SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 1-10392
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U.S. Bioscience, Inc.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified on its charter)
Delaware 23-2460100
- --------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Bridge, One Hundred Front St., West Conshohocken, PA 19428
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 832-0570
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
---- ----
As of August 9, 1996, there were 22,781,900 shares of common stock outstanding.
Page 1 of 16 sequentially
numbered pages
U.S. BIOSCIENCE, INC.
INDEX
Page
Part I - Financial Information ----
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Securities 14
Holders
Item 6. Exhibits and Reports on Form 8-K 15
-2-
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 34,720,200 $ 41,618,800
Investments 6,856,500 3,977,400
Accounts receivable, net 917,800 802,500
Interest receivable 128,200 60,000
Inventories 2,552,700 2,165,100
Other 1,538,100 6,922,200
--------------- ---------------
Total current assets 46,713,500 55,546,000
Property, plant and equipment at cost, less accumulated depreciation 5,773,700 6,334,300
--------------- ---------------
Total assets $ 52,487,200 $ 61,880,300
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,702,100 $ 1,937,600
Accrued clinical grants payable 973,500 716,300
Accrued product manufacturing costs payable 299,000 384,300
Accrued marketing costs payable 353,300 125,900
Accrued professional fees payable 358,800 393,200
Line of Credit 634,600 676,000
Current Maturities of long-term debt 718,900 721,300
Accounts payable and other accrued liabilities 4,142,200 8,014,400
--------------- ---------------
Total current liabilities 9,182,400 12,969,000
Long-term liabilities:
Long-term debt, net of current maturities 2,212,600 2,587,600
Convertible Debentures -- 16,500,000
Other long-term liabilities 1,193,900 1,035,800
--------------- ---------------
Total long-term liabilities 3,406,500 20,123,400
--------------- ---------------
Total liabilities 12,588,900 33,092,400
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value-50,000,000 shares authorized; 22,778,400
shares issued and outstanding at June 30, 1996, and 21,046,900 shares
issued and outstanding at December 31, 1995 227,800 210,500
Additional paid-in capital 150,735,300 133,157,700
Deficit accumulated during the development stage (111,154,200) (104,929,800)
Foreign currency translation adjustment 89,400 349,500
--------------- ---------------
Total stockholders' equity 39,898,300 28,787,900
--------------- ---------------
Total liabilities and stockholders' equity $ 52,487,200 $ 61,880,300
=============== ===============
See accompanying notes.
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ---------------- PERIOD MAY 7, 1987
JUNE 30, JUNE 30, (INCEPTION)
-------- -------- THROUGH
1996 1995 1996 1995 JUNE 30, 1996
---- ---- ---- ---- -------------
Revenues:
Net sales $ 3,682,600 $ 2,160,100 $ 6,645,200 $ 4,360,300 $ 31,798,400
Net investment income 579,400 290,400 1,263,300 669,800 26,313,300
Licensing, royalty and other income 582,600 1,161,500 762,600 1,223,900 26,501,900
-------------- -------------- -------------- -------------- --------------
4,644,600 3,612,000 8,671,100 6,254,000 84,613,600
Expenses:
Cost of sales 822,500 448,800 1,696,000 1,190,900 8,222,400
Selling, general and administrative costs 3,660,400 2,639,100 6,952,200 5,886,500 84,602,200
Research and development costs 3,053,300 2,977,600 5,817,900 5,766,200 90,981,000
Provision for litigation -- -- -- -- 10,165,000
Interest expense 99,600 20,500 429,400 40,300 1,797,200
-------------- -------------- -------------- -------------- --------------
7,635,800 6,086,000 14,895,500 12,883,900 195,767,800
-------------- -------------- -------------- -------------- --------------
Net loss $ (2,791,200) $ ( 2,474,000) $ (6,224,400) $ (6,629,900) $(111,154,200)
============== ============== ============== ============== ==============
Net loss per common share $ (0.12) $ (0.12) $ (0.28) $ (0.33)
============== ============== ============== ==============
Weighted average number of common
shares outstanding 22,553,600 20,388,000 21,983,300 20,386,700
============== ============== ============== ==============
See accompanying notes.
