Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from............... to ...............
Commission file number 001-10546
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State of Incorporation) (I.R.S. Identification No.)
10030 Barnes Canyon Road
San Diego, California 92121
(619) 812-7001
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
The number of shares outstanding of the issuer's common stock, $.01 par value,
as of October 23, 1998 was 18,580,745 shares.
INDEX PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
1. Consolidated Balance Sheets 3
March 31, 1998 (audited) and September 30, 1998
2. Consolidated Statements of Operations 4
Three Months Ended September 30, 1997 and 1998
Six Months Ended September 30, 1997 and 1998
3. Consolidated Statements of Cash Flows 5
Six Months Ended September 30, 1997 and 1998
4. Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Securities Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
Signatures 16
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
March 31, 1998
1998 (Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,064 $ 749
Marketable securities, available-for-sale 20,274 21,242
Accounts and notes receivable 1,498 10,752
License rights 8,500 -
Inventories 1,902 1,628
Prepaid expenses and other assets 400 359
----------- -----------
Total current assets 33,638 34,730
----------- -----------
Property and equipment, at cost:
Building and improvements 14,412 14,412
Equipment, furniture and fixtures 4,364 4,144
Construction in progress 471 1,192
----------- -----------
19,247 19,748
Less: Accumulated depreciation and amortization 7,073 7,247
----------- -----------
Total property and equipment 12,174 12,501
----------- -----------
Other assets:
Patents and license rights, net of amortization
$87 and $127 respectively 320 330
Certificate of deposit, pledged 3,000 -
Other assets, net 2,186 2,089
----------- -----------
Total other assets 5,506 2,419
----------- -----------
$ 51,318 $ 49,650
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,272 $ 1,272
Accounts payable and accrued liabilities 7,498 9,839
Compensation accruals 2,227 1,888
Deferred revenue 1,575 -
----------- -----------
Total current liabilities 12,572 12,999
----------- -----------
Long-term debt, net of current portion 6,082 5,447
Other noncurrent liabilities 1,500 -
Commitments and contingencies (Note 2)
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized, 17,846,237 and 18,576,745 shares
issued and outstanding, respectively 178 186
Additional paid-in capital 128,145 134,347
Accumulated deficit (96,729) (103,057)
Unrealized gain (loss) on available-for-sale securities (67) 92
Less 40,470 shares of treasury stock, at cost (363) (363)
----------- -----------
Total stockholders' equity 31,164 31,205
----------- -----------
$ 51,318 $ 49,650
=========== ===========
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
1997 1998 1997 1998
---------- ----------- ---------- -----------
Revenues:
Revenues under collaborative agreements $ 1,345 $ 1,248 $ 2,595 $ 2,498
Product and royalty revenues 81 1,418 305 2,785
License fees - - - 16,371
---------- ----------- ---------- -----------
1,426 2,666 2,900 21,654
---------- ----------- ---------- -----------
Operating expenses:
Research and development costs 2,680 2,409 4,865 4,636
Costs of products sold 970 1,801 2,481 3,440
Selling, general and administrative expenses 2,751 5,740 5,791 9,609
Other nonrecurring charges - - - 9,378
---------- ----------- ---------- -----------
6,401 9,950 13,137 27,063
---------- ----------- ---------- -----------
Loss from operations (4,975) (7,284) (10,237) (5,409)
Interest expense (186) (154) (377) (314)
Interest income 540 370 1,194 795
---------- ----------- ---------- -----------
Loss before income taxes (4,621) (7,068) (9,420) (4,928)
Foreign income tax provision - - - (1,400)
---------- ----------- ---------- -----------
Net loss $ (4,621) $ (7,068) $ (9,420) $ (6,328)
========== =========== ========== ===========
Loss per common share - basic and diluted $ (0.26) $ (0.38) $ (0.53) $ (0.34)
========== =========== ========== ===========
Weighted average common shares outstanding 17,768 18,581 17,760 18,547
========== =========== ========== ===========
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
Six Months Ended
September 30,
1997 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (9,420) $ (6,328)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 618 215
Write-off of license fees - 8,500
Loss on disposals of property and equipment 3 -
Premium received on Chugai Investment - (2,371)
Changes in operating assets and liabilities:
Receivables (87) (9,352)
Inventories (602) 274
Prepaid expenses and other assets 263 140
Accounts payable and accrued liabilities 837 2,841
Deferred contract revenues - (1,575)
Compensation accruals (450) (339)
---------- ----------
Cash used in operating activities (8,838) (7,994)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (566) (501)
