FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number 0-15313
BIO-TECHNOLOGY GENERAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3033811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Wood Avenue South, Iselin, New Jersey 08830
(Address of principal executive offices)
(732) 632-8800
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, par value $.01 per share, outstanding as of
May 1, 2001: 57,264,058
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000......................................................3
Consolidated Statements of Operations
for the three months ended
March 31, 2001 and 2000...................................................................4
Consolidated Statement of Changes in
Stockholders' Equity for the three
months ended March 31, 2001...............................................................5
Consolidated Statements of Cash Flows
for the three months ended
March 31, 2001 and 2000...................................................................6
Notes to Consolidated Financial Statements...................................................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................................10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................................18
Item 6. Exhibits and Reports on Form 8-K............................................................18
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31,
2001(Unaudited) December 31, 2000
- ----------------------------------------------------------------------------------------------- ----------------------
ASSETS:
Current Assets
Cash and cash equivalents....................................... $ 55,487 $ 26,353
Short-term investments.......................................... 58,675 93,217
Accounts receivable............................................. 50,615 39,188
Inventories..................................................... 10,050 9,880
Deferred income taxes........................................... 2,445 2,445
Prepaid expenses and other current assets....................... 1,838 989
--------- ----------
Total current assets ........................................ 179,110 172,072
--------- ----------
Deferred income tax............................................. 13,170 5,745
Account receivable ............................................. 1,703 1,703
Severance pay funded............................................ 2,224 2,321
Property and equipment, net..................................... 31,663 27,819
Other investment................................................ 5,000 ---
Other assets.................................................... 3,641 3,565
--------- ----------
Total assets ................................................ $236,511 $213,225
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Deferred revenues............................................... $1,151 $1,153
Accounts payable ............................................... 10,091 6,420
Other current liabilities ...................................... 29,299 11,155
--------- ----------
Total current liabilities ................................... 40,541 18,728
--------- ----------
Negative goodwill.................................................... 18,357 ---
Long-term debt....................................................... 20,126 20,000
Deferred revenues.................................................... 10,265 10,551
Provision for severance pay.......................................... 4,451 4,593
Stockholders' equity:
Preferred stock - $.01 par value; 4,000,000
shares authorized; no shares issued.......................... --- ---
Common stock - $.01 par value; 150,000,000 shares
authorized; issued: 57,177,000 (54,765,000 at
December 31, 2000)........................................... 572 547
Capital in excess of par value ................................. 199,113 179,586
Deficit......................................................... (50,946) (14,817)
Accumulated other comprehensive loss............................ (5,968) (5,963)
--------- ----------
Total stockholders' equity .................................. 142,771 159,353
--------- ----------
Total liabilities and stockholders' equity ............... $236,511 $213,225
========= ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)
Three Months Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------
2001 2000*
--------------------------------------------------
Revenues:
Product sales...................................................... $ 29,887 $12,507
Contract fees...................................................... 289 1,838
Royalties ......................................................... 843 635
Other revenues..................................................... 221 432
Interest income.................................................... 2,496 1,351
----------- ----------
33,736 16,763
----------- ----------
Expenses:
Research and development........................................... 5,930 5,397
Cost of product sales.............................................. 5,139 2,336
General and administrative......................................... 3,277 3,446
Marketing and sales................................................ 4,741 3,256
Royalties.......................................................... 646 654
Interest and finance............................................... 17 30
Write-off of in-process research and development acquired.......... 45,600 --
----------- ----------
65,350 15,119
----------- ----------
Income (loss) before income taxes..................................... (31,614) 1,644
Income taxes.......................................................... 4,515 559
----------- ----------
Income (loss) before cumulative effect of change in
accounting principle............................................... (36,129) 1,085
Cumulative effect of change in accounting principle.................. -- (8,178)
----------- ----------
Net loss............................................................. $(36,129) $(7,093)
=========== ==========
Earnings per common share:
Basic:
Income (loss) before cumulative effect of change in
accounting principle............................................ $ (0.66) $ 0.02
Cumulative effect of change in accounting principle............... -- (0.15)
----------- ----------
Net loss.......................................................... $ (0.66) $ (0.13)
=========== ==========
Diluted:
Income (loss) before cumulative effect of change in accounting
principle....................................................... $ (0.66) $ 0.02
Cumulative effect of change in accounting principle............... -- (0.14)
----------- ----------
Net loss.......................................................... $ (0.66) $ (0.12)
=========== ==========
Weighted average number of common and common equivalent shares
Basic ............................................................ 55,117 53,748
=========== ==========
Diluted .......................................................... 55,117 57,373
=========== ==========
* See Note 3
The accompanying notes are an integral part of these consolidated statements.
4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
Stock Capital in Other Total
Common Par Excess of Comprehensive Stockholders'
Shares Value Par Value Deficit Loss Equity
- ------------------------------------- ------------- ------------ ---------------- ------------- --------------- ---------------
Balance, December 31, 2000....... 54,765 $547 $179,586 $(14,817) $(5,963) $159,353
Comprehensive income:
Net loss for three months
ended March 31, 2001...... (36,129) (36,129)
Unrealized loss on marketable
securities, net............. (5) (5)
---------------
Total comprehensive loss......... (36,134)
---------------
Issuance of common stock
in Myelos acquisition....... 2,345 24 19,009 19,033
Issuance of common stock......... 61 1 483 484
Exercise of stock options........ 6 35 35
------------- ------------ ---------------- ------------- --------------- ---------------
Balance, March 31, 2001.......... 57,177 $572 $199,113 $(50,946) $(5,968) $142,771
============= ============ ================ ============= =============== ===============
The accompanying notes are an integral part of this consolidated statement.
