acceptable terms.
We use hazardous materials in our business, and any claims relating to improper
handling, storage or disposal of these materials could harm our business
Our research and development activities involve the controlled use of hazardous
materials, chemicals, biological agents and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, we
could be held liable for any resulting damages, and any such liability could
exceed our resources. We may be required to incur significant costs to comply
with these laws in the future. Failure to comply with these laws could result
in fines and the revocation of permits, which could prevent us from conducting
our business.
S-11
Risks Related to Our Offering
Our stock price continues to experience large fluctuations, and you could lose
some or all of your investment
The market price of our stock has been and is likely to continue to be highly
volatile. These price fluctuations have been rapid and severe. The market price
of our common stock may fluctuate significantly in response to the following
factors, most of which are beyond our control:
. variations in our quarterly operating results;
. changes in securities analysts' estimates of our financial performance;
. changes in market valuations of similar companies;
. announcements by us or our competitors of significant contracts;
. acquisitions, strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. future sales of common stock;
. announcements by us or our competitors of technological innovations of new
therapeutic products, clinical trial results and developments in patent or
other proprietary rights;
. announcements regarding government regulations, public concern as to the
safety of drugs developed by us or others or changes in reimbursement
policies; and
. fluctuations in stock market price and volume, which are particularly common
among securities of biopharmaceutical companies.
We are at risk of securities class action litigation
In the past, securities class action litigation has often been brought against
a company following a decline in the market price of its securities. This risk
is especially relevant for us because biotechnology companies have experienced
greater than average stock price volatility in recent years. Several years ago,
we were the subject of a securities class action lawsuit, which was eventually
dismissed with a determination that the plaintiffs had no basis for their
claim. If we face such litigation in the future, it could result in substantial
costs and a diversion of management's attention and resources, which could harm
our business.
We have implemented provisions in our charter documents that may ultimately
delay, discourage or prevent a change in our management or control of us
Our certificate of incorporation and bylaws contain provisions that could make
it more difficult for our stockholders to replace or remove our directors or to
effect any other corporate action. These provisions include those which:
. prohibit holders of less than ten percent of our outstanding capital stock
from calling special meetings of stockholders;
. prohibit stockholder action by written consent, thereby requiring stockholder
actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
Moreover, our certificate of incorporation does not provide for cumulative
voting in the election of directors, which would otherwise allow less than a
majority of stockholders to elect director candidates.
Some of the above provisions may also have possible anti-takeover effects,
which may make an acquisition of us by a third party more difficult, even if
such an acquisition could be beneficial to our stockholders. In addition, our
certificate of incorporation also authorizes us to issue up to 20,000,000
shares of preferred stock in one or more different series with terms to be
determined by our board of directors at time of issuance. As of March 31, 2001,
an aggregate of 71,053 shares of preferred stock had been authorized for
issuance by the board of directors and 4,991 shares were issued and
outstanding. Issuance of other shares of preferred stock could also be used as
an anti-takeover device.
S-12
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements. These statements relate to
future events or our future financial performance. We have attempted to
identify these statements by terminology including "anticipate," "believe,"
"can," "continue," "could," "estimate," "expect," "intend," "may," "plan,"
"potential," "predict," "should," or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
and uncertainties outlined under "Risk Factors," that may cause our or our
industry's actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements.
Although we believe that the expectations reflected in these statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
S-13
Use of Proceeds
We estimate that the net proceeds from the sale of the 5,000,000 shares of
common stock that we are offering will be approximately $98.5 million, based
upon a public offering price of $21.00 per share, after deducting underwriting
discounts and commissions and our estimated offering expenses. If the
underwriters exercise their option to purchase 750,000 additional shares in the
offering, we estimate the aggregate net proceeds to us will be approximately
$113.3 million.
We intend to use the net proceeds of this offering for operating costs, capital
expenditures and working capital needs, which may include the following:
. manufacturing and commercializing Natrecor;
. clinical trials for additional Natrecor indications, SCIO-469 and other
pipeline products;
. research and development of other pipeline products;
. costs of regulatory activities associated with Natrecor, both in the United
States and abroad; and
. other general corporate purposes.
We have not identified the amounts we plan to spend on each of these areas or
the timing of such expenditures. Proceeds of this offering may also be used to
acquire companies, technologies or products that complement our business
although we are not planning or negotiating any such transactions as of the
date of this prospectus supplement. The amounts actually expended for each
purpose may vary significantly depending upon numerous factors, including the
amount and timing of the proceeds from this offering, progress with the
regulatory review, manufacture and commercialization of Natrecor and progress
with our other development programs. Expenditures will also depend upon the
establishment of collaborative arrangements with other companies, the
availability of additional financing and other factors.
Pending these uses, we intend to invest the net proceeds in United States
Treasury and agency obligations, highly-rated corporate obligations or other
liquid investments.
Price Range of Common Stock and Dividend Policy
Since 1983, our common stock has traded on the Nasdaq National Market. We
currently trade under the symbol "SCIO." The following table sets forth the
high and low reported sale prices for our common stock for the periods
indicated as reported on the Nasdaq National Market.
-------------
High Low
------ ------
2001
First Quarter.................................................. $23.88 $12.50
Second Quarter (through June 18)............................... 30.50 19.50
2000
First Quarter.................................................. $ 9.19 $ 4.13
Second Quarter................................................. 5.91 3.38
Third Quarter.................................................. 11.44 5.44
Fourth Quarter................................................. 24.63 8.75
1999
First Quarter.................................................. $12.50 $ 8.13
Second Quarter................................................. 9.94 2.88
Third Quarter.................................................. 5.25 3.25
Fourth Quarter................................................. 5.16 3.38
On June 18, 2001, the last reported sale price of our common stock on the
Nasdaq National Market was $22.42 per share. As of May 15, 2001, we had
approximately 4,079 stockholders of record.
We have never declared or paid cash dividends on our common stock or preferred
stock. We do not intend to declare or pay any cash dividends on our common
stock or preferred stock in the foreseeable future. We plan to retain any
earnings for use in the operation of our business and to fund future growth.
S-14
Capitalization
The following table presents our unaudited capitalization as of March 31, 2001:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of 5,000,000 shares of common
stock in this offering at a public offering price of $21.00 per share, less
underwriting discounts and our estimated offering expenses.
The number of shares of common stock to be outstanding after this offering does
not include:
. 5,579,761 shares of common stock issuable as of May 21, 2001 upon the
exercise of outstanding options at a weighted average exercise price of
$12.11 per share;
. 700,000 shares of common stock issuable as of May 21, 2001 upon exercise of
outstanding warrants at a weighted average exercise price of $20.00 per
share;
. 499,100 shares of common stock issuable as of May 21, 2001 upon conversion of
4,991 shares of Series B convertible preferred stock;
. 1,839,476 additional shares of common stock reserved for future issuance as
of May 21, 2001 under our stock option plans;
. 375,000 additional shares of common stock reserved for future issuance as of
May 21, 2001 under our employee stock purchase plan; and
. 30,000 shares of unvested restricted common stock outstanding as of May 21,
2001.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the accompanying notes appearing elsewhere in this prospectus
supplement.
----------------------
As of March 31, 2001
----------------------
Actual As Adjusted
--------- -----------
(Unaudited)
In thousands, except share data
Long-term debt......................................... $ 39,944 $ 39,944
--------- ---------
Stockholders' equity:
Preferred stock; $0.001 par value; 20,000,000 shares
authorized; 4,991 shares issued and outstanding,
actual and as adjusted.............................. -- --
Common stock; $0.001 par value; 150,000,000 shares
authorized; 39,364,224 shares issued and
outstanding, actual and 44,364,224 shares as
adjusted............................................ 39 44
Additional paid-in capital............................. 430,408 528,853
Notes receivable from stockholders..................... (406) (406)
Deferred compensation, net............................. (106) (106)
Accumulated other comprehensive income................. 1,311 1,311
Accumulated deficit.................................... (415,630) (415,630)
--------- ---------
Total stockholders' equity........................... 15,616 114,066
--------- ---------
Total capitalization................................. $ 55,560 $ 154,010
========= =========
S-15
Dilution
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the public offering price per share of our common
stock and the adjusted net tangible book value per share of our common stock
after this offering. Our net tangible book value per share as of March 31, 2001
is $0.40. We calculate net tangible book value per share by dividing net
tangible book value, which equals total tangible assets less total liabilities,
by the number of outstanding shares of our common stock.
At a public offering price of $21.00 per share, our as adjusted net tangible
book value at March 31, 2001 would have been $2.57 per share. This represents
an immediate increase in the net tangible book value per share of $2.17 per
share to existing stockholders and an immediate dilution of $18.43 per share to
new investors purchasing shares of common stock in this offering.
The following table illustrates this dilution on a per share basis:
-------------
Public offering price per share.............................. $21.00
Net tangible book value per share as of March 31, 2001...... $ 0.40
Increase per share attributable to new investors............ 2.17
As adjusted net tangible book value per share after this
offering.................................................... 2.57
------
Dilution per share to new investors ......................... $18.43
======
S-16
Selected Consolidated Financial Data
You should read our selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes thereto contained elsewhere in this prospectus supplement. The
following selected consolidated statement of operations and consolidated
balance sheet data as of and for the years ended December 31, 1996 through 2000
are derived from our audited consolidated financial statements. Our audited
consolidated financial statements as of December 31, 1999 and 2000 and for each
of the three years in the period ended December 31, 2000, are included
elsewhere in this prospectus supplement. The consolidated financial data as of
March 31, 2001 and for the three months ended March 31, 2000 and 2001 are
derived from our unaudited consolidated financial statements included elsewhere
in this prospectus supplement.
----------------------------------------------------------------------------------
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
In thousands, except share and per (Unaudited)
share data
Consolidated Statements of
Operations Data
Revenues:
Product sales and co-
promotion commissions,
net of expenses (1)... $ 9,578 $ 8,045 $ 6,567 $ 9,953 $ 6,914 $ 1,331 $ 1,483
Research and
development
contracts............. 19,531 6,414 38,101 18,402 5,710 1,894 1,097
Gain on sale of
marketing rights...... -- -- -- -- -- -- 9,363
---------- ---------- ---------- ---------- ---------- ---------- ----------
29,109 14,459 44,668 28,355 12,624 3,225 11,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Research and
development........... 39,424 41,907 46,637 34,305 39,278 9,284 9,480
Marketing, general and
administrative........ 11,738 12,289 10,022 11,983 16,711 3,476 6,480
Restructuring charges
(credits)............. -- -- -- 6,400 (993) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
51,162 54,196 56,659 52,688 54,996 12,760 15,960
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.... (22,053) (39,737) (11,991) (24,333) (42,372) (9,535) (4,017)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Investment income...... 5,942 3,966 4,154 4,828 4,774 1,384 812
Interest expense....... -- (2,229) (2,685) (2,793) (3,796) (991) (849)
Realized gains (losses)
on securities......... -- -- 9,003 4,933 (152) (84) 254
Other income (expense),
net................... (1,445) 517 630 (2,685) (973) (299) (423)
---------- ---------- ---------- ---------- ---------- ---------- ----------
4,497 2,254 11,102 4,283 (147) 10 (206)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity in net loss of
affiliate.............. 274 (1,261) (1,343) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Minority interest....... (1,121) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before provision
for income taxes....... (18,403) (38,744) (2,232) (20,050) (42,519) (9,525) (4,223)
(Provision) benefit for
income taxes........... -- 77 (131) (14) (3) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ (18,403) $ (38,667) $ (2,363) $ (20,064) $ (42,522) $ (9,525) $ (4,223)
========== ========== ========== ========== ========== ========== ==========
Loss per common share,
basic and diluted...... $ (0.51) $ (1.07) $ (0.06) $ (0.53) $ (1.12) $ (0.25) $ (0.11)
========== ========== ========== ========== ========== ========== ==========
Weighted average number
of common shares
outstanding used in
calculation of net loss
per share, basic and
diluted................ 35,885,922 36,105,797 37,694,358 37,730,048 37,997,872 37,780,077 39,290,982
--------------------------------------------------------
December 31,
-------------------------------------------- March 31,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- ------- -----------
In thousands (Unaudited)
Consolidated Balance
Sheet Data
Cash and cash
equivalents, and
marketable securities
(current and
noncurrent)............ $ 62,170 $ 64,700 $ 97,311 $100,712 $71,531 $62,179
Working capital
(deficit).............. (5,838) 4,524 8,083 1,706 13,057 11,795
Total assets............ 113,961 116,871 138,829 118,272 88,387 86,087
Long-term debt.......... 349 31,919 34,573 42,866 39,095 39,944
Total stockholders'
equity................. 93,628 60,142 74,926 42,787 17,763 15,616
-------------------
(1) Effective April 1, 2001, we no longer sell or co-promote psychiatric
products.
S-17
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated
financial statements, including the related notes, contained elsewhere in this
prospectus supplement. The following discussion also contains forward-looking
statements about our plans, objectives and future results. These forward-
looking statements are based on our current expectations, and we assume no
obligation to update this information. Realization of these plans and results
involves risks and uncertainties, and our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include those set forth under "Risk Factors."
Overview
We are a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory diseases. Our disease-based technology platform
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets and rationally design small molecule
compounds for large markets with unmet medical needs.
We are primarily focused on the development of two product candidates--Natrecor
for the treatment of acute CHF, and SCIO-469, an oral, small molecule inhibitor
of p38 kinase, for the treatment of rheumatoid arthritis.
Results of Operations
Three Months Ended March 31, 2001 and 2000
Revenues
Net Product Sales and Co-Promotion Commissions. Net product sales and co-
promotion commissions for the three months ended March 31, 2001 were $1.5
million versus $1.3 million for the three months ended March 31, 2000. We no
longer intend to sell or co-promote psychiatric products.
Research and Development Contract Revenues. Research and development contract
revenues were $1.1 million for the three months ended March 31, 2001 versus
$1.9 million for the three months ended March 31, 2000. The decrease of
$0.8 million is primarily due to the end of our research collaboration
agreement with DuPont Pharmaceutical Company, effective November 2000.
Gain on Sale of Marketing Rights. Commencing in the fourth quarter of 2000, we
solicited and received bids regarding the sale of our exclusive marketing
rights for certain GSK psychiatric products sold by us. The marketing rights
were eventually sold to GSK. The marketing rights were originally licensed from
GSK under a 1990 licensing agreement. In order to effect the sale, the
licensing agreement was terminated effective March 31, 2001, and we will
receive from GSK $4.0 million in 2001, $3.0 million in 2002 and $2.5 million in
2003. We recognized a one-time gain of $9.4 million related to the sale.
Costs and Expenses
Research and Development. Research and development expenses were $9.5 million
and $9.3 million for the three months ended March 31, 2001 and 2000,
respectively. The expenses were mainly attributable to clinical expenses
related to Natrecor and research expenses related to our p38 kinase inhibitor
program.
Marketing, General and Administrative. Marketing, general and administrative
expenses were $6.5 million and $3.5 million for the three months ended March
31, 2001 and 2000, respectively. The increase of $3.0 million in expenses for
the quarter is largely attributable to the costs associated with building a
marketing and sales infrastructure for the anticipated Natrecor product launch.
Other Income (Expense). Net other income (expense) was $(0.2) million and
$10,000 for the three months ended March 31, 2001 and 2000, respectively. The
decrease of $0.2 million in income (expense) was principally due to the
$0.6 million decline in investment income due to the lower cash balances from
quarter to quarter, which was partially offset by an increase in realized gains
on marketable securities of $0.3 million.
S-18
Years ended December 31, 2000, 1999 and 1998
Revenues
Total Revenues. Total revenues, after the reclassification required by EITF 99-
19, were $12.6 million, $28.4 million and $44.7 million for the years ended
December 31, 2000, 1999 and 1998, respectively. In 2000, approximately 40% of
our total revenues were derived from PSMD product sales under our license
agreement with GSK. This license agreement was terminated in March 2001, and
effective April 1, 2001, we discontinued the sale of these products. In 1999,
no customer accounted for more than 10% of our total revenues. In 1998,
research and development contract revenues from Bayer AG accounted for
approximately 55% of our total revenue.
Net Product Sales and Co-Promotion Commissions. Net product sales and co-
promotion commissions were $6.9 million, $10.0 million and $6.6 million for the
years ended December 31, 2000, 1999 and 1998, respectively, and were primarily
derived from sales of PSMD products. The $3.0 million decrease in net product
sales and co-promotion commissions from 1999 to 2000 was primarily the result
of reduced distributor inventories caused by manufacturing and product shelf
life issues of Eskalith CR, coupled with sales erosion due to increased
competition and the introduction of generic drugs. The $3.4 million increase
from 1998 to 1999 was primarily attributable to an increase in prescriptions
for PSMD products resulting from increased marketing programs.
Research and Development Contract Revenues. Research and development contract
revenues were $5.7 million, $18.4 million and $38.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The $12.7 million decrease from
1999 to 2000 was primarily attributable to $9.0 million in one-time milestone
payments received in 1999 from corporate partners Chiron Corporation and Novo
Nordisk A/S, $2.3 million in clinical research funding from Bayer AG and
$1.9 million in royalty payments from GenVec and Guilford Pharmaceuticals. The
$19.7 million decrease from 1998 to 1999 was primarily due to $20.0 million
received from Bayer AG in 1998 for the commercialization of Natrecor. The
agreement with Bayer AG was terminated in May 1999 after non-approval of
Natrecor in April 1999 by the FDA.
Costs and Expenses
Research and Development. Research and development expenses were $39.3 million,
$34.3 million and $46.6 million for the years ended December 31, 2000, 1999 and
1998, respectively. The $5.0 million increase from 1999 to 2000 was primarily
attributable to the increased clinical expenses related to Natrecor and
increased research expenses related to our p38 kinase inhibitor program. The
$12.3 million decrease from 1998 to 1999 was primarily due to our corporate
restructuring in 1999 that included the layoff of personnel and the closure of
a manufacturing facility.
Marketing, General and Administrative. After the reclassification required by
EITF 99-19, marketing, general and administrative expenses were $16.7 million,
$12.0 million and $10.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. The $4.7 million increase from 1999 to 2000 was primarily
the result of Natrecor pre-launch activities, a proxy contest in early 2000,
outside consulting expenses relating to strategic planning, increased headcount
and bonuses paid during the period. The $2.0 million increase from 1998 to 1999
was primarily attributable to increased outside consulting fees related to
Natrecor pre-launch activities, our corporate restructuring in 1999 and product
licensing activities.
Restructuring Charges. We incurred a one-time restructuring expense in 1999 of
$6.4 million resulting from a corporate reorganization, which included the
closure of our Mountain View manufacturing facility and a 30% reduction in our
workforce. All restructuring activities were complete by the end of the second
quarter of 2000, leaving a remaining balance of $1.0 million in the
restructuring reserve. This unused reserve primarily resulted from changes in
the estimates of the cost of workforce reductions and the gain on the sale of
excess capital assets that were unanticipated. The reserve was credited to
restructure expense in the second quarter of 2000.
Other Income (Expense). Net other income (expense) was $(0.1) million, $4.3
million and $11.1 million in the years ended December 31, 2000, 1999 and 1998,
respectively. The $4.4 million decrease from 1999 to 2000 was primarily
attributable to the 1999 net gain on the sales of securities in Guilford. The
$6.8 million decrease from 1998 to 1999 was primarily attributable to a
reduction in realized gains on the sale of securities in Guilford in 1999 and
the increase in royalty expense to Biotechnology Research Partners due to the
licensing of Fiblast to Chiron.
Equity in Net Loss of Affiliate. We had a loss of $1.3 million in equity in net
loss of affiliate in 1998, which was the result of Guilford's net losses. Our
ownership in Guilford declined from 62% in May 1994 to 7% at December 31, 1998
as a result of Guilford's public stock offerings and our sale of Guilford
common stock. In the fourth quarter of 1998, we reclassified our investment in
Guilford common stock as marketable securities. In 1999, we sold our entire
holdings of Guilford common stock.
S-19
Liquidity and Capital Resources
To date, our operations and capital requirements have been financed primarily
with the proceeds of public and private sales of common stock and preferred
stock, research and development partnerships, collaborative agreements with
pharmaceutical firms, product sales and investment income. At March 31, 2001,
our combined cash, cash equivalents and marketable securities (both current and
non-current) totaled $62.2 million.