Proceeds from sale of property and equipment 2 -
Additions to patents and license rights - (50)
Purchase of license rights from Shionogi (2,000) (2,000)
Decrease in other assets 17 97
Decrease in marketable securities 11,250 2,189
---------- ----------
Cash provided by (used in) investing activities 8,703 (266)
---------- ----------
Cash flows from financing activities:
Net proceeds from sale of Common Stock to Chugai - 8,300
Net proceeds from stock options exercised 281 281
Principal payments on long-term debt (630) (635)
---------- ----------
Cash provided by (used in) financing activities (349) 7,946
---------- ----------
Decrease in cash and cash equivalents (484) (315)
Cash and cash equivalents, beginning of period 587 1,064
---------- ----------
103 749
========== ==========
Supplemental cash flow disclosures:
Interest income received $ 1,285 $ 944
========== ==========
Interest paid $ 374 $ 312
========== ==========
NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation-
These interim Consolidated Financial Statements of Molecular
Biosystems, Inc. and Subsidiaries (the "Company") should be read in conjunction
with the Consolidated Financial Statements of the Company and related Notes
filed with the Company's Annual Report on Form 10-K for the year ended March 31,
1998.
These interim Consolidated Financial Statements of the Company have not
been audited by independent public accountants. However, in the opinion of the
Company, all adjustments required for a fair presentation of the financial
position of the Company as of September 30, 1998, and the results of its
operations for the six-months ended September 30, 1997 and 1998, and its cash
flows for the six-months ended September 30, 1997 and 1998, have been made. The
results of operations for these interim periods are not necessarily indicative
of the operating results for the full year.
(2) Commitments and Contingencies-
In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid
on a variety of independent grounds under U.S. patent law. In addition to
requesting that all of the patents in question be declared invalid, the
complaint requests a declaration that, contrary to defendants' contentions, the
Company and Mallinckrodt do not infringe the defendants' patents, and asks that
defendants be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON(R), the Company's second generation ultrasound contrast agent,
and will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the
complaint on jurisdictional grounds. In January 1998, the court dismissed each
of the defendants except Nycomed, ruling that the court lacked jurisdiction over
those defendants with respect to the Company's claims of patent invalidity and
non infringement. The court's ruling does not purport to rule on the merits of
the Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus
activated a patent infringement lawsuit (the "Sonus Case") which it had filed in
August 1997 against the Company and Mallinckrodt in the United States District
Court for the Western District of Washington. Although the complaint was filed
in August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. These two patents are the same patents for which the Company was
seeking a declaration of invalidity in the MBI Case. As discussed below, in
conjunction with the reexamination proceedings, the PTO has issued a final
rejection of all relevant claims of the patents involved in the Sonus Case and
the MBI Case.
Beginning in July 1997, the Company received the first of five notices
from the PTO granting the Company's petitions for reexamination which it had
filed with respect to five patents held by three potential competitors, Sonus,
Nycomed and ImaRx. Each of the five notices stated there was a substantial new
question of patentability raised by the Company's petitions with respect to all
claims of the patents. Each of the patents in the reexamination process is
related to the use of perfluorocarbon gases in ultrasound contrast agents and is
included among the patents for which the Company was seeking a declaration of
invalidity in the MBI Case (and for which the Company is continuing to seek a
declaration of invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in
connection with the Company's patent reexamination petitions filed against
Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of
these patents based on prior art not previously disclosed to the PTO by Sonus,
Nycomed or ImaRx during prosecution of their patent applications. In June 1998,
the PTO issued a final rejection of all claims of the two Sonus patents involved
in the Sonus Case. In August 1998, the PTO issued a final rejection of all
relevant claims of the Nycomed patent involved in the MBI Case. If the PTO
rejections are maintained on any appeal subsequently filed by Sonus or Nycomed,
the patents which Sonus and Nycomed are attempting to assert against the Company
and Mallinckrodt to block the manufacture and sale of OPTISON will be
invalidated.