5
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss............................................................ $ (36,129) $ (7,093)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of accounting change, net..................... --- 8,178
Deferred revenue................................................ (288) 637
Depreciation and amortization................................... 787 728
Provision for severance pay..................................... (142) 302
Write-off of in-process research and development acquired....... 45,600 --
Loss (gain) on sales of short-term investments.................. (303) 260
Gain on sales of fixed assets................................... (1) (12)
Deferred income taxes........................................... -- 733
Common stock as payment for services............................ 17 (221)
Changes in: receivables......................................... (11,427) 9,545
inventories......................................... (170) (712)
prepaid expenses and other current assets........... (1,075) (1,559)
accounts payable.................................... 3,673 (3,267)
other assets........................................ (100) (251)
other current liabilities........................... 2,599 2,161
--------- --------
Net cash provided by operating activities............................ 3,041 9,429
--------- --------
Cash flows from investing activities:
Short-term investments............................................ (1,614) (6,662)
Capital expenditures.............................................. (4,439) (1,616)
Severance pay funded (used) ...................................... 97 (91)
Proceeds from sales of fixed assets............................... 25 40
Cash acquired from acquisition.................................... 67 --
Other investment.................................................. (5,000) --
Proceeds from sales of short-term investments..................... 36,454 6,447
--------- --------
Net cash provided by (used in) investing activities.................. 25,590 (1,882)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 503 6,287
--------- --------
Net increase in cash and cash equivalents.............................. 29,134 13,834
Cash and cash equivalents at beginning of period..................... 26,353 18,703
--------- --------
Cash and cash equivalents at end of period........................... $ 55,487 $ 32,537
========= ========
SUPPLEMENTARY INFORMATION
Other information:
Acquisition of Myelos Corporation
Assets acquired................................................. $ 8,194 $ --
Liabilities assumed............................................. (1,124) --
Negative goodwill............................................... (18,357) --
Amounts due..................................................... (15,348) --
Equity issued................................................... (19,032) --
In-process research and development acquired.................... 45,600 --
--------- --------
Net cash acquired............................................. $ (67) $ --
========== ========
The accompanying notes are an integral part of these consolidated statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION
In the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal
recurring accruals, considered necessary for a fair presentation. Due
to fluctuations in quarterly revenues earned, operating results for
interim periods are not necessarily indicative of the results that may
be expected for the full year. The accounting policies continue
unchanged from December 31, 2000. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
Note 2: ACQUISITION AND INVESTMENT
ACQUISITION OF MYELOS CORPORATION
On March 19, 2001, BTG acquired Myelos Corporation, a
privately-held biopharmaceutical company focused on the development of
novel therapeutics to treat diseases of the nervous system. Under the
terms of the acquisition agreement, BTG paid Myelos shareholders
$35,000,000 in a combination of cash and stock ($14,000,000 in cash and
$21,000,000 through the issuance of approximately 2,344,700 shares of
the Company's common stock (based on a value of $8.9564, representing
the average closing price of BTG's common stock for the 20 trading day
period ending one day prior to February 21, 2001, the date the
acquisition agreement was executed)). In addition, BTG has agreed to
pay the Myelos shareholders an additional $30,000,000 if BTG is able to
file a New Drug Application with respect to Prosaptide to treat
neuropathic pain or neuropathy, of which at least $14,000,000 will be
paid through the issuance of shares of BTG common stock. The remaining
$16,000,000 can be paid, at BTG's option, in cash, shares of BTG common
stock or a combination thereof. BTG has also agreed that if Prosaptide
is approved by the United States Food and Drug Administration for the
treatment of neuropathic pain or neuropathy, BTG will pay the Myelos
shareholders 15% of net sales of Prosaptide during the 12 month period
beginning on the earlier of (i) the 25th full month after commercial
introduction of Prosaptide in the United States for the treatment of
neuropathic pain or neuropathy and (ii) April 1, 2010. At least 50% of
this payment must be in shares of BTG common stock, with the remainder
payable, at BTG's option, in cash, shares of BTG common stock or a
combination thereof. In no event is BTG required to issue more than
10,962,000 shares of its common stock; any equity required to be issued
in excess of that amount will be issued in shares of BTG preferred
stock. The preferred stock would be non-voting, non-convertible,
non-transferable, non-dividend paying (except to the extent a cash
dividend is paid on the BTG common stock), with no mandatory redemption
for a period of 20 years and one day from the closing date of the
acquisition, and a right to share in proceeds in liquidation, up to the
liquidation amount.
