ITEM 1. BUSINESS
GENERAL
SICOR Inc. (formerly Gensia Sicor Inc.) ("SICOR" or the "Company") is a vertically integrated pharmaceutical company with expertise in the development, manufacture and marketing of injectable pharmaceuticals and the production of specialty bulk drug substances utilizing synthesis or fermentation. On February 28, 1997, the Company completed the acquisition of Rakepoll Holding B.V. ("Rakepoll Holding") from Rakepoll Finance N.V. ("Rakepoll Finance"). Rakepoll Holding is the parent company of three specialty pharmaceutical businesses: SICOR-Societa Italiana Corticosteroidi S.p.A. ("Sicor S.p.A.") of Milan, Italy, and two companies located in Mexico: Lemery, S.A. de C.V. ("Lemery") and Sicor de Mexico, S.A. de C.V. ("Sicor de Mexico"). In addition, in December 1997, Sicor S.p.A. purchased a 50% equity interest in Diaspa S.p.A. ("Diaspa"), an Italian company engaged in the manufacture of certain raw materials used in Sicor S.p.A.'s business. In June 1998, Sicor S.p.A. purchased the remaining 50% of Diaspa. During the second quarter of 1999, the Company divested a 46% interest in Metabasis Therapeutics, Inc. ("Metabasis"), a proprietary research and development subsidiary. The Company is headquartered in Irvine, California.
Gensia Sicor Pharmaceuticals, Inc. ("Gensia Sicor Pharmaceuticals") is a wholly-owned subsidiary of the Company located in Irvine, California. Prior to the acquisition of Rakepoll Holding, Gensia Sicor Pharmaceuticals was the Company's primary operating unit. Gensia Sicor Pharmaceuticals' business emphasis has been on the development, manufacture and marketing of oncology, anesthesiology and other key multisource injectable pharmaceuticals for the North American market. Gensia Sicor Pharmaceuticals is currently engaged in discussions with other pharmaceutical companies in an effort to expand its product offerings to both domestic and foreign markets. In addition, Gensia Sicor Pharmaceuticals provides contract manufacturing support and services to a number of pharmaceutical and biotechnology companies.
Sicor S.p.A. and Sicor de Mexico produce specialty bulk drug substances. Lemery manufactures oral and injectable finished multisource drug products. The specialty drug substances produced by Sicor S.p.A. and Sicor de Mexico are primarily used in oral, parenteral, topical and inhalation therapy products. Almost all of these products belong to one of four categories: (i) immunosuppression, (ii) anticancer agents, (iii) steroids or (iv) non-depolarizing muscle relaxants used in anesthesia. The principal markets for Sicor S.p.A.'s and Sicor de Mexico's specialty bulk drug substances are the U.S., Canada, the European Union ("EU") and Japan. The finished multisource drug products manufactured by Lemery are sold primarily to the national health program in Mexico and to certain countries in Central and South America, North Africa, the Middle East and Eastern Europe.
Genchem Pharma Ltd. ("Genchem Pharma") is a wholly-owned subsidiary of the Company created in June 1997 to acquire and develop technology and to sell bulk products manufactured by Sicor S.p.A. and Sicor de Mexico. In March 1998, Genchem Pharma acquired a research and development branch ("Genchem Vacallo") in Vacallo, Switzerland. Genchem Vacallo conducts research and development with respect to specialty bulk drug substances.
Gensia Sicor de Mexico, S.A. de C.V. is a wholly-owned subsidiary of Rakepoll Holding with approximately 20 employees located in Mexico that provides administrative services for Lemery and Sicor de Mexico. This service company enables Lemery and Sicor de Mexico to utilize common administrative services, thus avoiding duplication of resources.
In 1998, Sicor S.p.A. acquired a 50% interest in Zetesis S.p.A. ("Zetesis") of Milan, Italy from private investors. Zetesis holds the patents relating to UK101, an oncological product under development.
UNITED STATES PHARMACEUTICAL OPERATIONS
GENSIA SICOR PHARMACEUTICALS
Gensia Sicor Pharmaceuticals has broad capabilities in the formulation, development, marketing and manufacturing of multisource injectable pharmaceuticals. Since 1991, Gensia Sicor Pharmaceuticals has built a sales and marketing infrastructure which covers the major hospital and non-hospital markets in the United States, focusing its sales calls on hospital pharmacies and distributors servicing alternate site providers such as oncology clinics and outpatient surgery centers. As collective purchasing agreements have become increasingly important to healthcare providers as a means to control costs, Gensia Sicor Pharmaceuticals' marketing group has established relationships with hospital group purchasing organizations, managed care groups and other large healthcare purchasing organizations.
One area of particular focus for the Company is the development of products for the worldwide oncology market. In support of this strategy, Gensia Sicor Pharmaceuticals has built an oncology manufacturing facility at Irvine, California. The United States Food and Drug Administration ("FDA") has recently approved several new Abbreviated New Drug Applications ("ANDAs") for new oncology products, and manufacturing site transfers for existing oncology products, which will be manufactured in this facility. This facility is also being used for contract manufacturing opportunities that require the sophisticated and specialized compounding and filling capability incorporated into the facility. Gensia Sicor Pharmaceuticals markets two oncology products, doxorubicin and etoposide, in the United States that are manufactured in polymer vials by Delta West Pty. Limited, a wholly-owned subsidiary of Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") under FDA approved ANDAs owned by the Company.
Gensia Sicor Pharmaceuticals is developing additional oncology products for sale through distributors and marketing partners. Gensia Sicor Pharmaceuticals does not intend to establish a sales force outside of North America. The Company intends to have Sicor S.p.A. supply the bulk drug substances required for a number of the oncology products under development. The Company believes that through its vertical integration of bulk drug substances and finished product manufacturing, it can be one of the lowest cost producers in the multisource oncology market.
In addition, product development is continuing for multisource injectable drugs in anesthesiology and critical care as well as other selected areas. Gensia Sicor Pharmaceuticals has fifteen ANDAs pending with the FDA and has approximately 44 multisource products under development. The Company believes that this investment in product development may position Gensia Sicor Pharmaceuticals for growth over the next five years when a number of major injectable drugs will lose patent protection. There is no assurance that such growth will occur.
Gensia Sicor Pharmaceuticals' major injectable pharmaceutical products include alprostadil, atracurium, bumetanide, dacarbazine, desmopressin, diltiazem, dipyridamole, doxorubicin, etoposide, fluphenazine, haloperidol, hydralazine, leucovorin calcium, metoclopromide, propofol, and tobramycin. Gensia Sicor Pharmaceuticals offers approximately 40 multisource pharmaceuticals in its product line.
Gensia Sicor Pharmaceuticals also operates a contract manufacturing business focused on the manufacture of sterile injectable products for biotechnology and pharmaceutical companies. The Company offers a range of manufacturing services, including production of pilot and commercial quantities of bulk materials, formulation development, and commercial scale manufacturing of finished dosage forms. The contract manufacturing business has experienced growth since 1995, and the Company believes additional growth may be attained by expanding its collaborations with biotechnology and pharmaceutical companies. There is no assurance that such growth will be sustained.
Gensia Sicor Pharmaceuticals entered into a Sales and Distribution agreement with Abbott Laboratories ("Abbott") in January 1999, under which the two companies formed a strategic alliance for marketing and distribution of oncology products in the United States. This seven-year collaboration currently includes ten of the Company's oncology products (including doxorubicin and leucovorin calcium) and will expand in the future to include certain of Gensia Sicor Pharmaceuticals' oncology products under development. Under the agreement, Gensia Sicor Pharmaceuticals develops and manufactures oncology products, and Abbott promotes and sells them to hospitals and clinics throughout the United States. Abbott has a well established market presence with hospitals and clinics, and had previously co-marketed oncology products with Pharmacia & Upjohn through November 1998. Gensia Sicor Pharmaceuticals' oncology product sales during 1999 were approximately $23.5 million.
In January 1999, Gensia Sicor Pharmaceuticals received approval from the FDA for propofol injectable emulsion, an intravenous sedative hypnotic agent used for the induction and maintenance of anesthesia or sedation. Pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman/Hatch Act"), the Company was granted 180 days of marketing exclusivity in which to sell propofol without other generic competition. The 180-day exclusivity period commenced in the second quarter of 1999 with the commercial launch of propofol and expired on October 15, 1999. The propofol product manufactured by Gensia Sicor Pharmaceuticals currently remains as the only generic propofol product on the U.S. market, although there can be no assurance that other generic competitors will not enter the U.S. market at any time. The Company's propofol product is being sold in the U.S. through Baxter Pharmaceutical Products, Inc. ("Baxter"), which is the Company's marketing partner for a variety of products in the U.S. The U.S. propofol market in 1999 was estimated by the IMS market research firm to have sales of $363.7 million. The branded propofol product, DIPRIVAN-Registered Trademark- Injectable Emulsion with disodium edetate, is marketed by AstraZeneca PLC (formerly Zeneca Limited) ("AstraZeneca"). Propofol has been a key contributor to the Company's profitability in 1999. As of the fourth quarter of 1999, it was estimated that the Company's marketing partner, Baxter, had captured 30% of the U.S. market for propofol, according to IMS, a market research firm. In February 1999, AstraZeneca filed suit in the U.S. District Court for the District of Maryland against the FDA, alleging that the FDA improperly approved Gensia Sicor Pharmaceuticals' ANDA for propofol injectable emulsion. Gensia Sicor Pharmaceuticals has intervened in the lawsuit to protect its interest and support the FDA in its defense of this lawsuit. The court denied AstraZeneca's motion for a preliminary injunction on March 26, 1999, and on August 11, 1999, granted Gensia Sicor Pharmaceuticals' and the FDA's motion for summary judgment and entered judgment in favor of the defendants. AstraZeneca has appealed this judgment to the United States Court of Appeals for the Fourth Circuit. Should AstraZeneca ultimately succeed on appeal in its litigation against the Company and the FDA, it could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In April 1999, Gensia Sicor Pharmaceuticals filed a lawsuit in the Superior Court of California for Orange County against American Pharmaceutical Partners ("APP") for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of confidence, unfair competition and declaratory relief. The suit alleged that APP breached a distributorship agreement for some of Gensia Sicor Pharmaceuticals' products by, among other things, acquiring and operating a business which competes with Gensia Sicor Pharmaceuticals with respect to some of the same products. In December 1999, APP filed a cross-complaint against Gensia Sicor Pharmaceuticals asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, unjust enrichment, accounting and declaratory relief. In March 2000, the Company and APP settled the litigation. Management believes the settlement will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
FOREIGN PHARMACEUTICAL OPERATIONS
In February 1997, the Company acquired three specialty pharmaceutical companies comprised of a
company located in Italy, Sicor S.p.A., and two companies located in Mexico, Sicor de Mexico and Lemery. Sicor S.p.A. and Sicor de Mexico manufacture specialty bulk drug substances. Lemery produces oral and injectable finished multisource drug products (also called finished dosage forms) utilizing specialty bulk drug substances produced by Sicor S.p.A. and Sicor de Mexico or purchased from third parties. In December 1997, Sicor S.p.A. purchased a 50% equity interest in Diaspa, a private Italian pharmaceutical company specializing in bulk fermentation products. In June 1998, Sicor S.p.A. purchased the remaining 50% of Diaspa.
The specialty bulk drug substances manufactured by Sicor S.p.A. and Sicor de Mexico are used in oral, parenteral, topical administration, or inhalation therapy, and almost all belong to one of four categories: (i) immunosuppression, (ii) oncolytic agents, (iii) steroids or (iv) non-depolarizing muscle relaxants used in anesthesia. The steroids are either progestins used in contraceptives or corticosteroids used in a variety of anti-inflammatory preparations, including preparations used in the treatment of asthma, allergies and certain dermatological conditions. Certain progestins also have oncolytic applications. The muscle relaxants are used in conjunction with anesthetics during surgery.
The principal markets for these specialty bulk drug substances are the United States, Canada, the EU and Japan. The finished multisource drug products manufactured by Lemery are sold primarily to the government public hospital program in Mexico and exported to countries in Central and South America, North Africa, the Middle East and Eastern Europe.
ONCOLYTIC AGENTS
Due to a worldwide increase in the incidence of cancer, related in part to the general aging of the world's population, and to the introduction of new regimens for the treatment of cancer, the demand for oncolytic agents continues to increase. Sicor S.p.A. and Sicor de Mexico offer a wide range of oncolytic specialty bulk drug substances and Lemery offers finished dosage forms. The oncolytic agents produced by Sicor S.p.A. are etoposide, the anti-cancer antibiotics bleomycin, mitomycin, daunorubicin, epirubicin and idarubicin, and the progestins medroxyprogesterone acetate and megestrol acetate. Lemery manufactures various oncolytic agents in finished dosage form, including carboplatin, epirubicin, etoposide, cisplatin, doxorubicin, bleomycin, paclitaxel and vincristine.
Sicor de Mexico produces two progestins, megestrol acetate and medroxyprogesterone acetate, which may be used in treating wasting syndrome in terminally ill AIDS patients, in high dosages to treat certain hormone dependent malignancies, such as breast cancer and in contraceptives. The principal markets for these compounds include the U.S. and Far East. Sicor de Mexico also produces the progestins cyproterone acetate, which is generally used in the treatment of prostate cancer, although it may also be used as a component in contraceptives, and chlormadinone acetate, which is administered orally for the treatment of prostate cancer and benign prostate hypertrophy. Sicor de Mexico also produces deflazacort, a steroid with oral anti-inflammatory activity. The principal markets for these drug substances are the EU, Brazil, Canada, Argentina, the Middle East and Japan.
Sicor de Mexico also produces oncolytic agents such as cisplatin (used in the treatment of testicular, ovarian and bladder cancers), carboplatin (used in the treatment of advanced ovarian cancer), and mitoxantrone (used in combination therapy for the treatment of adult leukemias).
STEROIDS
The steroids manufactured by Sicor S.p.A. and Sicor de Mexico are either progestins or corticosteroids, used in a variety of anti-inflammatory preparations for the treatment of asthma, allergies and certain dermatological conditions. Sicor S.p.A. and Sicor de Mexico together produce five such progestins: medroxyprogesterone acetate, megestrol acetate, cyproterone acetate, chlormadinone acetate, and gestodene.
Medroxyprogesterone acetate is principally used as component of sustained release contraceptives. The principal markets for this steroid are in Indonesia, the Philippines and Thailand. In addition, megestrol acetate, chlormadinone acetate, cyproterone acetate and medroxyprogesterone acetate have certain oncolytic applications.
Gestodene is a highly active third generation progestin of which Sicor S.p.A. has only produced laboratory quantities to date. The compound is principally used in contraceptives in more advanced markets such as the United States and the EU. Its activity allows the production of dosage forms with very low concentrations of such compounds.
Sicor S.p.A. and Sicor de Mexico manufacture corticosteroid products with respect to which they have either developed a proprietary production technology, including seven different process patents, or enjoy some other market advantage. Sicor S.p.A. and Sicor de Mexico manufacture over 50 corticosteroids.
Ongoing research to increase the selective activity and reduce the long-term toxicity of various corticosteroid compounds has produced a number of corticosteroid products which are now coming off patent. These new products, together with a growing market for such products in developing countries, have enabled Sicor S.p.A. and Sicor de Mexico to consistently expand their production of these compounds for several years.