Litigation or administrative proceedings relating to these matters
could result in a substantial cost to the Company; and given the complexity of
the legal and factual issues, the inherent vicissitudes and uncertainty of
litigation, and other factors, there can be no assurance of a favorable outcome.
An unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can be
no assurance that, in the event of an unfavorable outcome, the Company would be
able to obtain a license to any proprietary rights that may be necessary to
commercialize OPTISON, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, the Company's
failure or inability to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
(3) Earnings per Share -
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS). SFAS 128 requires companies to compute net income (loss) per share under
two different methods, basic and diluted per share data for all periods for
which an income statement is presented. Basic earnings per share was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if net income were divided by the weighted-average
number of common shares and potential common shares from outstanding stock
options for the period. Potential common shares are calculated using the
treasury stock method and represent incremental shares issuable upon exercise of
the Company's outstanding options. For the quarters and six months ended
September 30, 1997 and 1998, the diluted loss per share calculation excludes
effects of outstanding stock options as such inclusion would be anti-dilutive.
(4) The Chugai Agreement -
In April, 1998, the Company entered into a cooperative development and
marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan.
The parties entered into this strategic alliance which covers Japan, Taiwan and
South Korea, to develop OPTISON (which may be marketed under a different name)
and ORALEX(R), as well as related products. The Company granted Chugai an
exclusive license to develop, manufacture, and market these products
in the subject territory, for which the Company received an up-front license
fee of $14 million in the first quarter of fiscal year 1999.
With respect to licensed products manufactured by Chugai, Chugai will
pay the Company a royalty on net sales. For licensed products manufactured by
the Company, the Company will receive royalties on net sales, the amount of
which will depend upon the sales volume, in addition to a transfer price based
on average net sales per unit from the previous quarter.
Additionally, Chugai purchased 691,883 shares of the Company's common
stock at a premium of 40% over the then-prevailing market price. This premium
was equal to $2.4 million and was recognized as revenue in the first quarter of
fiscal year 1999. The equity investment was valued at $8.3 million. The Company
is also eligible to receive milestone payments of up to $20 million based on
Chugai's achievement of certain Japanese product development and regulatory
goals.
The accompanying consolidated statements of operations incorporate the
impact of the Chugai transaction. Pro forma unaudited consolidated operating
results of the Company for the six month period ended September 30, 1998,
excluding the impact of the Chugai transaction, are summarized below (in
thousands, except per share amounts):
Results Pro forma
Including Impact of Results
Chugai Chugai Excluding
Transaction Transaction Chugai
-----------------------------------------
Revenues $ 21,654 $ 16,371 $ 5,283
Operating Expenses (27,063) (9,378) (17,685)
Interest Income, Net 481 - 481
-----------------------------------------
Income (Loss) before income taxes $ (4,928) $ 6,993 $(11,921)
Foreign income taxes (1,400) (1,400) -
=========================================
Net Income (Loss) $ (6,328) $ 5,593 $(11,921)
=========================================
Net Income (Loss) per share - Basic and Diluted $ (0.34) $ 0.30 $ (0.64)
Weighted Avg Common Shares Outstanding 18,547 18,547 18,547
These unaudited pro forma results have been prepared for comparative
purposes only.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following management discussion and analysis should be read in
conjunction with (1) the current Consolidated Financial Statements and (2) the
Company's Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations in its
Annual Report on Form 10-K for the year ended March 31, 1998.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, regulatory approval,
research and development activities and similar matters. A variety of factors
could cause the Company's actual results and experience to differ materially
from the Company's anticipated results or other expectations. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include the expense and uncertain outcome of
the litigation described under the caption "Recent Events," including the
possibility of injunctive relief to competitors prohibiting the sale of
OPTISON(R); a ruling by the Patent and Trademark Office ("PTO") in the pending