The transaction was treated as a "purchase" for accounting
purposes. The purchase price for accounting purposes is approximately
$33,000,000, based on a value for the approximately 2,344,700 shares of
Company common stock issued in the acquisition of $8.1172, representing
the average closing price of the Company's common stock for the four
day period preceding the date the terms of the acquisition were agreed
to (February 21, 2001). In connection with the Merger and based on an
independent valuation, BTG allocated $45,600,000 to in-process research
and development projects of Myelos, representing the estimated fair
value based on risk-adjusted cash flows of the acquired technology. At
the date of the Merger the technology acquired in the acquisition was
not fully commercially developed and had no alternative future uses.
Accordingly, the value was expensed as of the acquisition date. The
Company recorded negative goodwill of $18,357,000 on its balance sheet,
primarily because the amount written off as in-process research and
development acquired exceeded the purchase price for accounting
purposes. This negative goodwill will be amortized over its expected
useful life of five years.
The Company allocated values to the in-process research and
development based on an independent valuation of the research and
development project. The value assigned to these assets was determined
by estimating the costs to develop the acquired technology into a
commercially viable product, estimating the resulting net cash flows
from the product, and discounting the net cash flows to their present
7
value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market size and growth
factors, expected trends in technology, and the nature and expected
timing of new product introductions by the Company and its competitors.
The resulting net cash flows from such product are based on
management's estimates of cost of sales, operating expenses and income
taxes from such product. The Company believes that the assumptions used
in the forecasts were reasonable at the time of the merger. No
assurance can be given, however, that the underlying assumptions used
to estimate sales, development costs or profitability, or the events
associated with such product, will transpire as estimated. For these
reasons, actual results may vary from projected results. The most
significant and uncertain assumptions relating to the in-process
research and development relate to the ability to successfully develop
a product and the projected timing of completion of, and revenues
attributable to, that product. The Company estimates that it will cost
approximately $30,000,000 to complete development of the product over
the next three to five years.
The following pro forma consolidated results of operations for
the three month period ended March 31, 2001 was prepared assuming the
acquisition at Myelos occurred on January 1, 2001. The pro forma
results of operations are not necessarily indicative of the
consolidated results which actually would have occurred if the
acquisition had been consummated at the beginning of the year
presented, nor does it purport to represent the results of operations
for future periods.
Three months
ended March 31, 2001
------------------------------------
(In thousands except per share data)
As Reported Pro Forma
----------- -----------
Total revenues...................................................... $33,736 $33,736
Net loss............................................................ $(36,129) $(36,339)
Loss per common share (basic and diluted)........................... $(0.66) $(0.66)
The pro forma results were adjusted to record amortization of negative
goodwill.
INVESTMENT IN OMRIX BIOPHARMACEUTICALS, INC.
In January 2001, in order to obtain a period of exclusivity to
negotiate a possible strategic relationship with Omrix
Biopharmaceuticals, Inc., BTG loaned $2,500,000 to Omrix and agreed to
convert the loan into, and to purchase an additional $2,500,000 of,
shares of Omrix preferred stock if it did not pursue a relationship.
BTG determined not to pursue a strategic relationship with Omrix, and
on March 31, 200l converted the existing loan into, and purchased an
additional $2,500,000 of, shares of Omrix preferred stock, which is
convertible into approximately 4.5% of Omrix common stock (on a
fully-diluted basis). Omrix is a privately-held company that develops
and markets a unique surgical sealant and a number of immunology
products based on blood plasma processing technology. Omrix currently
sells its products in Europe, South America and the Middle East.
Note 3: SAB 101
Effective January 1, 2000, the Company adopted Staff
Accounting Bulletin 101 ("SAB 101") issued by the Securities and
Exchange Commission in December 1999. As a result of adopting SAB 101,
the Company changed the way it recognizes revenue from contract fees
for the license of marketing and distribution rights where the
consideration is a one-time nonrefundable payment. Prior to the
issuance of SAB 101, the Company recorded revenue from the license of
marketing and distribution rights when the rights were licensed and/or
when these payments were received. In accordance with SAB 101, the
related revenues are now being recognized over the term of the related
agreements. Effective January 1, 2000, the Company recorded a
cumulative effect of change in accounting principle related to contract
revenues recognized in prior years in the amount of $12,558,000, net of
income taxes of $4,380,000. Contract fees that have been received but
not yet recognized as revenue are recorded as deferred revenue on the
balance sheet.
8
Following is a reconciliation of the quarterly information for
March 31, 2000 as reported:
As reported Adjustments As Adjusted
----------- ----------- -----------
(In thousands except per share data)
Contract fees $2,425 $(637) $1,838
Income taxes $796 $(237) $559
Earnings (loss) per common share:
Basic $0.03 $(0.16) $(0.13)
Diluted $0.03 $(0.15) $(0.12)
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended March 31, 2001
compared with three months ended March 31, 2000
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q CONCERNING THE COMPANY'S
BUSINESS OUTLOOK OR FUTURE ECONOMIC PERFORMANCE; ANTICIPATED PROFITABILITY,
REVENUES, EXPENSES OR OTHER FINANCIAL ITEMS; INTRODUCTIONS AND ADVANCEMENTS IN
DEVELOPMENT OF PRODUCTS, AND PLANS AND OBJECTIVES RELATED THERETO; AND
STATEMENTS CONCERNING ASSUMPTIONS MADE OR EXPECTATIONS AS TO ANY FUTURE EVENTS,
CONDITIONS, PERFORMANCE OR OTHER MATTERS, ARE "FORWARD-LOOKING STATEMENTS" AS
THAT TERM IS DEFINED UNDER THE FEDERAL SECURITIES LAWS. FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE STATED IN SUCH STATEMENTS.