In anticipation of the launch of Natrecor in the third quarter of 2001, we
entered into a sales and marketing agreement with Innovex, a subsidiary of
Quintiles Transnational Corp. We believe that this marketing alliance will
allow us to quickly commercialize Natrecor in the United States. Under the
terms of the agreement, PharmaBio Development, an affiliate of Innovex, has
agreed to fund $30.0 million of our costs to launch Natrecor over the first
24 months of Natrecor's commercialization and to loan us up to $5.0 million. Of
the $30.0 million, we anticipate that $10.0 million will be paid to us in 2001
following FDA approval of Natrecor. Innovex will also identify, hire, train and
deploy a dedicated cardiology and emergency medicine sales force of
approximately 180 people at our cost to launch and market Natrecor.
Net cash used in operating activities of $10.7 million in the quarter ended
March 31, 2001 was primarily attributable to the loss of $4.2 million and
decreases in operating assets and liabilities of $8.9 million, partially offset
by non-cash expenses of $2.4 million.
Net cash provided by investing activities of $6.3 million in the quarter ended
March 31, 2001 consisted of a net increase in sales/maturities of marketable
securities of $6.8 million, partially offset by purchases of property and
equipment of $0.5 million.
Net cash provided by financing activities of $1.6 million in the quarter ended
March 31, 2001 was due to the proceeds from the issuance of common stock and
collection of notes receivable from stockholders.
Net cash used in operating activities of $34.5 million in 2000 was primarily
attributable to the net loss in 2000 of $42.5 million, partially offset by non-
cash charges. For 1999, net cash used in operating activities of $8.5 million
was primarily attributable to funding net operating losses, partially offset by
non-cash expenses and increases in operating assets and liabilities. Net cash
provided by operating activities of $9.0 million in 1998 was largely due to
deferred contract revenue of $5.2 million, depreciation and accrued interest
payable, partially offset by operating losses and decreases in operating assets
and liabilities.
Net cash provided by investing activities of $20.8 million in 2000 consisted of
net sales of marketable securities of $22.1 million, offset by purchases of
property and equipment of $1.3 million. Net cash provided by investing
activities of $5.7 million in 1999 consisted of net purchases of marketable
securities of $11.1 million and purchases of property and equipment of $5.0
million, offset by the proceeds from the sales of facilities and equipment of
$21.8 million. For 1998, net cash used by investing activities of $18.3 million
consisted of net purchases of marketable securities of $16.3 million and
purchases of property and equipment of $2.5 million, partially offset by the
sale of investments in an affiliate of $0.4 million.
Net cash provided by financing activities of $5.4 million in 2000 was primarily
due to the proceeds from the issuance of common stock and the collection of
notes receivables from stockholders of $10.0 million, partially offset by the
payment of notes payable of $4.6 million. Net cash provided by financing
activities of $7.7 million in 1999 was largely due to proceeds from notes
payable of $7.5 million and proceeds from the issuance of common stock of
$1.3 million, partially offset by the purchase of treasury stock of $1.0
million. Net cash provided by financing activities of $5.7 million for 1998 was
primarily due to the proceeds from the issuance of common stock of $7.6 million
for 1998 partially offset by the purchase of treasury stock of $1.5 million and
the payment of notes payable of $0.3 million.
We expect that the net proceeds from this offering, together with our existing
cash, cash equivalents and marketable securities and proceeds from existing
collaborations, including our agreement with Innovex and PharmaBio, will enable
us to maintain our current and planned operations for the next twelve months.
In the long-term, and in the event that we do not receive FDA approval to
market Natrecor, we will need to arrange additional financing for the operation
of our business, including the commercialization of our products currently
under development. We will consider collaborative arrangements and additional
public or private financings, including additional equity financings. Factors
influencing the availability of additional financing include our progress in
product development, investor perception of our prospects and the general
conditions of the financial markets.
S-20
Income Taxes
At December 31, 2000, we had federal and state net operating loss carryforwards
of approximately $349.0 million and $41.5 million, respectively. We also had
federal and state research tax credit carryforwards of approximately $13.3
million and $5.1 million, respectively. The federal net operating loss and
other tax credit carryforwards will expire at various dates beginning in the
year 2001 through 2020, if not used. Our state net operating loss and other tax
credit carryforwards will expire at various dates beginning in the year 2001
through 2005, if not used. These net operating loss and other tax credit
carryforwards provide an additional source of liquidity only to the extent that
profitable operations are achieved prior to the expiration of the carryforward
periods. The use of losses generated through the date of our 1992 merger with
Nova Pharmaceuticals Corporation may be subject to substantial annual
limitations due to the "ownership change" provisions of the Internal Revenue
Code of 1986.
New Accounting Pronouncements
Financial Accounting Standards No. 133. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of
relationship that exists. Effective January 1, 2001, Scios adopted SFAS 133. We
do not currently hold derivative instruments or engage in hedging activities
and as such the implementation of SFAS 133 did not have a material effect on
our financial position and results of operations.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including changes in interest rates
affecting the return on our investments and foreign currency fluctuations. In
the normal course of our business, we employ established policies and
procedures to manage our exposure to fluctuations in interest rates and foreign
currency values.
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We attempt to place our investments with
high quality issuers and, by policy, limit the amount of credit exposure to any
one issuer and do not use derivative financial instruments in our investment
portfolio. We maintain an investment portfolio of various issuers, types and
maturities, which consist of both fixed and variable rate financial
instruments. These securities are classified as available-for-sale, and
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a separate component in stockholders' equity, net
of applicable taxes. At any time, sharp changes in interest rates can affect
the value of our investment portfolio and its interest earnings. Currently, we
do not hedge these interest rate exposures. However, through our money manager,
we maintain management control systems to monitor interest rate risk. The risk
management control systems use analytical techniques as well as other
procedures to review interest rate risk. Assuming a hypothetical interest rate
increase of 10%, the fair value of our total investment portfolio as of March
31, 2001 would have potentially incurred a loss of $0.3 million.
Our exposure to foreign currency fluctuations is currently limited to our
supply contract for Natrecor, which is denominated in German Marks. Changes in
the exchange rate between German Marks and the U.S. dollar could adversely
affect our manufacturing costs. All of our other contracts are denominated in
U.S. dollars. Exposure to foreign currency exchange rate risk may change over
time as our business evolves and our products are introduced into international
markets. Currently, we do not hedge against any foreign currencies and, as a
result, could incur unanticipated gains or losses.
S-21
Business
Overview
We are a biopharmaceutical company developing novel treatments for
cardiovascular and inflammatory diseases. Our disease-based technology platform
integrates expertise in protein biology with computational and medicinal
chemistry to identify novel targets and rationally design small molecule
compounds for large markets with unmet medical needs.
We are primarily focused on the development of two product candidates--Natrecor
for the treatment of acute CHF, and SCIO-469, an oral, small molecule inhibitor
of p38 kinase, for the treatment of rheumatoid arthritis.
Recent Developments
Since December 31, 2000, the following significant developments have occurred
with respect to our business:
Natrecor
. In January 2001, we filed an amendment to our NDA for Natrecor with the FDA.
On May 25, 2001, the Cardiovascular and Renal Drugs Advisory Committee to the
FDA met with our lead clinical investigators to discuss our amended NDA. The
advisory committee unanimously recommended that Natrecor be approved by the
FDA for sale in the United States for the treatment of acute CHF. We expect
the FDA to announce its decision on whether to approve Natrecor in July 2001.
FDA decisions regarding the approval or non-approval of an NDA sometimes
differ from an advisory committee recommendation, and there can be no
assurance that the FDA will decide to approve Natrecor.
. In January 2001, we entered into a marketing alliance with Innovex, a
division of Quintiles, to commercialize Natrecor in North America. Innovex
will deliver a wide range of sales and marketing solutions for us, including
hiring, training and deploying a dedicated cardiology and emergency medicine
sales force of approximately 180 salespeople at our cost.
. In March 2001, we began a new clinical trial aimed at investigating the
potential pharmaco-economic impact of Natrecor in improving treatment and
outcomes for acute CHF patients. This PROACTION trial is a pilot study
designed to compare the clinical effects, safety profile and costs of
standard therapy plus Natrecor to standard therapy plus placebo in 250 acute
CHF patients treated in the emergency department or an observation unit. We
expect to complete an interim data analysis in the third quarter of 2001 and
to complete this study during the fourth quarter of 2001.
. In May 2001, we expanded our existing research collaboration with Medtronic
to initiate a clinical study to evaluate the hemodynamic, endrocrine and
clinical effects of Natrecor using information collected by Medtronic's
Chronicle Implantable Hemodynamic Monitor both during and after infusions of
Natrecor. This study is expected to begin in July 2001 at the Karolinska
Hospital in Stockholm. Our research collaboration also covers the feasibility
of infusing patients with Natrecor using Medtronic's infusion products.
p38 Kinase Inhibitor Program
. In January 2001, we completed a Phase Ia clinical trial of SCIO-469
evaluating single doses in healthy volunteers.
. In April 2001, we completed a Phase Ib clinical trial in 20 healthy
volunteers in which we evaluated the safety and tolerability of multiple
doses of SCIO-469 over a two-week period. Based on the results of these
trials, we plan to begin a Phase II clinical trial in the fourth quarter of
2001.
Natrecor
Congestive Heart Failure
According to the American Heart Association's 2001 Heart and Stroke Statistical
Update, approximately 4.7 million Americans currently suffer from chronic CHF
and 550,000 new cases of CHF will be diagnosed in the United States this year.
Annual expenditures for CHF are estimated to be $21.0 billion, including $15.8
billion for inpatient care.
Chronic CHF is characterized by a progressive loss in the heart's ability to
pump blood. It is attributable to weakening of the contractile cells of the
heart and accumulation of scar tissue. Different diseases can cause CHF,
including coronary artery disease, heart attacks, inflammation of the heart
tissue and diseases of the heart valves. Weakened heart muscle often results in
poor cardiac output because the heart is unable to empty blood adequately from
the ventricles to the circulation with each beat. Blood pools in the
ventricles, and the heart changes from its normal shape and becomes
S-22
enlarged. Subsequently, blood begins to back up into the blood vessels of the
lungs, causing marked increases in pulmonary vascular pressures. As pressure
increases, fluid moves from the pulmonary blood vessels into the air spaces,
causing pulmonary congestion. One frequently used measurement of pulmonary
vascular pressure is pulmonary capillary wedge pressure, or PCWP.
CHF symptoms that result from the pooling of blood include shortness of breath,
edema, or fluid retention, and swelling of the legs and feet. CHF symptoms that
result from the inefficiency of the heart to distribute or adequately pump
oxygen-rich blood to body tissues include fatigue and weakness as well as a
loss of appetite. As the disease progresses, these symptoms can severely impact
the patient's quality of life, such that even the ability to perform simple
tasks, such as walking across the room, becomes limited.
In the early stages of CHF, the body activates several hormonal pathways that
help the heart compensate in the short-term but have adverse long-term effects.
These hormones, which include adrenalin, angiotensin II, aldosterone and
endothelin, stimulate the heart to beat faster and stronger, thicken the wall
of the heart and maintain blood pressure by constricting blood vessels and
stimulating the kidney to retain sodium. If these pathways remain activated
over a sustained period of time, the beneficial effects are lost and injurious
effects develop, contributing to an eventual deterioration of heart function.
Current medications and medications under development generally focus on one or
more of these hormonal pathways.
Many CHF patients will eventually experience a rapid deterioration, or
decompensation, and require urgent treatment in the hospital. This condition is
called acute CHF. Acute CHF accounts for approximately one million hospital
admissions each year in the United States. Acute CHF is the most frequent cause
of hospitalization among Medicare patients. In addition, patients suffering
from chronic CHF have a five-year mortality rate of approximately 50%. For more
than a decade, there have been no new FDA-approved drugs to treat acute CHF.
Current Treatments for Congestive Heart Failure
While some cardiac risk factors such as smoking, high cholesterol, high blood
pressure, diabetes and obesity can be controlled with lifestyle changes, the
majority of patients with CHF require additional treatments to help manage
their disease. Current medications for the treatment of CHF, including
diuretics, inotropes, vasodilators and beta blockers, only focus on single
components of the diverse pathways contributing to CHF. For example, diuretics
help the kidneys rid the body of excess fluid, thereby reducing blood volume
and the heart's workload. Inotropes strengthen the heart's pumping action.
Vasodilators, such as ACE inhibitors, cause the peripheral arteries to dilate,
making it easier for blood to flow. Beta blockers slow the heart rate and
reduce blood pressure by blocking the effects of adrenalin.
Upon arrival at the emergency department, patients who experience acute
episodes of CHF are typically treated with a combination of oxygen, morphine
and intravenous diuretics. A small percentage of patients respond to this
initial therapy and do not require admission to the hospital; however, the
majority of acute CHF patients require additional medical intervention and are
admitted. Additional acute CHF treatments may include intravenous
administration of inotropes, such as dobutamine, and vasodilators, such as
nitroglycerin. While each of these therapies assist in managing acute CHF, each
also has inherent limitations. Inotropes strengthen the contractility of the
heart but increase the incidence of cardiac arrhythmias, or irregular
heartbeats, and are associated with increased mortality. Intravenously
administered nitroglycerin requires careful monitoring and slow dosage
increases in small increments, resulting in delays in attaining positive
responses in acutely ill patients. Moreover, therapeutically effective doses of
IV nitroglycerin are:
. unpredictable from patient to patient;
. very close to toxic degrees of hypotension; and
. associated with increased tolerance or loss of effectiveness.
These complications of IV nitroglycerin often require the transfer of acute CHF
patients to more costly treatment units within the hospital, such as the
cardiac and intensive care units, in order to provide careful patient
monitoring.
Natrecor: Our Solution for the Treatment of Acute Congestive Heart Failure
Natrecor is a recombinant form of human B-type natriuretic peptide, or BNP, a
naturally occurring hormone in the body that aids in the healthy functioning of
the heart. BNP is secreted by the ventricles of the heart as a response to CHF.
We believe that the advantage of Natrecor, compared to existing forms of
therapy for acute CHF, is that it works on multiple
S-23
components of the acute CHF disease pathway. In particular, based upon
preclinical studies and clinical trials, we believe that Natrecor:
. dilates veins, which decreases elevated pulmonary pressures, or preload;
. dilates arteries, which decreases the resistance against which the heart has
to pump, or afterload;
. stimulates the kidney to excrete excess sodium, or natriuresis;
. stimulates the kidney to excrete excess fluid, or diuresis; and
. opposes many of the injurious consequences caused by the long-term elevation
of hormones such as adrenalin, angiotension II, aldosterone and endothelin.
In clinical trials, Natrecor has also been shown to significantly improve blood
circulation and patient symptoms compared to IV nitroglycerin without the need
for labor-intensive monitoring, and its method of administration does not
require frequent dosing adjustments. In addition, in clinical trials, Natrecor
has not been associated with an increase in the incidence of cardiac
arrhythmias and has demonstrated no evidence of drug interactions with other
agents used concurrently in the treatment of acute CHF.
Natrecor Clinical Trials
We have conducted numerous clinical trials evaluating Natrecor over the past
eight years. Approximately 1,000 patients have been treated with Natrecor in 12
trials, including four pivotal efficacy trials. In all of these trials,
Natrecor administration has been associated with improved blood circulation and
vascular filling pressures in the heart and lungs. Each of the efficacy trials
further demonstrated statistically significant improvement of symptoms in acute
CHF patients.
Amended NDA Submission Trials
We have completed two trials since the submission of our original NDA, the VMAC
trial, or Vasodilation in the Management of Acute CHF, and the PRECEDENT trial,
or Prospective Randomized Evaluation of Cardiac Ectopy with Dobutamine or
Nesiritide Therapy. These trials form the basis of our amended NDA.
The VMAC Trial. We began enrollment in our VMAC trial in October 1999 and, in
July 2000, completed enrollment of 498 patients hospitalized for acute CHF in
the United States. This trial compared the effects of Natrecor,
IV nitroglycerin and placebo, when individually added to standard therapy, such
as diuretics and inotropes. The primary endpoints were a reduction in pulmonary
capillary wedge pressure, or PCWP--a measure of the pulmonary vascular pressure
of the heart, reflecting its workload--and improvement of the symptom of
shortness of breath. The VMAC trial achieved both of its primary endpoints. Key
results of the VMAC trial that were presented in November 2000 at the annual
scientific meeting of the American Heart Association include:
. Natrecor produced a 20% decrease in PCWP at three hours, most of which
occurred in the first 15 minutes, which was significantly better than the 7%
decrease in PCWP at three hours for the placebo group;
. Natrecor improved shortness of breath significantly better than placebo;
. Natrecor decreased PCWP significantly faster and to a greater extent than IV
nitroglycerin;
. Natrecor significantly improved breathing in patients receiving standard
active therapy; in contrast, IV nitroglycerin did not significantly improve
breathing in these patients;
. Natrecor-treated patients had significantly fewer adverse events than either
placebo or IV nitroglycerin patients;
. acute CHF patients experiencing active ischemia, which is impaired blood flow
to the heart, showed no adverse side effects in response to Natrecor; and
. patients receiving Natrecor did not develop tolerance to the drug over time,
and consequently, unlike IV nitroglycerin, the effects of Natrecor were
sustained through 24 hours at the same dosage.
The PRECEDENT Trial. The PRECEDENT trial compared the safety of Natrecor and
dobutamine, the most commonly used inotrope treatment for acute CHF. Key
results of the PRECEDENT trial indicated that:
. Natrecor produced fewer cardiac arrythmias than dobutamine; and
. use of Natrecor was associated with fewer deaths than the use of dobutamine.
S-24
Initial NDA Clinical Trials
We conducted three pivotal Phase III clinical trials that were submitted to the
FDA in our original NDA for Natrecor.
Trial 704.311. Trial 704.311 was our first Phase III clinical trial that we
conducted to evaluate the efficacy of Natrecor in patients with acute CHF. In
this trial, we enrolled 103 patients who were treated with one of three
intravenously administered doses of Natrecor over a 24-hour period. This trial
demonstrated that Natrecor produced significant improvements in PCWP and
cardiac pump function. Results of this study were published in The Journal of
the American College of Cardiology in July 1999.
Trial 704.325. Trial 704.325, our second Phase III clinical trial, was a
double-blind, placebo-controlled trial which consisted of 127 patients and was
designed to determine the short-term efficacy of Natrecor with regard to
hemodynamic measures and symptoms. In this trial, Natrecor demonstrated
statistically significant improvements in multiple symptoms of acute CHF, such
as severe shortness of breath and fatigue. In addition, patients treated with
Natrecor also experienced improvements in blood circulation, vascular pressures
in the heart and lungs and cardiac pumping ability. The results from this trial
were published in the July 27, 2000 issue of The New England Journal of
Medicine.
Trial 704.326. In our third Phase III clinical trial, we enrolled 305 patients
and demonstrated that Natrecor resulted in the rapid and statistically
significant improvement of the symptoms and clinical severity of acute CHF when
compared to placebo. Patients not receiving Natrecor received one or more
standard intravenous drugs for acute CHF, most commonly dobutamine, milrinone
or nitroglycerin. The trial also compared Natrecor with standard intravenous
agents with respect to adverse events. The safety of Natrecor was demonstrated
to be equal to the safety of standard intravenous drugs for acute CHF. The
trial also demonstrated patients treated with Natrecor experienced a reduced
need for diuretics. The results from this trial were also published in the July
27, 2000 issue of The New England Journal of Medicine.
In each of these trials, Natrecor demonstrated efficacy with respect to the
symptoms and hemodynamic parameters of acute CHF. The most common adverse event
in the patients treated with Natrecor was dose-related, mild hypotension, which
was usually asymptomatic.