patent reexamination proceedings favoring competitors' patents; delays or an
inability to bring OPTISON to market in Europe as a result of regulatory
delays or patent litigation; difficulties and delays with respect to the
performance of clinical trials; delays by regulatory authorities in approving
additional indications for OPTISON, including the evaluation of myocardial
perfusion; manufacturing problems; difficulties and delays with respect to
marketing and sales activities; general uncertainties accompanying the
development and introduction of new products; and other risk factors reported
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
Recent Events
In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid
on a variety of independent grounds under U.S. patent law. In addition to
requesting that all of the patents in question be declared invalid, the
complaint requests a declaration that, contrary to defendants' contentions, the
Company and Mallinckrodt do not infringe the defendants' patents, and asks that
defendants be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON, the Company's second generation ultrasound contrast agent, and
will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the
complaint on jurisdictional grounds. In January 1998, the court dismissed each
of the defendants except Nycomed, ruling that the court lacked jurisdiction over
those defendants with respect to the Company's claims of patent invalidity and
non infringement. The court's ruling does not purport to rule on the merits of
the Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus
activated a patent infringement lawsuit (the "Sonus Case") which it had filed in
August 1997 against the Company and Mallinckrodt in the United States District
Court for the Western District of Washington. Although the complaint was filed
in August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. These two patents are the same patents for which the Company was
seeking a declaration of invalidity in the MBI Case. As discussed below, in
conjunction with the reexamination proceedings, the PTO has issued a final
rejection of all relevant claims of the patents involved in the Sonus Case and
the MBI Case.
Beginning in July 1997, the Company received the first of five notices
from the PTO granting the Company's petitions for reexamination which it had
filed with respect to five patents held by three potential competitors, Sonus,
Nycomed and ImaRx. Each of the five notices stated there was a substantial new
question of patentability raised by the Company's petitions with respect to all
claims of the patents. Each of the patents in the reexamination process is
related to the use of perfluorocarbon gases in ultrasound contrast agents and is
included among the patents for which the Company was seeking a declaration of
invalidity in the MBI Case (and for which the Company is continuing to seek a
declaration of invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in
connection with the Company's patent reexamination petitions filed against
Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of
these patents based on prior art not previously disclosed to the PTO by Sonus,
Nycomed or ImaRx during prosecution of their patent applications. In June 1998,
the PTO issued a final rejection of all claims of the two Sonus patents involved
in the Sonus Case. In August 1998, the PTO issued a final rejection of all
relevant claims of the Nycomed patent involved in the MBI Case. If the PTO
rejections are maintained on any appeal subsequently filed by Sonus or Nycomed,
the patents which Sonus and Nycomed are attempting to assert against the Company
and Mallinckrodt to block the manufacture and sale of OPTISON will be
invalidated.
Litigation or administrative proceedings relating to these matters
could result in a substantial cost to the Company; and given the complexity of
the legal and factual issues, the inherent vicissitudes and uncertainty of
litigation, and other factors, there can be no assurance of a favorable outcome.
An unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there can be
no assurance that, in the event of an unfavorable outcome, the Company would be
able to obtain a license to any proprietary rights that may be necessary to
commercialize OPTISON, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, the Company's
failure or inability to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
Liquidity and Capital Resources
At September 30, 1998, the Company had net working capital of $21.7
million compared to $21.1 million at March 31, 1998. Cash, cash equivalents,
marketable securities and certificates of deposit were $22.0 million at
September 30, 1998 compared to $24.3 million at March 31, 1998. The cash balance
at September 30, 1998 does not include $6.4 million of the $22.3 million in
up-front payments due from Chugai, which will be received in quarterly
installments during the remainder of fiscal year 1999.