SUCH RISKS, UNCERTAINTIES AND FACTORS INCLUDE, BUT ARE NOT LIMITED TO, CHANGES
AND DELAYS IN PRODUCT DEVELOPMENT PLANS AND SCHEDULES, CHANGES AND DELAYS IN
PRODUCT APPROVAL AND INTRODUCTION, CUSTOMER ACCEPTANCE OF NEW PRODUCTS, CHANGES
IN PRICING OR OTHER ACTIONS BY COMPETITORS, PATENTS OWNED BY THE COMPANY AND ITS
COMPETITORS, CHANGES IN HEALTHCARE REIMBURSEMENT, RISK OF OPERATIONS IN ISRAEL,
RISK OF PRODUCT LIABILITY, GOVERNMENTAL REGULATION, DEPENDENCE ON THIRD PARTIES
TO MANUFACTURE PRODUCTS AND COMMERCIALIZE PRODUCTS, GENERAL ECONOMIC CONDITIONS,
AS WELL AS OTHER RISKS DETAILED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2000.
OVERVIEW
BTG is engaged in the research, development, manufacture and marketing
of biopharmaceutical products. Through a combination of internal research and
development, acquisitions, collaborative relationships and licensing
arrangements, BTG has developed a portfolio of therapeutic products, including
eight products that have received regulatory approval for sale, of which seven
are currently being marketed, four products that are in registration or clinical
trials and several products that are in pre-clinical development. BTG pursues
the development of both products with broad markets as well as products with
specialized niche markets where BTG can seek Orphan Drug designation and
potential marketing exclusivity.
BTG was founded in 1980 to develop, manufacture and market novel
therapeutic products. BTG's overall administration, licensing, human clinical
studies, marketing activities, quality assurance and regulatory affairs are
primarily coordinated at its headquarters in Iselin, New Jersey. Pre-clinical
studies, research and development activities and manufacturing of the Company's
genetically engineered and fermentation products are primarily carried out
through its wholly owned subsidiary in Rehovot, Israel.
ACQUISITION OF MYELOS CORPORATION
On March 19, 2001, BTG acquired Myelos Corporation, a privately-held
biopharmaceutical company focused on the development of novel therapeutics to
treat diseases of the nervous system. Under the terms of the acquisition
agreement, BTG paid Myelos shareholders $35 million in a combination of cash and
stock ($14 million in cash and $21 million through the issuance of approximately
2,344,700 shares of BTG common stock (based on a value of $8.9564, representing
the average closing price of BTG's common stock for the 20 trading day period
ending one day prior to the February 21, 2001 date the acquisition agreement was
executed)).
In the event that (i) BTG publicly announces that it will file a New
Drug Application ("NDA") related to the use of Prosaptide to treat neuropathic
pain or neuropathy, (ii) BTG receives FDA minutes stating that the clinical data
possessed by BTG is sufficient for an NDA filing for the use of Prosaptide to
treat neuropathic pain or neuropathy without requiring any further testing or
(iii) BTG initiates preparation of an NDA for Prosaptide for the treatment of
neuropathic pain or neuropathy (the date the earliest of the foregoing occurs
being the "Payment Trigger Date"), then BTG will pay to the Myelos shareholders
an additional $30 million, at least approximately $14 million of which must be
paid in shares of BTG common stock, valued at the average of the closing prices
of BTG common stock during the 20 trading days ending on the Payment Trigger
Date, and the remainder can be paid in cash, shares of BTG common stock, or a
combination thereof, as determined by BTG in its sole discretion.
10
In addition, in the event that the FDA approves the sale of Prosaptide
for the treatment of neuropathic pain or neuropathy, BTG will pay the Myelos
shareholders 15% of the net sales of Prosaptide for the treatment of neuropathic
pain or neuropathy during the 12 month period beginning on the earlier of (i)
the 25th full month after commercial introduction of Prosaptide in the United
States for the treatment of neuropathic pain or neuropathy and (ii) April 1,
2010. At least 50% of this payment must be paid in shares of BTG common stock,
valued at the average of the closing prices of BTG common stock during the 20
days ending one day prior to the payment, and the remainder can be paid in cash,
shares of BTG common stock, or a combination thereof, as determined by BTG in
its sole discretion.
In no event will BTG be obligated to issue in aggregate to the Myelos
shareholders more than 10,962,000 shares of BTG common stock. Any amount of the
contingent payments that cannot be paid in shares of BTG common stock shall
instead be paid in shares of BTG's preferred stock. The preferred stock will be
non-voting, non-convertible, non-transferable, non-dividend paying (except to
the extent a cash dividend is paid on the BTG common stock), with no mandatory
redemption for a period of 20 years and one day from the closing date of the
acquisition, and a right to share in proceeds in liquidation, up to the
liquidation amount.
The transaction was treated as a "purchase" for accounting purposes.