Current Clinical Trials
In March 2001, we also initiated the PROACTION, or Prospective Randomized
Outcomes Study of Acutely Decompensated Congestive Heart Failure Treated
Initially in Outpatients with Natrecor, trial, a pilot study designed to
compare the clinical effects, safety profile and economic impact of standard
therapy plus Natrecor to standard therapy plus placebo. The PROACTION trial has
an enrollment target of 250 acute CHF patients. We expect to complete an
interim data analysis in the third quarter of 2001 and to complete this study
in the fourth quarter of 2001. These patients are being treated in the
emergency department or observation unit of a hospital, where the majority of
the approximately one million hospitalizations each year for acute CHF begin.
NDA Filings
In April 1998, we submitted an NDA to the FDA for the use of Natrecor for the
treatment of acute CHF. This NDA was based on the efficacy trials 704.311,
704.325 and 704.326. In January 1999, the Cardiovascular and Renal Advisory
Committee recommended that the FDA approve Natrecor for the treatment of acute
CHF. In April 1999, we received a non-approval letter from the FDA, requesting
that we conduct further studies with Natrecor. The FDA requested that in these
studies we demonstrate:
. the clinical utility of Natrecor as compared to the current standard of care
vasodilator therapy, IV nitroglycerin;
. that Natrecor is safe in acute CHF patients experiencing active ischemia; and
. that the clinical benefits of Natrecor occur early after the initiation of
therapy.
The VMAC trial was designed to address each of the issues raised by the FDA in
its non-approval letter.
The data from the VMAC and PRECEDENT trials were submitted to the FDA in our
amendment to the NDA for Natrecor in January 2001. On May 25, 2001, the
Cardiovascular and Renal Drugs Advisory Committee to the FDA met with our lead
clinical investigators to discuss our amended NDA for Natrecor. The advisory
committee unanimously recommended that Natrecor be approved by the FDA for sale
in the United States for the treatment of acute CHF. We expect the FDA to
announce its decision on whether to approve Natrecor in July 2001. FDA
decisions regarding the approval or non-approval
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of an NDA sometimes differ from an advisory committee recommendation, and there
can be no assurance that the FDA will decide to approve Natrecor. For example,
in April 1999, the FDA issued a non-approval letter for Natrecor even though in
January 1999, the Cardiovascular and Renal Drugs Advisory Committee to the FDA
had recommended approval of Natrecor.
Advisory committees provide independent advice and recommendations to the FDA
on scientific and technical matters related to the development and evaluation
of products regulated by the FDA. The FDA's Center for Drug Evaluation and
Research requests advice from advisory committees on a variety of matters,
including various aspects of clinical investigations and applications for
marketing approval of drug products. Committee members are scientific experts
such as physician-researchers and statisticians, as well as representatives of
the public, including patients.
Research Collaboration with Medtronic
In April 2000, we entered into a research collaboration agreement with
Medtronic to study the feasibility of infusing patients with Natrecor via
Medtronic's infusion products. This agreement requires Medtronic to collaborate
with us on the infusion of vasodilators using Medtronic's products until the
first patient is implanted with a Medtronic infusion product administering
Natrecor. In May 2001, we expanded this research collaboration by entering into
an agreement to conduct a clinical study to evaluate the hemodynamic, endocrine
and clinical effects of Natrecor using information collected by Medtronic's
Chronicle Implantable Hemodynamic Monitor, or IHM, both during and after
infusions of Natrecor. A pilot feasibility study is expected to begin in July
2001 at the Karolinska Hospital in Stockholm. The Chronicle IHM is an implanted
system designed to measure and record hemodynamic variables over time such as
right ventricular systolic and diastolic pressures, estimated pulmonary artery
diastolic pressure, heart rate and activity. The Chronicle IHM is not approved
for sale in the United States or Europe.
p38 Kinase Inhibitor Program
The Immune System and Inflammation
The immune system is composed of multiple cell types, including white blood
cells, each with a specific functional role. This system is regulated by
cytokines, which are proteins produced by immune system cells. When the body
encounters foreign material, or when tissue injury occurs, numerous enzymes in
the immune system are activated, causing the production of various inflammatory
cytokines such as interleukin-1, or IL-1, and tumor necrosis factor, or TNF.
One class of the immune system's family of enzymes is the mitogen-activated
protein kinases, or MAP kinases. The MAP kinases are a family of intracellular
signaling enzymes that are activated when cells are either stimulated or
stressed and mediate many beneficial and injurious cellular responses. One of
the MAP kinases, p38 kinase, is responsible for increased production of IL-1,
TNF and the inflammatory enzyme cyclooxygenase-2, or COX-2.
Autoimmune diseases occur when the immune system is abnormally activated
against its own body. In the case of rheumatoid arthritis, the immune system is
activated against joint tissues. White blood cells then invade the joint space,
and, when activated, produce proteins such as IL-1, TNF and COX-2, which result
in pain, swelling and eventual destruction of the affected joints. Other
diseases that are worsened by sustained high levels of TNF and IL-1 include
inflammatory bowel disease, CHF and neurodegenerative conditions such as
Alzheimer's disease and Parkinson's disease. We believe that patients treated
with an oral p38 kinase inhibitor could experience a reduction in both the
symptoms and the progression of inflammatory diseases since it could inhibit
the production of IL-1, TNF and COX-2.
Current Therapy for Autoimmune and Inflammatory Diseases
Currently, there is no cure or prevention for autoimmune disease. Optimal
medical management requires the early introduction of therapies in order to
prevent the long-term effects of the disease. In the case of rheumatoid
arthritis, long-term effects include irreversible joint damage and hypertrophy
of joint tissues limiting a patient's ability to move the affected joints.
Traditionally, initial drug treatment of inflammatory diseases involves the use
of non-steroidal anti-inflammatory agents. Steroids, such as glucocorticoids,
are often added as the disease or symptoms progress. Although these agents help
patients increase function and improve symptoms, they do not stop progression
of the disease. Moreover, these drugs have been demonstrated to cause both
stomach and kidney problems. In addition, persistent steroid treatment may
result in excess suppression of the immune system, which can lead to infection,
decreased bone marrow function and osteoporosis.
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Recently, more selective anti-inflammatory agents, or COX-2 inhibitors, such as
Celebrex and Vioxx, have been introduced for symptom relief; however, they do
not alter the progression of inflammatory disease. Sales of COX-2 inhibitors
for the treatment of inflammatory disease were approximately $4.8 billion in
2000.
More powerful drugs exist for patients that do not respond to initial drug
therapy. In the case of rheumatoid arthritis, drugs such as methotrexate,
hydroxychloroquine and sulfasalazine can have individual side effects which
must be monitored closely, and a delay of one to six months for a clinical
response is common.
Within the past four years, inhibition of inflammatory cytokines has become an
established treatment for autoimmune disease. In the case of rheumatoid
arthritis, two new protein therapeutics, Enbrel and Remicade, were introduced
to inhibit the effects of TNF. Combined U.S. sales of these agents totaled
approximately $956.0 million in 2000. These treatments have been shown to be
effective at arresting the progression of the disease; however, they must be
given by injection or infusion on a repeated basis, which is cumbersome for
chronic diseases. In addition, when taken on a chronic basis, increased rates
of infections have been reported in patients taking these medications because
these new therapies result in an excessive inhibition of TNF upon injection due
to the limited ability to adjust the dose of drug administered. Resistance to
the treatment is also an issue with these new drugs. This is due in part to
increasing production by a patient's immune system of antibodies that
neutralize administered proteins.
We are focusing our initial drug development efforts on creating an orally
available small molecule drug for the treatment of rheumatoid arthritis. The
Arthritis Foundation estimates that approximately 2.1 million Americans
currently suffer from rheumatoid arthritis. Decision Resources, an independent
market research group, suggests that the global market for rheumatoid arthritis
therapies will be approximately $6.6 billion by 2009, up from almost
$1.5 billion in 1999. Rheumatoid arthritis patients generate more than nine
million physician office visits and more than 250,000 hospitalizations each
year. It is estimated that, in aggregate, the average yearly earnings deficits
for all working individuals with rheumatoid arthritis is approximately $6.5
billion.
SCIO-469: Our p38 Kinase Inhibitor for the Treatment of Inflammatory Diseases
SCIO-469 is a novel oral, small molecule compound designed to inhibit p38
kinase. Oral administration allows for careful dosage adjustment, which may
permit the physician to inhibit TNF sufficiently to obtain a useful therapeutic
effect without subjecting the patient to the risk of infection associated with
complete TNF inhibition.
Preclinical Studies. In preclinical studies of acute and chronic inflammatory
arthritis, orally administered doses of SCIO-469 reduced cellular production of
COX-2 in a dose-dependent manner and reduced COX-2 and TNF levels in whole
blood assays. Statistically significant reductions in inflammation also were
observed in animal models of arthritis. In October 2000, we presented
preclinical data involving our p38 kinase inhibitors at the annual scientific
meeting of the American College of Rheumatology. The study demonstrated that
our p38 kinase inhibitors had statistically significant anti-inflammatory
effects in both acute and chronic animal models of inflammation.
Clinical Trials. In January 2001, we completed a Phase Ia clinical trial of
SCIO-469 evaluating single oral doses in healthy volunteers. This Phase Ia
clinical trial enrolled 30 volunteers. In April 2001, we completed a Phase Ib
clinical trial with 20 healthy volunteers in which we evaluated the safety and
tolerability of multiple doses of SCIO-469 over a two-week period. Based on the
results of these trials, we plan to initiate a Phase II clinical trial with
rheumatoid arthritis patients in the fourth quarter of 2001. This trial will
consist of testing SCIO-469 in patients with the active disease, evaluating for
both safety and efficacy over a range of doses.
Strategy
We are focused on developing and commercializing novel pharmaceutical products
that address large market opportunities with unmet medical needs, initially in
the areas of cardiovascular and inflammatory disease. Key elements of our
strategy include:
. Maximizing the Near-Term Commercial Opportunities for Natrecor. If approved,
Natrecor will be the first drug to be approved by the FDA for the treatment
of acute CHF in over a decade. With the help of our partner, Innovex, we are
building a focused 180-person sales force dedicated to establishing Natrecor
as the standard of care. We believe that this sales force will be the largest
in the United States exclusively dedicated to the acute CHF market. We also
intend to expand the near-term commercial opportunities for Natrecor in the
area of acute CHF by obtaining approvals to market Natrecor, through
collaborators, outside of the United States.
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. Expanding the Commercial Opportunities for Natrecor. We plan to expand the
market opportunities for Natrecor including its use in additional indications
and in device-based therapies. We will pursue additional indications for
Natrecor beyond that of acute CHF including its use in outpatient infusions.
We recently expanded our research collaboration with Medtronic to study the
effects of Natrecor in combination with Medtronic's heart failure devices and
implantable infusion systems.
. Advancing the Development of Our Small Molecule Therapeutics Program. We plan
to continue to add state-of-the-art technologies to enhance our ability to
develop small molecule therapeutics in addition to our traditional strengths
in developing protein therapeutics. The major advantages of small molecule
therapeutics are the potential for oral administration, the ability to adjust
dosing to maximize efficacy and minimize toxicity and the ease and cost of
manufacturing. Currently, we are developing SCIO-469, an oral, small molecule
inhibitor of p38 kinase for the treatment of rheumatoid arthritis.
. Broadening our Product Portfolio through License or Acquisition. We believe
that we can leverage our Natrecor-dedicated sales force by marketing
additional products to the acute care market. We are evaluating the licensing
or acquisition of additional product candidates, several of which are in the
areas of cardiovascular and inflammatory disease. We may also acquire
additional technologies or businesses that we believe will enhance our
research and development capabilities.
. Collaborating Selectively with Biotechnology and Pharmaceutical Companies. As
we expand certain aspects of our development pipeline, we intend to partner
with biotechnology and pharmaceutical companies in order to gain access to
additional research and development or marketing expertise. Our approach to
partnership will be on a selective basis, seeking to maintain the highest
possible value of our product candidates. In order to accomplish this task,
we intend to delay partnering of any product until its clinical utility has
been established.
Marketing and Sales--Natrecor
BNP Education
We are developing awareness for BNP among key target audiences through a
variety of tactical programs, including medical seminars, continuing medical
education programs, advisory boards and publications. We have identified and
are developing relationships with physicians and nurses who play a leading role
in the diagnosis and treatment of CHF.
Our Agreement with Innovex
In January 2001, we entered into a marketing alliance with Innovex, which will
deliver a wide range of sales and marketing solutions for us. We will lead
strategic and tactical planning for the sales and marketing of Natrecor, and we
will also maintain control over the clinical development for additional
indications for Natrecor. Innovex will identify, hire, train and deploy a
dedicated cardiology and emergency medicine sales force of approximately 180
people at our cost to launch Natrecor. Together with Innovex, we have
established hiring, training and deployment criteria for the sales force.
Commencing three years after Innovex begins to supply us with dedicated
salespeople, we have the option, upon 90 days notice, to acquire all or any
portion of this sales force from Innovex for a fee.
We have created a field support team of 32 people. Twelve scientific affairs
managers are currently working in the field to build relationships with
opinion-leading cardiologists. We also have hired two area business directors
and 18 area business managers to support the Natrecor sales force.
PharmaBio, an affiliate of Innovex, has agreed to fund $30.0 million of our
costs to launch Natrecor over the first 24 months of Natrecor's
commercialization and to loan us up to $5.0 million. Of the $30.0 million, we
anticipate that $10.0 million will be paid to us in 2001 following FDA approval
of Natrecor. We will recognize 100% of the revenues from sales of Natrecor.
Assuming FDA approval and launch of Natrecor in July 2001, we will pay
PharmaBio a declining royalty rate on net sales of Natrecor through early 2008.
We also granted PharmaBio a warrant to purchase 700,000 shares of our common
stock at an exercise price of $20.00 per share.
Licensing Arrangements with Third Parties
We have licensed some of our product candidates to third parties, who are now
responsible for product development. Under these arrangements, we typically
receive a combination of upfront payments, milestone payments upon their
achievement of scientific and clinical benchmarks and royalties on commercial
sales of products by our partners.
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BNP
In 1998, we entered into a cross-license agreement with Shionogi under which we
granted Shionogi a royalty-free, nonexclusive license to our BNP patent rights
for the diagnostic field. In exchange, Shionogi granted us a royalty-bearing,
exclusive license under Shionogi's BNP patents to develop therapeutic products.
For therapeutic products, we pay royalties on net sales for the life of the
patent in countries where Shionogi holds one or more BNP patents. In countries
where Shionogi has BNP patents pending, we are obligated to pay a reduced
royalty on the net sales of our therapeutic products until the earlier of the
invalidity of the BNP patents pending or four years from the commencement of
sales in that country of such therapeutic products. Shionogi holds patents in
Japan and Europe. We believe that Shionogi may have a patent application
pending in the United States.
We have licensed to Biosite Diagnostics and Abbott Laboratories the right to
use our patents on BNP for diagnostic purposes. Biosite has developed and is
currently marketing a point-of-care diagnostic test for BNP levels in the
United States and Europe. This test is used to identify individuals with CHF or
to monitor progression of their disease or their response to treatment. We are
currently receiving royalties from Biosite on the sales of their diagnostic
products. Abbott is continuing to develop its BNP diagnostic product.
Fibroblast Growth Factor
FGF, a naturally-occurring protein, stimulates the growth of new blood vessels.
In November 1999, we granted a license to Chiron covering rights to FGF in the
areas not previously licensed by us. We may receive up to $12.0 million in
milestone payments upon Chiron's completion of certain development objectives.
In addition, we will receive royalties based on sales of FGF products in
countries where we hold patents. Chiron has completed separate Phase II human
clinical trials evaluating FGF as treatment for coronary artery and peripheral
vascular disease.
In 1988, we licensed our FGF technology to Kaken Pharmaceutical. In April 2001,
Kaken received approval from the Japanese Ministry of Health and Welfare to
market an FGF-based product for the treatment of recalcitrant dermal ulcers in
Japan. We will receive royalties on any sales of FGF-based products by Kaken in
Asia.
We have also granted nonexclusive licenses under our FGF patents and technology
to Orquest, for the development of products for the treatment of bone
fractures.
We are obligated to make payments to Organon International based on amounts
received by us upon commercialization of FGF. Approximately $0.2 million
remains to be paid under this obligation, which stems from our 1989
reacquisition of certain FGF rights previously licensed to Organon.
Vascular Endothelial Growth Factor\\121\\
VEGF\\121\\ is a naturally-occurring protein used to stimulate the growth of
new blood vessels. In May 1996, we granted a license to GenVec for the use of
the gene encoding VEGF\\121\\ in gene therapy products. GenVec is currently
conducting Phase II clinical trials of its BIOBYPASS angiogen which
incorporates the use of our licensed technology. This product is being
evaluated to treat coronary artery disease and peripheral vascular disease. We
will receive royalties on any future sales of these products.
Glucagon-Like Peptide-1
GLP-1 is a potent peptide that stimulates insulin release when blood sugar
levels are above normal. In 1988, we licensed from Massachusetts General
Hospital the exclusive use of certain patent applications for GLP-1 and certain
analogs upon which we will pay a royalty on any future sales. In 1996, we
granted Novo Nordisk an exclusive license to our GLP-1 technology and the
additional rights we acquired pursuant to the Massachusetts General Hospital
license. We will receive royalties on product sales made by Novo Nordisk. Novo
Nordisk is responsible for development activities for GLP-1 and has initiated
Phase II human clinical trials of a GLP-1 analog that they are developing as a
treatment for Type 2 diabetes.
Alzheimer's Disease
We have separate research collaborations with Eli Lilly and with DuPont
Pharmaceuticals to develop new therapies for Alzheimer's Disease. The joint
research phase of our collaboration with DuPont ended in November 2000. DuPont
is continuing its efforts to develop a therapeutic for Alzheimer's disease
based in part on our technology and, if successful, we
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will receive royalty payments. The joint research phase of our collaboration
with Eli Lilly is fully funded by Eli Lilly and has been extended through
December 2001. We are entitled to receive potential milestone payments if
certain events are achieved, and Eli Lilly is entitled to commercialize any
resulting products subject to royalty payments to us.
Drug Delivery Systems
Prior to our acquisition of Nova Pharmaceuticals in 1992, Nova had been
developing several drug delivery systems, including the Gliadel implant to
treat primary brain cancer. The Gliadel technology was developed pursuant to a
license agreement with the Massachusetts Institute of Technology relating to
MIT's Biodel drug delivery technology. We licensed Gliadel to Guilford
Pharmaceuticals in 1994. Gliadel was approved for marketing in the United
States in 1996. We assigned our Biodel license rights back to MIT, which will
administer the licensing of this technology, including the license with
Guilford. We and MIT are receiving royalty and milestone payments under the
license agreement with Guilford. We conducted the Gliadel project on behalf of
Nova Technology Limited Partnership, the limited partnership that funded Nova's
research and development on these projects.
Psychiatric Sales and Marketing Division
Since 1990, our Psychiatric Sales and Marketing Division, or PSMD, has had the
exclusive right to market certain products in the United States under a
licensing agreement with GSK, including Eskalith and Eskalith CR, Thorazine,
Stelazine, and Parnate. GSK was responsible for the manufacture and
distribution of these products. As part of our agreement with GSK, we paid GSK
40% of our net profits from the sales of these products. We sold the marketing
rights back to GSK and terminated the licensing agreement effective March 31,
2001. We will receive from GSK $4.0 million in 2001, $3.0 million in 2002 and
$2.5 million in 2003. Approximately 40% of our total revenues in 2000 were
derived from these psychiatric products.
From time to time, our PSMD has also marketed various psychiatric products on
behalf of other companies under co-promotion agreements. We were compensated
for our services based upon the number of sales calls we made. The last of
these other agreements ended as of March 31, 2001.
Research and Development
Our technical capabilities now include disease-based gene microarrays,
bioinformatics, structural informatics and state-of-the-art medicinal
chemistry, including computational chemistry modeling, all of which have added
to our traditional technical strengths in protein cloning and expression.
In order to discover new pathways of disease, our research has assembled tissue
samples from a broad array of human and experimental diseases of the
cardiovascular system. We analyze these tissues for the expression of new genes
that may be involved in particular diseases. We do this by a technique known as
microarray gene display, in which fluorescent tags identify which genes may be
up regulated or down regulated during the course of a particular disease. We
then apply commercial and proprietary software analysis to the sequence of
these genes and to the patterns of their expression in order to highlight
cellular pathways that may be playing a particular role in a disease process.