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. The Company
anticipates that its existing resources, including the proceeds of the public
offering in May 1996, up-front license fees received from Chugai, and interest
thereon, plus payments under its collaborative agreements with Mallinckrodt and
Chugai, will enable the Company to fund its operations for at least the next
fifteen months. The Company continually reviews its product development
activities in an effort to allocate its resources to those products that the
Company believes have the greatest commercial potential. Factors considered by
the Company in determining the products to pursue may include, but are not
limited to, the projected markets, potential for regulatory approval, technical
feasibility and estimated costs to bring the product to the market. Based upon
these factors, the Company may from time to time reallocate its resources among
its product development activities.
The Company may pursue a number of options to raise additional funds,
including borrowings; lease arrangements; collaborative research and development
arrangements with pharmaceutical companies; the licensing of product rights to
third parties; or additional public and private financing, as capital
requirements change as a result of strategic, competitive, technological and
regulatory factors. There can be no assurance that funds from these sources will
be available on favorable terms, or at all.
Results of Operations
Revenues Under Collaborative Agreements. Revenues under collaborative
agreements were $1.2 million and $2.5 million for the three-month and six-month
periods ended September 30, 1998 compared to $1.3 million and $2.6 million for
the same periods in the prior year. These revenues in both years consist of
quarterly payments to support clinical trials, regulatory submissions and
product development received from Mallinckrodt under the Company's amended
agreement with Mallinckrodt which the Company entered into in September 1995.
Product and Royalty Revenues. Revenues from product sales and royalties
were $1.4 million and $2.8 million for the three-month and six-month periods
ended September 30, 1998, compared to $100,000 and $300,000 for the same periods
in the prior year. Product revenues come from the Company's sales of OPTISON to
Mallinckrodt in the case of the quarter ended September 30, 1998 and from the
Company's sales of ALBUNEX(R) to Mallinckrodt in the case of the quarter ended
September 30, 1997. Product revenues were recognized upon shipment of the
product.
The transfer price for the Company's sales of OPTISON to Mallinckrodt
is approximately equal to 40% of Mallinckrodt's average net sales price to its
end users of the product for the immediately preceding quarter. Pursuant to
the Company's Amended and Restated Distribution Agreement ("ARDA"), the average
net sales price to end users is calculated by dividing the net sales for the
preceding quarter by the total number of units shipped to end users whether
paid for or shipped as samples. Consistent with industry practice, the Company
considers samples a marketing expense and as such the cost of samples is
recorded as selling, general and administrative expense.
The transfer price for the Company's sales of ALBUNEX to Mallinckrodt
was determined pursuant to ARDA and was approximately equal to 40% of
Mallinckrodt's average net sales price to its end users of the product.
Although Mallinckrodt's sales of OPTISON have improved slightly in each
of the past two quarters, the Company anticipates that its sales to Mallinckrodt
will be reduced in the near term as Mallinckrodt manages its current inventory
of the product. The Company expects that revenues from sales of OPTISON for the
quarters ended December 31, 1998, and March 31, 1999, will be lower than
revenues from sales of OPTISON for the quarters ended June 30, 1998, and
September 30, 1998. To address this issue, the Company is working with
Mallinckrodt to increase the awareness of physicians and third party payors
about the benefits of OPTISON. The Company's expectation is based on
management's current judgment, which may change in the future based on numerous
potential events, including unanticipated increases in purchases of OPTISON by
end-users. As a result of the Company's reduced expectation for sales of
OPTISON, the Company is actively evaluating cost reduction measures. During its
fiscal third quarter the Company expects to finalize and to begin implementing
its cost reduction measures.
Royalty revenues are pursuant to a licensing agreement between the
Company and Abbott Laboratories.
Costs of Products Sold. Cost of products sold totaled $1.8 million and
$3.4 million for the three-month and six-month periods ended September 30, 1998,
resulting in a negative gross profit margin. This negative gross profit margin
was due to the fact that the current low levels of production are insufficient
to cover the Company's fixed manufacturing overhead expenses. For the same
quarter in the prior year, cost of products sold totaled $1.5 million. The
Company anticipates an increase in its gross profit margins as OPTISON sales
volume increases. The increase in sales volume will permit fixed costs included
in manufacturing overhead to be allocated over a larger number of vials
produced. Manufacturing fixed costs are currently running at an annual rate of
approximately $5.5 million. The amount of any increase in the Company's margins
and the time required by the Company to achieve higher margins are highly
dependent on the market acceptance of OPTISON and are therefore uncertain.