The purchase price for accounting purposes is approximately $33,000,000, based
on a value for the approximately 2,344,700 shares of Company common stock issued
in the acquisition of $8.1172, representing the average closing price of the
Company's common stock for the four day period preceding the date the terms of
the acquisition were agreed to (February 21, 2001). In connection with the
Merger and based on an independent valuation, BTG allocated $45,600,000 to
in-process research and development projects of Myelos, representing the
estimated fair value based on risk-adjusted cash flows of the acquired
technology. At the date of the Merger the technology acquired in the acquisition
was not fully commercially developed and had no alternative future uses.
Accordingly, the value was expensed as of the acquisition date. The Company
recorded negative goodwill of $18,357,000 on its balance sheet, primarily
because the amount written off as in-process research and development acquired
exceeded the purchase price for accounting purposes. This negative goodwill will
be amortized over its expected useful life of five years.
The Company allocated values to the in-process research and development
based on an independent valuation of the research and development project. The
value assigned to these assets was determined by estimating the costs to develop
the acquired technology into a commercially viable product, estimating the
resulting net cash flows from the product, and discounting the net cash flows to
their present value. The revenue projection used to value the in-process
research and development was based on estimates of relevant market size and
growth factors, expected trends in technology, and the nature and expected
timing of new product introductions by the Company and its competitors. The
resulting net cash flows from such product are based on management's estimates
of cost of sales, operating expenses and income taxes from such product. The
Company believes that the assumptions used in the forecasts were reasonable at
the time of the merger. No assurance can be given, however, that the underlying
assumptions used to estimate sales, development costs or profitability, or the
events associated with such product, will transpire as estimated. For these
reasons, actual results may vary from projected results. The most significant
and uncertain assumptions relating to the in-process research and development
relate to the ability to successfully develop a product and the projected timing
of completion of, and revenues attributable to, that product. The Company
estimates that it will cost approximately $30,000,000 to complete development
of the product over the next three to five years.
11
RESULTS OF OPERATIONS
The following tables set forth for the fiscal periods indicated the
percentage of revenues represented by certain items reflected on the Company's
statements of operations.
Three Months Ended
March 31,
------------------------------
2001 2000
---- ----
Revenues:
Products sales.............................................. 88.6% 74.6%
Contract fees............................................... 0.9 11.0
Royalties................................................... 2.4 3.8
Other revenues.............................................. 0.7 2.6
Interest income............................................. 7.4 8.0
------ -----
Total.................................................... 100.0% 100.0%
------ -----
Expenses:
Research and development.................................... 17.6% 32.2%
Cost of product sales....................................... 15.2 13.9
General and administrative.................................. 9.7 20.6
Marketing and sales......................................... 14.1 19.4
Royalties................................................... 1.9 3.9
Interest and finance........................................ 0.0 0.2
Write-off of in-process research and development acquired... 135.2 --
------ -----
Total.................................................... 193.7 90.2
------ -----
Income (loss) before income taxes.............................. (93.7) 9.8
Income taxes................................................... 13.4 3.3
------ -----
Income (loss) before cumulative effect of change in
accounting principle................................... (107.1) 6.5
Cumulative effect of change in accounting principle............ -- (48.8)
------ -----
Net loss....................................................... (107.1)% (42.3)%
====== =====
BTG has historically derived its revenues from product sales as well as
from collaborative arrangements with third parties, under which the Company may
earn up-front contract fees, may receive funding for additional research
(including funding from the Chief Scientist of the State of Israel), is
reimbursed for producing certain experimental materials, may be entitled to
certain milestone payments, may sell product at specified prices, and may
receive royalties on sales of product. The Company anticipates that product
sales will continue to constitute the majority of its revenues in the future.
Revenues have in the past displayed and will in the immediate future continue to
display significant variations due to changes in demand for its products, the
operational needs of its customers, new product introductions by the Company and
its competitors, the obtaining of new research and development contracts and
licensing arrangements, the completion or termination of such contracts and
arrangements, the timing and amounts of milestone payments, and the timing of
regulatory approvals of products.
12
The following table summarizes the Company's sales of its
commercialized products as a percentage of total product sales for the periods
indicated:
Three Months Ended March 31,
---------------------------
2001 2000
---- ----
Oxandrin........................................ 55.8% 40.1%
Bio-Tropin...................................... 18.5 31.7
BioLon.......................................... 7.5 14.7
Delatestryl..................................... 17.8 12.7
Other........................................... 0.4 0.8
------- ------
Total..................................... 100.0% 100.0%
======= ======
The Company believes that its product mix will change significantly as
it continues to focus on: (i) increasing market penetration of its existing
products; (ii) expanding into new markets; and (iii) commercializing additional
products.
The following table summarizes the Company's U.S. and international
product sales as a percentage of total product sales for the period indicated:
Three Months Ended March 31,
----------------------------------
2001 2000
---- ----
United States................................. 74.2% 53.2%
International................................. 25.8 46.8
------ ------
Total................................... 100.0% 100.0%
====== ======
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000.
REVENUES. Total revenues increased 101% in the first quarter of 2001 to
$33,736,000 from $16,763,000 in the first quarter of 2000. The increase in total
revenues from the comparable prior period was entirely due to the substantial
increase in product sales.