This process is known as bioinformatics.
Particular attention is paid either to the presence of a known enzyme
participating unexpectedly in a disease process or to a novel enzyme. Our
molecular biologists then express these candidate target enzymes in an
activated state as pure proteins and develop high throughput screening assays
to discover inhibitors of those enzymes within our chemical compound library,
which we have developed over the last several years. Applying the tools of
structural informatics, our protein chemists develop computer-based, three-
dimensional structures of these enzymes that guide our chemists in developing
lead inhibitory molecules with respect to potency and selectivity. Once we have
brought a drug candidate to the optimum level of potency and safety, we test
the drug at both the cellular and animal level, again applying gene microarray
technology. This allows the rapid evaluation of the drug for efficacy while
ensuring that potential toxicities are minimized before testing in the clinic.
We are focused on diseases of the cardiovascular system, with a particular
emphasis on inflammation in both its acute and chronic forms and scarring as a
cause of chronic organ failure. Our research has emphasized an emerging family
of protein therapeutic targets known as protein kinases. Kinases are naturally
occurring intracellular signaling "switches" that work by attaching phosphate
groups to other proteins, thereby activating cellular processes controlled by
those proteins, including the transcription of new proteins. While the vast
majority of protein kinases are engaged in beneficial work on
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behalf of the cells of the body, medical research over the last decade has
clearly demonstrated that cellular pathways abnormally activated by certain
kinases contribute to both the symptoms and progression of many diseases. By
applying the most advanced technologies available with proprietary methodology,
including the development of gene analysis software, we have dedicated
ourselves to the identification of kinases participating in diseases within our
strategic focus and developing and testing inhibitors of those enzymes for
potential therapeutic value. The rapid preclinical and clinical development of
our p38 kinase inhibitor, SCIO-469, represents the initial success of this
innovative approach.
Our aggregate research and development expense totaled $39.3 million in 2000,
$34.3 million in 1999 and $46.6 million in 1998.
Manufacturing
Our products are manufactured for us by third parties. In 1995, we entered into
an agreement with Biochemie GmbH in Austria for the manufacture of Natrecor. If
Natrecor is approved by the FDA in 2001, we expect the agreement to run through
2009. Biochemie ships Natrecor in powder form to Abbott Laboratories in
McPherson, Kansas, where it is blended, filled and packaged for shipment. We
also maintain arrangements with several companies to manufacture our p38 kinase
inhibitor compounds and intend to enter into a long-term supply relationship if
our compounds continue to proceed through development.
Patents and Proprietary Rights
We seek patent protection for proprietary technology and products in the United
States and abroad to prevent others from unfairly capitalizing on our
investment in research. Other companies engaged in research and development of
new health care products also are actively pursuing patents for their
technologies. We also rely upon trade secrets and know-how to reinforce our
competitive position. However, trade secret protection will not preclude others
from independently developing technology similar to ours, nor can there be any
assurance that third parties who have signed confidentiality agreements with us
will honor those agreements.
We currently own or hold exclusive rights to approximately 69 issued U.S.
patents and approximately 58 U.S. pending patent applications covering our
proprietary technology and products. We also own or hold exclusive rights to
foreign patents and patent applications corresponding to most of the U.S.
patents and patent applications in our portfolio. Our issued patents include
patents on Natrecor, certain of our p38 kinase inhibitors, FGF, VEGF\\121\\ and
GLP-1. Our proprietary position with respect to certain principal products
under development is described below. If a patent issues prior to marketing
approval, as has been the case with all of our issued patents to date, we can
apply for extension of the patent term for a limited period of time to make up
for a portion of the patent term lost to the regulatory approval period. The
absence of a patent covering products which we have licensed to third parties
could reduce the royalties due to us under the agreements with those parties.
Natrecor
We have been issued United States, Canadian and European patents covering the
endogenous form of Natrecor, human BNP. Our U.S. patents on Natrecor are
subject to possible extension due to time taken up in the regulatory approval
process. We believe our key patent on Natrecor, which currently expires in May
2009, may be extended to late 2013 or early 2014. Pursuant to a royalty-
bearing, exclusive license granted to us by Shionogi, we also have the
exclusive right to develop therapeutic products using BNP under certain patents
and applications on BNP originally filed by Daiichi Pharmaceutical and
subsequently acquired by Shionogi. Shionogi holds patents in Japan and Europe.
We believe that Shionogi may have a patent application pending in the United
States. Although we were granted a Japanese patent on BNP, the patent was
revoked in 1998 in an opposition filed against the patent by an unidentified
party. The opposition did not challenge the originality of our BNP discovery
but based its challenge solely on an interpretation of utility requirements for
patentability peculiar to Japanese patent law. We appealed the revocation to
the Tokyo High Court. On March 13, 2001, the Tokyo high court affirmed the
revocation. Because we believe the decision is contrary to both Japanese
precedent and patentability requirements in the United States and Europe, we
intend to appeal the revocation to the Japanese Supreme Court. The decision
does not affect our patent rights outside of Japan, nor does the revocation
impact our ability to exclusively market BNP in Japan insofar as our exclusive
license under the patent rights of Daiichi includes several Japanese patents of
Daiichi directed to BNP.
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p38 Kinase Inhibitors
We have filed a series of patent applications in the United States covering the
classes of p38 kinase inhibitors that we have identified. To date, we have been
issued two U.S. patents directed to certain of these p38 inhibitors. These
patents will expire in 2018, subject to possible extension for FDA regulatory
delays. While the classes of small molecule compounds identified by our
researchers appear to be unique, we are aware that other companies are also
working to develop p38 kinase inhibitor compounds, and have filed patent
applications on and received patents covering certain classes of compounds that
these competing companies have identified and covering various aspects of
identifying such compounds.
FGF
After an interference with The Salk Institute for Biological Studies, we were
awarded a U.S. patent on DNA sequences, expression vectors, and microorganisms
used in the recombinant production of human basic FGF. Our basic FGF U.S.
patent will expire in 2012, and it may be extended for FDA regulatory delays.
We also hold European and Japanese patents on human basic FGF. Synergen, now
owned by Amgen, has obtained patents directed to a form of FGF that we believe
is different from the form of FGF produced by us. A U.S. patent issued to Salk
contains claims directed to substantially pure mammalian basic FGF containing
the 146 amino acid sequence of bovine basic FGF or a naturally occurring
homologous sequence of another mammalian species. Although we have been advised
by counsel that the Salk patent would be invalid if read broadly enough to
cover our form of FGF, there is still risk that an assertion of this patent
could block our partners' ability to develop and market human basic FGF in the
absence of a license, or if such a license is granted, could reduce the royalty
income to us. We successfully opposed Salk's European patent, the revocation of
which is currently under appeal by Salk. Our European patent was opposed by
Chiron and Pharmacia. Our patent was upheld and both opponents appealed. As a
result of our license to Chiron, Chiron, who is also a licensee of Salk,
withdrew from the opposition against our European patent, and we have withdrawn
from our opposition against the Salk patent.
In March 1994, we obtained a non-exclusive license to make, use and sell FGF
under a U.S. patent issued to Harvard University containing claims to purified
cationic (basic) FGF. The Harvard patent is based on a patent application
having a filing date earlier than the application which formed the basis for
the Salk patent. Sublicense rights under this patent are included in the rights
granted by us to our FGF licensees, Kaken and Chiron.
VEGF\\121\\
Seven isoforms of human VEGF (hVEGF) are known, having 121, 145, 148, 165, 183,
189 and 206 amino acids, respectively. We believe that our researchers were the
first to identify, clone and produce by recombinant DNA technology the 121
amino acid form of hVEGF (hVEGF\\121\\). hVEGF\\121\\ is the only human VEGF
isoform known not to bind to heparin. We own two U.S. patents issued in 1993
covering hVEGF\\121\\, and in 1996 received a European patent covering this
VEGF isoform. Our U.S. patents on VEGF\\121\\ will expire 2010 but may be
extended for FDA regulatory delays. We have patent applications pending in
Canada and Japan. Other companies and institutions, including Genentech,
Pharmacia and the Regents of the University of California, hold patents and
pending patent applications claiming various isoforms of hVEGF and certain VEGF
variants.
Competition
For patients treated with acute CHF, many therapeutic options are available.
Currently used drugs fall into three main categories: vasodilators, inotropes
and diuretics. Natrecor would compete against both vasodilators and inotropes
in the acute CHF market. Many of these drugs are available in generic
formulation and have an associated low cost. In addition, milrinone, an
inotrope, is currently promoted by Sanofi-Synthelabo and is expected to lose
patent protection in November 2001. We intend to price Natrecor above the cost
of these existing drugs, which may harm our competitive position relative to
these drugs. We may not be able to compete effectively with these long-standing
existing forms of therapy.
New drugs in development for the treatment of acute CHF would compete with
Natrecor if approved by the FDA or other regulatory agencies. Veletri
(tezosentan), a non-selective endothelin receptor antagonist, is being
developed by Actelion and is in late-stage clinical trials as a vasodilator for
the treatment of acute CHF. Abbott had previously submitted an NDA for Simdax,
a calcium sensitizer described as an inotrope, but withdrew the application in
2000. To our knowledge, Abbott has not announced its intent to refile an NDA
for Simdax.
Current commercial competition for the inhibition of TNF in rheumatoid
arthritis includes injectible proteins such as Johnson & Johnson's Remicade and
Immunex's Enbrel. Current COX-2 inhibitors include Pharmacia's Celebrex and
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Merck's Vioxx. In addition, many pharmaceutical companies have expressed
interest in pursuing the development of p38 kinase inhibitors. We are unable to
determine if they are actively developing these compounds internally. If they
are developing these or similar products, several of these companies possess
both greater access to capital and research and development resources. We may
be unable to compete effectively with any of these development projects. We are
also aware that Vertex Pharmaceuticals is conducting Phase II clinical trials
of its p38 kinase inhibitor compound. If we are successful in developing our
own p38 kinase inhibitor compound we may face intense competition.
We expect that competition for our products, when approved for sale, will be
based, among other things, on efficacy, reliability, product safety, price and
patent position. Our ability to compete effectively and develop products that
can be manufactured cost-effectively and marketed successfully will depend on
our ability to:
. advance our technology platforms;
. license additional technology;
. maintain a proprietary position in our technologies and products;
. obtain required government and other public and private approvals on a timely
basis;
. attract and retain key personnel; and
. enter into corporate partnerships.
Our failure to achieve any of the above goals could impair our business.
Government Regulation
Pharmaceutical drugs are subject to extensive pre- and post-market regulation
by the FDA, including regulations that govern the testing, manufacturing,
safety, efficacy, labeling, storage, record keeping, advertising, and promotion
of the products. The process required by the FDA before a new drug may be
marketed in the United States generally involves the following: completion of
preclinical laboratory and animal testing; submission of an investigational new
drug application, which must become effective before clinical trials may begin;
performance of adequate and well controlled human clinical trials to establish
the safety and efficacy of the proposed drug products intended use; and
approval by the FDA of an NDA.
Human clinical trials are typically conducted in three sequential phases that
may overlap. These phases generally include the following: Phase I during which
the drug is introduced into healthy human subjects or, on occasion patients,
and is tested for safety, dose tolerance and metabolism; Phase II during which
the drug is introduced into a limited patient population to determine the
efficacy of the product of specific targeted diseases, to determine dosage
tolerance and optimal dosage and to identify possible adverse effects and
safety risks; and, Phase III during which the clinical trial is expanded to a
more diverse patient group in geographically dispersed clinical trial sites to
further evaluate clinical efficacy, optimal dosage and safety. The FDA, and the
Institutional Review Board at each institution at which a clinical trial is
being performed, may suspend a clinical trial at any time for various reasons,
including a belief that the subjects are being exposed to an unacceptable
health risk.
The results of product development, preclinical animal studies and human
studies are submitted to the FDA as part of the NDA. The NDA also must contain
extensive manufacturing information. FDA does allow under certain circumstances
for the joint manufacturing of drug products. The FDA may approve or disapprove
the NDA if applicable FDA regulatory criteria are not satisfied or it may
require additional clinical data. Once approved, the FDA may withdraw the
product approval if compliance with pre- and post-market regulatory standards
is not maintained or if problems occur after the product reaches the
marketplace. In addition, the FDA may require post-marketing studies, referred
to as Phase IV studies, to monitor the effect of approved products, and may
limit further marketing of the product based on the results of these post-
market studies. The FDA has broad post-market regulatory and enforcement
powers, including the ability to levy fines and civil penalties, suspend or
delay issuance of approvals, seize or recall products, and withdraw approvals.
With respect to post-market product advertising and promotion, the FDA imposes
a number of complex regulations on entities that advertise and promote
pharmaceuticals, which include, among others, off-label promotion, industry
sponsored scientific and educational activities, standards and regulations for
direct-to-consumer advertising, and promotional activities involving the
Internet. The FDA has very broad enforcement authority under the Federal Food
Drug and Cosmetic Act, and failure to abide by these regulations can result in
penalties including the issuance of a warning letter directing a company to
correct deviations from FDA standards, a requirement that future advertising
and promotional materials be pre-cleared by the FDA, and state and federal
civil and criminal investigations and prosecutions.
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We are also subject to various laws and regulations regarding laboratory
practices, product manufacturing, including FDA's current Good Manufacturing
Practice requirements, the experimental use of animals, and the use and
disposal of hazardous or potentially hazardous substances in connection with
our research. In each of these areas, the FDA has broad regulatory and
enforcement powers, including the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw
approvals, any one or more of which could harm our business. Additionally,
before any of our products may be marketed in foreign countries, they are
subject to pre- and post-market regulation similar to that required in the
United States.
Facilities
We lease a 52,000 square foot office building in Sunnyvale, California pursuant
to two leases which both expire on August 31, 2008. We also lease a neighboring
33,600 square foot office building which expires on December 31, 2002. Our
annual lease payments for the Sunnyvale facilities are approximately
$1.5 million. We believe our facilities are sufficient for the foreseeable
future.
Employees
We had 232 full-time employees as of May 1, 2001, including 160 employees in
our research and development departments and 45 employees holding doctorate
degrees. We believe our employee relations are good. None of our employees is
subject to a collective bargaining agreement.
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Management
Our executive officers and directors and their ages at May 1, 2001 are as
follows:
--------------------------------------------------------------------------------
Name Age Position
------------------------ --- ----------------------------------------------------------
Richard B. Brewer....... 50 President, Chief Executive Officer and Director
George F. Schreiner,
M.D., Ph.D............. 51 Chief Scientific Officer
David W. Gryska......... 45 Senior Vice President, Finance and Chief Financial Officer
John H. Newman.......... 50 Senior Vice President, General Counsel and Secretary
Patricia Baldwin,
Ph.D................... 45 Vice President, Quality and Product Development
Thomas L. Feldman....... 50 Vice President, Sales and Marketing
M. Allison Herd......... 40 Vice President, Human Resources
Darlene P. Horton,
M.D. .................. 39 Vice President, Medical Affairs
Donald B. Rice, Ph.D.... 61 Chairman of the Board of Directors
Samuel H. Armacost...... 62 Director
Randal J. Kirk.......... 47 Director
Charles A. Sanders,
M.D.................... 69 Director
Solomon H. Snyder,
M.D.................... 62 Director
Burton E. Sobel, M.D.... 63 Director
Eugene L. Step.......... 72 Director
Richard B. Brewer joined us in September 1998 as President, Chief Executive
Officer and Director. From February 1996 to June 1998, he served as the
Executive Vice President of Operations and then as Chief Operating Officer of
Heartport, Inc., a medical device company. From 1984 to 1995, Mr. Brewer served
in various capacities for Genentech Europe Ltd., Genentech Canada, Inc. and
Genentech, Inc., most recently as Senior Vice President, U.S. Sales and
Marketing. Mr. Brewer received a B.S. from Virginia Polytechnic Institute and
an M.B.A. from Northwestern University.
George F. Schreiner, M.D., Ph.D., joined us in January 1997 as Vice President,
Cardiorenal Research. He became our Chief Scientific Officer in August 2000,
responsible for leading our research group. From 1992 until January 1997,
Dr. Schreiner was with CV Therapeutics, Inc., a biopharmaceutical company, as
Vice President, Medical Science and Preclinical Research. From 1980 to 1992,
Dr. Schreiner served on the faculties of Harvard Medical School and Washington
University School of Medicine. Dr. Schreiner received an A.B. in
Psychology/Sociology from Harvard College, an M.D. from Harvard Medical School
and a Ph.D. in Immunology from Harvard University.
David W. Gryska joined us in December 1998 as Vice President of Finance and
Chief Financial Officer and became our Senior Vice President of Finance in
November 2000. From 1993 to December 1998, Mr. Gryska was Vice President,
Finance and Chief Financial Officer of Cardiac Pathways Corporation, a medical
device company. Mr. Gryska was with Ernst & Young LLP from 1982 to 1993 and
served as a partner from 1989 to 1993. Mr. Gryska received a B.A. in Accounting
and a B.A. in Finance from Loyola University of Chicago and an M.B.A. from
Golden Gate University.
John H. Newman joined us in 1983 as Vice President, General Counsel and
Secretary, and became our Vice President of Commercial Development, General
Counsel and Secretary in 1989, our Vice President of Legal Affairs, General
Counsel and Secretary in 1992 and our Senior Vice President, General Counsel
and Secretary in February 1998. Prior to joining Scios, Mr. Newman was an
attorney in private practice. Mr. Newman received a B.A. in Economics from the
University of California, Santa Cruz and a J.D. from The Hastings College of
Law.
Patricia Baldwin, Ph.D., joined us in 1986 as a Scientist in the Novel Drug
Delivery Department. In 1990, she moved to the Pharmaceutical Research and
Development Department and in 1995, Dr. Baldwin became our Director of
Analytical Chemistry. In September 1999, she became our Senior Director of
Analytical Methods and Quality Control and in March 2000, Dr. Baldwin was
promoted to our Vice President, Quality and Product Development. Dr. Baldwin
received a B.S. in Chemistry from Stanford University and a Ph.D. in Chemistry
from the University of California, Berkeley.
Thomas L. Feldman joined us in 1995 as Vice President of Commercial Operations
and in November 1999, became our Vice President, Sales and Marketing. From 1973
to 1995, Mr. Feldman held various sales and marketing positions at
pharmaceutical companies affiliated with Johnson & Johnson, including National
Sales Manager at Ortho Pharmaceutical Corporation (1993 to 1994) and National
Sales Manager at McNeil Pharmaceutical (1990 to 1993). Mr. Feldman received a
B.A. in Business and a B.A. in Speech from North Dakota State University.
S-35
M. Allison Herd joined us in March 2001 as Vice President of Human Resources.
From February 2000 to March 2001, she was Director of Human Resources with
Network ICE Corporation, a software company. From March 1998 to February 2000,
Ms. Herd was Director of Human Resources with Cardiac Pathways, a medical
device company. From November 1996 to March 1998, she was Human Resources
Manager with Progressive Angioplasty Systems (PAS), a medical device company.
From April 1996 to November 1996, Ms. Herd was Senior Human Resources
Generalist with CLONTECH Laboratories, Inc., a biotechnology company. Ms. Herd
holds a B.A. in Sociology from San Jose State University and an M.A. in Human
Resources from Golden Gate University.
Darlene P. Horton, M.D., joined us in July 1996 and is responsible for
directing and managing our clinical research programs. In August 2000, Dr.
Horton was appointed our Vice President, Medical Affairs. Prior to joining
Scios, she was a Pediatric Cardiology Fellow at UCSF's Cardiovascular Research
Institute, and she remains on the clinical faculty at the University of
California, San Francisco. Dr. Horton received a B.S. and an M.D. in
Microbiology from the University of Florida in Gainesville.
Donald B. Rice, Ph.D., has served on our Board of Directors since 1997 and was
elected our Chairman of the Board in November 1998. Since March 1997, Dr. Rice
has served as the President, Chief Executive Officer and director of
UroGenesys, Inc., a biopharmaceutical company. Previously, he served Teledyne,
Inc., as President, Chief Operating Officer and a director from 1993 to August
1996, the U.S. Department of Defense as Secretary of the Air Force from 1989 to
1993, and The RAND Corporation as President and Chief Executive Officer from
1972 to 1989. He was also Assistant Director of the Office of Management and
Budget, The White House. Dr. Rice is a member of the board of directors of
Wells Fargo & Company, Vulcan Materials Company, Unocal Corporation and Amgen,
Inc.