Research and Development Costs. For the three-month and six-month
periods ended September 30, 1998, the Company's research and development costs
totaled $2.4 million and $4.6 million, as compared to $2.7 million and $4.9
million for the same periods in fiscal year 1997.
Selling, General and Administrative Expenses. For the three-month and
six-month periods ended September 30, 1998, the Company's selling, general and
administrative expenses totaled $5.7 million and $9.6 million, as compared to
$2.8 million and $5.8 million for the same periods in fiscal year 1997.
This increase in the current year is primarily due to continuing legal expenses
and marketing costs associated with the launch of OPTISON.
Other Nonrecurring Charges and Foreign Income Taxes. Total operating
expenses for the three-month and six-month periods ended September 30, 1998 were
$10.0 million and $27.1 million compared to $6.4 million and $13.1 million for
the same periods in fiscal year 1998. The increase is primarily due to a
non-cash, non-recurring expense of $8.5 million related to the sale to Chugai of
territory rights previously reacquired from Shionogi. Additionally, the company
paid $1.4 million in foreign taxes related to the Chugai alliance.
Interest Expense and Interest Income. Interest expense for the
three-month and six-month periods ended September 30, 1998 amounted to $154,000
and $314,000, compared to $186,000 and $377,000 for the same periods in the
prior year, and consisted of mortgage interest on the Company's manufacturing
building and interest on a note payable which is secured by the tangible assets
of the Company. The interest rate on the mortgage was 8% in September 1998.
The terms of the note payable were renegotiated during the current
quarter. Prior to this revision, interest on the note payable was calculated at
prime plus 1%, equal to 9.5% in September, 1998, and the note payable was
secured by a $3 million pledged certificate of deposit. Effective September 18,
1998, interest on the loan was reduced to prime and the pledged certificate of
deposit was released as collateral. The note is payable in monthly installments
of principal plus interest over five years.
Interest income for the three-month and six-month periods ended
September 30, 1998 was $370,000 and $795,000 compared to $540,000 and $1.2
million for the same periods in the prior year. The decrease in interest income
in the current year is due to lower average cash and marketable securities
balances. The Company's cash is invested primarily in short-term, fixed
principal investments, such as U.S. Government agency issues, corporate bonds,
certificates of deposit and commercial paper.
Pro forma Results. See Note 4 in Notes to the Financial Statements for
a discussion of quarterly results excluding the impact of the Chugai
transaction.
Year 2000 Readiness. The Year 2000 problem is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or miscalculations,
which could disrupt operations, including product development, manufacturing,
the processing of transactions and other normal business activities. The
Year 2000 problem may also create unforeseen risks to the Company from its
internal computing systems as well as from computer systems of third parties
with which it deals.
The Company has conducted a comprehensive review of its information
technology ("IT") and non information technology ("Non-IT") systems to identify
the systems that could be affected by the "Year 2000" issue and has developed
a plan to assess and resolve Year 2000 problems with its IT and Non-IT
systems. The plan includes five phases: inventory, assessment, evaluation,
implementation and testing. The Company has completed the inventory phase on its
IT systems and has identified all IT systems that the Company believes are
at risk. The Company is in the process of inventorying its Non-IT systems and
expects to have identified all Non-IT systems that are at risk within the
next few months.
The Company has already initiated the assessment phase (in which
systems that were inventoried are prioritized) on the IT-Systems and expects to
start on the Non-IT systems in the very near future. The Company estimates that
the assessment phase for all systems should be complete by January 1999.
Immediately following completion of the assessment phase, the Company will begin
the evaluation phase which involves testing systems and determining which IT and
Non IT systems need to be replaced, repaired or retired. The evaluation phase is
expected to take approximately 3 months.