Product sales increased by $17,380,000, or 139%, in the three months
ended March 31, 2001 from the comparable prior period. Oxandrin sales to Gentiva
Health Services ("Gentiva"), the Company's wholesale and retail distributor of
Oxandrin in the United States, increased by $11,683,000, or 233%, in the three
months ended March 31, 2001 compared to the three months ended March 31, 2000.
The increase in sales to Gentiva was due to: (i) the completion, in May 2000, of
Gentiva's reduction in the amount of Oxandrin inventory it carries, which
reduction began in April 1999; (ii) increased end-user sales of Oxandrin by
Gentiva; and (iii) the commencement, in September 2000, of sales to the Ross
Products Division of Abbott Laboratories for the long-term care market. Product
sales of human growth hormone, Delatestryl and BioLon increased $1,568,000,
$3,729,000 and $401,000, or 37%, 135% and 22%, respectively, over the comparable
period in 2000.
Contract fees in the three months ended March 31, 2001 represent
contract fees received in prior periods but recognized in the first quarter of
2001 in accordance with SAB 101. Of the contract fees earned in the three months
ended March 31, 2000, $1,475,000, or 80% of total contract fees, was earned in
respect of BTG's Hepatitis-B-vaccine, and the remainder consists primarily of
contract fees received in prior years but recognized in the quarter ended March
31, 2000 in accordance with SAB 101.
Royalties were $843,000 in the first quarter of 2001, as compared to
$635,000 in the same period last year. These revenues consist of royalties from
the licensee of the Company's Mircette product.
13
Other revenues were primarily generated from partial research and
development funding by the Chief Scientist of the State of Israel.
Interest income increased $1,145,000, or 85%, over the comparable prior
period, primarily as a result of increased cash balances (including short-term
investments) resulting mainly from cash flow from operations, proceeds from a
$20,000,000 loan borrowed to finance construction of the Company's new
manufacturing facility in Israel, and the exercise of options subsequent to
March 31, 2000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased 10% in the first quarter of 2001 to $5,930,000 from $5,397,000 in the
first quarter of 2000. The increase in research and development expenditures
resulted mainly from the increase in research and development personnel and the
increased level of grants by BTG for clinical studies.
COST OF PRODUCT SALES. Cost of product sales increased by 120% in the
three months ended March 31, 2001 to $5,139,000 from $2,336,000 in the three
months ended March 31, 2000 as a result of the 139% increase in product sales.
Cost of product sales as a percentage of product sales decreased to 17.2% as
compared to 18.7% in the comparable period last year. Cost of product sales as a
percentage of product sales decreased due to manufacturing efficiencies and the
more favorable mix of products. Oxandrin and human growth hormone have a
relatively low cost of manufacture as a percentage of product sales, while
BioLon has the highest cost to manufacture as a percentage of product sales.
Cost of product sales as a percentage of product sales varies from year to year
and quarter to quarter depending on the quantity and mix of products sold.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased by 5% in the three months ended March 31, 2001 to $3,277,000 from
$3,466,000 in the comparable prior period. As a percentage of revenues, general
and administrative expense decreased to approximately 9.7% of revenues in the
first quarter of 2001 compared to 20.6% of revenues in the comparable prior year
period. The decrease in general and administrative expense derived mainly from
reduction of legal fees as compared to the same quarter last year, when legal
fees increased primarily due to the reactivation in the fourth quarter of 1998
of the Company's declaratory judgment action against Genentech in respect of the
Company's human growth hormone product in the United States, and reduction of
compensation costs, partially offset by increased expenses associated with
merger and acquisition activities. The substantial decrease in general and
administrative expenses as a percentage of revenues derived principally from
the substantial increase in total revenues.
MARKETING AND SALES EXPENSE. Marketing and sales expense increased 46%
in the first quarter of 2001 to $4,741,000 from $3,256,000 for the prior year
period. As a percentage of revenues, marketing and sales expense decreased to
approximately 14.1% from 19.4% for the first quarter of 2000. These expenses
primarily related to the sales and marketing force in the United States that the
Company established to promote distribution of Oxandrin in the United States.
The increase was primarily due to increased personnel, principally sales force,
and other expenses associated with these personnel and increased advertising,
promotional and market research activities.
ROYALTIES. Royalties were $646,000 in the three months ended March 31,
2001, as compared to $654,000 in the three months ended March 31, 2000. These
expenses consist primarily of royalties to entities from which the Company
licensed certain of its products and to the Chief Scientist.
INCOME TAXES. Provision for income taxes for the three months ended
March 31, 2001 was $4,515,000, representing approximately 32.3% of income before
income taxes (excluding the write-off of in-process research and development
acquired which is a non recurring item and is not a tax deductible item), as
compared to $559,000, or 34% of income before income taxes, in the comparable
quarter last year. The decrease in the effective tax rate in the first quarter
of 2001 compared to the first quarter of 2000 was primarily due to an increase
in revenues generated by BTG-Israel, which is entitled to certain Israeli tax
benefits. BTG's consolidated effective tax rate differs from the statutory rate
because of Israeli tax benefits, tax credits and similar items which reduce the
effective tax rate.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED. In the three
months ended March 31, 2001 BTG wrote-off $45,600,000 as in-process research and
development acquired relating to the acquisition of Myelos Corporation. In
connection with the acquisition BTG allocated $45,600,000 to in-process research
and development projects of Myelos, representing the estimated fair value based
on risk-adjusted cash flows of the acquired technology based on an independent
valuation. At the date of the Merger the technology acquired in the acquisition
14
was not fully commercially developed and had no alternative future uses.