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 PERIOD MAY 7, 1987
------------------------------ (INCEPTION)
THROUGH
1996 1995 JUNE 30, 1996
------------- ------------- -------------
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net loss $ (6,224,400) $ (6,629,900) $ (111,154,200)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 560,300 569,500 4,558,500
Compensation element of stock option grants -- -- 5,303,400
Loss (gain) on investments (4,500) 8,200 134,900
Amortization of debenture interest 154,300 -- 198,700
Change in accounts receivable (115,300) (109,100) (917,600)
Change in interest receivable (68,200) 39,000 (128,200)
Change in inventories (434,600) (848,900) (2,609,900)
Change in other current assets 5,367,400 (100,700) (1,517,700)
Change in current liabilities (3,695,600) (1,110,700) 7,768,700
Provision for litigation -- (36,800) 10,000,000
Change in other long-term liabilities 158,100 40,300 1,193,800
------------- ------------- -----------------
Total adjustments 1,921,900 (1,549,200) 23,984,600
------------- ------------- -----------------
Net cash provided by (used in) operating activities (4,302,500) (8,179,100) (87,169,600)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 27,517,800 9,767,400 3,141,921,900
Purchase of investments (30,392,400) (2,020,900) (3,148,908,400)
Purchase of property, plant and equipment (302,800) (309,900) (10,137,000)
------------- ------------- -----------------
Net cash provided by (used in) investing activities (3,177,400) 7,436,600 (17,123,500)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement
of securities 187,500 -- 128,491,800
Proceeds from exercise of stock options 753,200 83,100 6,969,400
Proceeds from loan -- 1,502,600 3,219,100
Proceeds from line of credit -- -- 676,000
Repayment of long-term debt (337,000) -- (551,700)
------------- ------------- -----------------
Net cash provided by (used in) financing activities 603,700 1,585,700 138,804,600
Foreign currency translation adjustment (22,400) (559,600) 208,700
------------- ------------- -----------------
Net increase (decrease) in cash and cash equivalents (6,898,600) 283,600 34,720,200
Cash and cash equivalents-beginning of period 41,618,800 11,681,900 --
------------- ------------- -----------------
Cash and cash equivalents-end of period $ 34,720,200 $ 11,965,500 $ 34,720,200
============= ============= =================
Supplemental cash flow disclosure:
Interest paid to affiliate -- $ 1,005,800
See accompanying notes.
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MAY 7, 1987 (INCEPTION) THROUGH JUNE 30, 1996
COMMON STOCK CLASS B STOCK
------------ -------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------------- ------------ --------------- ------------
Issuance of shares for initial cash contribution
of capital ($.005 per share of common stock
and $.005 per share of Class B stock) 9,000,000 $ 45,000 500,000 $ 5,000
Net loss for the period May 7, 1987 (inception)
through December 31, 1987 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1987 9,000,000 45,000 500,000 5,000
Net loss for the year ended December 31, 1988 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1988 9,000,000 45,000 500,000 5,000
Proceeds from exercise of stock options 2,500 -- -- --
Compensation related to stock options -- -- -- --
Issuance of shares ($6.00 per share, less costs) 2,500,000 12,500 -- --
Conversion of class B stock to common stock 1,000,000 5,000 (500,000) (5,000)
Net loss for the year ended December 31, 1989 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1989 12,502,500 62,500 -- --
Proceeds from exercise of stock options 285,800 1,400 -- --
Compensation related to stock options -- -- -- --
Issuance of shares ($9.00 per share, less costs) 4,025,000 20,200 -- --
Net loss for the year ended December 31, 1990 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1990 16,813,300 84,100 -- --
Proceeds from exercise of stock options 500,700 2,500 -- --
Compensation related to stock options -- -- -- --
Issuance of shares ($28.50 per share, less costs) 2,300,000 11,500 -- --
Issuance of shares for a 2 for 1 stock dividend 19,614,000 98,000 -- --
Net loss for the year ended December 31, 1991 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1991 39,228,000 196,100 -- --
Proceeds from exercise of stock options 264,400 1,400 -- --
Compensation related to stock options -- -- -- --
Net loss for the year ended December 31, 1992 -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1992 39,492,400 197,500 -- --
Proceeds from exercise of stock options 106,500 500 -- --
Compensation related to stock options -- -- -- --
Net loss for the year ended December 31, 1993 -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1993 39,598,900 198,000 -- --
Proceeds from exercise of stock options 75,300 400 -- --
Class Action Settlement 1,096,600 5,500 -- --
Compensation related to stock options -- -- -- --
Net loss for the year ended December 31, 1994 -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1994 40,770,800 203,900 -- --
Proceeds from exercise of stock options 202,900 1,000 -- --