Samuel H. Armacost has served on our Board of Directors since 1995. Since July
1998, Mr. Armacost has been Chairman of the Board of Directors of SRI
International. From 1990 to 1998, he was a Managing Director of Weiss, Peck &
Greer, LLC, an investment firm. He was a Managing Director of Merrill Lynch
Capital Markets from 1987 to 1990, and was President, Chief Executive Officer
and a director of BankAmerica Corporation from 1981 to 1986. Mr. Armacost is a
member of the board of directors of Chevron Corporation and Exponent, Inc., a
science and engineering consulting company. In addition, Mr. Armacost is on the
board of directors of the James Irvine Foundation and the Advisory Board of the
California Academy of Sciences, and he is a member of the International
Advisory Group for Toshiba Corporation and The Business Council.
Randal J. Kirk has served on our Board of Directors since February 2000. He has
served as a Managing Director of Third Security, LLC, a financial services
firm, since March 1999. Additionally, Mr. Kirk currently serves in a number of
capacities, including the following: Chairman of New River Pharmaceuticals
Inc., a developmental pharmaceutical company, since August 1996; Chairman of
Clinical Chemistry Holdings, Inc., a clinical laboratory management company,
since October 1999; Manager of New River Management Company, LLC, an investment
holding company, since June 1996; and Chairman of Biological & Popular Culture
Inc., an internet automation service provider, since October 1999. He also
serves on the board of directors of Radford University Foundation, Inc., since
September 1998. Previously, Mr. Kirk served as the Chairman of General
Injectables & Vaccines, Inc., a pharmaceutical distributor, between 1994 and
December 1998, and as the Chairman and Chief Executive Officer of GIV Holdings,
Inc., a holding company, between August 1996 and December 1998.
Charles A. Sanders, M.D., has served on our Board of Directors since 1997. He
served as Chief Executive Officer of Glaxo Inc. from 1989 to 1994, and was
Chairman of its board of directors from 1992 to 1995. He also served on the
board of directors of Glaxo plc. Previously, he held a number of positions at
Squibb Corporation, a multinational pharmaceutical corporation, including Vice
Chairman, Chief Executive Officer of the Science and Technology Group and
Chairman of the Science and Technology Committee of its board of directors. Dr.
Sanders is a member of the board of directors of Genaera Corporation, a
biopharmaceutical company, Vertex Pharmaceuticals Incorporated, Edgewater
Technologies, an internet consulting company, Kendle International Inc., a
contract research organization, Trimeris, Inc., a drug discovery company,
Pharmacopeia Inc., a drug discovery company, Genentech, Inc., Cephalon, Inc., a
pharmaceutical company, and Biopure Corporation, a pharmaceutical company.
Solomon H. Snyder, M.D., has served on our Board of Directors since 1992.
Dr. Snyder is Director of the Department of Neuroscience and Distinguished
Service Professor of Neuroscience, Pharmacology and Molecular Sciences and
Psychiatry at The Johns Hopkins University, where he has been a faculty member
since 1966. Dr. Snyder received the Albert Lasker Award for Basic Biomedical
Research and Honorary Doctor of Science degrees from Northwestern University,
Georgetown University and Ben Gurion University. Dr. Snyder received the Wolfe
Award in Medicine from the government of Israel for research relating to
receptors. Dr. Snyder is a member of the National Academy of Sciences and a
Fellow of the American
S-36
Academy of Arts and Sciences. Dr. Snyder is also the author of numerous
articles and several books. Dr. Snyder is a founder and a director of Guilford
Pharmaceuticals Inc.
Burton E. Sobel, M.D., has served on our Board of Directors since 1996. Dr.
Sobel is Physician-in-Chief, E.L. Amidon Professor and Chair of the Department
of Medicine at The University of Vermont College of Medicine since 1994. From
1973 to 1994, Dr. Sobel was Professor of Medicine at Barnes Hospital,
Washington University and Director of its Cardiovascular Division. Dr. Sobel
has been a consultant to and served on scientific advisory boards of several
pharmaceutical and biotechnology companies, served as a director of Squibb
Corporation from 1986 to 1989 and is also a member of the Board of Directors of
Fletcher Allen Healthcare. Dr. Sobel has been the recipient of numerous awards,
including the American Heart Association's James B. Herrick Award and its
Scientific Council's Distinguished Achievement Award, as well as the American
College of Cardiology's Distinguished Scientist Award. Dr. Sobel has been the
editor of Circulation and, since 1989, has served as editor of Coronary Artery
Disease. His memberships and fellowships include the American College of
Physicians, Royal Society of Medicine, American Heart Association, American
College of Cardiology and Fellowship and Council membership in the American
Association for the Advancement of Science.
Eugene L. Step has served on our Board of Directors since 1993. From 1956 until
he retired in 1992, Mr. Step was employed by Eli Lilly and Company, most
recently as Executive Vice President, President of the Pharmaceutical Division,
where he was responsible for U.S. pharmaceutical operations and for the
operations of Eli Lilly International. In addition, Mr. Step served on Eli
Lilly's board of directors and Executive Committee. Mr. Step was Chairman of
the Board of Directors of the Pharmaceutical Manufacturers Association and
President of the International Federation of Pharmaceutical Manufacturers
Associations. He is a member of the board of directors of Cell Genesys, Inc., a
biopharmaceutical company, Guidant Corporation and Medco Research, Inc., a
biopharmaceutical company.
S-37
Underwriting
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, J.P. Morgan Securities
Inc., Lehman Brothers Inc. and SG Cowen Securities Corporation, have severally
agreed to purchase from us the following numbers of shares of common stock:
----------------
Number of Shares
----------------
Underwriters
J.P. Morgan Securities Inc.................................... 2,300,000
Lehman Brothers Inc........................................... 1,150,000
SG Cowen Securities Corporation............................... 1,150,000
Needham & Company, Inc........................................ 100,000
ABN AMRO Rothschild LLC....................................... 100,000
A.G. Edwards & Sons, Inc...................................... 100,000
Leerink Swann & Company....................................... 100,000
---------
Total........................................................ 5,000,000
=========
The underwriting agreement provides that the obligations of the underwriters
are conditioned on the absence of any material adverse change in our business
and the receipt of certificates, opinions and letters from us, our counsel and
our independent auditors. The underwriters are committed to purchase all shares
of common stock offered in this prospectus supplement if any shares are
purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and to dealers at the public offering price less a
concession not in excess of $0.66 per share. The underwriters may allow and the
dealers may reallow a concession not in excess of $0.10 per share to other
dealers. After the public offering of the shares, the underwriters may change
this offering price and other selling terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus supplement, to purchase up to 750,000
additional shares of common stock at the public offering price, less the
underwriting discount set forth on the cover page of this prospectus
supplement. To the extent that the underwriters exercise this option, each
underwriter will have a firm commitment to purchase a number of shares that
approximately reflects the same percentage of total shares the underwriter
purchased in the above table. We will be obligated to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus supplement and accompanying
prospectus.
The following table shows the per share and total underwriting discounts and
commissions that we will pay to the underwriters. The underwriting discount was
determined based on an arms' length negotiation between the representatives of
the underwriters and us. These amounts are shown assuming both no exercise and
full exercise of the underwriters' over-allotment option to purchase additional
shares.
-------------------------
Paid by Scios
-------------------------
No Exercise Full Exercise
----------- -------------
Per share............................................. $ 1.20 $ 1.20
Total................................................ $6,000,000 $6,900,000
We estimate that our share of the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $550,000. This
offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect to those liabilities.
Each of our executive officers and directors (except for 481,377 shares of
common stock held by an entity affiliated with one of our directors) has agreed
for the period ending 90 days after the date of this prospectus supplement,
subject to
S-38
specified exceptions, not to directly or indirectly, sell, offer, contract to
sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of common stock or any securities
convertible into or exchangeable or exercisable for any other rights to
purchase or acquire common stock, without the prior written consent of J.P.
Morgan Securities Inc., acting alone, or of each of J.P. Morgan Securities
Inc., Lehman Brothers Inc. and SG Cowen Securities Corporation acting jointly.
However, J.P. Morgan Securities Inc. may, in its sole discretion and at any
time or from time to time, without notice, release all or any portion of the
securities subject to lock-up agreements. There are no existing agreements
between the representatives and any of our stockholders with respect to any
shares subject to a lock-up agreement providing consent to the sale of shares
prior to the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not, without
the prior written consent of J.P. Morgan Securities Inc., subject to certain
exceptions, sell, offer, contract to sell, make any short sale, pledge, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any shares of common stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire common
stock or enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences or ownership of common stock other than
our sale of shares in this offering, the issuance of our common stock upon the
exercise of outstanding options or warrants, the issuance of our common stock
under our employee stock purchase plan and the issuance of options under
existing stock option and incentive plans provided that those options do not
vest prior to expiration of the lock-up period.
Persons participating in this offering may over-allot or effect transactions
that stabilize, maintain or otherwise affect the market price of the common
stock at levels above those that might otherwise prevail in the open market,
including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.
S-39
Legal Matters
Certain legal matters relating to the shares of common stock offered hereby
will be passed upon for Scios Inc. by Latham & Watkins, San Francisco,
California. Legal matters in connection with this offering will be passed upon
for the underwriters by Cooley Godward LLP, Palo Alto, California.
Experts
The consolidated financial statements of Scios Inc. as of December 31, 1999 and
2000 and for each of the three years in the period ended December 31, 2000
included in this prospectus supplement have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
S-40
Scios Inc.
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) ... F-4
Consolidated Statements of Cash Flows.................................... F-5
Consolidated Statements of Stockholders' Equity.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedules
(Omitted because they are not required, are not applicable, or the
information is included in the consolidated financials statements or
notes thereto.)
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of Scios Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), of
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Scios Inc. and its subsidiary at December
31, 1999 and 2000, and the results of their operations and comprehensive income
(loss) and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 7, 2001, except for Note 18b
as to which the date is March 27, 2001.
F-2
Scios Inc.
Consolidated Balance Sheets
---------------------------------
December 31,
-------------------- March 31,
1999 2000 2001
--------- --------- -----------
(Unaudited)
In thousands, except share data
Assets
Current assets:
Cash and cash equivalents.................. $ 11,582 $ 3,291 $ 613
Marketable securities...................... 18,776 35,356 28,002
Accounts receivable........................ 3,068 5,217 12,204
Prepaid expenses and other assets ......... 899 722 1,503
--------- --------- ---------
Total current assets.................... 34,325 44,586 42,322
Marketable securities, non-current.......... 70,354 32,884 33,564
Property and equipment, net................. 11,534 8,910 8,119
Other assets................................ 2,059 2,007 2,082
--------- --------- ---------
Total assets............................ $ 118,272 $ 88,387 $ 86,087
========= ========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable........................... $ 1,572 $ 4,587 $ 3,919
Other accrued liabilities.................. 11,157 10,749 10,236
Deferred contract revenue.................. 17,890 16,193 16,372
Current portion of long term debt.......... 2,000 -- --
--------- --------- ---------
Total current liabilities............... 32,619 31,529 30,527
Long-term debt.............................. 42,866 39,095 39,944
--------- --------- ---------
Total liabilities....................... 75,485 70,624 70,471
--------- --------- ---------
Commitments and contingencies (Notes 10, 11
and 12)
Stockholders' equity:
Preferred stock; $0.001 par value;
20,000,000 shares authorized; issued and
outstanding none, 4,991 and 4,991 shares,
respectively.............................. -- -- --
Common stock; $0.001 par value; 150,000,000
shares authorized; issued and outstanding
38,468,652, 39,166,373 and 39,364,224
shares, respectively...................... 38 39 39
Additional paid-in capital................. 416,600 428,987 430,408
Treasury stock; 735,036, none and none
shares, respectively...................... (3,458) -- --
Notes receivable from stockholders......... (108) (634) (406)
Deferred compensation, net................. (340) (417) (106)
Accumulated other comprehensive income
(loss).................................... (1,060) 1,195 1,311
Accumulated deficit........................ (368,885) (411,407) (415,630)
--------- --------- ---------
Total stockholders' equity.............. 42,787 17,763 15,616
--------- --------- ---------
Total liabilities and stockholders'
equity................................. $ 118,272 $ 88,387 $ 86,087
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Scios Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
----------------------------------------------------------
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(Unaudited)
In thousands, except share and per share data
Revenues:
Product sales and co-promotion commissions,
net of expenses............................ $ 6,567 $ 9,953 $ 6,914 $ 1,331 $ 1,483
Research and development contracts.......... 38,101 18,402 5,710 1,894 1,097
Gain on sale of marketing rights............ -- -- -- -- 9,363
---------- ---------- ---------- ---------- ----------
44,668 28,355 12,624 3,225 11,943
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Research and development.................... 46,637 34,305 39,278 9,284 9,480
Marketing, general and administrative....... 10,022 11,983 16,711 3,476 6,480
Restructuring charges (credits)............. -- 6,400 (993) -- --
---------- ---------- ---------- ---------- ----------
56,659 52,688 54,996 12,760 15,960
---------- ---------- ---------- ---------- ----------
Loss from operations......................... (11,991) (24,333) (42,372) (9,535) (4,017)
---------- ---------- ---------- ---------- ----------
Other income (expense):
Investment income........................... 4,154 4,828 4,774 1,384 812
Interest expense............................ (2,685) (2,793) (3,796) (991) (849)
Realized gains (losses) on securities....... 9,003 4,933 (152) (84) 254
Other income (expense), net................. 630 (2,685) (973) (299) (423)
---------- ---------- ---------- ---------- ----------
11,102 4,283 (147) 10 (206)
Equity in net loss of affiliate.............. (1,343) -- -- -- --
---------- ---------- ---------- ---------- ----------
Loss before provision for income taxes...... (2,232) (20,050) (42,519) (9,525) (4,223)
Provision for income taxes.................. (131) (14) (3) -- --
---------- ---------- ---------- ---------- ----------
Net loss.................................... (2,363) (20,064) (42,522) (9,525) (4,223)
Other comprehensive income (loss):
Change in unrealized gains (losses) on
securities................................. 11,124 (12,472) 2,255 (96) 116
---------- ---------- ---------- ---------- ----------
Comprehensive income (loss)................. $ 8,761 $ (32,536) $ (40,267) $ (9,621) $ (4,107)
========== ========== ========== ========== ==========
Loss per common share, basic and diluted..... $ (0.06) $ (0.53) $ (1.12) $ (0.25) $ (0.11)
========== ========== ========== ========== ==========
Weighted average number of common shares
outstanding used in calculation of net loss
per share, basic and diluted ............... 37,694,358 37,730,048 37,997,872 37,780,077 39,290,982
Pro forma effect of adopting SAB 101:
Net loss.................................... $ (21,511) $ (916) N/A N/A N/A
========== ========== ========== ========== ==========
Basic and diluted loss per share............ $ (0.57) $ (0.02) N/A N/A N/A
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Scios Inc.
Consolidated Statements of Cash Flows
-------------------------------------------------
Three Months
Year Ended December 31, Ended March 31,
------------------------------ -----------------
1998 1999 2000 2000 2001
--------- --------- -------- ------- --------
(Unaudited)
In thousands
Cash flows from operating
activities:
Net loss................... $ (2,363) $ (20,064) $(42,522) $(9,525) $ (4,223)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............. 3,845 3,473 3,717 978 872
Accrued interest payable.. 2,577 2,793 3,791 991 849
Loss on disposal of
property and equipment... -- 429 253 -- 365
Equity in net loss of
affiliate................ 1,343 -- -- -- --
Amortization of deferred
compensation............. 92 317 234 85 311
Change in assets and
liabilities:
Accounts receivable....... (1,553) 3,700 (2,149) (265) (6,987)
Accounts payable.......... 642 (754) 3,015 66 (668)
Other accrued
liabilities.............. (950) (2) 647 (662) (513)
Other..................... 168 (422) 1,245 779 (856)
Deferred contract
revenue.................. 5,244 994 (1,697) (902) 179
Restructuring charges..... -- 1,052 (1,052) (184) --
--------- --------- -------- ------- --------
Net cash provided by
(used in) operating
activities.............. 9,045 (8,484) (34,518) (8,639) (10,671)
--------- --------- -------- ------- --------
Cash flows from investing
activities:
Purchases of property and
equipment................. (2,476) (4,975) (1,346) (628) (446)
Proceeds from sale of
investment in affiliate... 459 -- -- -- --
Proceeds from sale of
facilities and equipment.. -- 21,754 -- -- --
Sales/maturities of
marketable securities..... 260,388 105,240 63,971 6,738 43,371
Purchases of marketable
securities................ (276,654) (116,368) (41,845) (2,933) (36,581)
--------- --------- -------- ------- --------
Net cash provided by
(used in) investing
activities.............. (18,283) 5,651 20,780 3,177 6,344
--------- --------- -------- ------- --------
Cash flows from financing
activities:
Issuance of common stock
and collection of notes
receivable from
stockholders, net......... 7,572 1,280 10,009 594 1,649
Purchase of treasury
stock..................... (1,509) (1,048) -- -- --
Payment of notes payable... (339) -- (4,562) (2,000) --
Proceeds from notes
payable................... -- 7,500 -- -- --
--------- --------- -------- ------- --------
Net cash provided by
financing activities.... 5,724 7,732 5,447 (1,406) 1,649
--------- --------- -------- ------- --------
Net increase (decrease) in
cash and cash equivalents.. (3,514) 4,899 (8,291) (6,868) (2,678)
Cash and cash equivalents at
beginning of period........ 10,197 6,683 11,582 11,582 3,291
--------- --------- -------- ------- --------
Cash and cash equivalents at
end of period.............. $ 6,683 $ 11,582 $ 3,291 $ 4,714 $ 613
========= ========= ======== ======= ========
Supplemental cash flow data:
Cash paid during the year
for interest.............. $ 21 $ -- $ 4,562 $ 2,000 $ --
Converted Genentech notes
payable into preferred
stock..................... $ -- $ -- $ 5,000 $ -- $ --
Change in net unrealized
gains (losses) on
securities................ $ 11,124 $ (12,472) $ 2,255 $ (96) $ 116
Investment in affiliate.... $ 1,343 $ -- $ -- $ -- $ --
Write-off of fully
depreciated assets........ $ 143 $ 13,407 $ 904 $ -- $ --
Notes receivable from
stockholders.............. $ 138 $ -- $ 423 $ -- $ --
Deferred compensation...... $ 597 $ 152 $ 311 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Scios Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Notes Other Com-
Common Common Additional Receivable prehenisve
Preferred Stock Stock Paid-In Treasury From Deferred Income Accumulated
Shares Shares Par Value Capital Stock Stockholders Compensation (Loss) Deficit
--------- ---------- --------- ---------- -------- ------------ ------------ ----------- -----------
In thousands,
except share
data
Balances at
January 1,
1998............ -- 38,032,120 $38 $411,045 $(4,758) $ (13) $ -- $ 288 $(346,458)
Common stock
issued.......... 262,283 3,048
Purchase of
treasury stock.. (1,509)
Options
exercised....... 677,249 4,524
Treasury stock
reissued........ (603,000) (2,786) 2,786
Notes receivable
from
stockholders.... (132)
Deferred
compensation.... 100,000 597 (597)
Amortization of
deferred
compensation.... 92
Changes in
unrealized gains
on available-
for-sale
securities...... 11,124
Net loss........ (2,363)
----- ---------- --- -------- ------- ----- ----- -------- ---------
Balances at
December 31,
1998............ -- 38,468,652 38 416,428 (3,481) (145) (505) 11,412 (348,821)
Purchase of
treasury stock.. (1,048)
Options
exercised....... 185,163 1,243
Treasury stock
reissued........ (225,163) (1,223) 1,071
Notes receivable
from
stockholders.... 37
Deferred
compensation.... 40,000 152 (152)
Amortization of
deferred
compensation.... 317
Changes in
unrealized gains
(losses) on
available-for-
sale
securities...... (12,472)
Net loss........ (20,064)
----- ---------- --- -------- ------- ----- ----- -------- ---------
Balances at
December 31,
1999............ -- 38,468,652 38 416,600 (3,458) (108) (340) (1,060) (368,885)
Preferred stock
issued to retire
debt............ 4,991 5,000
Options
exercised....... 1,432,757 1 10,534
Treasury stock
reissued........ (735,036) (3,458) 3,458
Notes receivable
from
stockholders.... (526)
Deferred
compensation.... 311 (311)
Amortization of
deferred
compensation.... 234
Changes in
unrealized gains
(losses) on
available-for-
sale
securities...... 1,236
Unrealized gain
on GenVec common
stock........... 1,019
Net loss........ (42,522)
----- ---------- --- -------- ------- ----- ----- -------- ---------
Balances at
December 31,
2000............ 4,991 39,166,373 39 428,987 -- (634) (417) 1,195 (411,407)
Options
exercised
(unaudited)..... 197,851 1,421
Notes receivable
from
stockholders
(unaudited)..... 228
Amortization of
deferred
compensation
(unaudited)..... 311
Changes in
unrealized gains
(losses) on
available-for-
sale securities
(unaudited)..... 116
Net loss
(unaudited)..... (4,223)
----- ---------- --- -------- ------- ----- ----- -------- ---------
Balances at
March 31, 2001
(unaudited)..... 4,991 39,364,224 $39 $430,408 $ -- $(406) $(106) $ 1,311 $(415,630)
===== ========== === ======== ======= ===== ===== ======== =========
---------
Total
---------
In thousands,
except share
data
Balances at
January 1,
1998............ $ 60,142
Common stock
issued.......... 3,048
Purchase of
treasury stock.. (1,509)
Options
exercised....... 4,524
Treasury stock
reissued........ --
Notes receivable
from
stockholders.... (132)
Deferred
compensation.... --
Amortization of
deferred
compensation.... 92
Changes in
unrealized gains
on available-
for-sale
securities...... 11,124
Net loss........ (2,363)
---------
Balances at
December 31,
1998............ 74,926
Purchase of
treasury stock.. (1,048)
Options
exercised....... 1,243
Treasury stock
reissued........ (152)
Notes receivable
from
stockholders.... 37
Deferred
compensation.... --
Amortization of
deferred
compensation.... 317
Changes in
unrealized gains
(losses) on
available-for-
sale
securities...... (12,472)
Net loss........ (20,064)
---------
Balances at
December 31,
1999............ 42,787
Preferred stock
issued to retire
debt............ 5,000
Options
exercised....... 10,535
Treasury stock
reissued........ --
Notes receivable
from
stockholders.... (526)
Deferred
compensation.... --
Amortization of
deferred
compensation.... 234
Changes in
unrealized gains
(losses) on
available-for-
sale
securities...... 1,236
Unrealized gain
on GenVec common
stock........... 1,019
Net loss........ (42,522)
---------
Balances at
December 31,
2000............ 17,763
Options
exercised
(unaudited)..... 1,421
Notes receivable
from
stockholders
(unaudited)..... 228
Amortization of
deferred
compensation
(unaudited)..... 311
Changes in
unrealized gains
(losses) on
available-for-
sale securities
(unaudited)..... 116
Net loss
(unaudited)..... (4,223)
---------
Balances at
March 31, 2001
(unaudited)..... $ 15,616
=========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Scios Inc.