The highest growth rate of corticosteroid use is in the management of obstructive airway diseases, and corticosteroids are one of the preferred prophylactic treatments for asthma in the U.S. This, together with the expiration of certain patents, has led to an increase in the demand for two principal corticosteroids in this field: beclomethasone dipropionate and budesonide, both of which are produced by Sicor S.p.A. and Sicor de Mexico.
OTHER DRUGS
In addition to the oncolytic agents and steroid products discussed above, Sicor S.p.A. also produces as bulk drug substances the muscle relaxants atracurium besylate, pancuronium bromide and vecuronium bromide, the immunosuppressant drug cyclosporine and the prodrug dexrazoxane.
Prodrugs become effective only after they are partially metabolized by the body. Dexrazoxane metabolites trap the iron ions involved in the process which leads to myocardial damage caused by anthracycline oncolytic agents such as doxorubicin. Administration of dexrazoxane with such oncolytic agents protects tissues of the heart and allows for higher dosages of the oncolytic agent. Sicor S.p.A. manufactures dexrazoxane according to a proprietary process covered by process patents filed in many countries. Sicor S.p.A. developed dexrazoxane with Chiron BV, including performing clinical trials, developing dosage form manufacturing, marketing and sales.
FUTURE DEVELOPMENTS
Sicor S.p.A. has obtained an exclusive license for a new oncolytic product ("UK 101") from Zetesis. In 1998, Sicor S.p.A. acquired a 50% interest in Zetesis. UK 101 is a protein antigen obtained from goat liver. Antigens trigger an immune response designed to destroy such antigens. Antibodies attach themselves to the antigen marking it for elimination by the immune system. The antibodies which attack UK 101 also attach themselves to the membrane of certain cancer cells. It is hoped that cancer cells so marked may then be disposed of by the immune system. The mechanics of this process are now the subject of further study by university researchers in Italy. A Phase I study with women who have advanced breast cancer was completed in Italy which demonstrated UK101 to be safe and well tolerated.
UK114 is one of the major components of UK101 and is thought to be responsible for most of its anti-cancer activity. Pre-clinical studies and toxicology studies on UK114 are currently under way.
Sicor S.p.A. is also currently negotiating with a number of pharmaceutical companies to develop new proprietary pharmaceutical products. If these products are successfully developed, Sicor S.p.A. expects to have long term supply rights for the bulk active ingredients used in these products.
Lemery is planning to invest in facilities and infra-structure to develop biotechnology products, such as interferon and human growth hormones. Lemery plans to begin manufacturing furnished dosage forms of biotechnology products in Mexico starting in 2001 using bulk drug substance. Sales will be targeted to Lemery's existing international customer base (Central and South America, North Africa, the Middle East and Eastern Europe), and ultimately to Mexico's government public hospital program.
METABASIS THERAPEUTICS, INC.
Metabasis conducts basic pharmaceutical research in premises subleased from the Company at its San Diego location. In December 1997, Sankyo Co. Ltd. ("Sankyo") made a $7.25 million equity investment in Metabasis for approximately an 8% interest in Metabasis. As the Company's strategic direction did not include a significant commitment to basic research, the Company divested a 46% interest in Metabasis during the second quarter of 1999. Following this transaction, the Company retains a 46% equity interest in Metabasis and will receive royalty payments if technologies currently owned by Metabasis are licensed or if products are developed and sold using those technologies. Subsequently, due to the uncertain value of the remaining interest, the Company elected to write off $1.8 million related to its remaining investment in Metabasis. Starting in the second quarter of 1999, investment in Metabasis was accounted for using the equity method as the Company no longer had control of Metabasis.
PATENTS, TRADEMARKS AND TRADE SECRETS
SICOR's policy is to protect its technology by, among other things, filing patent applications for technology which it considers important to the development of its business. SICOR intends to file additional patent applications, when appropriate, relating to improvements in its technology and other specific products that it develops. SICOR also relies on trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position.
Competitors may have filed applications for, or may have been issued, patents or may obtain additional patents and proprietary rights relating to, products or processes competitive with those of SICOR. Accordingly, there can be no assurance that SICOR's patent applications will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology; nor can there be any assurance that any patents issued to SICOR will not be infringed or circumvented by others, or that others will not obtain patents that SICOR would need to license or circumvent. There can be no assurance that licenses that might be required for SICOR's processes or products would be available on reasonable terms. If SICOR does not obtain such licenses, product introductions could be delayed or foreclosed. In addition, there can be no assurance that SICOR's patents, if issued, would be held valid by a court. Litigation to defend against or assert claims of infringement or otherwise related to proprietary rights could result in substantial costs to SICOR.
SICOR also relies upon unpatented trade secrets, and no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to SICOR's trade secrets or disclose such technology. There can be no assurance that SICOR can meaningfully protect its rights to its unpatented trade secrets.
COMPETITION
Significant competition exists in the multisource injectable drug business from other multisource drug companies, health care companies and proprietary pharmaceutical companies. The major competitors in the multisource injectable drug industry include Abbott Laboratories, F.H. Faulding & Co. Ltd., American Regent (a subsidiary of Luitpold Inc.), Bedford Laboratories (a division of Boerhinger Ingleheim Corp.), Elkins-Sinn (a division of American Home Products Corp.), American Pharmaceutical Products, Schein Pharmaceutical, Inc., Pharmacia & Upjohn, Inc., Bristol-Myers Squibb Co., and AstraZeneca. Many of these companies have been in business for a longer period of time, have a greater number of products on the market and have substantially greater resources than SICOR.
The various competitive factors affecting the marketing of multisource injectable pharmaceutical products are price, quality, timing (the ability to produce generic versions of brand name drugs promptly after the patent protection for the brand name drug expires), product cost, maintenance of sufficient inventories for timely deliveries, breadth of product line, reputation, distribution capabilities and customer service.
SICOR believes that price and quality are the most significant competitive factors in the multisource injectable drug industry as the number of manufacturers of a particular multisource injectable product increases. As competition from other manufacturers intensifies, selling prices typically decline. Accordingly, Gensia Sicor Pharmaceuticals' profitability will depend in part on its ability to develop and introduce appropriate new products to the market in a timely manner, to obtain raw materials at competitive prices and to continue to improve the efficiency of its production capabilities. Gensia Sicor Pharmaceuticals will also compete with manufacturers of off-patent injectable brand name products, which may reduce prices in order to keep their brand name products competitive with equivalent multisource products.
GOVERNMENT REGULATION
Under the Waxman/Hatch Act, the FDA approves certain drugs under an abbreviated procedure which waives submission of the extensive animal and human studies of safety and effectiveness normally required to be in an NDA. Instead, the manufacturer need only to provide an ANDA containing labeling, information on manufacturing procedures and data establishing that the original "pioneer" product and the proposed "generic" product are equivalent when administered to humans. Prior to November 1997, antibiotic drugs were classified separately for purposes of FDA approval, although the approval procedures for such drugs conformed substantially to the NDA/ANDA procedures.
As compared to an NDA, an ANDA typically involves reduced research and development costs. However, there can be no assurance that any such applications will be approved. Furthermore, the suppliers of raw materials also must be approved by the FDA. Delays in the review process or failure to obtain approval of certain of these ANDAs or suppliers could have a material adverse effect on the financial condition of SICOR.
The President signed into law the Uruguay Round Agreements Act ("URAA") in December 1994. URAA, which took effect on June 8, 1995, implemented the General Agreements on Tariffs and Trade ("GATT"). One change in U.S. law required by GATT is the amendment of patent law to permit owners to choose a patent term of 20 years from the date of filing the application or 17 years from the date of issuance. URAA extended the requirement by allowing the application of this provision to all patents in force on June 8, 1995. Congress recognized the potential harm in this requirement and provided that a potential competitor who had already made a "substantial investment" in a competing product could make, use and sell its product after the expiration of the original patent period provided that they pay the patentee "equitable remuneration" through the extended patent period. However, the FDA has taken the position that it cannot approve an ANDA, which certifies the date of patent expiration, until the expiration of the extended patent period. The extension
of patent protection may delay the launch of future products by the Company.
Prior to receiving FDA approval, the Company may face more lawsuits relating to intellectual property rights. While these suits, instituted by branded pharmaceutical companies, rarely result in findings of infringement or monetary settlements, they significantly delay the FDA approval process. The Company expects the branded pharmaceutical companies to continue such tactics since it is a very cost effective way to delay generic competition and the subsequent cost savings for the consumer. It is impossible for the Company to predict the extent to which its operations will be affected under the regulations discussed above or any new regulations which may be adopted by regulatory agencies.
In connection with its activities outside the United States, SICOR is also subject to regulatory requirements governing the testing, approval, manufacture, labeling, marketing and sale of pharmaceutical, intravenous and diagnostic products, which requirements vary from country to country. Whether or not FDA approval has been obtained for a product, approval of the product by comparable regulatory authorities of foreign countries must be obtained prior to marketing the product in those countries. The approval process may be more or less rigorous from country to country, and the time required for approval may be longer or shorter than that required in the United States. No assurance can be given that clinical studies conducted outside of any country will be accepted by such country, and the approval of any pharmaceutical, intravenous or diagnostic product in one country does not assure that such product will be approved in another country.
HEALTH CARE REFORM
The federal and state governments in the United States, as well as many foreign governments, including the United Kingdom, are exploring ways to reduce medical care costs through health care reform. This effort has resulted in, among other things, government policies that encourage the use of generic drugs rather than brand name drugs to reduce drug reimbursement costs. Virtually every state in the United States has a generic substitution law that permits the dispensing pharmacist to substitute a generic drug for the prescribed brand name product. The debate to reform the United States' health care system is expected to be protracted and intense. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, SICOR cannot predict what impact any reform proposal ultimately adopted may have on its businesses.
MANUFACTURING
The manufacturing facility at Gensia Sicor Pharmaceuticals provides SICOR with the capability to formulate, fill, label and package final dosage forms of injectable drug products. The Gensia Sicor Pharmaceuticals facility has a broad filling capability, including the ability to terminally sterilize or aseptically fill syringes and single and multiple dose vials. The facility also has the capability to lyophilize (freeze dry) products.
Gensia Sicor Pharmaceuticals completed an oncology manufacturing facility and additional laboratories for the development of oncology products in a building adjacent to Gensia Sicor Pharmaceuticals' existing manufacturing facility in Irvine. The new oncology facility includes the capability to produce oncology products in lyophilized or liquid forms and in glass or polymer vials. The new facility underwent FDA Good Manufacturing Practices ("GMP") inspection during 1998, and is being used to manufacture oncolytics upon ANDA or ANDA supplemental approval. The initial approval for vincristine and an alternative manufacturing site approval for etoposide was received in 1999. Flourouracil and daunorubicin were approved in the first quarter of 2000. Additionally, this facility started contract manufacturing products for other companies in January 2000.
The principal raw materials to be used in manufacturing Gensia Sicor Pharmaceuticals' products are
active drug ingredients (such as those produced by Sicor S.p.A.) and inactive pharmaceutical chemicals. The FDA approval process requires manufacturers of pharmaceutical products to identify their suppliers of active ingredient raw materials. If raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required, which could result in manufacturing delays. Development, approval and continued commercialization of Gensia Sicor Pharmaceuticals' products are, therefore, dependent upon Gensia Sicor Pharmaceuticals' ability to procure active ingredient raw materials from suppliers who are, and who remain, FDA approved. Sicor S.p.A. has filed over 37 Drug Master Files with the FDA and is a qualified source for several of Gensia Sicor Pharmaceuticals' current products as well as the planned supplier for many of products in development. Termination of qualified supply arrangements could have a material adverse impact on the sale of Gensia Sicor Pharmaceuticals' products as Gensia Sicor Pharmaceuticals currently utilizes single sources for certain raw materials and packaging components.
Sicor S.p.A.'s production is carried out at its two manufacturing sites in Italy. The principal manufacturing facility is located near Milan and is regularly inspected and approved by the FDA. It is a major producer of oncolytic agents, steroids and certain other products in bulk drug substance form. These products are manufactured through fermentation or chemical synthesis processes. This facility supplies specialty bulk drug substances to Gensia Sicor Pharmaceuticals and Lemery and to other drug manufacturers around the world.
Sicor S.p.A.'s second manufacturing facility is located on the outskirts of Turin. It is currently undergoing a significant expansion of its facilities to produce anthracycline products for the U.S. and European markets. The Company had plans to purify cyclosporine at this location; however, these plans have been deferred due to lower expectations of cyclosporine sales.
The acquisition of Diaspa was completed to significantly increase the Company's capacity for the production of cyclosporine bulk drug substance to meet expected demand from the long-term cyclosporine supply agreement with SangStat Medical Corporation ("SangStat"). In November 1998, the Company received notification from SangStat that it has been granted marketing clearance by the FDA for SangCya-TM-, SangStat's patented formulation of liquid cyclosporine. However, demand for SangStat's liquid cyclosporine has not met management's expectations. In addition to cyclosporine, Diaspa is used for the production of bulk fermentation products for SICOR and other pharmaceutical companies under existing and future supply contracts.
Lemery is located in Mexico City and produces drugs in finished dosage form, of which injectable oncolytic agents are an important product line. These products are sold in Mexico and exported to certain countries in Central and South America, North America, Middle East and Eastern Europe.
Sicor de Mexico is located near Toluca, on the outskirts of Mexico City, and produces principally steroid products for export to various countries. Sicor de Mexico also recently completed construction of a facility to produce oncolytic agents, which commenced production in 1997. Production from this new facility is being used by Lemery to replace certain existing third party suppliers. The oncology facility is GMP certified by the FDA and produces megestrol acetate for export to a major U.S. pharmaceutical company.
Each of SICOR's manufacturing sites is maintained in accordance with applicable regulatory agency regulations. The Company's manufacturing facilities are considered key strategic assets of the Company. Management believes that the Company has adequate manufacturing capacity to meet the current and planned sales demand for its injectable products, once the substantially completed Irvine oncology facility becomes operational. The Company's manufacturing capacity for specialty bulk drug substances is also expected to be adequate to meet current and planned demand.
RISK FACTORS THAT MAY AFFECT RESULTS
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that its operating cash flows, combined with its current cash and cash equivalents on hand at December 31, 1999 of $47.5 million, and commitments from third parties, will enable it to maintain its current and planned operations. The Company will continue to evaluate the need for additional capital and, if appropriate, pursue equity, debt and lease financing, or a combination of these, for its capital needs. Such financings may not be available on acceptable terms, or at all. If the Company is unable to obtain additional financing, the Company may have to reduce its capital expenditures, spending for the development of new products, and its workforce. Such reductions would have a material adverse effect on the Company. In addition, at December 31, 1999, approximately $107 million of the Company's $386 million in assets consisted of either intangibles or goodwill. The Company may not be able to realize any value from these intangible assets. The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
LOSS HISTORY; UNCERTAINTY OF FUTURE PROFITABILITY
Until 1999, the Company was unprofitable on an annual basis since its inception in 1986. As of December 31, 1999, the Company had an accumulated deficit of approximately $348.3 million. The Company may not be profitable on a quarterly or annual basis in the future. The Company believes that future operating results will be subject to quarterly and annual fluctuations due to a variety of factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays or inefficiencies, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and uncertainty with respect to patent matters.