Accordingly, the value was expensed as of the acquisition date.
EARNINGS PER COMMON SHARE. BTG had approximately 1.4 million additional
basic weighted average shares outstanding for the three month period ended March
31, 2001 as compared to the same period in 2000. The increased number of basic
shares was primarily the result of the issuance, subsequent to March 31, 2000,
of shares upon the exercise of options and the issuance of approximately 2.3
million shares to the former shareholders of Myelos in March 2001. For 2001
diluted weighted average shares outstanding does not include dilutive securities
because the effect would be anti-dilutive.
On a pro-forma basis, excluding the write-off of in-process research
and development acquired, net income would have been $9,471,000, or $0.17 per
share on both a basic and diluted share basis. Diluted weighted average shares
outstanding would have been 55,809,000, a decrease of 1.6 million shares from
the comparable period in 2000, primarily due to the fact that more outstanding
options would not be considered common equivalent because their exercise price
was above the average fair market value of the common stock for the first
quarter of 2001, which average fair market value was lower than in the first
quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 2001 was $138,855,000 as
compared to $153,344,000 at December 31, 2000.
The cash flows of the Company have fluctuated significantly due to the
impact of net income, capital spending, working capital requirements, the
issuance of Common Stock and other financing activities. BTG expects that cash
flow in the near future will be primarily determined by the levels of net income
and financings, if any, undertaken by the Company. Net cash increased by
$29,134,000 and $13,834,000 in the three months ended March 31, 2001 and 2000,
respectively.
Net cash provided by operating activities was $3,041,000 and $9,429,000
in the three months ended March 31, 2001 and 2000, respectively. Net loss was
$36,129,000 and $7,093,000 in the same periods, respectively. In the three
months ended March 31, 2001 the Company had net cash provided by operating
activities despite the net loss mainly due to the write-off of in-process
research and development acquired of $45,600,000, an increase in accounts
payable and other current liabilities of $3,674,000 and $2,599,000,
respectively, partially offset by an increase in accounts receivable and prepaid
expenses and other current assets of $11,427,000 and $1,075,000, respectively.
In the three months ended March 31, 2000 BTG had net cash provided by operating
activities despite the net loss primarily due to the cumulative effect of change
in accounting principle, net of $8,178,000, as a result of the adoption of SAB
101, a decrease in accounts receivable of $9,545,000 and an increase in other
current liabilities of $2,161,000 partially offset by an increase in prepaid
expenses and other current assets of $1,559,000 and a decrease in accounts
payable of $3,267,000.
Net cash used in investing activities was $25,590,000 and $1,882,000 in
the three months ended March 31, 2001 and 2000, respectively. Net cash used in
investing activities included capital expenditures of $4,439,000 and $1,616,000
in these periods, respectively, primarily for the new manufacturing facility, as
well as a $5,000,000 investment in Omrix in the first quarter of 2001. The
remainder of the net cash used in investing activities was primarily for
purchases and sales of short-term investments.
Net cash provided by financing activities was $503,000 and $6,287,000
in the three months ended March 31, 2001 and 2000, respectively, which are net
proceeds from issuance of Common Stock as a result of the exercise of stock
options.
In April 1999, BTG purchased a manufacturing facility in Israel for
approximately $6,250,000. The Company will initially locate its production
activities for FibrimageTM at this new facility, and will thereafter move the
remainder of its production activities to this facility. The Company expects
that construction will be completed in the second half of 2001. Following
completion of the construction, BTG will begin the validation process, which is
currently expected will take approximately six to nine months for all products.
BTG expects it will cost approximately $40,000,000 to complete the production
facility (excluding the cost of purchasing the facility), of
15
which approximately $15,878,000 had been expended through March 31, 2001. As of
March 31, 2001 BTG had outstanding commitments of $16,768,000 related to
completion of this facility.
In June 2000 Bio-Technology General (Israel) Ltd., BTG's wholly-owned
subsidiary ("BTG-Israel"), entered into a $20,000,000 revolving credit facility
with Bank Hapoalim B.M. to finance a portion of the cost of completing its new
production facility. Short-term borrowings under the facility are due 12 months
from the date of borrowing and long-term borrowings are due five years from the
date of borrowing. Loans under the facility bear interest at the rate of LIBOR
plus 0.5% in the case of short-term borrowings and LIBOR plus 1% in the case of
long-term borrowings. Amounts repaid under the facility can be reborrowed. The
credit facility is secured by the assets of BTG-Israel and has been guaranteed
by the Company. At March 31, 2001 the Company had outstanding long-term
borrowings of $20,000,000 under the facility.
BTG maintains its funds in money market funds, commercial paper and
other liquid debt instruments.