Notes to Consolidated Financial Statements
1. Business of the Company
Scios Inc. (the "Company") is a biopharmaceutical company developing novel
treatments for cardiovascular and inflammatory diseases. The Company is
distinguished by its disease-based technology platform, which integrates
expertise in protein biology with computational and medicinal chemistry to
identify novel targets, and rationally design small molecule compounds. The
Company's psychiatric sales and marketing division also markets seven products
in the United States in cooperation with the Company's partners (see Note 18b).
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue at least through fiscal
year 2003.
2. Restructuring Charges and Expenses
In 1999, the Company recorded a one-time restructuring charge of approximately
$6.4 million for the disposal of certain excess assets and severance costs. All
restructuring activities were complete by the end of the second quarter of
2000, leaving a remaining balance of $1.0 million in the reserve. The remaining
reserve was credited to restructure expense in the second quarter of 2000.
3. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiary. Other affiliates, more than
20%, but less than 50% owned, are accounted for on the equity basis.
Intercompany transactions and balances are eliminated on consolidation.
Unaudited interim results
The accompanying consolidated balance sheet as of March 31, 2001, the
consolidated statements of operations and of cash flows for the three months
ended March 31, 2000 and 2001, and the statement of stockholders' equity for
the three months ended March 31, 2001 are unaudited. The unaudited interim
consolidated financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's consolidated financial position at March 31, 2001
and its results of operations and cash flows for the three months ended March
31, 2000 and 2001. The financial data and other information disclosed in these
notes to financial statements related to the three month periods are unaudited.
The results for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the year ending December 31, 2001.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with maturities of less
than 90 days, at the time acquired, to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value.
Marketable securities
All marketable securities at December 31, 1999 and December 31, 2000 were
deemed by management to be available-for-sale and are stated at fair market
value with net unrealized gains or losses reported in stockholders' equity.
Realized gains and losses on sales of all such securities are reported in
earnings and computed using the specific identification cost method.
F-7
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
Business risk and credit concentration
Approximately 40% (reclassified for EITF 99-19, see recent pronouncements) of
the Company's total revenues in 2000 were derived from psychiatric product
sales, which consists entirely of sales in the United States under a license
agreement with GlaxoSmithKline Corp. ("GSK") (see Notes 4 and 18b). In December
1999, the Company announced a temporary shortage of Eskalith CR (lithium
carbonate), one of five products developed and manufactured by GSK that are
sold by the Company. As a result of these manufacturing issues, the product
shelf life has been reduced to six months.
In 1999 license revenues from Chiron Corporation ("Chiron") accounted for 27%,
milestone payments from Novo Nordisk accounted for 22%, and Alzheimer's
research reimbursement with Eli Lilly and Company accounted for 22% of total
research and development contract revenues. Approximately 11% of 1999, and 33%
of 1998 research and development contract revenues were from the agreement with
Bayer AG ("Bayer") for commercialization of Natrecor (nesiritide). The
agreement with Bayer was terminated in May 1999, after non-approval of Natrecor
by the Food and Drug Administration (FDA). In 1999, no individual customer or
partner contributed more than 10% to total revenues.
At December 31, 1999, the $3.1 million in accounts receivable included $1.5
million from GSK, $1.1 million from Janssen, and $0.3 million from the National
Institutes of Health.
At December 31, 2000, the $5.2 million in accounts receivable included $3.5
million from GSK, and $1.0 million from Janssen Pharmaceutica Inc. ("Janssen").
The Company's excess cash is invested in a diversified portfolio of securities
consisting of United States Treasury Notes, deposits with major banks and
financial institutions, and investment-grade interest-bearing corporate
securities issued by companies in a variety of industries. In addition, the
Company owns 201,742 shares of GenVec Corporation ("GenVec") common stock.
GenVec completed its initial public stock offering on December 13, 2000. All
pre-IPO stockholders were required to lock up their stock for 180 days
subsequent to the offering.
Certain Company products require approval from the FDA and foreign regulatory
agencies prior to commercialized sales and are subject to continued regulations
once approved. There can be no assurances that the Company's new products will
receive any of these required approvals. If the Company were denied such
approvals or such approvals were delayed, it could have a materially adverse
impact on the Company.
Depreciation and amortization
Buildings and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (3 to 7
years for equipment and 40 years for buildings). Leasehold improvements are
amortized on a straight-line basis over the shorter of the asset life or fixed-
lease term. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization is removed from the balance sheet, and the
resulting gain or loss is reflected in operations.
Treasury stock
Treasury stock of 735,036 shares at December 31, 1999 was stated at cost and
was considered issued and outstanding. All treasury stock was issued during
2000 in connection with the exercise of stock options.
Product sales
Revenue from product sales is recognized in the period in which the products
are shipped. Provision is made for estimated returns and allowances, cash
discounts and rebates attributable to Medicaid programs related to sales of the
psychiatric products.
Co-promotion commissions
Revenue from co-promotion commissions (see Notes 4 and 18b) is recognized based
on specified sales levels of Janssen's psychiatric product Risperdal(R)
(risperdone) ("Risperdal"), and GSK's psychiatric product Paxil(R) (paroxetine
HCl) ("Paxil"), for their respective contract years.
F-8
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
Contract revenues
Research and development contract revenue from cost-reimbursement agreements
with collaboration partners is recorded as the related expenses are incurred,
up to contractual limits. Payments received that are related to future
performance are deferred and recorded as revenue as they are earned over
specified future performance periods. Charges to these collaboration partners
are based upon negotiated rates for full time equivalent employees of the
Company and such rates are intended to approximate the Company's anticipated
costs. All revenues recognized to date are not refundable if the relevant
research effort is not successful. Research and development expenses in 1998,
1999, and 2000 include approximately $4.9 million, $5.2 million, and
$5.7 million, respectively, incurred in connection with programs subject to
cost reimbursement, collaborative or other performance agreements.
Research and development
Research and development costs are charged to operations as incurred. Certain
research and development projects are funded under agreement with collaboration
partners, and the costs related to these activities are included in research
and development expense. The charges to collaboration partners are based upon
negotiated rates for full-time equivalent employees of the Company, and such
rates are intended to approximate the Company's anticipated costs.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and other
accrued liabilities approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of notes payable approximates fair value. Estimated
fair values for marketable securities, which are separately disclosed
elsewhere, are based on quoted market prices for the same or similar
instruments.
Computation of net loss per share
Basic net loss per share is calculated using the weighted average number of
vested common shares outstanding for the period. Diluted net loss is calculated
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. The outstanding options to purchase
common stock and the affect of converting preferred stock to common stock were
excluded from diluted earnings calculations because the effect would be anti-
dilutive.
Comprehensive income (loss)
The Company's unrealized gains (losses) on marketable securities represent the
only component of comprehensive income that is excluded from the Company's net
loss. The Company's comprehensive income (loss) has been presented in the
consolidated financial statements. As the Company is in a loss position, tax
effects have not been allocated to the components of other comprehensive income
(loss).
Accumulated other comprehensive income (loss) balances are as follows for the
years ended:
-----------------------------
Accumulated
Unrealized Other
Gains (losses) Comprehensive
on Securities Income (loss)
-------------- -------------
In thousands
Balance, January 1, 1999......................... $ 11,412 $ 11,412
Current period change............................ (12,472) (12,472)
-------- --------
Balance, December 31, 1999....................... (1,060) (1,060)
Current period change............................ 2,255 2,255
-------- --------
Balance, December 31, 2000....................... 1,195 1,195
Current period change............................ 116 116
-------- --------
Balance, March 31, 2001.......................... $ 1,311 $ 1,311
======== ========
F-9
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes," which prescribes the use of
the liability method whereby deferred tax asset or liability account balances
are calculated at the balance sheet date using current tax laws and rates in
effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
Reclassification
Certain amounts in the consolidated financial statements have been reclassified
to conform with the current years presentation. The reclassification has no
impact on previously reported net loss.
Recent pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 will be effective for the Company's first quarter of 2001.
The Company does not currently hold derivative instruments or engage in hedging
activities, and does not believe that the implementation of SFAS 133 will have
any significant impact on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of the Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees." This interpretation clarifies
the definition of an employee for purposes of applying APB No. 25, the criteria
for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award and the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 was effective July 1,
2000, but certain conclusions cover specific events that occurred after either
December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 did not have
any material impact on the Company's consolidated financial statements.
Effective January 1, 2001, the Company adopted Staff Accounting Bulletin No.
101 (SAB 101) "Revenue Recognition in Financial Statements." SAB 101 requires
that license and other up front fees received from research collaborators be
recognized as earned over the term of the agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process.
The cumulative effect of adoption as of January 1, 2000 was immaterial to the
results of the Company's operations and financial position. However, certain
revenue recognized in periods prior to January 1, 2000 would have been
recognized in different periods in accordance with the provisions of SAB 101.
In the year ended December 31, 1998, the Company recorded a $20.0 million
license fee in connection with the Natrecor commercialization agreement with
Bayer AG. Under SAB 101, $19.1 million of this license fee would have been
reallocated from 1998 to the year ended December 31, 1999, the year in which
the Bayer commercialization agreement was terminated. As a result, the loss for
the year ended December 31, 1998 would have increased by $19.1 million and the
loss for the year ended December 31, 1999 decreased by $19.1 million. In
accordance with the implementation provisions of SAB 101, the accompanying
financial data for periods prior to January 1, 2000, the date of adoption, have
not been restated.
F-10
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
The pro forma effects of implementing SAB 101 on the results previously
reported for the year ended December 31, 1998 and 1999 are presented below:
----------------------------
Year Ended
December 31, 1998
----------------------------
Basic and
Diluted
Loss per
Revenues Net Loss Share
-------- -------- ---------
In thousands, except per share data
As Reported....................................... $44,668 $ (2,363) $(0.06)
Pro-forma......................................... $25,520 $(21,511) $(0.57)
----------------------------
Year Ended
December 31, 1999
----------------------------
Basic and
Diluted
Loss per
Revenues Net Loss Share
-------- -------- ---------
In thousands, except per share data
As Reported....................................... $28,355 $(20,064) $(0.53)
Pro-forma......................................... $47,503 $ (916) $(0.02)
Concurrent with the implementation of SAB 101, the Company implemented the
consensus reached in EITF 99-19 "Reporting Revenue Gross as a Principal Versus
Net as an Agent." The effect of this EITF results in netting the revenues
received from the Psychiatric Sales and Marketing Division (PSMD) with related
direct costs, as such it had no effect on previously reported operating
results. All periods presented reflect retroactive application of this EITF
consensus.
4. Joint Business Arrangements
a. Agreement with Chiron Corporation
In November 1999, the Company signed a license agreement with Chiron for the
rights to Fiblast (trafermin)("Fiblast"). Fiblast is a human basic fibroblast
growth factor. The Company received $5.0 million in license and technology
transfer fees and $7.5 million from a Promissory Note due on December 31, 2006.
The note and related interest will be forgiven if Fiblast is approved in the
United States before December 31, 2006. The Company will also receive royalties
based on future sales of Fiblast products.
b. Agreement with Janssen Pharmaceutica Inc.
The Company entered into a three-year agreement, effective April 1998, with
Janssen to jointly promote the anti-psychotic drug, Risperdal, in the United
States. Under the agreement, the Company receives base payments plus incentive
compensation on achieving specified sales levels over a contract year beginning
in April and ending in March. Janssen manufactures and distributes the product.
This agreement will end on March 31, 2001.
c. Agreements with GlaxoSmithKline Corporation
Under the terms of an agreement with GSK, the Company has the exclusive rights
to market certain GSK psychiatric products in the United States (see Note 18b).
GSK is fully responsible for ancillary matters relating to product sales,
including various administrative tasks and maintenance of all New Drug
Applications with respect to the GSK Products, and certain product liability
insurance. The Company pays GSK 40% of net profits, as defined in the
agreement, from sales of the GSK Products.
In September 1998, the Company entered into an agreement with GSK to co-promote
Paxil in the United States. Under the agreement, the Company receives base
payments plus incentive compensation on achieving specified sales levels during
a specified term. Although the agreement ended in December 2000, the companies
have agreed to extend the agreement through March 31, 2001.
F-11
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
d. Agreement with DuPont Pharmaceuticals Company
In December 1997, the Company entered into an agreement with DuPont
Pharmaceuticals Company ("DuPont") that established a research collaboration in
the area of Alzheimer's disease with the goal of developing pharmaceuticals
that prevent or retard the disease. Under the terms of the agreement, DuPont
will fund research at the Company and will have responsibility to develop and
commercialize products from this collaboration.
DuPont also purchased $3.0 million of the Company's common stock in 1998 and
will make milestone and royalty payments to the Company as products advance
through development. On the basis of the agreement, the research collaboration
ended November 2000. Both DuPont and the Company are in the process of
finalizing closeout issues.
e. Agreement with Eli Lilly and Company
In April 1997, the Company entered into a research collaboration with Eli Lilly
and Company ("Eli Lilly") for the development of drugs to prevent or retard the
progression of Alzheimer's disease. Under the terms of the agreement, Eli Lilly
will fund research and will have the first opportunity to develop products from
the collaboration. The Company may elect to develop other products from the
collaboration. The commercialization partner will make milestone and royalty
payments to the other partner. In 2000, the existing agreement was amended to
decrease the number of dedicated and non-dedicated employees that work on the
project, and at that time the program was further extended to December 31,
2001.
f. Agreements with Kaken Pharmaceutical Co., Ltd.
In September 1994, the Company entered into a series of agreements with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), to expand a previous agreement signed in
1988 for Fiblast. Under the 1994 agreements, the Company will collaborate with
Kaken to further develop the Fiblast manufacturing process, provide Kaken a
license to the Company's Fiblast manufacturing technology and supply a
specified amount of Fiblast product. In return, the Company has received
milestone payments, which are contingent on Kaken's continuing development of
the product. At December 31, 2000, $15.9 million of the Company's deferred
revenue consisted of payments received for the supply of Fiblast material.
Prior to closing its Mountain View manufacturing facility in May 1999, the
Company produced the amount of Fiblast due to Kaken and the Company held it for
delivery to Kaken upon regulatory approval of the product in Japan.
g. Agreement with Genentech, Inc.
In December 1994, the Company entered into a collaboration agreement with
Genentech, Inc. ("Genentech") for the development and commercialization of
Auriculin (anaritide) ("Auriculin") for the treatment of acute renal failure.
Concurrent with the collaboration agreement, Genentech purchased $20.0 million
of the Company's preferred stock and provided a $30.0 million loan to the
Company in the form of a letter of credit (see Note 10), which the Company drew
down in March of 1997. As of December 31, 1997, Genentech had converted all
shares of preferred stock into 2.1 million shares of common stock. In 1997, the
Company and Genentech discontinued development of Auriculin based upon the
negative results of an interim study. In 1999 the terms of the loan were
amended. The loan is repayable in the Company's preferred stock up to a maximum
of $25.0 million at the Company's option at any time through December 31, 2002.
In the event the Company converts the loan to preferred stock, the stock cannot
be sold or registered until December 30, 2002 without the Company's approval.
In addition, if the Company should decide to convert the loan to preferred
stock, a portion of the loan that is not convertible will become due and
payable before December 31, 2002. The amount of the loan that is due before the
maturity date is based on a formula that considers the amount of loan converted
to stock and the outstanding loan balance.
In the first quarter of 2000, the Company paid down $2.0 million of the
Genentech loan. In the third quarter of 2000, the Company paid down the
Genentech loan by $7.6 million, which consisted of a cash payment of $2.6
million, and 4,991 shares of Series B preferred stock. The preferred shares
convert to 499,100 shares of common stock.
F-12
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
h. Agreement with Bayer AG
In May 1998, the Company entered into an agreement with Bayer for the
commercialization of Natrecor. Upon signing the contract, the Company received
a payment of $20.0 million and would have received up to $40.0 million in
milestone payments upon regulatory approvals in the United States, Europe and
Japan. The agreement provided the Company the option to participate in co-
promotion of Natrecor in the United States after three years upon achievement
of specified sales levels, and it provided for the Company to actively
participate in the further development of Natrecor with funding from Bayer at
specified minimum levels. In May 1999, Bayer terminated the agreement after the
Company received a non-approval letter from the FDA in April 1999. All rights
to Natrecor reverted to the Company without any payment being due to Bayer from
the Company.
5. Affiliate
The Company used the equity method of accounting for its investment in Guilford
Pharmaceuticals Inc. ("Guilford") through September 1998 because it had
representation from Guilford's Board of Directors. In October 1998, the Company
reclassified its Guilford investment to marketable securities because of a
change in the Company's representation on Guilford's Board of Directors. At
December 31, 1999 and December 31, 2000, the Company had no ownership in
Guilford.