COMPETITION
SICOR operates in a rapidly evolving business environment. Competition from large pharmaceutical companies, biotechnology companies, and other companies is intense. Many of these companies have substantially greater resources and experience in developing, manufacturing and marketing pharmaceutical products than SICOR. There can be no assurance that competitors will not succeed in developing technologies and products that are more effective or that would render the technology and products of SICOR obsolete or noncompetitive.
A significant portion of SICOR's business is dependent on winning bids from the Mexican government public hospital program. The bidding for this program is highly competitive with numerous other pharmaceutical manufacturers participating, many of which are established companies with greater financial and other resources than SICOR. The Company may not be able to continue to compete effectively
with respect to this program.
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS
The testing, manufacture and marketing of SICOR's products are subject to regulation by numerous federal, state and local governmental authorities in the United States, and by similar agencies in other countries in which SICOR develops, manufactures and markets drugs. SICOR must receive approval for each of its drugs from the applicable regulatory agencies before it may be marketed as a drug in a particular country. The regulatory process can take many years and may require SICOR to expend substantial resources. In addition, SICOR may encounter delays or rejections based on changes in regulatory agency policies during the period in which a potential drug is being developed and/or the period required for review of any application for regulatory agency approval. Delays in obtaining regulatory agency approvals could negatively affect the marketing of any potential drug, result in the imposition of costly procedures on SICOR's activities, and negatively affect SICOR's ability to receive royalties. SICOR may not obtain regulatory approvals for potential drugs.
Moreover, if SICOR obtains regulatory agency approval for a drug, such approval may be limited regarding the indicated uses for which the drug may be marketed and this would limit SICOR's potential market for the drug. Furthermore, the marketing and manufacture of drug products remain subject to extensive regulatory requirements. The discovery of previously unknown problems with any of SICOR's drugs could result in restrictions on such drug including withdrawal of the drug from the market. If SICOR fails to comply with regulatory requirements, it could be fined, its regulatory approvals suspended, its operations restricted, and it could be involved in criminal prosecution. In addition, regulatory agency approval of pricing is required in many countries and may be required for the marketing in such countries of any drug SICOR develops.
DEPENDENCE ON KEY PERSONNEL
The success of SICOR depends in large part upon its ability to attract and retain qualified scientific, manufacturing, marketing and management personnel. SICOR faces competition for such personnel from other companies, academic institutions, government entities and other organizations. In addition, the success of SICOR will be dependent upon key personnel, the loss of which may have a material adverse effect on the Company's business.
UNCERTAINTY OF ABILITY TO OPERATE WITHOUT INFRINGING ON PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS
The success of SICOR will depend, in part, on its ability to maintain trade secret protection and operate without infringing on the proprietary rights of third parties. The patents others have, or may acquire, may have an adverse effect on the ability of SICOR to commercialize its products. Litigation, which could result in substantial costs to the Company, may be necessary to determine the scope and validity of the proprietary rights of third parties. If any of the Company's products are found to infringe upon the patents or other rights owned by third parties, SICOR may be subject to significant liabilities to third parties and may be required to obtain licenses to patents or other proprietary rights of third parties which may not be available on acceptable terms. If SICOR does not obtain such licenses, product introductions could be delayed or foreclosed. SICOR may not have sufficient funds to obtain licenses that may be required in order to develop and commercialize its products, to contest patents obtained by third parties, or to defend against suits brought by third parties.
SICOR also relies on protecting its proprietary technology in part through confidentiality agreements with its corporate collaborators, employees, consultants and certain contractors. These agreements may be breached and SICOR may not have adequate remedies of any breach. In addition, SICOR's trade secrets may
otherwise become known or independently discovered by its competitors.
POTENTIAL INABILITY TO OBTAIN RAW MATERIALS OR MANUFACTURE PRODUCTS
SICOR depends on third party manufacturers for bulk raw materials for many of its products. These raw materials are generally available from a limited number of sources, and certain raw materials are available only from foreign sources. In addition, Gensia Sicor Pharmaceuticals utilizes sole sources of supply for certain raw materials used in the manufacture of its products and certain packaging components. Any disruption in one or more of these supply sources could have a material adverse effect on SICOR.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED MATTERS
The levels of revenues and profitability of pharmaceutical companies will be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control. Domestically and internationally, there have been, and SICOR expects that there will continue to be, a number of legislative proposals to implement government controls. While SICOR cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, or the effect such proposals or reforms may have on its businesses, the announcement of such proposals or reforms could have a material adverse effect on SICOR's ability to raise capital. Additionally, the adoption of such proposals or reforms could have a material adverse effect on SICOR's business, financial condition and profitability.
In addition, in both the United States and elsewhere, sales of prescription pharmaceuticals are dependent in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging the prices charged for medical products and services. The products of SICOR may not be considered cost effective and reimbursement to the consumer may not be available or may not be sufficient to allow SICOR to sell its products on a competitive basis. If purchasers or users of SICOR's products are not able to obtain adequate reimbursement for the cost of using SICOR's products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and whether adequate third party coverage will be available.
It has been reported that certain United States governmental agencies, including the Department of Justice and the Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers and used in the calculation of reimbursements under the Medicaid program administered jointly by the federal government and the states. The Company has supplied documents in connection with these investigations and has had preliminary discussions with representatives of the federal and state governments, but is unable to estimate at this time what effect, if any, these investigations will have on the Company's pricing policies or its financial statements. There can be no assurance that these investigations will not result in changes to the Company's pricing policies or other actions which might have a material adverse effect on the Company's financial position, results of operations or cash flows.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF PRODUCT LIABILITY INSURANCE
SICOR, as a manufacturer of finished drug products, faces an inherent exposure to product liability claims in the event that the use of any of its technology or products is alleged to have resulted in adverse effects. This exposure exists even with respect to those products that receive regulatory approval for commercial sale, as well as those undergoing clinical trials. While SICOR has taken and will continue to take what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure.
In addition, as a manufacturer of bulk drug substances, SICOR supplies other pharmaceutical companies with active ingredients, which are contained in finished products. The ability of SICOR to avoid significant product liability exposures depends in part upon its ability to negotiate appropriate commercial terms and conditions with its customers and its customers' manufacturing, quality control and quality assurance practices. SICOR may not be able to negotiate satisfactory terms and conditions with its customers. Although SICOR maintains insurance for product liability claims, which the Company believes is in line with the insurance coverage carried by other companies in its industry, the insurance coverage may not be sufficient. In addition, adequate insurance coverage might not continue to be available at acceptable costs, if at all, and product liability claims could adversely affect the business or financial condition of SICOR.
UNCERTAINTY REGARDING MEXICAN ECONOMIC FACTORS, GOVERNMENT POLICIES AND INFLATION
The Mexican government has exercised and continues to exercise significant influence over many aspects of the Mexican economy. Accordingly, Mexican government actions could have a significant effect on Lemery and Sicor de Mexico, and on market conditions and prices in Mexico. Approximately 50% of the finished multisource drug products manufactured by Lemery are sold to the Mexican government public hospital program. Sales to the Mexican government public hospital program may not continue in the future. In addition, although the Mexican government has paid Lemery on a timely basis, this payment pattern may not continue in the future. Further, as recently as 1995, Mexico experienced high double-digit inflation and it may experience similar high inflation in the future. Future actions by the Mexican government, or developments in the Mexican economy and changes in Mexico's political, social or economic situation may adversely affect the operations of Lemery and Sicor de Mexico.
RISKS RELATED TO INTERNATIONAL OPERATIONS
During 1998 and 1999, percentage of total product sales to customers outside of Canada, Western Europe, Japan and the United States was approximately 26% and 27%, respectively. Operations outside of Canada, Western Europe, Japan and the United States are subject in varying degrees to greater business risks such as war, civil disturbances, adverse governmental actions (which may disrupt or impede operations and markets, restrict the movement of funds, impose limitations on foreign exchange transactions or result in the expropriation of assets) and economic and governmental instability. SICOR may experience material adverse financial results with respect to its business in these markets if such events were to occur.
ENVIRONMENTAL MATTERS
SICOR's business involves the controlled storage, use and disposal of hazardous materials and biological hazardous materials. SICOR is subject to numerous environmental regulations in the jurisdictions in which it operates. Although SICOR believes that its safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation in each of its locations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, SICOR could be held liable for any damages that result, and such liability could exceed the Company's resources. SICOR's operations, business and assets may be substantially and detrimentally affected by current or future environmental laws or regulations. SICOR maintains liability insurance for some environmental risks which the Company's management believes to be appropriate and in accordance with industry practice. However, SICOR may incur liabilities beyond the limits or outside the coverage of its insurance and my not be able to maintain insurance on acceptable terms.
UNCERTAINTY OF OUTCOME OF LEGAL PROCEEDINGS
The Company is involved in various actions, claims, and legal proceedings arising from its business
operations. The ultimate outcome of these matters is uncertain and could have a material adverse effect on the Company's financial position, results of operations or cash flows. See Legal Proceedings.
CURRENCY FLUCTUATIONS
SICOR has significant operations in several countries, including the United States, Italy, Mexico and Switzerland. In addition, purchases and sales are made in a large number of other countries. As a result, its business is subject to the risk and uncertainties of foreign currency fluctuations. While SICOR has policies and strategies to minimize this risk, there can be no assurance that such policies and strategies will be effective in preventing significant negative financial adjustments in the future.
CONTROL BY PRINCIPAL STOCKHOLDER
Carlo Salvi, the Company's President, Chief Executive Officer and a director beneficially owns approximately 37% of the Company's Common Stock. In addition, pursuant to a shareholder's agreement, dated as of November 12, 1996, as amended (the "Shareholder's Agreement") Rakepoll Finance, an entity controlled by Mr. Salvi, is entitled to designate three of SICOR's directors, who in turn are entitled to designate (jointly with two executive officer directors of SICOR) five additional directors. The consent of the Rakepoll Finance designated directors is required for SICOR to take certain actions, such as a merger or sale of all or substantially all of the business or assets of SICOR and certain issuances of securities. As a result of his ownership of SICOR Common Stock, Mr. Salvi may be able to control substantially all matters requiring approval by the stockholders of SICOR, including the election of directors and the approval of mergers or other business combination transactions.
POSSIBLE VOLATILITY OF STOCK PRICE; DIVIDEND POLICY
The market price of the shares of SICOR Common Stock, like that of the common stock of many other pharmaceutical companies, has been and is likely to continue to be highly volatile. The market for securities of such companies has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market price of SICOR Common Stock could be subject to significant fluctuations in response to variations in SICOR's anticipated or actual operating results, sales of substantial amounts of SICOR Common Stock, other issuances of SICOR Common Stock pursuant to pre-existing obligations, announcements concerning SICOR or its competitors, including the results of testing, technological innovations or new commercial products or services, developments with SICOR's collaborators, developments in patent or other proprietary rights of SICOR or its competitors, including litigation, conditions in the pharmaceuticals industry, governmental regulation, health care legislation, public concern as to the safety of SICOR's products, changes in estimates of SICOR's performance by securities analysts, market conditions for pharmaceutical stocks in general, and other events or factors not within SICOR's control.
SICOR has never paid cash dividends on SICOR Common Stock. SICOR presently intends to retain earnings, if any, for the development of its businesses and does not anticipate paying any cash dividends on SICOR Common Stock in the foreseeable future. Unless full cumulative dividends are paid on SICOR's outstanding $3.75 Convertible Exchangeable Preferred Stock, $.01 par value ("Convertible Preferred Stock"), cash dividends may not be paid or declared and set aside for payment on SICOR Common Stock. At December 31, 1999, SICOR had approximately $7.5 million in undeclared cumulative preferred dividends on such Convertible Preferred Stock. If SICOR chooses not to declare dividends for six cumulative quarters, the holders of Convertible Preferred Stock, voting separately as a class, will be entitled to elect two additional directors until the dividend in arrears has been paid.
SUBORDINATION OF COMMON STOCK TO NOTES AND PREFERRED STOCK
SICOR's Common Stock is expressly subordinate to $20 million of 2.675% subordinated convertible notes due May 1, 2004, and to the series A preferred stock into which the notes are convertible, in the event of SICOR's liquidation, dissolution or winding up. SICOR's Common Stock is also subordinate to the approximately $80 million (plus accrued and unpaid dividends) liquidation preference of SICOR's outstanding $3.75 Convertible Exchangeable Preferred Stock. If SICOR was to cease operations and liquidate its assets, there may not be any remaining value available for distribution to the holders of common stock after providing for the above liquidation preferences.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
SICOR's Certificate of Incorporation and Bylaws include provisions that could discourage potential takeover attempts and make attempts by its stockholders to change management more difficult. The approval of 66-2/3% of SICOR's voting stock is required to approve certain transactions and to take certain stockholder actions, including the calling of a special meeting of stockholders and the amendment of any of the anti-takeover provisions contained in SICOR's Certificate of Incorporation. SICOR also has a stockholder rights plan, the effect of which may also deter or prevent takeovers. These rights will cause a substantial dilution to a person or group that attempts to acquire SICOR on terms not approved by the SICOR Board of Directors and may have the effect of deterring hostile takeover attempts.
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company as of March 15, 2000 are as follows:
Mr. Salvi has been a director of the Company since February 1997 and served as Executive Vice President of the Company from November 1997 to August 1998. He was named President and Chief Executive Officer of the Company in August 1998. Additionally, since February 1997 Mr. Salvi has served as a Chairman of the Board of Directors and President of Sicor S.p.A. Sicor S.p.A. is a wholly-owned subsidiary of Rakepoll Holding, which is owned by the Company. From September 1995 to February 1997, Mr. Salvi was a consultant to Alco Chemicals Ltd., Swiss Branch ("Alco") in Lugano, Switzerland, which acts as an agent and distributor of certain Sicor S.p.A. products. From 1986 to September 1995, he was General Manager of Alco.
Mr. Becker has been a director of the Company since June 1998 and was appointed Executive Vice President and Chief Operating Officer of the Company in June 1999. He retired as Vice President, Chemical Research and Development for Abbott Laboratories, a healthcare products and services company, in December 1997. Mr. Becker joined Abbott Laboratories in 1959. In January 1998, Mr. Becker formed Greenfield Chemicals Inc., an outsourcing and consulting company supporting the pharmaceutical industry.
Mr. Cannon joined the Company as Executive Vice President in February 1997. From August 1998 until June 1999, Mr. Cannon was President and Chief Operating Officer of the Company's wholly-owned subsidiary, Gensia Sicor Pharmaceuticals, Inc., and in June 1999 he was named Chief Scientific Officer of the Company. Prior to joining the Company, Mr. Cannon was a member of the Board of Directors of Sicor S.p.A. (where he worked from the company's beginning in 1983) and Director of Business Development of Alco Chemicals Ltd. in Lugano, Switzerland since 1986. From 1970 to 1982, Mr. Cannon worked at SIRS S.p.A., a manufacturer of bulk corticosteroids in Milan, Italy in a variety of technical positions.
Dr. Colla has been a director and the Company's Vice President, Italian Operations since March 1999. He has also been Managing Director of Sicor S.p.A. and a member of its Board of Directors since 1996, and
has served in various management capacities with Sicor S.p.A. since its founding in 1983. From 1983 to 1994, Dr. Colla also collaborated with the Elemond Group, a publishing company, as Strategic Operating Planning Coordinator, and prior to this period he was Director of Mergers and Acquisitions with Fides (now KPMG Peat Marwick LLP) from 1982 through 1983. Dr. Colla continues to serve as member of the Statutory Audit Board for several significant Italian companies. He is a Registered Statutory Auditor in Italy and graduated from Milan's Catholic University with a degree in Economics and Business Sciences.