Class Action Settlement -- -- -- --
Proceeds from private placement of securities 1,120,100 5,600 -- --
Net loss for the year ended December 31, 1995 -- -- -- --
Foreign currency translation adjustment -- -- -- --
--------------- ------------ --------------- ------------
Balance at December 31, 1995 42,093,800 210,500 -- --
Proceeds from exercise of stock options 251,200 1,500 -- --
Conversion of debentures 2,655,000 15,800 -- --
Net loss for the six months ended June 30, 1996 -- -- -- --
Foreign currency translation adjustment -- -- -- --
Conversion of shares to reflect the 1 for 2 reverse
stock split effective April 22, 1996 (22,221,600) -- -- --
Balance at June 30, 1996 (Unaudited) 22,778,400 $ 227,800 -- --
=============== ============ =============== ============
TOTAL
ADDITIONAL ACCUM- STOCK-
PAID-IN ULATED OTHER HOLDERS'
CAPITAL DEFICIT EQUITY EQUITY
--------------- --------------- ----------- ---------------
Issuance of shares for initial cash contribution
of capital ($.005 per share of common stock
and $.005 per share of Class B stock) $ 1,000,000 $ -- $ -- $ 1,050,000
Net loss for the period May 7, 1987 (inception)
through December 31, 1987 -- (1,030,500) -- (1,030,500)
--------------- -------------- ----------- ---------------
Balance at December 31, 1987 1,000,000 (1,030,500) -- 19,500
Net loss for the year ended December 31, 1988 -- (1,556,800) -- (1,556,800)
--------------- -------------- ----------- ---------------
Balance at December 31, 1988 1,000,000 (2,587,300) -- (1,537,300)
Proceeds from exercise of stock options 400 -- -- 400
Compensation related to stock options 305,900 -- -- 305,900
Issuance of shares ($6.00 per share, less costs) 14,061,400 -- -- 14,073,900
Conversion of class B stock to common stock -- -- -- --
Net loss for the year ended December 31, 1989 -- (5,743,300) -- (5,743,300)
--------------- -------------- ----------- ---------------
Balance at December 31, 1989 15,367,700 (8,330,600) -- 7,099,600
Proceeds from exercise of stock options 143,500 -- -- 144,900
Compensation related to stock options 269,000 -- -- 269,000
Issuance of shares ($9.00 per share, less costs) 33,009,700 -- -- 33,029,900
Net loss for the year ended December 31, 1990 -- (4,924,900) -- (4,924,900)
--------------- -------------- ----------- ---------------
Balance at December 31, 1990 48,789,900 (13,255,500) -- 35,618,500
Proceeds from exercise of stock options 3,349,600 -- -- 3,352,100
Compensation related to stock options 1,038,900 -- -- 1,038,900
Issuance of shares ($28.50 per share, less costs) 61,444,300 -- -- 61,455,800
Issuance of shares for a 2 for 1 stock dividend (98,000) -- -- --
Net loss for the year ended December 31, 1991 -- (6,540,100) -- (6,540,100)
--------------- -------------- ----------- ---------------
Balance at December 31, 1991 114,524,700 (19,795,600) -- 94,925,200
Proceeds from exercise of stock options 1,336,400 -- -- 1,337,800
Compensation related to stock options 1,452,400 -- -- 1,452,400
Net loss for the year ended December 31, 1992 -- (20,225,800) -- (20,225,800)
--------------- -------------- ----------- ---------------
Balance at December 31, 1992 117,313,500 (40,021,400) -- 77,489,600
Proceeds from exercise of stock options 614,300 -- -- 614,800
Compensation related to stock options 906,900 -- -- 906,900
Net loss for the year ended December 31, 1993 -- (40,629,600) -- (40,629,600)
Foreign currency translation adjustment -- -- (291,800) (291,800)
--------------- -------------- ----------- ---------------
Balance at December 31, 1993 118,834,700 (80,651,000) (291,800) 38,089,900
Proceeds from exercise of stock options 404,900 -- -- 405,300
Class Action Settlement 7,753,200 -- 7,758,700
Compensation related to stock options 1,330,300 -- -- 1,330,300
Net loss for the year ended December 31, 1994 -- (24,041,000) -- (24,041,000)
Foreign currency translation adjustment -- -- 395,700 395,700
--------------- -------------- ----------- ---------------
Balance at December 31, 1994 128,323,100 (104,692,000) 103,900 23,938,900
Proceeds from exercise of stock options 359,900 -- -- 360,900
Class Action Settlement 2,241,200 -- -- 2,241,200
Proceeds from private placement of securities 2,233,500 -- -- 2,239,100
Net loss for the year ended December 31, 1995 -- (237,800) -- (237,800)
Foreign currency translation adjustment -- -- 245,600 245,600
--------------- -------------- ----------- ---------------
Balance at December 31, 1995 133,157,700 (104,929,800) 349,500 28,787,900
Proceeds from exercise of stock options 751,700 -- -- 753,200
Conversion of debentures 16,825,900 -- -- 16,841,700
Net loss for the six months ended June 30, 1996 -- (6,224,400) -- (6,224,400)
Foreign currency translation adjustment -- -- (260,100) (260,100)
Conversion of shares to reflect the 1 for 2 reverse
stock split effective April 22, 1996 -- -- -- --
--------------- -------------- ----------- ---------------
Balance at June 30, 1996 (Unaudited) $ 150,735,300 $(111,154,200) $ 89,400 $ 39,898,300
=============== ============== =========== ===============
See accompanying notes.