6. Marketable Securities
Unrealized gains and losses on marketable securities at December 31, 1999 by
classification were as follows:
-----------------------------------------------
Cost Accrued Unrealized Unrealized Fair
Basis Interest Gains Losses Value
------- -------- ---------- ---------- -------
In thousands
Debt securities:
U.S. Government & Government
Agency Securities............ $46,083 $ 457 $ -- $ (688) $45,852
Corporate Bonds............... 43,142 508 5 (377) 43,278
------- ------ ----- ------- -------
Total........................ $89,225 $ 965 $ 5 $(1,065) $89,130
======= ====== ===== ======= =======
Unrealized gains and losses on marketable securities at December 31, 2000 by
classification were as follows:
-----------------------------------------------
Cost Accrued Unrealized Unrealized Fair
Basis Interest Gains Losses Value
------- -------- ---------- ---------- -------
In thousands
Debt securities:
U.S. Government & Government
Agency Securities............ $35,641 $ 614 $ 191 $ (85) $36,361
Corporate Bonds............... 31,242 567 102 (32) 31,879
------- ------ ----- ------- -------
Total........................ $66,883 $1,181 $ 293 $ (117) $68,240
======= ====== ===== ======= =======
The scheduled maturities for marketable securities at December 31, 2000 by
classification were as follows:
--------------------
Maturity Maturity
1 Year Greater
or Less than 1 Year
-------- -----------
In thousands
Debt securities:
U.S. Government & Government Agency Securities........... $18,688 $14,849
Corporate Bonds.......................................... 16,668 18,035
------- -------
Total................................................... $35,356 $32,884
======= =======
F-13
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
The Company realized gains of $9.1 million and losses of $96,000 on the
disposal of marketable securities during 1998, gains of $5.2 million and losses
of $0.3 million on the disposal of marketable securities during 1999, and gains
of $96,000 and losses of $0.3 million on the disposal of marketable securities
in 2000.
7. Property and Equipment
-----------------
December 31,
-----------------
1999 2000
------- --------
In thousands
Laboratory equipment........................................ $ 7,197 $ 6,085
Computer and related equipment.............................. 2,260 3,256
Furniture and other......................................... 1,202 1,370
Buildings and building improvements......................... 8,334 8,977
------- --------
18,993 19,688
Accumulated depreciation and amortization................... (8,938) (11,366)
------- --------
10,055 8,322
Construction-in-progress.................................... 1,479 588
------- --------
Total..................................................... $11,534 $ 8,910
======= ========
8. Other Assets
-----------------
December 31,
-----------------
1999 2000
------- --------
In thousands
Deposits.................................................... $ 354 $ 348
Other assets................................................ 1,171 1,256
Employee notes receivable................................... 534 403
------- --------
Total..................................................... $ 2,059 $ 2,007
======= ========
9. Other Accrued Liabilities
-----------------
December 31,
-----------------
1999 2000
------- --------
In thousands
Accrued Medicaid rebates.................................... $ 1,688 $ 1,532
Accrued payroll............................................. 2,619 4,021
Profit distribution to third parties........................ 723 1,139
Accrued clinical trial expenses............................. 608 598
Restructure reserve......................................... 1,052 --
Accrued Biotechnology Research Partners, Ltd. royalties..... 1,657 --
Accrued R&D contract payable................................ -- 737
Other....................................................... 2,810 2,722
------- --------
Total..................................................... $11,157 $ 10,749
======= ========
10. Lease and Debt Commitments
a. Operating leases
The Company leases two facilities in Sunnyvale, California with agreements that
expire in 2002 with options to extend the leases, and a warehouse in Mountain
View, California that expires in 2003. In addition, the Company has entered
into operating leases covering certain laboratory and computer equipment.
F-14
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
At December 31, 2000, future minimum payments under these leases are as
follows:
------------------------
Facilities and Equipment
Operating Operating
Leases Leases
-------------- ---------
In thousands
2001................................................... $1,682 $217
2002................................................... 186 198
2003................................................... 33 105
------ ----
Total................................................ $1,901 $520
====== ====
Rent expenses for all facilities operating leases were approximately $1.0
million, $2.2 million, and $1.6 million in 1998, 1999, and 2000, respectively.
b. Borrowing arrangements
As part of the Auriculin agreement, Genentech committed to loan the Company up
to $30.0 million. The $30.0 million was drawn down in March of 1997, and bears
interest at the prime rate (9.5% at December 31, 2000). In 1999 the terms of
the loan were amended. The loan is repayable in the Company's preferred stock
up to a maximum of $25.0 million at the Company's option at any time through
December 31, 2002. In the event the Company converts the loan to preferred
stock, the stock cannot be sold or registered until December 30, 2002. In
addition, if the Company should decide to convert the loan to preferred stock,
a portion of the loan that is not convertible will become due and payable
before December 31, 2002. The amount of the loan that is due before the
maturity date is based on a formula that considers the amount of the loan
converted to stock and the outstanding loan balance.
In the first quarter of 2000, the Company paid down $2.0 million of the
Genentech loan. In the third quarter of 2000, the Company paid down the
Genentech loan by $7.6 million, which consisted of a cash payment of $2.6
million and 4,991 shares of Series B preferred stock. (For rights and features
of Series B preferred stock see Note 13a). Each share of Series B preferred
stock converts at a rate of 100:1 of common stock at Genentech's option. The
Series B preferred stock is convertible after December 30, 2002 and at
Genentech's option before January 20, 2003.
As part of the Fiblast agreement, Chiron loaned the Company $7.5 million in
December 1999. The Promissory Note bears interest at the rate of 8.5%
compounded annually, and is due December 31, 2006. The note and related
interest will be forgiven if Fiblast is approved in the United States before
December 31, 2006.
c. Natrecor supply contract
The Company has entered into a long-term supply agreement with a manufacturer
for the supply of bulk Natrecor. The contract provides for the purchase of at
least 25 kg of bulk solution over an eight-year period after the first delivery
of commercialized quantities, at a maximum price of 48.0 million German marks
(United States equivalent at December 31, 2000, $23.0 million).
11. Litigation
On November 29, 1995, the Company was notified by the United States
Environmental Protection Agency ("EPA"), that it may have a liability in
connection with the clean-up of a toxic waste site arising out of the alleged
disposal of hazardous substances by a subcontractor of Nova Pharmaceutical
Corporation, which the Company acquired in 1992. The Company is one of many
potentially responsible parties that have been identified as associated with
this specific site. The Company has held discussions with the EPA and finalized
the amount of potential liability. The Company has reserved $90,000 at December
31, 2000 as provision for the settlement thereof.
F-15
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
12. Research and Development Commitments
a. Commitments to research partnerships
In 1988, the Company purchased the interests of Biotechnology Research
Partners, a limited partnership in a joint venture, and made a down payment of
$0.6 million. The balance of the purchase price is to be paid in quarterly
installments in accordance with the following formula: (i) until the minority
partners have received payments of approximately $22.8 million, the Company
will pay approximately 37% of the royalty income from third-party licenses and
approximately 4% of the Company's gross sales of Partnership products; (ii)
thereafter, until the minority partners have received aggregate payments of
approximately $34.1 million, the Company will pay approximately 31% of the
royalty income and approximately 3% of the Company's gross sales of Partnership
products; and (iii) thereafter, until the earlier of 20 years from the date of
exercise of the option or the time all patents relating to the Partnership's
technology expire and all information relating to that technology becomes part
of the public domain, the Company will pay to the minority partners
approximately 21% of the royalty income and approximately 2% of the Company's
gross sales of Partnership products. Partnership products for which minority
partners will receive payments include Fiblast. The Company has accrued
$1.7 million at December 31, 1999 as the partnership's share of license fees
received from Fiblast in 1999, and no amount was accrued at December 31, 2000.
In December 1992, the Company exercised its option to acquire all interests in
Nova Technology Limited Partnership for $20.4 million. The Company also issued
contingent payment rights to all limited partners of the partnership, pursuant
to which the Company is obligated until January 15, 2008 to pay royalties on
the sale or license of certain products that were under development by the
partnership. The Company accrued $1.7 million at December 31, 1999 as a result
of royalties associated with the commercialization of Guilford's Gliadel wafer.
As of December 31, 2000, $44,000 was accrued.
b. Research collaborations with partners
As part of the Joint Business Arrangements described in Note 4 above, the
Company from time to time agrees to provide and receive resources and support
as part of its collaborations with other companies. In the course of such
collaborations, issues may arise concerning the ownership of technology that is
developed and the fulfillment of each party's obligations to the other.
Generally these have been resolved by the parties without resorting to
litigation.
13. Stockholders' Equity
a. Series B preferred stock
The Company's Series B preferred stock may be issued in series that have such
rights as may be designated by the Board of Directors from time to time. There
were no shares of Series B preferred stock issued and outstanding at December
31, 1999 and at December 31, 2000 there were 4,991 shares outstanding. As
previously mentioned in Note 10 b, the Company paid down the Genentech loan by
$7.6 million which consisted of a cash payment of $2.6 million and 4,991 shares
of Series B preferred stock. Each share of Series B preferred stock converts at
a rate of 100:1 of common and will not have voting rights until converted into
shares of Scios common stock. In addition, the holders of the Series B
preferred stock are entitled to receive dividends as payable on each share of
common stock into which such shares could then be converted, when and if
declared by the Board of Directors. In the event of any liquidation,
dissolution or winding up of the Company, after payment of debts and other
liabilities, the holders of the Series B preferred stock (on an as converted
basis) and the holders of the common stock shall be entitled to share ratably
in the remaining assets of the Company.
b. Deferred compensation
In August 2000, the Company granted shares of restricted stock to an officer.
The shares vest over a six month period provided that the recipient is still
employed by the Company. The market value of these shares was $0.3 million and
has been recorded as a separate component of stockholders' equity. In August
1999, the Company granted shares of restricted stock to an officer. The shares
vest over a three-year period provided that the recipient is still employed by
the Company. The market value of the shares awarded was $0.2 million and has
been recorded as a separate component of stockholders' equity. In September
1998, the Company granted shares of restricted stock to an officer and
director. The shares vest over
F-16
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
a two-year period provided that the recipient is still employed by the Company.
The market value of the shares awarded was $0.6 million and has been recorded
as a separate component of stockholders' equity. Deferred compensation for
these share grants is being amortized over the applicable period of the
vesting. The restricted stock was granted under the 1992 Incentive Stock Plan.
14. Employee 401(k) Benefit Plan
The Company has a qualified profit sharing plan and trust under Internal
Revenue Service Code sections 401(a) and 401(k). Employees are eligible to
participate in the plan the first day of the month after hire and can elect to
contribute to the plan up to 15% of their salary subject to current statutory
limits. In 2000, the Company matched employee contributions at a rate of 100%
to a maximum of $3,000 per employee, except as restricted by statutory limits.
The Company contribution is 100% vested at the end of an employee's third year
of employment. Company contributions to the plan totaled approximately $0.8
million in 1998, $0.8 million in 1999, and $0.6 million in 2000.
15. Stock Option Plans
Under the Company's stock option plans, the Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the vesting period and the exercise price (which cannot be less than fair
market value ("FMV") at date of grant for incentive stock options or 85% of FMV
for non-statutory options). The options are exercisable at times and in
increments as specified by the Board of Directors, generally expire ten years
from date of grant and fully vest over periods from three to five years. The
following shares are authorized and available for grant as of December 31,
2000:
-------------------------------------------------------------
Shares Options Available for
Plan Title Authorized Outstanding Grant Option Price
---------- ---------- ----------- ------------- ------------------------
1983/86.......... 2,200,000 115,911 -- Not less than 85% of FMV
1989............. 170,000 10,000 -- FMV
1992............. 5,000,000 2,133,326 575,878 Not less than 85% of FMV
1996............. 2,475,000 2,233,053 35,429 Not less than 85% of FMV
NQ............... 443,161 2,538 -- Not less than 85% of FMV
Additional information with respect to the activity of outstanding options and
restricted common stock is summarized in the following table:
-----------------------------------------
Number of Aggregate Price
Shares Options Price (in thousands)
---------- ------------- ---------------
Balances at January 1, 1998.......... 3,986,142 $ 3.50-$21.13 $ 29,344
Granted............................. 1,515,475 $ 5.19-$12.75 13,245
Exercised........................... (677,249) $ 3.50-$ 9.13 (4,525)
Canceled............................ (318,533) $ 3.50-$20.54 (2,502)
---------- ------------- --------
Balances at December 31, 1998........ 4,505,835 $ 3.69-$21.13 35,562
Granted............................. 2,119,200 $ 3.81-$ 8.75 12,638
Exercised........................... (185,163) $ 5.13-$ 9.63 (1,243)
Canceled............................ (868,011) $ 3.81-$15.06 (6,592)
---------- ------------- --------
Balances at December 31, 1999........ 5,571,861 $ 3.69-$21.13 40,365
Granted............................. 1,190,922 $0.001-$15.19 10,912
Exercised........................... (1,432,757) $0.001-$12.00 (10,535)
Canceled............................ (835,198) $ 3.81-$21.13 (7,190)
---------- ------------- --------
Balances at December 31, 2000........ 4,494,828 $0.001-$21.13 33,552
Granted............................. 964,250 $17.09-$21.38 19,303
Exercised........................... (197,851) $ 3.81-$12.75 (1,421)
Canceled............................ (65,844) $ 3.81-$20.37 (636)
---------- ------------- --------
Balances at March 31, 2001........... 5,195,383 $0.001-$21.38 $ 50,798
========== ============= ========
F-17
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
The options outstanding by range of exercise price at December 31, 2000 are as
follows:
-----------------------------------------------------------
Weighted
Average Outstanding Exercisable
Remaining Weighted Weighted
Number of Contractual Average Number of Average
Options Life Exercise Options Exercise
Exercise Price Outstanding (in years) Price Exercisable Price
-------------- ----------- ----------- ----------- ----------- -----------
$ 3.00-$ 3.69...... 575 4.85 $ 3.69 575 $ 3.69
$ 3.70-$ 3.81...... 660,552 8.60 $ 3.81 168,086 $ 3.81
$ 3.87-$ 5.43...... 610,657 8.02 $ 4.30 322,553 $ 4.32
$ 5.56-$ 6.12...... 586,826 7.24 $ 5.97 421,802 $ 5.99
$ 6.25-$ 6.81...... 113,925 5.34 $ 6.42 111,160 $ 6.41
$ 7.12-$ 7.43...... 282,334 2.78 $ 7.21 276,334 $ 7.21
$ 7.50-$ 7.75...... 423,624 7.76 $ 7.67 180,102 $ 7.59
$ 8.00-$ 8.75...... 578,603 8.13 $ 8.65 327,742 $ 8.61
$ 9.00-$ 9.19...... 112,124 2.46 $ 9.07 107,790 $ 9.07
$ 9.62-$21.13...... 1,055,608 7.72 $12.30 491,356 $10.83
--------- ---------
$ 3.00-$21.13...... 4,424,828 7.38 $ 7.61 2,407,500 $ 7.37
========= =========
On May 8, 2001, the stockholders approved an amendment to the 1992 Equity
Incentive Plan adding 1.5 million shares of common stock to this plan. In
addition, an Employee Stock Purchase Plan was approved by the stockholders with
an initial allocation of 375,000 shares of common stock.
Restricted common stock
At December 31, 2000 there were 70,000 shares of restricted common stock
granted to two officers that were outstanding. The shares vest over a period
ranging from six months to three years and at December 31, 2000 none of these
shares were vested.
Stock based compensation
The Company is required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock- Based Compensation" ("SFAS 123"), to disclose pro
forma information regarding option grants made to its employees based on
specified valuation techniques that produce estimated compensation charges.
These amounts have not been reflected in the Company's Consolidated Statements
of Operations because no compensation charge arises when the price of the
employees' stock options equals the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees. Pro
forma information under SFAS 123 is as follows:
The following pro forma information has been prepared following the provisions
of SFAS No. 123:
---------------------------
For the year ended
December 31,
---------------------------
1998 1999 2000
------- -------- --------
In thousands, except per share amounts
Net loss--as reported............................ $(2,363) $(20,064) $(42,522)
Net loss--pro forma.............................. $(6,331) $(25,449) $(48,148)
Net loss per common share basic and diluted--as
reported........................................ $ (0.06) $ (0.53) $ (1.12)
Net loss per common share basic and diluted--pro
forma........................................... $ (0.17) $ (0.67) $ (1.27)
F-18
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes single option pricing method assuming the following parameters:
----------------------
For the year ended
December 31,
----------------------
1998 1999 2000
------ ------ ------
Risk free interest rate................................. 5.29% 5.50% 5.01%
Expected life (years)................................... 4.8 5.4 6.1
Volatility.............................................. 0.7916 0.9121 0.8573
Dividend yield.......................................... -- -- --
The weighted average per share fair value of options granted in 1998, 1999, and
2000 was $5.71, $4.11, and $7.73, respectively.
16. Income Taxes
The Company's deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
The Company has federal and state income tax net operating loss ("NOL") and
research credit carryforwards at December 31, 2000 for tax purposes available
as follows:
In thousands
Federal NOL........................................................ $348,956
State NOL.......................................................... $ 41,536
Federal research credit............................................ $ 13,256
State research credit.............................................. $ 5,066
These federal and state NOL carryforwards expire in the years 2001 through 2020
and 2001 through 2005, respectively. The federal and state research credit
carryforwards expire in the years 2001 through 2020.
Due to a change in the ownership of the Company, as defined, a portion of the
federal and state NOL carryover is subject to an annual utilization limitation.
Should another change in ownership occur, future utilization of the Company's
NOL carryforwards may be subject to additional limitations.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
--------------------
December 31,
--------------------
1999 2000
--------- ---------
In thousands
Net operating loss carryforward........................... $ 100,440 $ 118,650
State (net of federal benefit)............................ 15,250 15,840
Credits................................................... 15,240 13,260
Assets subject to depreciation and amortization........... 4,520 3,770
Deferred revenue.......................................... 6,080 5,760
Other accrued liabilities................................. 6,140 6,550
--------- ---------
Total deferred tax assets................................. 147,670 163,830
Valuation allowance....................................... (147,670) (163,830)
--------- ---------
Net deferred tax asset.................................. $ -- $ --
========= =========
F-19
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
17. Industry and Geographic Segment Information
The Company operates in one business segment, using one measurement of
profitability for its business. All long-lived assets are maintained in the
United States. The Company receives revenue from product sales and from
licensing and development of products. The Company received licensing revenue
from partners in the United States, Europe and Asia Pacific.
Revenue (reclassified for EITF 99-19) by geographic area for the year ended is
as follows:
--------
Revenues
--------
In thousands
December 31, 1998:
United States......................................................... $13,196
International......................................................... 31,472
-------
Total................................................................ $44,668
=======
December 31, 1999:
United States......................................................... $22,002
International......................................................... 6,353
-------
Total................................................................ $28,355
=======
December 31, 2000:
United States......................................................... $12,624
International......................................................... --
-------
Total................................................................ $12,624
=======
18. Subsequent Events
a. Agreement with Innovex.
In January 2001, the Company entered into an agreement with Innovex, a
subsidiary of Quintiles Transnational Corp. Under the terms of the agreement,
Innovex will identify, hire, train and deploy a dedicated cardiology and
emergency medicine sales force of approximately 180 people at Scios' cost to
launch Natrecor in 2001.
In addition, Quintiles, through its corporate ventures group, PharmaBio
Development, will provide the Company up to $35.0 million in funding for the
commercialization of Natrecor over a period of 3.5 years.
The Company granted PharmaBio 700,000 warrants to purchase the Company's common
stock at a price of $20.00 per share. The warrants will vest over three years.
b. Psychiatric Sales and Marketing Division.
Commencing in the fourth quarter of 2000, Scios solicited and received bids in
connection with selling its marketing rights for certain products sold by
Scios. The marketing rights were sold to GlaxoSmithKline, or GSK. The marketing
rights were originally licensed from GSK under a 1990 licensing agreement. In
order to effect the sale, the licensing agreement was terminated effective
March 31, 2001, and the Company will receive from GSK $4.0 million in 2000,
$3.0 million in 2002, and $2.5 million in 2003.
Scios recognized a one-time gain on the sale of $9.4 million which has been
classified on the statement of operations under the caption Gain on Sale of
Marketing Rights. In addition, the Company ended the deployment of our
Psychiatric Sales Marketing Division sales force and terminated certain full-
time support personnel. Severance payments for these personnel amounted to
approximately $0.8 million.