Mr. Sayward has been a director of the Company since June 1998. He joined the Company in 1992 and was named Vice President, Finance, Chief Financial Officer and Treasurer in February 1997 and Executive Vice President in August 1998. Prior to that he was Division Vice President, Finance, Corporate Controller of the Company and Chief Financial Officer of Gensia Sicor Pharmaceuticals, Inc. From 1975 to 1992, Mr. Sayward was employed in a wide variety of financial and accounting positions at Baxter Healthcare Corporation, serving as Vice President of Finance and Business Development, I.V. Systems Division from 1988 to 1992. From 1986 to 1988, he was Vice President and Controller, Dade Diagnostics Division of Baxter. Mr. Sayward served in a number of financial management positions at Baxter and American Hospital Supply from 1975 to 1986. He received his master of management degree from the Northwestern Kellogg School of Management.
Mr. LeBlanc joined the Company as Vice President, Scientific Affairs, Gensia Sicor Pharmaceuticals in January 1996. He was appointed Senior Vice President, Corporate Scientific Affairs in June 1999. Prior to joining the Company, Mr. LeBlanc was Vice President, Quality Assurance/Quality Control at Fujisawa USA, Inc. from 1993 to 1996. From 1976 to 1993, he was employed in various management capacities in Quality Assurance/Quality Control for Lorex Pharmaceuticals, G.D. Searle & Co., Millipore Corporation, and Mallinckrodt, Inc. Prior to being employed in the pharmaceutical industry, Mr. LeBlanc was employed as a Microbiologist with the U.S. Food and Drug Administration from 1966 to 1976. He received his master of science degree from Georgia Institute of Technology.
Mr. Fach joined the Company as Assistant General Counsel in January 1992 and was named Secretary in January 1993. He was appointed Vice President and Senior Legal Counsel in July 1997. Prior to joining the Company Mr. Fach was legal counsel to Marrow-Tech Incorporated (now named Advanced Tissue Sciences, Inc.) from 1990 to 1992. From 1984 to 1990 he was General Counsel of IMED Corporation and from 1986 to 1990 he was Assistant General Counsel of its parent company, Fisher Scientific Group Inc. Mr. Fach received his juris doctor degree from Columbia University.
HUMAN RESOURCES
As of December 31, 1999, the Company employed a total of approximately 1300 individuals on a full-time basis. The Company employs approximately 390 individuals in Southern California.
Sicor S.p.A., Diaspa, Lemery, Sicor de Mexico and Gensia Sicor de Mexico employ approximately 930 individuals, of whom approximately 30% work in Italy and 70% in Mexico. As is customary in Italy and Mexico, most of these employees are represented by unions. Sicor S.p.A., Diaspa, Lemery, Sicor de Mexico and Gensia Sicor de Mexico have not experienced any significant labor disputes in recent years.
The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases a total of approximately 150,000 square feet of space in San Diego, California. Of this amount, approximately 146,000 square feet is
subleased to third-party tenants. These facilities include both laboratory and office space.
In December 1997, the Company moved its principal administrative offices from San Diego to Irvine, California where Gensia Sicor Pharmaceuticals is located.
Gensia Sicor Pharmaceuticals leases approximately 220,000 square feet of office, laboratory, warehouse and manufacturing space in Irvine, California. These facilities are leased under several lease agreements expiring in 2000 to 2006 with some of the leases including an option to extend an additional five and ten years.
Sicor S.p.A.'s production is carried out at its two manufacturing sites in Italy. The principal site is located on the outskirts of Milan and is regularly inspected and approved by the FDA. This production center covers approximately 1,200 square meters of a 14,438 square meter site. Sicor S.p.A.'s other production center is located in Santhia, on the outskirts of Turin, and covers approximately 6,200 square meters of a site encompassing more than 90,000 square meters. This site has been undergoing a significant expansion of its production facilities to become one of the Company's key manufacturing facilities of strategic bulk products. Sicor S.p.A. also leases approximately 200 square meters of office space in Milan.
All of Diaspa's operations are carried out at its site in Corana, which is approximately 50 km south of Milan. The plant and administrative offices cover approximately 7,000 square meters of a 33,000 square meter site. In December 1999, Diaspa entered into a sale-leaseback transaction covering certain assets including the plant and administrative offices, which are being leased back over a period of 9.5 years. See Note 14 to the financial statements.
Lemery owns a 10,403 square meter manufacturing/office site located in Mexico City. Sicor de Mexico owns a 22,037 square meter manufacturing/office site located near Toluca, on the outskirts of Mexico City.
Gensia Sicor de Mexico leases approximately 560 square meters of office space in Mexico City.
Genchem Vacallo leases approximately 870 square meters of office and laboratory space in Vacallo, Switzerland. The lease expires in 2006 with an option to cancel in 2001 and an option to renew for an additional five years in 2006.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, the Company was named as a defendant in a complaint filed by Protocol Systems, Inc. ("Protocol Systems"). The complaint alleged breach of a supply agreement (the "Supply Agreement"). In August 1999, the Company reached a settlement with Protocol Systems concerning the alleged breach of the Supply Agreement. The resolution of the matter did not result in an adjustment to the Company's consolidated financial position or results of operations in 1999 as an adequate provision was recorded in the fourth quarter of 1998.
In February 1999, a lawsuit was filed by AstraZeneca, Inc. in the U.S. District Court in Baltimore, Maryland against the FDA with regards to Gensia Sicor Pharmaceuticals' ANDA for propofol. In the suit, AstraZeneca alleged that the FDA improperly approved Gensia Sicor Pharmaceuticals' propofol product. The Company believes this lawsuit is without merit, and that it represents AstraZeneca's continued legal maneuvering to stop the FDA approval of generic propofol. Gensia Sicor Pharmaceuticals intervened in the lawsuit to protect its interest and support the FDA in its defense of this lawsuit. The court denied AstraZeneca's motion for a preliminary injunction on March 26, 1999, and on August 11, 1999, granted Gensia Sicor Pharmaceuticals' and the FDA's motion for summary judgment and entered judgment in favor of the defendants. AstraZeneca has appealed this judgment
to the United States Court of Appeals for the Fourth Circuit. Should AstraZeneca ultimately succeed on appeal in its litigation against the Company and the FDA, it could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In April 1999, Gensia Sicor Pharmaceuticals filed a lawsuit in the Superior Court of California for Orange County against APP for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of confidence, unfair competition and declaratory relief. The suit alleged that APP breached a distributorship agreement for some of Gensia Sicor Pharmaceuticals' products by, among other things, acquiring and operating a business which competes with Gensia Sicor Pharmaceuticals with respect to some of the same products. In December 1999, APP filed a cross-complaint against Gensia Sicor Pharmaceuticals asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, unjust enrichment, accounting and declaratory relief. In March 2000, the Company and APP settled the litigation. Management believes the settlement will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
It has been reported that certain United States governmental agencies, including the Department of Justice and the Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers and used in the calculation of reimbursements under the Medicaid program administered jointly by the federal government and the states. The Company has supplied documents in connection with these investigations and has had preliminary discussions with representatives of the federal and state governments, but is unable to estimate at this time what effect, if any, these investigations will have on the Company's pricing policies or its financial statements. There can be no assurance that these investigations will not result in changes to the Company's pricing policies or other actions which might have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company is also a defendant in various actions, claims, and legal proceedings arising from its normal business operations. Management believes the Company has meritorious defenses and intends to vigorously defend against all allegations and claims. As the ultimate outcome of these matters is uncertain, no contingent liabilities or provisions have been recorded in the accompanying financial statements for such matters. However, in management's opinion, liabilities arising from such matters, if any, will not have a material adverse effect on consolidated financial position, results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market on the Nasdaq National Market under the symbol "SCRI." The following table sets forth, for the periods indicated, the range of high and low trade price information for the Company's Common Stock on the Nasdaq National Market.
As of March 15, 2000, there were approximately 774 holders of record of the Company's Common Stock.
The Company has not paid a cash dividend to date on its Common Stock. The Company elected not to make a payment of quarterly cash dividends on its Preferred Stock in June, September and December 1995 and March and June 1996. The Company resumed payment of the Preferred Stock dividend in September 1996. Unless full cumulative dividends are paid on the Company's outstanding Preferred Stock, cash dividends may not be paid or declared and set aside for payment on the Company's Common Stock. At March 15, 2000, the Company had undeclared cumulative Preferred Stock dividends of approximately $7.5 million. The Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company intends to retain its earnings, if any, for the development of its business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data) The data set forth below should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document.
(1) Computed on the basis described for earnings per share in Note 2 to the financial statements.
(2) 1997 amounts include the results for Rakepoll Holding B.V. from February 28, 1997, the date of acquisition (see Note 1).
(3) Balance sheet data as of December 31, 1997 includes amounts relating to the acquisition of Rakepoll Holding B.V. and Diaspa, S.p.A. (see Note 1).
(4) Restated to reflect the retroactive effect to the change in accounting for certain inventories from the LIFO method to the FIFO method during 1999 (see Note 3).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Annual Report on Form 10-K, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements involve risks and uncertainties, including the timely development, regulatory approvals, and successful marketing of new products and acceptance of new products, the impact of competitive products, product costs and pricing, changing market conditions and the other risks detailed throughout this Form 10-K, including those listed under "RISK FACTORS THAT MAY AFFECT RESULTS." Actual results may differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which represent the Company's judgment as of the date of the filing of this Form 10-K. The Company disclaims, however, any intent or obligation to update these forward-looking statements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
In 1999, the Company reported a net income applicable to common shares of $5.7 million (after preferred stock dividends of $6.0 million for the year) as compared to a net loss applicable to common shares of $24.7 million in 1998 (after preferred stock dividends of $6.0 million for the year), and a net loss of $82.1 million in 1997 (after preferred stock dividends of $6.0 million for the year). The 1999 results included a $1.8 million charge related to the divestiture of a 46% interest in Metabasis, a proprietary research and development subsidiary. As a result of the divestiture, the operating results of Metabasis are included in the Company's consolidated results through the quarter ended March 31, 1999. Starting in the second quarter of 1999, Metabasis has been accounted for under the equity method. The 1997 loss included an in-process research and development charge of $29.2 million recognized as a part of the purchase price for the Rakepoll Holding acquisition, along with a restructuring charge of $11.5 million related to the divestiture of an 81% interest in Gensia Automedics, Inc. ("Automedics"), and a one-time restructuring charge of $3.2 million for costs from relocating the Company's headquarters from San Diego to Irvine, California. Total revenues for 1999 were $229.0 million as compared to $178.5 million in 1998, and $149.7 million in 1997. During 1999, the Company's subsidiary, Sicor S.p.A. changed its method of determining the cost of inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Accordingly, all previously reported results have been restated to reflect the retroactive application of this accounting change as required by generally accepted accounting principles. The accounting change reduced the net income for 1999 by $0.9 million. The net loss previously reported for 1998 was increased by $0.1 million and the net loss previously reported for 1997 was reduced by $0.5 million.
Product sales increased to $223.7 million in 1999, from $168.1 million in 1998 and from $140.4 million in 1997. The increase in product sales in 1999 compared to 1998 is primarily due to increased sales by Gensia Sicor Pharmaceuticals mainly from the launch of its new product, propofol and from the sale of oncology finished goods inventory to Abbott Laboratories as a result of the Sales and Distribution Agreement entered into with Abbott in January 1999. Pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman/Hatch Act"), the Company had a 180-day exclusive period in which to sell propofol without other generic competition. The 180-day exclusivity period was initiated in the second quarter of 1999 with the commercial launch of propofol and expired on October 15, 1999. The Company's propofol product is being sold in the U.S. through Baxter, which is the Company's marketing partner for a variety of products in the U.S.
Product sales also increased in the international operations in 1999 compared to 1998 mainly as the result of sales of new products. The increase in product sales in 1998 compared to 1997 is due to the inclusion of operating results for Rakepoll Holding for the full twelve months in 1998 as opposed to only from February 28, 1997, the date of its acquisition, for the same period in 1997, and increased sales at Sicor de Mexico principally resulting from megestrol product sales. Sicor de Mexico successfully completed its initial FDA facility inspection in the second quarter of 1998 and commenced shipments of megestrol to a major U.S. customer. The increase is also due to the acquisition of Diaspa in December 1997 and increased sales at Genchem Pharma and Gensia Sicor Pharmaceuticals. Partially offsetting these increases was the termination of the Company's distribution agreement for the Laryngeal Mask Airway ("LMA") effective January 1, 1998. In 1997, the LMA accounted for approximately $12.1 million in product sales. The Company expects product sales to increase in 2000 compared to 1999 primarily from the continued growth of Gensia Sicor Pharmaceuticals' products approved for sale in the U.S. during 1999, mainly propofol, along with new products which the Company expects to be approved for sale by regulatory agencies during 2000 (e.g. hydralazine, thiotepa and bleomycin).
Cost of sales in 1999 was $143.8 million which yielded a product gross margin of 36%, compared to a cost of sales of $119.2 million in 1998 which yielded a gross margin of 29%, and a cost of sales of $99.0 million in 1997 which yielded a gross margin of 29%. The increase in gross margin in 1999 compared to 1998 was primarily due to a more profitable product mix. This mix was positively impacted by the U.S. launch of three new products during the second quarter of 1999, propofol, haloperidol and alprostadil.
Contract research and license fees for the years ended December 31, 1999, 1998, and 1997 were $5.3 million, $10.4 million, and $9.3 million, respectively. The decrease in 1999 compared to 1998 was primarily due to the divestiture of Metabasis during the second quarter of 1999 and an up-front non-refundable license fee received in June 1998 from a major U.S. pharmaceutical company for the development and production of sample batches of a bulk drug substance. The 1999 decrease was partially offset by a $3.5 million reimbursement received in March 1999 from Baxter for Gensia Sicor Pharmaceuticals' expenses incurred for propofol research and development. The increase in 1998 compared to 1997 was primarily due to an up-front non-refundable license fee received in June 1998 from a major U.S. pharmaceutical company for the development and production of sample batches of a bulk drug substance. In addition, in the fourth quarter of 1998, Metabasis achieved a certain milestone with Sankyo Co. Ltd., which resulted in the Company recording $1 million in research revenue. These increases were partially offset by a decrease in license revenue from fully amortizing certain deferred license revenue in 1998.
Research and development expenses decreased to $15.8 million in 1999 from $23.1 million in 1998, and $26.1 million in 1997. The decrease in expenses in 1999 compared to 1998 was primarily due to the exclusion of Metabasis' expenses as a result of the divestiture of a 46% interest in Metabasis in the second quarter of 1999 and research related milestone payments made during 1998. The decrease in expenses in 1998 compared to 1997 was primarily due to the exclusion of Automedics' expenses as a result of the divestiture of an 81% interest in Automedics in the fourth quarter of 1997, and lower research spending by Metabasis. This was offset by increased expenses by the Rakepoll Holding companies as a result of the inclusion of operating results for Rakepoll Holding for the full twelve month period ended December 31, 1998 as opposed to only from February 28, 1997, the date of its acquisition, for the same period in 1997. Additionally, there was an increase in expenses from several research related milestone payments made during 1998, including costs incurred by Gensia Sicor Pharmaceuticals related to a co-development agreement with ASTA Medica.