BTG manages its Israeli operations with the objective of protecting
against any material net financial loss in U.S. dollars from the impact of
Israeli inflation and currency devaluations on its non-U.S. dollar assets and
liabilities. The cost of the Company's operations in Israel, as expressed in
dollars, is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the Israeli Shekel in relation to the U.S. dollar. The rate of
inflation (as measured by the consumer price index) was approximately 1% in the
first quarter of 2000, while the Shekel's value in relation to the U.S. dollar
increased by approximately 3%. For the full year of 2000, the rate of inflation
was unchanged while the Israeli Shekel's value in relation to the U.S. dollar
increased by approximately 3%. In the three months ended March 31, 2001 the
consumer price index decreased by 0.5% and the Shekel's value in relation to the
U.S. dollar decreased by approximately 3.7%. As a result, for those expenses
linked to the Israeli Shekel, such as salaries and rent, this resulted in
corresponding increase in these costs in U.S. dollar terms in 2000 but a
decrease in these costs in U.S. dollar terms in the first quarter of 2001. To
the extent that expenses in Shekels exceed BTG's revenues in Shekels (which to
date have consisted primarily of research funding from the Chief Scientist and
product sales in Israel), the devaluations of Israeli currency have been and
will continue to be a benefit to BTG's financial condition. However, should
BTG's revenues in Shekels exceed its expenses in Shekels in any material
respect, the devaluation of the Shekel will adversely affect BTG's financial
condition. Further, to the extent the devaluation of the Shekel with respect to
the U.S. dollar does not substantially offset the increase in the costs of local
goods and services in Israel, BTG's financial results will be adversely affected
as local expenses measured in U.S. dollars will increase.
The Company believes that its remaining cash resources as of March 31,
2001, together with anticipated product sales, scheduled payments to be made to
BTG under its current agreements with pharmaceutical partners, the proceeds from
sales of equity and continued funding from the Chief Scientist at current
levels, will be sufficient to fund the Company's current operations for the
foreseeable future. There can, however, be no assurance that product sales will
occur as anticipated, that scheduled payments will be made by third parties,
that current agreements will not be canceled, that the Chief Scientist will
continue to provide funding at current levels, or that unanticipated events
requiring the expenditure of funds will not occur. The satisfaction of the
Company's future cash requirements will depend in large part on the status of
commercialization of the Company's products, the Company's ability to enter into
additional research and development and licensing arrangements, and the
Company's ability to obtain additional equity investments, if necessary. There
can be no assurance that the Company will be able to obtain additional funds or,
if such funds are available, that such funding will be on favorable terms.
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. To
date BTG's exposure to market risk has been limited and it is not currently
hedging any market risk, although it may do so in the future. BTG does not hold
or issue any derivative financial instruments for trading or other speculative
purposes.
BTG's obligations under its $20,000,000 revolving credit facility bear
interest at floating rates and, therefore, BTG is impacted by changes in
prevailing interest rates. A 100 basis point increase in market interest rates
on the $20,000,000 outstanding under this facility at March 31, 2001 would
result in an increase in its annual
16
interest expense of $200,000. Because these borrowings relate to the
construction of BTG's new facility, interest expense is currently being
capitalized.
BTG's material interest bearing assets consist of cash and cash
equivalents and short-term investments consisting primarily of investments in
U.S. Treasury bonds, short-term corporate bonds and mutual funds which invest in
short-term bonds. BTG's interest income is sensitive to changes in the general
level of interest rates, primarily U.S. interest rates.
As discussed above under "--Liquidity and Capital Resources," BTG
manages its Israeli operations with the objective of protecting against any
material net financial loss in U.S. dollars from the impact of Israeli inflation
and currency devaluations on its non-U.S. dollar assets and liabilities. All of
BTG's revenues are in U.S. dollars except for payments from the Chief Scientist
and sales of its products in Israel, which are denominated in Israeli Shekels.
17
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 19, 2001, BTG issued 2,344,657 shares of its common stock to
the shareholders of Myelos in connection with BTG's acquisition of Myelos. The
common stock issued by the Company in this transaction was not registered under
the Securities Act of 1933, as amended, in reliance upon exemptions contained in
Section 4(2) thereof. Each of the Myelos shareholders made representations to
the effect that (i) the shares were being acquired for its own account and not
with a view to, or for sale in connection with, any distribution; (ii)
acknowledging that the shares were restricted securities under Rule 144;
(iii) it had knowledge and experience in business matters, was capable of
evaluating the merits and risks of the investment, and was able to bear the risk
of loss; and (iv) it had the opportunity to make inquiries of and obtain
information from BTG. The Company is obligated to register the common stock for
resale under the Securities Act of 1933, as amended.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) EXHIBITS:
10.1 Employment Agreement, dated as of March 14, 2001, between
Bio-Technology General Corp. and Bernard R. Tyrrell.
(2) REPORTS ON FORM 8-K
Current Report on Form 8-K dated February 21, 2001 reporting
the execution of a definitive agreement for the Company to acquire Myelos
Corporation.
Current Report on Form 8-K dated March 19, 2001 reporting the
Company's acquisition of Myelos Corporation.
18
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.
BIO-TECHNOLOGY GENERAL CORP.
---------------------------
(Registrant)
By: /s/ SIM FASS
-----------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ YEHUDA STERNLICHT
------------------------
Vice President-Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Dated: May 14, 2001