F-20
Scios Inc.
Notes to Consolidated Financial Statements -- (Continued)
19. Quarterly Financial Data (Unaudited)
The following tables summarize the quarterly financial data for the last two
fiscal years:
-----------------------------------------------------
Fiscal 1999 Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ---------- ------------- ------------
In thousands, except per
share data
Total revenues.......... $ 5,002 $ 5,650 $ 5,275 $ 12,428
Income (loss) from
operations............. (15,230) (4,553) (5,230) 680
Net loss................ (9,857) (3,777) (4,735) (1,695)
Basic and diluted net
loss per share......... $ (0.26) $ (0.10) $ (0.13) $ (0.04)
-----------------------------------------------------
Fiscal 2000 Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ---------- ------------- ------------
In thousands, except per
share data
Total revenues.......... $ 3,225 $ 3,066 $ 2,816 $ 3,517
Loss from operations.... (9,535) (9,991) (10,374) (12,472)
Net loss................ (9,525) (10,309) (10,484) (12,204)
Basic and diluted net
loss per share......... $ (0.25) $ (0.27) $ (0.28) $ (0.32)
The pro forma effect of adopting SAB 101 for periods prior to fiscal year 2000
was:
-----------------------------------------------------
Fiscal 1999 Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
---------- ---------- ------------- ------------
In thousands, except per
share data
Net income (loss)....... $ (9,538) $ 15,051 $ (4,735) $ (1,694)
Basic and diluted gain
(loss) per share....... $ (0.25) $ 0.40 $ (0.13) $ (0.04)
F-21
Prospectus
SCIOS INC.
$120,000,000 OF COMMON STOCK
This prospectus will allow us to sell up to $120,000,000 in the aggregate of
common stock over time. This means:
. we may issue shares offered in this prospectus from time to time;
. we will provide a prospectus supplement each time we issue shares;
. the prospectus supplement will inform you about the specific terms of that
offering and also may add, update or change the information contained in this
prospectus; and
. you should read this prospectus and any prospectus supplement carefully
before you invest.
Our common stock is traded on the Nasdaq National Market under the symbol
"SCIO." On February 8, 2001, the last reported sale price of our common stock
on Nasdaq was $19.39 per share.
We will sell these securities directly to our stockholders or to purchasers or
through agents on our behalf or through underwriters or dealers as designated
from time to time. If any agents or underwriters are involved in the sale of
any of these securities, the applicable prospectus supplement will set forth
the names of the agents or underwriters and any applicable fees, commissions or
discounts.
This prospectus may not be used to offer or sell any securities unless
accompanied by a prospectus supplement.
Investing in our common stock involves a high degree of risk.
See "Risk Factors" on page 4.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is February 13, 2001.
About This Prospectus
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (SEC) using a "shelf" registration process.
Under this shelf process, we may offer, from time to time, in one or more
offerings, up to $120,000,000 in the aggregate of our common stock.
This prospectus provides you with a general description of the securities we
may offer. Each time we sell securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read both this prospectus and any
prospectus supplement together with additional information described
immediately below under the heading "Where You Can Find More Information."
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
732-0330 for further information on the public reference rooms.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to these documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below (and any amendments
thereto) and any future filings made with the SEC under Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 until the offering of our
common stock under this registration statement is completed or withdrawn:
. Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed
with the SEC on February 7, 2000.
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 filed with
the SEC on May 15, 2000.
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 filed with
the SEC on August 14, 2000.
. Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed
with the SEC on November 13, 2000.
. The description of our common stock contained in Form 8-A filed on June 19,
1990, including any amendments or reports filed to update such information.
To obtain a copy of these filings at no cost, you may write or telephone us at
the following address:
Corporate Secretary
Scios Inc.
749 N. Mary Avenue
Sunnyvale, CA 94085
(408) 616-8309
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The Company
Scios Inc. is a biopharmaceutical company developing novel treatments for heart
failure and inflammatory diseases. The company's disease-based technology
platform integrates expertise in protein biology with combinatorial and
medicinal chemistry to identify novel targets and rationally design large and
small-molecule compounds to treat cardiovascular and inflammatory diseases. Our
principal executive offices are located at 820 W. Maude Avenue, Sunnyvale, CA
94085, and our telephone number is (408) 616-8200.
We are developing the following products:
Natrecor(R) (nesiritide)
Our lead product candidate is Natrecor(R) (nesiritide). We filed an amended New
Drug Application (NDA) with the United States Food and Drug Administration
(FDA) in January 2001 seeking approval to market Natrecor(R) for the treatment
of acute decompensated heart failure. The FDA has a six month period in which
to respond to our filing. The amended NDA responds to questions raised by the
FDA in a non-approval letter issued in April 1999 for Natrecor(R). To provide
further information requested by the FDA, we conducted the VMAC (Vasodilation
in the Management of Acute Congestive heart failure) study for Natrecor(R) in
498 acutely decompensated congestive heart failure patients in the United
States. The VMAC trial compared the effects of Natrecor(R) against both placebo
and intravenously administered (IV) nitroglycerin, a standard therapy in the
treatment of acute decompensated heart failure.
The VMAC trial was successful in that we achieved our primary endpoints for the
trial. Specifically, in the VMAC trial, Natrecor(R) had a statistically
significant effect on the primary endpoint, reducing pulmonary capillary wedge
pressure (PCWP) in as little as 15 minutes, an effect that was sustained for at
least 48 hours without any loss of effectiveness (i.e., tachyphylaxis or
tolerance). At three hours, patients treated with Natrecor(R) had significant
improvement in PCWP, compared with those patients given placebo, and those
patients given IV nitroglycerin. At three hours, patients treated with
Natrecor(R) had significant improvement in their breathing, compared with those
patients given placebo. Using primarily a fixed dose infusion, Natrecor(R)
produced a more rapid improvement in hemodynamics than IV nitroglycerin, which
physicians need to titrate to achieve an effective dose. Significantly fewer
adverse events were reported in patients treated with Natrecor versus IV
nitroglycerin. The most common adverse event associated with Natrecor
administration was headache, which occurred significantly less often than in
patients treated with nitroglycerin (20% in the nitroglycerin patients vs. 9%
with Natrecor). In the VMAC study, symptomatic hypotension occurred in patients
treated with Natrecor at about the same rate as in patients treated with IV
nitroglycerin (4% and 5%, respectively) within 24 hours.
In January 2001 we announced that, assuming FDA approval, we would launch
Natrecor(R) in the United States using a sales force coordinated by Innovex
L.P., a commercial solutions provider to the biopharmaceutical industry.
Innovex will identify, hire, train and deploy a dedicated cardiology and
emergency medicine sales force of approximately 180 people to launch Natrecor.
We will create a field support team of approximately 30 people. At the end of
2004 we can acquire this sales force from Innovex for a nominal fee. In
exchange for a royalty on Natrecor(R) sales for five years (2003-2007) and a
warrant to purchase 700,000 shares of Scios common stock at a price of $20.00
per share that vests over 36 months, an affiliated company of Innovex has
agreed (assuming FDA approval) to fund $30.0 million of our costs to launch
Natrecor(R) over the first 24 months and loan Scios up to $5.0 million. Of the
$30.0 million, $10.0 million will be paid to us in 2001 following the launch of
Natrecor.
Inhibitors of p38 Kinase
We are also conducting a clinical trial of the lead compound (SCIO-469)
developed in our research program to discover small molecule compounds that
inhibit p38 map kinase. p38 map kinase in white blood cells is a key enzyme in
the inflammation pathway. Specifically, inhibition of p38 map kinase has been
shown to reduce the production of tissue necrosis factor (TNF), a primary
negative factor in various disease pathways. We believe inhibitors of p38 map
kinase represent a new approach to treating various diseases where inflammation
plays a central role. In the past several years, inhibition of TNF has been
established to be a treatment for rheumatoid arthritis by the introduction of
Enbrel(R) (etanercept) by Immunex Corporation and Remicade(R) (infliximab) by
Centocor, Inc., a subsidiary of Johnson & Johnson. The Immunex and Centocor
products are administered by injection and infusion.
We have developed and applied for patents on small molecule (non-protein)
compounds that inhibit p38 map kinase and block TNF production at the genomic
level. Our small molecule agents are intended to be given orally, which should
provide a significant advantage when treating a chronic disease such as
rheumatoid arthritis. We believe another key
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theoretical advantage to the Scios approach resides in the ability of our oral
product to be prescribed in a manner that allows careful dosage adjustment.
Such adjustment could lead to the same level of clinical efficacy seen in the
other agents mentioned above, but without shutting down TNF entirely as TNF
also plays a positive role in fighting infections.
We began our p38 map kinase research program in 1997. Our lead p38 map kinase
inhibitor is currently in Phase I human clinical trials to evaluate
bioavailability and pharmacodynamics in normal human volunteers. We currently
expect to begin our first Phase II trial in the second half of 2001. The
clinical indication we will initially target is rheumatoid arthritis because
the TNF reducing agents on the market have already demonstrated effectiveness
against this disease and the pathway to approval by the FDA has been clarified
by these other products. It appears that p38 map kinase inhibitors may also be
useful in treating other conditions that involve inflammation, such as
congestive heart failure and inflammatory bowel disease.
Partnered Projects
We also have commercial partners that are working to develop other products we
identified in our earlier research programs, including:
. Human Basic Fibroblast Growth Factor (FGF)--our licensee, Chiron Corporation,
is conducting separate Phase II human clinical trials evaluating FGF as
treatment for coronary artery disease and peripheral vascular disease. Our
licensee, Kaken Pharmaceutical, Co., Ltd., has pending in Japan an approval
to market an FGF-based product for the treatment of recalcitrant dermal
ulcers.
. Glucagon-Like Peptide-1--Novo Nordisk A/S has completed Phase I human
clinical trials of a GLP-1 analog that they are developing under a license
from us as a treatment for type 2 diabetes.
Risk Factors
Investing in our securities involves risk. Please see the risk factors set
forth in the supplement which accompanies this prospectus as well as our
periodic reports on Form 10-K and Form 10-Q which have been filed with the SEC,
incorporated by reference into this prospectus and available on EDGAR at
http://www.sec.gov. Before making an investment decision, you should carefully
consider these risks as well as the other information contained or incorporated
by reference into this prospectus.
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Recent Developments
On February 8, 2001, we reported our financial results for the full year 2000
and the fourth quarter of 2000 as follows:
Full Year 2000 Financial Results
Net revenues for the year ended December 31, 2000 were $12.6 million compared
to $28.4 million in 1999. The decrease in net revenues was primarily attributed
to $9.0 million in one-time milestone payments received in 1999 from our
corporate partners Chiron Corporation and Novo Nordisk A/S.
Total costs and expenses for the year 2000 were $55.0 million versus $52.7
million for the year ended December 31, 1999.
We reported a net loss of $42.5 million or $1.12 per diluted share for the year
ended December 31, 2000, compared to a net loss of $20.1 million, or $0.53 per
diluted share, for 1999. At December 31, 2000 we had approximately 39.2 million
common shares outstanding, and approximately 5,000 shares of preferred stock
outstanding. If converted, the preferred stock would convert into approximately
0.5 million common shares.
At December 31, 2000, we had $71.5 million in cash, cash equivalents and
marketable securities.
Fourth Quarter Financial Results
Net revenues for the quarter ended December 31, 2000 were $3.6 million compared
to $12.4 million in the fourth quarter of 1999. The decrease in net revenues
was primarily attributed to $9.0 million in one-time milestone payments
received in 1999 from corporate partners Chiron Corporation and Novo Nordisk
A/S.
Total costs and expenses for the fourth quarter of 2000 were $16.1 million
versus $11.7 million for the quarter ended December 31, 1999. The increase in
costs and expenses for the quarter was largely attributed to the clinical
development of Natrecor and SCIO-469.
We reported a net loss of $12.3 million or $0.32 per diluted share for the
quarter ended December 31, 2000, compared to a net loss of $1.7 million, or
$0.04 per diluted share, for the comparative quarter in 1999.
Special Note Regarding Forward-Looking Information
This prospectus, any prospectus supplement and the documents we incorporate by
reference contain forward-looking statements. We generally identify forward-
looking statements using words like "believe," "intend," "expect," "may,"
"should," "plan," "project," "contemplate," "anticipate" or similar statements.
We base these statements on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties and assumptions. These risks, uncertainties and assumptions are
described in the risk factors we set forth in this prospectus as well as in the
reports that we file with the SEC that are incorporated by reference in this
prospectus or that may be contained in a prospectus supplement. Actual results
may differ significantly from the results discussed in these forward-looking
statements. We do not undertake to update our forward-looking statements or
risk factors to reflect future events or circumstances.
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Use of Proceeds
Unless we specify otherwise in a prospectus supplement, we intend to use the
net proceeds from the sales of common stock to provide additional funds for our
operations and for other general corporate purposes, which may include but are
not limited to working capital, capital expenditures and the repayment or
refinancing of our debt.
Dilution
If you invest in our common stock, your interest would be diluted to the extent
of the difference between the public offering price per share of our common
stock and the adjusted net tangible book value per share of our common stock
after this offering. We calculate tangible net book value per share by dividing
the net tangible book value, which equals total assets, less intangible assets
and total liabilities, by the number of outstanding shares of our common stock.
Assuming an offering price of $20.00 per share, our tangible net book value at
September 30, 2000 would have been $3.16 per share. This represents an
immediate increase in the tangible net book value per share of $2.63 per share
to existing stockholders and an immediate dilution of $16.84 share to new
investors.
The following table illustrates this per share dilution:
Assumed offering price per share......................................... $20.00
Tangible net book value per share as of September 30, 2000............. $ 0.53
Increase per share attributable to new stockholders.................... $ 2.63
Adjusted net tangible net book value per share after offering............ $ 3.16
Dilution per share to new stockholders................................... $16.84
Description of Capital Stock
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.001 per share and 20,000,000 shares of preferred stock, par value
$0.001 per share. As of December 31, 2000, there were 39,166,373 shares of
common stock outstanding and 4,991 shares of preferred stock outstanding.
Voting Rights
Each share of common stock is entitled to one vote. The common stock votes
together as a single class on all matters presented for a vote of the
stockholders, except as provided under the Delaware General Corporation Law.
Dividends and Liquidation Rights
Each share of common stock is entitled to receive dividends, if, as and when
declared by the board of directors out of funds legally available for that
purpose. Subject to approval of certain holders of preferred stock in the event
of our dissolution, after satisfaction of amounts payable to our creditors and
distribution of any preferential amounts to the holders of outstanding
preferred stock, if any, holders of common stock are entitled to share ratably
in the assets available for distribution to the stockholders.
Other Provisions
There are no preemptive rights to subscribe for any additional securities that
we may issue, and there are not redemption provision or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
legally issued, fully paid and nonassessable.
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Plan of Distribution
We may sell the common stock to one or more underwriters for public offering
and sale by them or may sell the common stock to investors directly or through
agents. Any such underwriter or agent involved in the offer and sale of the
common stock will be named in the applicable prospectus supplement.
We may offer and sell the common stock at a fixed price or prices, which may be
changed, at prices related to the prevailing market prices at the time of sale
or at negotiated prices for cash or assets in transactions that do not
constitute a business combination within the meaning of Rule 145 promulgated
under the Securities Act. The terms and conditions of any specific offer will
be set forth in the applicable prospectus supplement. In connection with the
sale of the common stock, underwriters or agents may be deemed to have received
compensation from us in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of the common stock for whom they
may act as agent. Underwriters may sell common stock to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers from
whom they may act as agent.
We also may, from time to time, authorize dealers, acting as our agents, to
offer and sell securities upon the terms and conditions as are set forth in the
applicable prospectus supplement. In connection with the sale of securities,
underwriters may receive compensation from us in the form of purchasers of the
securities for whom they may act as agent. Underwriters may sell securities to
or through dealers, and these dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of the common stock, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Underwriters,
dealers and agents participating in the distribution of the common stock may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the common stock may be deemed to
be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with us, to indemnification against and contribution toward specified civil
liabilities, including liabilities under the Securities Act of 1933.
To the extent relevant, a prospectus supplement may also contain a description
of transactions that underwriters, dealers or agents may engage in during an
offering for the purpose of stabilizing or maintaining the price of the common
stock.
Some of the underwriters, dealers and agents and their affiliates may engage in
transactions with and perform services for us and our subsidiaries in the
ordinary course of our business.
New Accounting Pronouncements
As described in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements". We will adopt SAB 101 effective
January 1, 2000 upon issuance of our financial statements for the year ended
December 31, 2000.
SAB 101 requires that our license and other upfront fees received from research
collaborators be recognized as earned over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earnings process.
We have completed our evaluation of the effects of SAB 101 and have concluded
that the cumulative effect of adoption as of January 1, 2000 is immaterial to
our results of operations and financial position. However, certain revenue
recognized in periods prior to January 1, 2000 would have been recognized in
different periods in accordance with the provisions of SAB 101. In the year
ended December 31, 1998 we recorded a $20.0 million license fee in connection
with our Natrecor commercialization agreement with Bayer AG. Under SAB 101,
$19.1 million of the amount of this license fee has been reallocated from 1998
to the year ended December 31, 1999, the year in which the Bayer AG
commercialization agreement was terminated. As a result of this reallocation,
the loss for the year ended December 31, 1998 increased by $19.1 million and
the loss for the year ended December 31, 1999 decreased by $19.1 million.
Concurrently with the implementation of SAB 101, we will implement the
consensus reached in EITF 99-19 "Reporting Revenue Gross as a Principal Versus
Net As an Agent". The effect of this consensus will result in netting the
revenues received from our psychiatric pharmaceutical marketing business and
co-promotion commissions with related direct costs, as such it will have no
effect on our previously reported operating results.
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The pro forma effects of implementing SAB 101 and EITF 99-19 on the results we
have previously reported for the nine months ended September 30, 2000 and 1999
and for the years ended December 31, 1999, 1998 and 1997 are presented below:
---------------------------------------------
Nine Months Ended September 30, 2000
---------------------------------------------
Basic Loss Diluted Loss
In thousands, except per share Revenues Net Loss per Share per Share
data -------- ---------- ---------- ------------
As Reported.................... $30,804 $(30,312) $(0.80) $(0.80)
Pro-forma...................... $ 9,107 $(30,312) $(0.80) $(0.80)
---------------------------------------------
Nine Months Ended September 30, 1999
---------------------------------------------
Basic Diluted
Earnings / Earnings /
Net Income (Loss) per (Loss) per
In thousands, except per share Revenues (Loss) Share share
data -------- ---------- ---------- ------------
As Reported.................... $41,695 $(18,369) $(0.49) $(0.49)
Pro-forma...................... $35,079 $ 779 $ 0.02 $ 0.02
---------------------------------------------
Year Ended December 31, 1999
---------------------------------------------
Basic Loss Diluted Loss
In thousands, except per share Revenues Net Loss per Share per Share
data -------- ---------- ---------- ------------
As Reported.................... $60,787 $(20,064) $(0.53) $(0.53)
Pro-forma...................... $47,503 $ (916) $(0.02) $(0.02)
---------------------------------------------
Year Ended December 31, 1998
---------------------------------------------
Basic Loss Diluted Loss
In thousands, except per share Revenues Net Loss per Share per Share
data -------- ---------- ---------- ------------
As Reported.................... $73,715 $ (2,363) $(0.06) $(0.06)
Pro-forma...................... $25,520 $(21,511) $(0.57) $(0.57)
---------------------------------------------
Year Ended December 31, 1997
---------------------------------------------
Basic Loss Diluted Loss
In thousands, except per share Revenues Net Loss per Share per Share
data -------- ---------- ---------- ------------
As Reported.................... $47,429 $(38,667) $(1.07) $(1.07)
Pro-forma...................... $14,459 $(38,667) $(1.07) $(1.07)
Legal Matters
Latham & Watkins, San Francisco, California, will provide us with opinions as
to certain legal matters in connection with the common stock we are offering.
Experts
The consolidated financial statements incorporated in this prospectus by
reference to the Annual Report on Form 10-K for the year ended December 31,
1999, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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