Selling, general and administrative expenses for the years ended December 31, 1999, 1998, and 1997 were $41.0 million, $36.0 million, and $47.0 million, respectively. The increase in expenses in 1999 compared to 1998 was mainly due to a cash payment received in the third quarter of 1998 from the settlement of a contamination lawsuit with Great Lakes Chemical Corporation, and higher legal expenses in 1999 related to the propofol litigation and other patent litigation. This increase was partially offset by lower expenses in 1999
resulting from the absence of Metabasis' expenses after the first quarter of 1999 due to the divestiture and the charge for the Protocol Systems lawsuit in 1998 (see Note 17). The decrease in expenses in 1998 compared to 1997 was primarily due to the divestiture of Automedics and the settlement of the contamination lawsuit with Great Lakes Chemical Corporation in June 1998. These decreases were partially offset by the inclusion of operating results for Rakepoll Holding for the full twelve months in 1998 compared to ten months in the same period of 1997 and the reserve for the Protocol Systems lawsuit in 1998.
The Company recorded amortization expenses of $6.1 million, $6.0 million, and $4.4 million for the years ended December 31, 1999, 1998, and 1997, respectively. The increase in expenses in 1998 compared to 1997 was due to the amortization of goodwill resulting from the acquisition of 50% of Diaspa in December 1997 and the remaining 50% of Diaspa in June 1998, the acquisition of Genchem Vacallo in March 1998, and the inclusion of expenses related to the identified intangibles and goodwill resulting from the acquisition of Rakepoll Holding for the full twelve months in 1998 compared to ten months in the same period of 1997.
The Company had interest and other expenses of $7.2 million, $6.7 million, and $2.3 million for the years ended December 31, 1999, 1998, and 1997, respectively. The increase in expenses in 1999 compared to 1998 was primarily due to higher exchange losses in 1999 offset by a large product donation in the third quarter of 1998. The increase in expenses in 1998 compared to 1997 was mainly due to higher interest expenses, expenses from product donations, and a gain recognized on the sale of a parcel of land in 1997.
During the second quarter of 1999, the Company divested a 46% interest in Metabasis, a proprietary research and development subsidiary, to Metabasis management. Following this transaction, the Company retains a 46% equity interest in Metabasis. Subsequently, due to the uncertain value of the remaining interest, the Company elected to write off its remaining investment in Metabasis of $1.8 million.
The Company elected in January 1998 to write down the investment value of its 19% interest in Automedics from $1.8 million to $0.7 million, due to, among other things, the lack of market acceptance of the GenESA System. The Company subsequently wrote off the remaining balance of $0.7 million in the fourth quarter of 1998.
In December 1997, the Company divested an 81% interest in Automedics in order to reduce future operating losses and cash flow requirements associated with this business. As discussed in Note 13, due to the contingent nature of the royalty and milestone payments associated with this transaction, the Company recorded a charge of approximately $11.5 million. This restructuring charge included a $7.3 million write-off of intangible assets associated with products transferred into Automedics, specifically prepaid royalties for the GenESA System and Brevibloc rights, a $2.9 million loss realized on the sale of Automedics' assets and liabilities, and $1.3 million of severance related expenses.
The Company also recorded a restructuring charge of $3.2 million in 1997 for the expected costs related to the consolidation of the Company's headquarters from San Diego, California to Irvine, California where Gensia Sicor Pharmaceuticals occupies approximately 220,000 square feet of manufacturing, warehousing, laboratory and office space. This consolidation was completed during the first quarter of 1998.
In connection with the Rakepoll Holding acquisition in 1997, the assets and liabilities of Rakepoll Holding were adjusted to their estimated fair values, and the Company incurred a one-time $29.2 million write-off related to the value assigned to the acquired in-process research and development. This charge is not deductible for income tax purposes. The determination of acquired in-process research and development took under consideration both the costs and internal resources necessary to advance the in-process technology to
clinical development and eventual approval by regulatory agencies. Management also considered the risks of possible negative outcomes during clinical development, as well as changes in the market place with respect to competing technologies. The Company currently estimates that it will need to expend over $5 million to develop this in-process technology. The in-process technology may never be successfully developed.
The Company had income tax expenses of $1.7 million, $5.1 million, and $3.2 million for the years ended December 31, 1999, 1998, and 1997, respectively. The decrease in tax expense in 1999 compared to 1998 is primarily attributable to the utilization of net operating loss carryforwards in the U.S. and reduced profitability in one of the Italian operations. As of December 31, 1999, the Company had a federal tax net operating loss carryforward of approximately $253.6 million and a credit carryforward of approximately $11.6 million. The acquisition of Rakepoll Holding by the Company caused a cumulative change in ownership of more than 50% within the three-year period ending on February 28, 1997. This ownership change had a material impact on the utilization of approximately $238.2 million and $10.3 million of net operating loss and credit carryforward, respectively. The Company's Section 382 limitation is estimated to be approximately $11.5 million per year. Unused annual limitations may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased by the unrealized net built-in-gains in assets held by the Company at the time of the ownership change that are recognized within the five-year period after the ownership change.
The Company had minority interest income of $31,000 for the year ended December 31, 1999 which represented the minority stockholders' proportionate share of the loss in Metabasis. Minority interest income for the year ended December 31, 1998 was $0.8 million, which represented the minority stockholders' proportionate share of the loss in Metabasis and Diaspa. In June 1998, Sicor S.p.A. purchased the remaining 50% interest in Diaspa.
Dividends relate to the Company's convertible exchangeable preferred stock issued in February 1993. Annual dividends on preferred stock of $6.0 million in 1999, 1998, and 1997 consisted of payments of $1.5 million during each of the four quarters. In order to reduce its cash usage, the Company's Board of Directors determined not to declare the preferred stock quarterly dividend payments for June, September and December 1995 and March and June 1996. The Company resumed payments of preferred stock dividends in September 1996. Through March 2000, the Company has approximately $7.5 million in undeclared cumulative preferred dividends. If the Company chooses not to declare dividends for six cumulative quarters, the holders of Convertible Preferred Stock, voting separately as a class, will be entitled to elect two additional directors until the dividend in arrears has been paid.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and cash equivalents of $47.5 million and working capital of $42.3 million compared to $24.5 million and $18.3 million, respectively, as of December 31, 1998. The increase in cash and working capital in 1999 resulted from $41.6 million of cash provided by operations and $15.3 million of cash from financing activities, offset by investment activities of $31.4 million and $2.5 million of exchange rate changes.
Significant cash flow changes in operating assets and liabilities during the year ended 1999 included a $2.2 million decrease in inventories and a $10.0 million increase in accounts payable and accrued expenses. The decrease in inventory reflects the Company's successful launch of new products and tighter inventory controls. The increase in accounts payable and accrued expenses reflects the Company's higher expenses associated with new products and deferred income from its alliance partners, Abbott and Baxter.
During 1999, the Company expended approximately $29.1 million for property and equipment. The expenditures related primarily to the following: (i) increased propofol capacity at Gensia Sicor Pharmaceuticals; (ii) a new anthracyclines facility and related infrastructure at Sicor S.p.A.; and (iii) significant investments in the injectable and oncological facilities at Lemery. In December 1999, Diaspa completed a sale-leaseback transaction where it sold certain assets for net proceeds of approximately $12.3 million. The assets are being leased back from the purchaser over a period of 6.5 years for equipment and 9.5 years for land and buildings. Under the agreement, Diaspa will maintain deposits, initially in the amount of approximately $9.8 million, which will be reduced as future lease payments are made.
During 1999, the Company paid cash dividends on its preferred stock totaling $6.0 million. At December 31, 1999, the Company had five cumulative quarters, or approximately $7.5 million, in undeclared cumulative preferred dividends. If the Company chooses to not declare dividends for six cumulative quarters, the holders of the preferred stock, voting separately as a class, will be entitled to elect two additional directors until the dividend in arrears has been paid.
During the second quarter of 1999, the Company raised approximately $35 million through a private placement of SICOR units for $4.00 per unit. Each unit consists of one share of Common Stock and a warrant to purchase one-tenth of one share of the Company's Common Stock for $5.75 per share. In connection with this transaction, the Company repaid the loan of $10 million made in the fourth quarter of 1998 by Carlo Salvi, the Company's President, Chief Executive Officer, director and principal stockholder. Mr. Salvi purchased 2.5 million SICOR units for a total of $10 million in the private placement.
The Company had a net reduction of $6.8 million in short-term borrowings, proceeds of $14.1 million from the issuance of long-term debt and capital lease obligations, and principal reductions of $12.5 million in long-term debt and capital lease obligations during 1999. These changes reflect the expansion of operations and the pay down of higher cost loans utilizing operating cash flow and a portion of the private placement funds received in the second quarter of 1999.
In May 1998, Sicor S.p.A. received notification from the Italian Ministry of University, Scientific & Technological Research that it has been awarded approximately $8.8 million in a grant and subsidized loan package for an applied research program related to the development of anthracycline derivatives. The receipt of funding for the research program is contingent upon presentation of a statement of progress at established "Checkpoints," the first of which occurred in the third quarter of 1999. Accordingly, Sicor S.p.A. received approximately $0.8 million in the form of a subsidized loan, which is repayable in semi-annual installments of interest only for 3.5 years and subsequently repayable in semi-annual installments of principal and interest through 2009. Sicor S.p.A. expects the next funding to occur in the second quarter of 2000 in the amount of approximately $0.6 million.
The Company expects to incur additional costs, including manufacturing and marketing costs, to support anticipated product launches. The planned spending on sales and marketing activities during 2000 related to promoting products is approximately $14.5 million. Management also plans to invest in plant and equipment to increase and improve existing manufacturing capacity, including the expansion of facilities in Italy and Lemery and to make further investments in the oncology manufacturing facility at Gensia Sicor Pharmaceuticals in Irvine, California. Additional investments in plant and equipment are also planned for propofol production at Gensia Sicor Pharmaceuticals. Future spending relating to these planned capital expenditures in Italy, Mexico and Irvine, California, along with new planned capital expenditures, are estimated to total $34 million during 2000. This capital spending is anticipated to be funded through the Company's cash flow from operations and new lease agreements.
The Company has significantly improved its cash flow results. During 1999, net cash provided by operating activities was $41.6 million compared to $9.7 million net cash used in operating activities for the same period of 1998. The Company anticipates that its operating cash flows, combined with its current cash and cash equivalents on hand at December 31, 1999 of $47.5 million, and commitments from third parties, will enable it to maintain its current and planned operations. In connection with its plans for expanding its business, to accomplish its core strategy of being a leading fully-integrated provider of injectable pharmaceutical products and services, the Company's management and Board of Directors will continue to evaluate the need to raise additional capital and, if appropriate, pursue equity, debt and lease financing, or a combination of these, for its capital and investment needs. Such financings may not be available on acceptable terms, or at all. If financing is not available, the Company may have to reduce planned expenditures, discontinue certain operations, or otherwise restructure to continue operations.
In March 1999, the Company's Italian subsidiary, Sicor S.p.A., entered into twenty monthly U.S. $1 million U.S. Dollar put/Lira call options exercisable in 1999, ten at a strike price of Lira 1,696 per U.S. $1 and an additional ten at a strike price of Lira 1,750 per U.S. $1. Additionally, in September 1999, Sicor S.p.A. entered into sixteen monthly U.S. Dollar put/Lira call options, the first four contracts, exercisable in 1999, were for U.S. $0.5 million and the next twelve contracts, exercisable starting in January 2000, were for U.S. $1 million at a strike price of Lira 1,800 per U.S. $1. In addition, in November 1999, Sicor S.p.A. entered into twelve monthly U.S. $1 million U.S. Dollar put/Lira call options at a strike price of Lira 1,800 per U.S. $1 exercisable starting in January 2000. As of December 31, 1999, no contracts have been exercised.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The cost incurred to date for the Year 2000 transition was approximately $1.7 million which includes software and hardware upgrades that would have been purchased in the normal course of business to accommodate future growth and worldwide integration. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk with respect to its debt outstanding and foreign currency transactions. Most of the Company's long-term borrowings are based on fixed interest rates and therefore not subject to material risk from changes in interest rates. Short-term borrowings, however, are based on prime or other indicative base rates plus a premium. If these indicative base rates increase, the Company will incur higher relative interest expense and similarly, a decrease in the rates will reduce relative interest expense. In recent years, there have not been significant fluctuations in the prime or other indicative base rates. A 1.0% change in the prime rate or other indicative base rates would not materially change interest expense assuming levels of debt consistent with historical amounts. Due to the Company's international operations, certain transactions are conducted in foreign currencies. The Company's Italian operations hedge against transactional risks by borrowing against its receivables and against economic risk by buying monthly call options to strike at a rate equal to or above the budgeted exchange rate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999
Consolidated Statement of Stockholders' Equity for each of the three years in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999
Notes to Consolidated Financial Statements
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders SICOR Inc.
We have audited the accompanying consolidated balance sheets of SICOR Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SICOR Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
As explained in Note 3 to the financial statements, the Company has given retroactive effect to the change in accounting for inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
ERNST & YOUNG LLP
San Diego, California February 16, 2000
SICOR INC.
CONSOLIDATED BALANCE SHEETS (in thousands, except par value data)
See accompanying notes.
SICOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
See accompanying notes.
SICOR INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Three Years Ended December 31, 1999 (in thousands)
See accompanying notes.
SICOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
1. BASIS OF PRESENTATION
ORGANIZATION
SICOR Inc. (formerly Gensia Sicor Inc.) ("SICOR" or the "Company"), a Delaware corporation, was incorporated November 17, 1986. SICOR is a specialty pharmaceutical company focused on the development, manufacture and marketing of products for worldwide oncology and injectable pharmaceutical markets. The Company is headquartered in Irvine, California. On February 28, 1997, SICOR completed the acquisition of Rakepoll Holding B.V. ("Rakepoll Holding") from Rakepoll Finance N.V. ("Rakepoll Finance"). Rakepoll Holding is the parent company of three specialty pharmaceutical businesses: SICOR-Societa Italiana Corticosteroidi S.p.A. ("Sicor S.p.A.") of Milan, Italy, and two companies located in Mexico: Lemery, S.A. de C.V. ("Lemery") and Sicor de Mexico, S.A de C.V. ("Sicor de Mexico"). In addition, in December 1997, Sicor S.p.A. purchased a 50% equity interest in Diaspa S.p.A. ("Diaspa"), an Italian company engaged in the manufacture of certain raw materials used in Sicor S.p.A.'s business. In June 1998, Sicor S.p.A. purchased the remaining 50% of Diaspa. During the second quarter of 1999, the Company divested a 46% interest in Metabasis Therapeutics, Inc. ("Metabasis"), a proprietary research and development subsidiary, after which the Company retains a 46% interest.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiary companies, all of which are wholly owned. Affiliated companies in which the Company does not have a controlling interest, or for which control is expected to be temporary, are accounted for using the equity method. The four wholly-owned subsidiaries are as follows: Rakepoll Holding B.V., Gensia Sicor Pharmaceuticals, Inc. ("Gensia Sicor Pharmaceuticals"), Gensia Development Corporation and Genchem Pharma Ltd. ("Genchem Pharma"). All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated balance sheets at December 31, 1999 and 1998 include the assets, liabilities and stockholders' equity of the combined companies. The consolidated statement of operations and statement of cash flows for the year ended December 31, 1997 include the results for Rakepoll Holding from February 28, 1997 (the date of acquisition). As noted above, the remaining 50% of Diaspa was acquired during the second quarter of 1998, and accordingly, Diaspa became a wholly-owned subsidiary in the second quarter of 1998. Subsequent to the divestiture of a 46% interest in Metabasis, the Company retains a 46% equity interest in Metabasis. Accordingly, starting in the second quarter of 1999, investment in Metabasis was accounted for using the equity method as the Company no longer had control of Metabasis. Consequently, the consolidated statement of operations and statement of cash flows for the year ended December 31, 1999 include the results for Metabasis through the first quarter of 1999 only.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform with the current year presentation.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consist of highly liquid instruments. The Company considers instruments purchased with an original maturity of three months or less to be cash equivalents. Management has classified the Company's short-term investments as available-for-sale securities in the accompanying financial statements. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification of its cash investments and their maturities that should maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.