Once the evaluation phase is complete, the Company will begin the
implementation phase and repair/replace all noncompliant systems (both IT and
Non-IT), convert data as necessary, and obtain compliance statements. The
implementation phase is expected to take three to four months to complete.
Finally, the Company will test and validate the repaired noncompliant IT and
Non-IT systems for compliance. This final phase of the process should take 3
months and should be complete by October 1999.
In addition, the Company is in the process of conducting a
comprehensive review of its vendors, service providers (including financial
institutions and insurance companies), and collaborative partners. Although this
assessment is not yet complete, the Company is not currently aware of any
material Year 2000 issues with respect to its dealings with such third parties.
However, if the Company discovers Year 2000 problems with such third parties'
systems, the Company will be unable to control whether its current and future
suppliers', service providers' or collaborative partners' systems are Year 2000
compliant. To the extent that such third parties would be hindered by Year 2000
problems, the Company's operations could be materially adversely affected.
The Company anticipates that its assessment of both internal and third
party IT and Non-IT systems will be complete by October 31, 1999. At this time,
the Company believes that the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. The Company also
expects that the total costs required to fix the Year 2000 problem will be
immaterial. To date, the Company has not used, and does not plan to use, any
independent verification and validation process to assess the reliability of the
Company's risk and cost estimates. Since no significant issues have arisen, the
Company does not have a contingency plan to address any material 2000 issues. If
significant Year 2000 issues arise, the Company may not be able to timely
develop and implement a contingency plan and the Company's operations could be
adversely affected.
Prospective Information
Although Mallinckrodt's sales of OPTISON have improved slightly in each
of the past two quarters, the Company anticipates that its sales to Mallinckrodt
will be reduced in the near term as Mallinckrodt manages its current inventory
of the product. The Company expects that revenues from sales of OPTISON for the
quarters ended December 31, 1998, and March 31, 1999, will be lower than
revenues from sales of OPTISON for the quarters ended June 30, 1998, and
September 30, 1998. To address this issue, the Company is working with
Mallinckrodt to increase the awareness of physicians and third party payors
about the benefits of OPTISON. The Company's expectation is based on
management's current judgment, which may change in the future based on numerous
potential events, including unanticipated increases in purchases of OPTISON by
end-users. As a result of the Company's reduced expectation for sales of
OPTISON, the Company is actively evaluating cost reduction measures. During its
fiscal third quarter the Company expects to finalize and to begin implementing
its cost reduction measures.
The Company is involved in several legal and administrative proceedings
which could result in a substantial cost to the Company. Given the complexity of
the legal and factual issues and the uncertainty of litigation, there can be no
assurance of a favorable outcome. An unfavorable outcome could have a material
adverse effect on the Company's business, financial condition and results of
operations. For a detailed discussion of these matters, see "Recent Events."
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
See "Recent Events" in Part I, Item 2, which is incorporated by
reference in this response.
Item 2-4 - The Company has nothing to report with respect to these items during
the quarter ended September 30, 1998.
Item 5 - OTHER INFORMATION
Dates for Submission of Stockholder Proposals:
Any stockholder of the Company who wishes to present a proposal to be
considered at the 1999 Annual Meeting of Stockholders and who, pursuant to Rule
14a-8 of the Securities and Exchange Commission, wishes to have the proposal
included in the Company's proxy statement and form of proxy for that meeting,
must submit the proposal in writing to the Company at 10070 Barnes Canyon Road,
San Diego, California 92121, so that it is received by February 16, 1999.
Any stockholder of the Company who wishes to present a proposal to be
considered at the 1999 Annual Meeting of Stockholders, but to do so outside of
the processes of Rule 14a-8, must submit the proposal in writing to the Company
at 10070 Barnes Canyon Road, San Diego, California 92121, so that it is received
by April 30, 1999.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 Severance Agreement between the Company and
Kenneth J. Widder, M.D., effective as of September 4, 1998.
(b) Reports on Form 8-K -
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements 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.
MOLECULAR BIOSYSTEMS, INC.
/s/ Gerard Wills
Gerard A. Wills
Vice President Finance and
Chief Financial Officer
11/3/98
Date