The Company performs ongoing credit evaluations of its customers' financial condition, and generally does not require collateral. Allowances are maintained for potential credit losses and such losses have been within management's expectations. The Company's four largest customers accounted for approximately 50% of product sales for 1999. At December 31, 1999, these customers accounted for approximately 45% of net accounts receivable.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Effective January 1, 1999, Sicor S.p.A. changed its method of determining the cost of inventories from the last-in, first-out (LIFO) method to the FIFO method. See Note 3.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is computed on the straight-line method over the following estimated useful lives: building and building improvements - 11 to 20 years; machinery and equipment - 3 to 15 years; office furniture and equipment 3 to 12 years.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
INTANGIBLE ASSETS
The Company has recorded goodwill for the excess purchase price over the estimated fair values of tangible and intangible assets acquired and liabilities assumed resulting from acquisitions. In connection with the acquisitions, a portion of the purchase price was allocated to various identifiable intangible assets, including developed technology, trademarks and assembled workforce, based on their fair values at the date of acquisition. The excess purchase price over the estimated fair value of the net assets acquired has been assigned to goodwill. Additionally, the Company has recorded intangible assets related to the purchase of proprietary technology rights. Amortization of intangible assets is computed on the straight-line method over the following estimated useful lives: technology rights - 5 years; assembled workforce - 5 years; developed technology 17 years; trademarks - 30 years; goodwill - 10 to 30 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for trading purposes. The Company values financial instruments as required by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The carrying amounts of cash, accounts receivable, short-term debt and long-term, and variable-rate debt approximate fair value. The Company estimates that the carrying value of long-term fixed rate debt approximates fair value based on the Company's estimated current borrowing rates for debt with similar maturities.
RESEARCH AND DEVELOPMENT EXPENSES
All costs of research and development, including those incurred in relation to the Company's collaborative agreements, are expensed in the period incurred.
REVENUE RECOGNITION
Product sales revenues are recorded as products are shipped. Adjustments to product sales are made for estimated sales discounts offered due to wholesaler chargebacks, Medicaid-sponsored payor allowance discounts, and early payment discounts. The Company provides for returns at the time of sale based on estimated product returns. For contracts under which the Company is reimbursed for research and development efforts, revenue is recognized in accordance with the terms of the contract as the related expenses are incurred. Amounts recorded as revenues are not dependent upon the success of the research efforts. Nonrefundable license fees in connection with research and development agreements are recognized on the straight-line method over the term of the contract.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
EARNINGS PER SHARE
Basic EPS includes no dilution and is computed by dividing net income, after deducting preferred stock dividends, by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilutive effect, determined by the treasury stock method, of additional common shares that are issuable upon exercise of outstanding stock options and warrants.
The calculations of basic and diluted weighted average shares outstanding are as follows:
The conversion of the Convertible Exchangeable Preferred Stock (see Note 9) and Subordinated Convertible Notes (see Note 8) was not assumed for purposes of computing diluted ESP for the years ended December 31, 1999, 1998, and 1997 since its effect would be anti-dilutive.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts for common stock options granted to employees using the intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued to Employees" and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the fair value of the Company's common stock on the date of the grant. Deferred compensation for options granted to non-employees has been determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically remeasured as the underlying options vest.
COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." The new standard established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income (loss) or stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income (loss). Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States, except those subsidiaries located in highly inflationary economies, are generally measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange.
FOREIGN CURRENCY CONTRACTS
The Company's Italian operations hedge against transactional risks by borrowing against its receivables and against economic risk by buying monthly call options priced to strike at a rate equal to or above the budgeted exchange rate. The cost of the borrowing is recorded as interest expense when it is incurred. The cost of the options is recognized at the time the options are purchased. Gains on the options are recorded as foreign exchange gains at the time the options are exercised.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective January 1, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company has not completed its determination of the impact of the adoption of this new accounting standard on its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statement" ("SAB 101"). Among other things, SAB 101 discusses the SEC Staff's view on accounting for non-refundable up-front fees received in connection with collaboration agreements. The Company is currently evaluating the impact of SAB 101 on the accounting for up-front license fees received in prior years. Should the Company determine that a change in its accounting policy is necessary, such a change will be made effective January 1, 2000 and would result in a charge to results of operations for the cumulative effect of the change. This amount, if recognized, would be recorded as deferred revenue and recognized as revenue in future periods. Prior financial statements would not be restated.
3. CHANGE IN ACCOUNTING PRINCIPLES
Sicor S.p.A., at the time of acquisition in 1997, used the LIFO method to determine inventory valuation. Effective January 1, 1999, Sicor S.p.A. changed to the FIFO method. The change in accounting principal, which has been applied retroactively, was made to conform the inventory valuation method of the Sicor S.p.A. to the method used for all of the Company's other operations. At the time of acquisition, this change was considered but delayed because of the relative insignificance of the accounting change and the need to concentrate on other more pressing merger related issues. As expected, since the acquisition, the Company has been more
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
fully integrated and management believes one worldwide inventory valuation method is preferable. Additionally, the Company has been in a stable price environment where LIFO and FIFO are approximately the same and prices are not expected to increase significantly in the foreseeable future. As such, FIFO more closely represents current costs in the current stable price environment.
The effect of this change was to decrease income by $0.9 million ($.01 per share) in 1999, increase income by $0.1 million (no change per share) in 1998, and decrease income by $0.5 million ($.01 per share) in 1997. There was no effect on beginning retained earnings in 1997.
4. COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
Approximately $18.1 million and $30.9 million of trade receivables at December 31, 1999 and 1998, respectively were pledged as security for short-term borrowings (see Note 7).
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
At December 31, 1999 and 1998, equipment acquired under capital lease obligations totaled $7.2 million and $5.4 million, respectively. Such leased equipment is included in property and equipment, net of accumulated amortization of $1.6 million and $1.0 million at December 31, 1999 and 1998, respectively.
Depreciation expense, including amortization of capital leases, was $11.8 million, $11.0 million, and $9.0 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Severance indemnity is paid in Italy to employees upon termination of their employment. Each year, the employer accrues, for each employee, an amount partly based on the employee's remuneration and partly based on the revaluation of amounts previously accrued.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
5. DISTRIBUTION AGREEMENTS
Gensia Sicor Pharmaceuticals entered into a Sales and Distribution agreement with Abbott Laboratories ("Abbott") in January 1999, under which the two companies formed a strategic alliance for the marketing and distribution of oncology products in the United States. Under the agreement, the Company received $5.6 million from Abbott in the first quarter of 1999 representing an initial commitment fee to help finance Gensia Sicor Pharmaceuticals' future development of generic oncology drugs. Given the nature of this commitment, the Company has elected to recognize these commitment fees over the life of the agreement, through the year 2005.
Gensia Sicor Pharmaceuticals also entered into an amendment to an earlier agreement with Baxter Pharmaceutical Products, Inc. ("Baxter") under which a fee of approximately $3.5 million was received in March 1999 from Baxter to reimburse Gensia Sicor Pharmaceuticals for its expenses previously incurred for propofol research and development. The Company recognized this amount as contract research and license revenue in the first quarter of 1999. In April 1999, the Company, through Baxter, launched its generic propofol product.
6. INVESTMENTS
The following is a summary of available-for-sale securities classified as cash and cash equivalents (in thousands):
The amortized cost of available-for-sale securities approximated fair value at both December 31, 1999 and 1998. Gross realized gains and losses on sales of available-for-sale securities were immaterial in 1999, 1998, and 1997.
7. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (in thousands):
The Company's Italian subsidiaries maintain credit line arrangements with several banks where most are pledged with trade receivables to the banks in return for short-term borrowings in U.S. dollars and Italian lira. These transactions effectively eliminate most of the Company's foreign exchange risk associated with these receivables. The Company retains all credit risk with respect to the receivables. Consequently, both the receivables and related borrowings are included in the accompanying
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
consolidated financial statements. The weighted average interest rate on these borrowings was approximately 5.7% at December 31, 1999 and 1998.
The short-term borrowings from banks, repayable in U.S. dollars and Swiss francs are unsecured. The terms of the borrowings range from three to six months. The weighted average interest rate on these borrowings was approximately 11.2% and 7.2% at December 31, 1999 and 1998, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
In 1997, the Company issued $20 million of Subordinated Convertible Notes due May 1, 2004 ("the Notes"). The Notes bear interest at the rate of 2.675% annually, which is payable quarterly in arrears on the last business day of March, June, September and December of each year, commencing June 30, 1997.
The Notes are convertible at the option of the holder at any time into SICOR Convertible Preferred Stock or Common Stock at a conversion price of $100 per share and $3.78 per share, respectively, subject to adjustment under certain conditions. At the Company's option, the Notes are convertible into SICOR Preferred Stock at a conversion price of $100 per share, subject to meeting certain financial conditions or SICOR Common Stock price levels. At the Company's option, the Notes are redeemable on or after 18 months of the closing date, subject to meeting certain SICOR Common Stock price levels.
In connection with the Notes, Warrants to purchase up to 2,645,503 shares of SICOR Common Stock at $4.35 per share were also issued. Fifty percent of these Warrants are Conditional Warrants that may not be exercised for three years and will be cancelled if the SICOR Common Stock price exceeds certain levels during the first three years after the closing. The estimated fair market value of the Warrants of $3.6 million was recorded as a discount on Notes payable and is being amortized to interest expense over the term of the Notes. All Warrants were outstanding at December 31, 1999.
The mortgage notes payable are secured by certain production facilities with a carrying value of approximately $5.8 million. Additionally, a certain portion of the note is secured by deposits maintained by Diaspa following the sale-leaseback transaction of certain assets (see Note 14). The mortgage notes
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
payable are repayable in quarterly and semi-annual installments of principal and interest through 2005. The floating interest rate is based on several financial indicators. The weighted average interest rate on these loans was 4.5% and 5.8% at December 31, 1999 and 1998, respectively.
The notes payable to a bank are unsecured and are repayable in monthly and semi-annual installments of principal and interest through 2003. The weighted average fixed interest rate on these notes was 6.9% at December 31, 1999 and 1998.
Notes payable to suppliers are secured by certain machinery and equipment with a carrying value of approximately $6.8 million and are repayable in quarterly and semi-annual installments of principal and interest through 2004. The weighted average fixed interest rate on these notes was 5.4% and 6.7% at December 31, 1999 and 1998, respectively.
The notes payable to the Italian Ministry of Industry are secured by certain production facilities and are repayable in annual installments of principal and interest through 2009. The weighted average fixed interest rate on these notes was 7.3% at December 31, 1999 and 1998.
The research project loan payable is from the Italian Ministry of University, Scientific & Technological Research under the approximately $8.8 million in total grant and subsidized loan package for an applied research program related to the development of anthracycline derivatives. The receipt of funding for the research program is contingent upon presentation of a statement of progress at established "Checkpoints," the first of which occurred in the third quarter of 1999. The loan is repayable in semi-annual installments of interest only for 3.5 years and subsequently repayable in semi-annual installments of principal and interest through 2009. The variable interest rate on the loan was 4.4% at December 31, 1999.
Long-term debt maturities for each of the next five years are as follows (in thousands): $6,974 in 2000; $6,210 in 2001; $4,348 in 2002; $3,387 in 2003 and $19,985 in 2004. Interest expense for 1999, 1998, and 1997 was $6.3 million, $6.1 million, and $3.7 million, respectively.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's 1.6 million shares of $3.75 Convertible Exchangeable Preferred Stock (the "Preferred Stock") was issued in a private offering to institutional investors. The Preferred Stock has a liquidation preference of $50.00 per share. Cash dividends on the Preferred Stock are payable quarterly at an annual dividend rate of $3.75 for each share. Dividends on the Preferred Stock are cumulative. The Preferred Stock is convertible, at any time prior to redemption, into approximately 2.9 million shares of the Company's Common Stock at a conversion price of $27.60 per share, subject to certain anti-dilution adjustments. The Preferred Stock is redeemable at the option of the Company, initially at a price of $52.50 per share and thereafter at prices declining to $50.00 per share in March 2002 plus all accrued and unpaid dividends. The Preferred Stock will be exchangeable at the option of the Company in whole, but not in part, on any dividend payment date for its 7 1/2% Convertible Subordinated Debentures due 2003 at the rate of $50.00 principal amount of Debentures for each share of Preferred Stock.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
The Company made quarterly cash dividend payments of approximately $1.5 million per quarter on its outstanding Preferred Stock from June 1, 1993 through March 1, 1995. Subsequent to March 1995, as a measure to reduce cash outflows, the Company's Board of Directors suspended quarterly cash dividend payments on its outstanding Preferred Stock. The Company resumed payment of the Preferred Stock dividend in September 1996. At December 31, 1999, the Company had approximately $7.5 million ($4.69 per share) in undeclared cumulative preferred dividends. If the Company chooses to not declare dividends for six cumulative quarters, the holders of this Preferred Stock, voting separately as a class, will be entitled to elect two additional directors until the dividend in arrears has been paid. The holder of this Preferred Stock has no other voting rights.
WARRANTS
In July 1996, warrants to purchase 70,000 shares of Common Stock were issued in connection with a lease financing commitment for Gensia Sicor Pharmaceuticals. These warrants have an exercise price of $5.25 per share and expire in July 2006. At December 31, 1999, all warrants were outstanding.
In March 1997, the Company sold approximately 4 million Units in a private placement, each Unit consisting of one share of Common Stock and a Warrant to purchase one-half share of Common Stock at a per share exercise price of $4.1875 per share. These warrants expire in December 2002. At December 31, 1999, warrants to purchase an aggregate of 1,871,000 shares of SICOR Common Stock were outstanding.
In December 1997, the Company sold approximately 2.4 million Units in a private placement, each Unit consisting of one share of Common Stock and a Warrant to purchase one-half share of Common Stock at a per share exercise price of $7.34 per share. These warrants expire in July 2003. If a purchaser sold the Common Stock purchased in the Unit offering prior to June 30, 1998, then the purchaser was not issued the Warrant component of the Unit. At December 31, 1999, warrants to purchase an aggregate of 1,227,000 shares of SICOR Common Stock were outstanding.
During the second quarter of 1999, the Company sold approximately 8.7 million Units in a private placement, each Unit consisting of one share of Common Stock and a Warrant to purchase one-tenth of a share of Common Stock at a per share exercise price of $5.75 per share. These warrants expire in December 2003. Each Warrant is to be issued if the holder sells no Common Stock or other securities of the Company for a period commencing from the date of the purchase of Units and ending on December 31, 2000. At December 31, 1999, warrants to purchase an aggregate of 867,500 shares of SICOR Common Stock were outstanding.
Additional warrants were issued in connection with the issuance of the 2.675% Subordinated Convertible Notes (see Note 8).
STOCKHOLDER RIGHTS PLAN
The Company has adopted a Stockholder Rights Plan (the "Plan"). The Plan provides for the distribution of a Preferred Stock purchase right (a "Right") as a dividend for each share of the Company's Common Stock. Under certain conditions involving an acquisition by any person or group of 15% or more of the Common Stock, the Rights permit the holders (other than the 15% holder) to purchase the
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Company's Common Stock at a 50% discount upon payment of an exercise price of $200 per Right. In addition, in the event of certain business combinations, the Rights permit the purchase of the Common Stock of an acquiror at a 50% discount. Under certain conditions, the Rights may be redeemed by the Board of Directors in whole, but not in part, at a price of $.01 per Right. The Rights have no voting privileges and are attached to and automatically trade with the Company's Common Stock. The Rights expire on March 16, 2002. The Plan was amended in November 1996 to exempt the acquisition of Rakepoll Holding from the provisions of the Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") for all eligible employees to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last day of each six-month offering period. Employees may authorize the Company to withhold up to 12% of their total compensation during each six-month offering period, subject to certain limitations. The 1992 ESPP, as amended, authorizes up to 700,000 shares to be issued under the plan. During the year ended December 31, 1999, 1998, and 1997, shares totaling 50,139, 82,392, and 65,670 were issued under the plan at an average price of $3.52, $3.52, and $3.77 per share, respectively. At December 31, 1999, 177,050 shares were reserved for future issuance.
STOCK OPTION PLANS
In February 1997, the stockholders approved the 1997 Long-Term Incentive Plan (the "1997 Stock Plan") which replaced the 1990 Stock Plan (the "1990 Stock Plan"). The Stock Plan provides for both the direct award or sale of Common Shares and the granting of qualified and nonqualified options to its employees, directors and certain other individuals. Generally, options outstanding vest over a four-year period and are exercisable for up to ten years from the grant date. The 1997 Stock Plan, as amended, authorizes up to 5,600,000 shares to be issued. This amount will be increased by any shares not subject to exercise under the 1990 Stock Plan or which are not exercised because of forfeiture or termination of options granted under the 1990 Stock Plan. Under the 1990 Stock Plan, 6,383,334 shares of SICOR Common Stock have been authorized for issuance. Accordingly, as of December 31, 1999, 11,983,334 shares were authorized for issuance under both stock option plans.
In September 1997, the stockholders approved the Chairman's Options (the "Chairman's Options"). Under the Chairman's Options, 500,000 shares were authorized for issuance and the full 500,000 shares were issued to the Company's current Chairman of the Board, who at the time of issuance was a non-executive Chairman of the Board. Of the 500,000 shares subject to the Chairman's Options, 200,000 shares were fully vested, and the remaining 300,000 shares will vest in increments of 100,000 shares subject to meeting certain performance conditions. No compensation expense has been recorded related to these options through the year ended December 31, 1999 (see Note 19).
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
A summary of the Company's stock option activity and related information is as follows (in thousands except exercise price):
The following table summarizes information about stock options outstanding at December 31, 1999 (number of shares in thousands):
Shares of Common Stock reserved at December 31, 1999 for the exercise of available and outstanding stock options including the Chairman's options totaled 8,813,146.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro Forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock plans under the fair value method of that statement. The fair value was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 5.7% to 5.8%, 5.1% to 5.2% and 6.1% to 6.2%; dividend yields of 0% for 1999, 1998 and 1997; volatility factors of the expected market price of the Company's Common
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Stock of 59.3% for 1999 and 36.2% for 1998 and 1997; and a weighted-average life of six to seven years for 1999, five to six years for 1998 and four to five years for 1997.
The Black-Scholes option-valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair values of stock options granted during the years 1999, 1998, and 1997 were $2.82, $2.55, and $2.41 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value is amortized to expense over the vesting period of such stock or options. The effects of applying SFAS No. 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma information in future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1995. The Company's pro forma information for the years ended December 31 is as follows (in thousands except per share date):
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance at December 31, 1999 (in thousands):
10. EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company has a 401(k) plan that allows eligible U.S. employees to contribute up to 15% of their salary, subject to annual limits. Effective January 1, 1999, the Company matched 25% of the employee pretax contribution, up to an annual maximum of $1,875. The matching contribution was in the form of the Company Common Stock. As of December 31 1999, 500,000 shares were authorized for contribution pursuant to the plan and 46,659 shares had been issued valued at $168,000.
11. ACQUISITIONS
RAKEPOLL HOLDING B.V.
On February 28, 1997, after shareholder approval, the Company acquired all of the outstanding shares of capital stock of Rakepoll Holding from Rakepoll Finance in exchange for 29,500,000 shares of the Company's Common Stock and $100,000. The transaction was accounted for using the purchase method. The total purchase price was $157.1 million, which was comprised of the fair value of Common Stock issued of $146.6 million, acquisition costs of $10.4 million, and a cash payment of $100,000.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Based on the purchase price of $157.1 million, allocation of the total acquisition cost is as follows (in thousands):
The developed technology and other intangibles are being amortized over their estimated lives. The excess of the purchase price over the fair value of identified assets and liabilities of $45.0 million and the deferred income tax liability of $23.1 million were recorded as goodwill, which is being amortized over its estimated life of 30 years. The determination of acquired in-process research and development took under consideration both the costs and internal resources necessary to advance the in-process technology to clinical development and eventual approval by regulatory agencies. Management also considered the risks of possible negative outcomes during clinical development, as well as changes in the market place with respect to competing technologies. At the time of acquisition, the technological feasibility of the acquired in-process research and development had not yet been established and it was determined that the technology had no future alternative uses. Accordingly, the value assigned to in-process research and development was immediately charged to the statement of operations. This charge is not deductible for income tax purposes.
DIASPA S.p.A.
In December 1997, Sicor S.p.A. purchased a 50% equity interest in Diaspa, an Italian company engaged in the manufacture of certain raw materials used in Sicor S.p.A.'s business for $2.7 million. The remaining 50% interest in Diaspa was purchased by Archimica S.p.A. ("Archimica"), an Italian bulk pharmaceutical company in which the Company's President, Chief Executive Officer, director and a principal stockholder, had a 50% beneficial ownership. In June 1998, Sicor S.p.A. purchased the remaining 50% interest from Archimica for approximately $5.7 million in cash, including a $1.3 million payment to a third party for the release of an option on the Diaspa shares and approximately $1.9 million related to capital contributions made since the acquisition of the initial 50% interest in Diaspa. For financial reporting purposes, the acquisition of Diaspa's net assets was accounted for using the purchase method. Diaspa was consolidated in the 1997 financial statements as the Company had an other than temporary controlling financial interest.
The following unaudited pro forma data reflects the combined results of operations of the Company, Rakepoll Holding and Diaspa as if the acquisition had occurred on January 1, 1997 (in thousands, except per share data):
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
GENCHEM VACALLO
In March 1998, Genchem Pharma Ltd. acquired a research and development branch ("Genchem Vacallo") in Vacallo, Switzerland for $1.9 million. For financial reporting purposes, the acquisition was accounted for using the purchase method and the excess of the purchase price over the fair value of identified assets and liabilities of $1.2 million was recorded as goodwill. The financial position and results of operations of the acquired company are not material. Pro forma information has been omitted as the amounts are not significant.
12. RELATED PARTIES
The Company has agency agreements with Alco Chemicals ("Alco"). In September 1996, the majority shareholder of Alco acquired a majority of the outstanding shares of Rakepoll Finance N.V., which owns approximately 33% the Company's outstanding Common Stock. The same majority shareholder of Alco is also President, Chief Executive Officer and a director of the Company and beneficially owns approximately 37% of the Company Common Stock.
Under the terms of its agreements with the Company, Alco is to receive commissions equal to 4% of sales to third-party non-Italian customers. The agreements are in place for five years, unless there is a change in control of Alco. The agreement permits the Company to sell its products directly or through other agents. If the Company pays commissions that are less than the contractual commission percentage to such agents, the Company must pay the differential between the commissions paid and the contractual percentage to Alco. Commission expenses relating to Alco were approximately $2.3 million, $2.1 million and $2.0 MILLION for the years ended December 31, 1999, 1998, and 1997, respectively, and the net outstanding payable to Alco at December 31, 1999 and 1998 was $0.6 million and $0.7 million, respectively.
Lemery in Mexico purchases raw materials and supplies from two companies in which Lemery's Managing Director and Director of Operations have beneficial ownership. The combined material and supply purchases made by Lemery during 1999 and 1998 from these two companies totaled approximately $2.6 million and $3.1 million, respectively.
Sicor S.p.A. purchased a 50% equity interest in Diaspa (see Note 11) in December 1997 for approximately $2.7 million. The remaining 50% interest of Diaspa was purchased by Archimica, a company in which the Company's President, Chief Executive Officer, director and a principal stockholder, had a 50% beneficial ownership. In June 1998, Sicor S.p.A. purchased the remaining 50% interest from Archimica for approximately $5.7 million in cash, including a $1.3 million payment to a third party for the release of an option on the Diaspa shares and approximately $1.9 million related to capital contributions made since the acquisition of the initial 50% interest in Diaspa. Product sales to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Archimica were approximately $3.0 million and $0.5 million for the years ended December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the Company had a net receivable balance from Archimica of $2.3 million and a net payable balance to Archimica of $34,000, respectively.
The Company paid approximately $0.1 million in 1999 for services provided by a consulting firm owned by the Company's Executive Vice President, Chief Operating Officer and director, and approximately $0.2 million for services provided by a market research firm in which the same individual serves as a director.
In March 1998, Genchem Pharma Ltd. acquired a research and development branch in Vacallo, Switzerland for $1.9 million from Alco.
In December 1998, the Company sold $10 million of 8% Subordinated Convertible Notes due January 10, 2001 to the Company's President, Chief Executive Officer, director and a principal stockholder. The Company subsequently repaid the principal and accrued interest in the second quarter of 1999.
13. WRITE-DOWN OF INVESTMENT AND RESTRUCTURING CHARGE
During the second quarter of 1999, the Company divested a 46% interest in Metabasis Therapeutics, Inc., a proprietary research and development subsidiary, to Metabasis management. Following this transaction, the Company retains a 46% equity interest in Metabasis and will receive royalty payments if technologies currently owned by Metabasis are licensed or if products are developed and sold using those technologies. Subsequently, due to the uncertain value of the remaining interest, the Company elected to write off $1.8 million related to its remaining investment in Metabasis. Starting in the second quarter of 1999, investment in Metabasis was accounted for using the equity method.
In December 1997, the Company divested an 81% interest in Gensia Automedics, Inc. ("Automedics") in order to reduce future operating losses and cash flow requirements associated with this business. Due to the contingent nature of the royalty and milestone payments associated with this transaction, the Company recorded a charge of approximately $11.5 million. This restructuring charge included a $7.3 million write-off of intangible assets associated with products transferred into Automedics, specifically prepaid royalties for the GenESA System and Brevibloc rights, a $2.9 million loss realized on the sale of Automedics' assets and liabilities, and $1.3 million of severance expenses. Due to the lack of market acceptance of the GenESA System, the Company wrote off the investment value of its 19% interest in Automedics from $1.8 million to $0.7 million in the first quarter of 1998 and subsequently wrote off the remaining balance of $0.7 million in the fourth quarter of 1998. In August 1999, the Company reached a settlement with Protocol Systems, Inc. concerning the alleged breach of a supply agreement related to the GenESA System. The resolution of the matter did not result in an adjustment to the Company's consolidated financial position or results of operations in 1999 as an adequate provision was recorded in the fourth quarter of 1998.
In December 1997, the Company relocated its corporate staff from San Diego, California to Irvine, California to improve operating efficiencies and reduce operating costs. The Company's wholly-owned subsidiary, Gensia Sicor Pharmaceuticals, occupies approximately 220,000 square feet of manufacturing,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
warehousing, laboratory and office space in Irvine. In connection with the relocation, the Company recorded a non-recurring charge of $3.2 million in the third quarter of 1997.
14. COMMITMENTS
The Company leases its office, manufacturing and research facilities and certain equipment under operating and capital lease agreements. The minimum annual rents are subject to increases based on changes in the Consumer Price Index, taxes, insurance and operating costs.
In December 1999, the Company's subsidiary, Diaspa sold certain assets for net proceeds of approximately $12.3 million. The assets are being leased back from the purchaser over a period of 6.5 years for equipment and 9.5 years for land and buildings. The lease is being accounted for as an operating lease, and the resulting net gain of approximately $0.4 million is being amortized over the respective life of the lease. In connection with this agreement, a loss of approximately $0.3 million was immediately recognized for the difference between the undepreciated cost and the fair value for certain assets. Under the agreement, Diaspa will maintain deposits, initially in the amount of approximately $9.8 million, which will be reduced over time as future lease payments are made.
The Company also leases two buildings, which are secured by a $4.8 million letter of credit, which in turn is collateralized by a $4.9 million certificate of deposit, that will be released provided the Company achieves certain financial milestones.
Included in deposits and other assets was $15.1 million and $5.3 million at December 31, 1999 and 1998, respectively deposited under these agreements. Rent expense for 1999, 1998, and 1997 was $7.5 million, $5.4 million, and $6.6 million, respectively.
Rent expense for 1999, 1998 and 1997 was net of $2.0 million, $1.2 million, and $1.0 million of sublease income, respectively.
Future minimum payments, by year and in the aggregate, under the aforementioned leases and other non-cancelable operating leases with initial or remaining terms in excess of one year as of December 31, 1999, are as follows (in thousands):
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
Future minimum rentals to be received under non-cancelable subleases as of December 31, 1999 totaled approximately $3.3 million.
15. INCOME TAXES
The provision for income taxes comprises the following (in thousands):
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate due to the following (in thousands):
Significant components of the Company's deferred tax assets and liabilities as of December 31, 1999 and 1998 are shown below. A valuation allowance of $118.6 million has been recognized as an offset to the deferred tax assets as of December 31, 1999 as realization of such assets is uncertain. The valuation allowance decreased by $16.8 million in 1999 and increased by $9.1 million and $14.3 million in 1998 and 1997, respectively. During the second quarter of 1999, the Company divested a 46% interest in Metabasis Therapeutics, Inc. Approximately $10.2 million of the 1999 valuation allowance decrease is attributable to the allocation of the gross deferred tax asset and related valuation allowance to Metabasis upon divestiture. The balance of reduction in the valuation allowance relates to current year activity.
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
At December 31, 1999, the Company had federal and California tax net operating loss carryforwards of approximately $253.6 million and $34.4 million, respectively. The difference between the net operating loss carryforwards for federal and California income tax purposes is primarily attributable to the capitalization of research and development costs for California purposes and the fifty percent limitation on California loss carryforwards. The federal tax loss carryforwards will begin expiring in 2005 unless previously utilized. The California tax loss carryforwards will begin to expire in 2000 unless previously utilized. Approximately $1.6 million of California tax loss carryforwards expired unused in 1999. The Company has Mexican tax loss carryforwards of approximately $1.0 million. The Mexican tax loss carryforwards will begin expiring in 2004, unless previously utilized. The Company has federal and California research and development tax credit carryforwards totaling $11.6 million and $4.4 million, respectively, which will begin to expire in 2001 unless previously utilized. The Company also has alternative minimum tax credit carryforwards of $0.7 million.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company's net operating loss and credit carryforwards is limited because of a cumulative ownership changes of more than 50% which occurred within the three year periods ending in 1997. The ownership change in 1997 had a material impact on the utilization of the net operating loss and credit carryforwards.
16. SEGMENT AND GEOGRAPHIC INFORMATION
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
The Company operates predominantly in one industry segment, that being the development, manufacture and marketing of injectable pharmaceuticals and the production of specialty bulk drug substances. The Company evaluates its performance based on operating earnings of the respective business units primarily by geographic area. The three main business units that correspond to each geographic area are as follows: (i) United States: SICOR, Gensia Sicor Pharmaceuticals, Genchem Pharma and Gensia Development Corporation; (ii) Italy: Sicor S.p.A. and Diaspa, and (iii) Mexico: Lemery, Sicor de Mexico, and Gensia Sicor de Mexico. Intergeographic sales are accounted for at prices that approximate arm's length transactions. Information regarding business geographic areas at December 31, 1999, 1998, and 1997 and for each of the years then ended is as follows (in thousands):
17. CONTINGENCIES
In July 1998, the Company was named as a defendant in a complaint filed by Protocol Systems, Inc. ("Protocol Systems"). The complaint alleged breach of a supply agreement (the "Supply Agreement"). In August 1999, the Company reached a settlement with Protocol Systems concerning the alleged breach of
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
the Supply Agreement. The resolution of the matter did not result in an adjustment to the Company's consolidated financial position or results of operations in 1999 as an adequate provision was previously recorded in the fourth quarter of 1998.
In February 1999, a lawsuit was filed by AstraZeneca PLC (formerly Zeneca Limited) ("AstraZeneca") in the U.S. District Court in Baltimore, Maryland against the Food and Drug Administration ("FDA") with regards to Gensia Sicor Pharmaceuticals' Abbreviated New Drug Application ("ANDA") for propofol. In the suit, AstraZeneca alleged that the FDA improperly approved Gensia Sicor Pharmaceuticals' propofol product. The Company believes this lawsuit is without merit, and that it represents AstraZeneca's continued legal maneuvering to stop the FDA approval of generic propofol. Gensia Sicor Pharmaceuticals intervened in the lawsuit to protect its interest and support the FDA in its defense of this lawsuit. The court denied AstraZeneca's motion for a preliminary injunction on March 26, 1999, and on August 11, 1999, granted Gensia Sicor Pharmaceuticals' and the FDA's motion for summary judgment and entered judgment in favor of the defendants. AstraZeneca has appealed this judgment to the United States Court of Appeals for the Fourth Circuit. Should AstraZeneca ultimately succeed on appeal in its litigation against the Company and the FDA, it could have a material adverse effect on the Company's financial position, results of operations or cash flows.
In April 1999, Gensia Sicor Pharmaceuticals filed a lawsuit in the Superior Court of California for Orange County against American Pharmaceutical Partners ("APP") for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of confidence, unfair competition and declaratory relief. The suit alleged that APP breached a distributorship agreement for some of Gensia Sicor Pharmaceuticals' products by, among other things, acquiring and operating a business which competes with Gensia Sicor Pharmaceuticals with respect to some of the same products. In December 1999, APP filed a cross-complaint against Gensia Sicor Pharmaceuticals asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, unjust enrichment, accounting and declaratory relief.
It has been reported that certain United States governmental agencies, including the Department of Justice and the Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers and used in the calculation of reimbursements under the Medicaid program administered jointly by the federal government and the states. The Company has supplied documents in connection with these investigations and has had preliminary discussions with representatives of the federal and state governments, but is unable to estimate at this time what effect, if any, these investigations will have on the Company's pricing policies or its financial statements. There can be no assurance that these investigations will not result in changes to the Company's pricing policies or other actions which might have a material adverse effect on the Company's financial position, results of operations or cash flows.
The Company is also a defendant in various actions, claims, and legal proceedings arising from its normal business operations. Management believes the Company has meritorious defenses and intends to vigorously defend against all allegations and claims. As the ultimate outcome of these matters is uncertain, no contingent liabilities or provisions have been recorded in the accompanying financial statements for such matters. However, in management's opinion, liabilities arising from such matters, if
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
any, will not have a material adverse effect on consolidated financial position, results of operations or cash flows.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 is as follows (in thousands, except per share data):
(1) Quarterly results for 1998 and 1999 were retroactively restated to reflect an accounting change at the Company's Italian subsidiary, Sicor S.p.A. for changing inventory accounting from the LIFO method to the FIFO method (see Note 3). Management believes the financial impact of restating quarterly earnings in both the current and prior years for this accounting change is immaterial. (2) Second quarter 1999 results included a $1.8 million of expenses related to the write-down of investment in Metabasis. (3) First quarter 1998 results included a $1.1 million of expenses related to the write-down of investment in Automedics. (4) Fourth quarter 1998 results included a $3.7 million of expenses related to the additional write-down of investment in Automedics and a charge for the Protocol Systems lawsuit.
19. EVENTS (UNAUDITED) SUBSEQUENT TO REPORT OF INDEPENDENT AUDITORS
In connection with the Chairman's Options as discussed in Note 9, the Company's Chairman of the Board was issued 500,000 shares of which 200,000 shares were fully vested at the time of grant, and the
SICOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999
remaining 300,000 shares were to vest in increments of 100,000 shares subject to meeting certain performance conditions. During the first quarter of 2000, the remaining 300,000 shares vested upon attainment of the stipulated conditions. Accordingly, the Company expects to record approximately $1.7 million in compensation expense due to the vesting of said options in the first quarter of 2000. An additional incentive compensation expense of $1 million relating to the Company's chairman is also expected to be recorded in the first quarter of 2000 upon the Company reaching the market capitalization of $1 billion in accordance with the letter agreement between the Company and Chairman of the Board. The payment is to be paid out in the form of an annuity over 10 years, which amount may be paid by the Company in stock or cash.
During the first quarter of 2000, the holders of $20 million of Subordinated Convertible Notes notified the Company that they intend to convert the Notes into the Company's Common Stock. The Notes are convertible into Common Stock at a conversion price of $3.78 per share or 5,291,005 shares.
In connection with the lawsuit between Gensia Sicor Pharmaceuticals and APP as discussed in Note 17, the Company and APP settled the litigation in March 2000. Management believes the settlement will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (with respect to Directors) is incorporated by reference from the information under the caption "Election of Directors" contained in the registrant's definitive proxy statement to be filed in connection with solicitation of proxies for its Annual Meeting of Stockholders to be held on June 27, 2000 (the "Proxy Statement"). The required information concerning Executive Officers of the Company is contained in Part I of this Form 10-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors, its executive officers, and any persons holding more than 10% of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to identify in this document (or documents incorporated by reference to this document) those persons who failed to timely file these reports. In 1999, all directors, executive officers and 10% stockholders timely filed all such reports.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the information under the caption "Compensation of Executive Officers and Directors" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the information under the caption "Stock Ownership of Management and Certain Beneficial Owners" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporation by reference from the information contained under the caption "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report
(1) Financial Statements Reference is made to the Index to Consolidated Financial Statements under Item 8 in Part II hereof, where these documents are listed.
(2) Financial Statement Schedules All schedules are omitted because they are not applicable, not required, or the information is shown either in the consolidated financial statements or in the notes thereto.
(3) Exhibits See (c) below.
(b) Reports on Form 8-K during the fourth quarter:
None
(c) Exhibits
The following documents are exhibits to this Form 10-K:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
3(i)(21) Restated Certificate of Incorporation of the Company, as amended. 3(ii)(11) By-Laws of the Company. 4.1(4) Warrant Agreement dated November 26, 1991 between the Company and First Interstate Bank, Ltd. (Warrant Agent). 4.2(7) Form of Certificate for the Company's Common Stock with Rights Legend (4.1)*. 4.3(10) Warrant Agreement dated April 10, 1996 between the Company and Domain Partners III, L.P. (4.1)*. 4.4(10) Warrant Agreement dated July 22, 1996 between the Company and MMC/GATX Partnership No. 1 (4.2)*. 4.5(11) Shareholder's Agreement dated November 12, 1996, as amended on December 21, 1996 and on February 28, 1997, between Gensia, Inc. and Rakepoll Finance N.V. (4.1)*. 4.6(14) Amendment No. 3, dated May 19, 1997, to the Shareholder's Agreement, dated November 12, 1996, as amended on December 21, 1996 and on February 28, 1997, between the Company and Rakepoll Finance N.V. (4.1)*. 4.7(14) Securities Purchase Agreement, dated May 1, 1997, by and between the Company and HCCP (4.2)*. 4.8(14) Registration Rights Agreement, dated May 19, 1997, by and between the Company and HCCP (4.3)*. 4.9(14) Form of 2.675% Subordinated Convertible Notes due May 1, 2004, issued to certain affiliates of HCCP (4.4)*. 4.10(14) Form of Common Stock Purchase Warrant, dated May 19, 1997, issued to certain affiliates of HCCP (4.5)*. 4.11(15) Form of Unit Purchase Agreement between the Company and certain accredited investors, dated as of March 27, 1997 (4.2)*.
4.12(17) Form of Unit Purchase Agreement between the Company and certain accredited investors, dated December 1997 (4.6)*. 4.13(18)+ Investor's Rights Agreement among the Company, Metabasis Therapeutics, Inc. and Sankyo Co., Ltd. dated December 18, 1997 (4.13)*. 4.14(19) Securities Purchase Agreement between the Company and Carlo Salvi dated December 1, 1998, including the 8% Subordinated Convertible Notes due January 10, 2001, and Registration Rights Agreement. 4.15(21) Form of Unit Purchase Agreement between the Company and certain investors (4.1)*. 10.1(1)# Form of Indemnification Agreement entered into between the Company and its directors (10.1)*. 10.2(6)# Amended and Restated 1990 Stock Plan of the Company (the "Plan"). 10.3(1)# Form of Incentive Stock Option Agreement under the Plan (10.3)*. 10.4(1)# Form of Nonstatutory Stock Option Agreement under the Plan (10.4)*. 10.5(2)# Form of Indemnification Agreement entered into between the Company and its officers and certain key employees (10.50)*. 10.6(3) Form of Warrant issued to MMC/GATX Partnership No. 1 (10.56)*. 10.7(5) Stockholder Rights Plan dated March 9, 1992. 10.8(8) Lease agreement between Gena Property Company and the Company dated as of December 21, 1993. 10.9(9) Form of Severance Agreement for officers and certain other employees. 10.10(12) Amendment No. 1 to Stockholder Rights Agreement dated November 12, 1996. 10.11(13) Factoring agreement, dated September 25, 1997, by and between the Company and Silicon Valley Financial Services (a division of Silicon Valley Bank) (10.1)*. 10.12(15)+Supply Agreement between and among Sicor S.p.A., Alco Chemicals, Ltd. and Boehringer Ingelheim International GmbH, dated September 23, 1996 (10.2)*. 10.13(15)+Distribution and Supply Agreement between and among the Sicor S.p.A. and Alco Chemicals, Ltd. and The Upjohn Company, dated as of January 1, 1994 (10.3)*. 10.14(15) Manufacturing Agreement between Sicor S.p.A. and Alco Chemicals, Ltd., dated July 16, 1992 (10.12)*. 10.15(15) Service Agreement between Sintesis Lerma and Grupo Fairmex S.A. de C.V., dated January 2, 1995 (10.13)*. 10.16(15) Letter Agreement between the Company and Donald E. Panoz, dated March 18, 1997 (10.14)*. 10.17(16)+Cyclosporine Amended and Restated Supply and License Agreement, dated as of March 31, 1997, between and among the Company, Alco Chemicals, Ltd., Vinchem, Inc. and Sangstat. 10.18(14) Agreement, dated as of April 15, 1997, by and between Sicor de Mexico S.A. de C.V. and Alco Chemicals, Ltd. (10.2)*. 10.19(14)+Agreement, dated as of April 15, 1997, by and between Genchem Pharma, Ltd. and Alco Chemicals, Ltd. (10.3)*. 10.20(14) Agreement, dated as of January 1, 1997, by and between Sicor S.p.A. and Alco Chemicals, Ltd. (10.4)*. 10.21(18)+Amendment No. One to Cyclosporine Amended and Restated Supply and License Agreement dated as of December 22, 1997 between the Company and Sangstat Medical Corporation (the Transplant Company) (10.41)*. 10.22(18) Asset and Liability Transfer Agreements by and among Gensia Automedics, Inc., the Company and Gensia Sicor Pharmaceuticals, Inc. dated December 23, 1997 (10.44)*. 10.23(19) Loan and Security Agreement, dated September 29, 1998, as amended on October 30, 1998 and November 4, 1998, by and between the Company and Coast Business Credit (a division of Southern Pacific Bank) (10.34)*.
10.24(20)+Sales and Distribution Agreement dated as of January 28, 1999 between Gensia Sicor Pharmaceuticals and Abbott Laboratories, Inc. (10.1)*. 10.25(21) Employment Agreement dated June 1, 1999 between the Company and Frank C. Becker (10.1)*. 10.26(22) Amended and Restated Employee Stock Purchase Plan (10.1)*. 10.27(23) Amended and Restated 1997 Long-Term Incentive Plan (10.1)*. 18 Preference Letter re: Change in Accounting Principles re: LIFO to FIFO. 21.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule. - - - - - - - - ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-34565). (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-38877). (3) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-43221). (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (No. 0-18549). (5) Incorporated by reference to the Company's Current Report on Form 8-K dated March 16, 1992 (No. 0-18549). (6) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-95152). (7) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 33-94778). (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (0-18549). (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (0-18549). (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (0-18549). (11) Incorporated by reference to the Company's Report on Form 8-K dated February 28, 1997 (0-18549). (12) Incorporated by reference to the Company's Annual Report of Form 10-K for the fiscal year ended December 31, 1996 (0-18549). (13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (0-18549). (14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (0-18549). (15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (0-18549). (16) Incorporated by reference to Exhibit 10.24 of SangStat Medical Corporation's (the Transplant Company) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 000-22890). (17) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 332-44563). (18) Incorporated by reference to the Company's Annual Report of Form 10-K, as amended by Amendment No. 1, filed on May 6, 1998 and Amendment No. 2, filed on May 20, 1998, for the fiscal year ended December 31, 1997 (0-18549). (19) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (0-18549). (20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (0-18549). (21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (0-18549). (22) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-83079). (23) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-83077).
* Parenthetical references relate to the exhibit number under which such exhibit was initially filed. # Indicates management contract or compensatory plan or arrangement. + Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SICOR INC.
Date: March 29, 2000 By: /s/ Carlo Salvi ------------------------------------ Carlo Salvi, President and Chief Executive Officer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURES
EXHIBIT INDEX