U.S. BIOSCIENCE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The company is a pharmaceutical company specializing in the development and
commercialization of products for patients with cancer and allied diseases. For
accounting purposes, the company is considered a "development stage enterprise."
Through June 30, 1996, the company's revenues have been derived principally from
product sales of Hexalen(R), NeuTrexin(R) and Ethyol(R), licensing fees for
rights to develop and market certain products principally in the United States,
and investment income. Expenses incurred have been primarily for the
development of its drugs and related therapies, marketing and sales activities,
and corporate organizational and administrative activities.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited information -- The financial information for the three and six
month periods ended June 30, 1996 and 1995, and the period from May 7, 1987
(inception) through June 30, 1996 included herein is unaudited. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applicable to interim periods.
Such information includes all adjustments, consisting of adjustments of a normal
and recurring nature, which, in the opinion of the company, are necessary for a
fair presentation of the company's consolidated financial position and the
results of its operations and cash flows.
Principles of Consolidation -- The consolidated financial statements
include the accounts of U.S. Bioscience, Inc. and its wholly owned subsidiaries,
USB Pharma B.V., and USB Pharma Ltd. All significant intercompany accounts and
transactions are eliminated in consolidation.
Inventories -- Inventories are stated at the lower of cost (first in, first
out) or fair value. Inventories consist of:
June 30, December 31,
1996 1995
---------- ------------
Raw materials $ 861,500 $ 813,300
Work-in-process 1,386,100 893,000
Finished goods 305,100 458,800
---------- ----------
Total $2,552,700 $2,165,100
========== ==========
Property, Plant and Equipment -- Buildings, furniture, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Buildings, furniture and equipment are depreciated by the
straight-line method over their useful lives. Leasehold improvements are
depreciated by the straight-line method over the shorter of their useful lives
or the life of the lease. All assets are depreciated under accelerated methods
for federal income tax purposes.
Property, plant and equipment consist of:
June 30, December 31,
1996 1995
------------- ------------
Land, buildings, and leasehold improvements $ 1,971,700 $ 2,106,500
Equipment, furniture and fixtures 8,238,000 8,173,500
Accumulated depreciation (4,436,000) (3,945,700)
------------ -----------
Property, plant and equipment, net $ 5,773,700 $ 6,334,300
============= ===========
Reverse Stock Split -- On April 22, 1996 the stockholders of the company,
at the annual meeting of stockholders, approved an amendment to the company's
Certificate of Incorporation pursuant to which the number of authorized shares
of common stock was reduced from 100,000,000 shares to 50,000,000 shares, and
the par value of a share of common stock was increased from $.005 per share to
$.01 per share. In connection with that amendment, there was a 1-for-2 reverse
split of the common stock, thereby reducing the number of outstanding shares of
common stock by 50%. All "share" and "per share" amounts reflected in this
report on Form 10-Q have been adjusted to reflect the 1-for-2 reverse stock
split.
Long-Term Debt -- Long-term debt consists of:
June 30, December 31,
1996 1995
----------- ------------
MELF Equipment Loan $ 288,300 $ 323,600
Mortgage Loan 619,700 685,300
Term Loan 2,000,000 2,300,000
Convertible Debentures 0 16,500,000
Capital Lease Obligations 23,500 0
---------- -----------
2,931,500 19,808,900
Less Current Portion 718,900 721,300
---------- -----------
Long-Term Debt $2,212,600 $19,087,600
========== ===========
During the first half of 1996, the investors who purchased the unsecured
convertible debentures in the December 1995 private placement, converted the
entire $16,500,000 of principal and accrued interest into 1,577,366 shares of
the company's Common Stock.
Additionally, all information should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes to Financial Statements
included in the company's Annual Report on Form 10-K for the year ended December
31, 1995 and in the company's quarterly report on Form 10-Q for the interim
period ended March 31, 1996. Operating results for the three and six month
interim periods ended June 30, 1996 are not necessarily indicative of the
results that may be obtained for any other interim period or the entire year.
U.S. BIOSCIENCE, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
This report on Form 10-Q contains forward-looking statements concerning the
business and financial conditions of the company, which are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those anticipated in any forward-looking statements. Factors that could
cause such differences include, but are not limited to, the ability of the
company and its collaborative partners to efficiently market, manufacture and
sell the company's products, the availability of adequate funds for the
company's operations, the ability of the company to obtain timely regulatory
approvals to market its potential products in the United States and other major
markets, the ability of the company to obtain rights to new compounds for
commercial development, policies relating to product pricing and reimbursement
levels in the markets where the company's products are or may be commercialized,
technological change and competition, the product liability risks associated
with being the manufacturer or seller of pharmaceutical products, and the
company's reliance on its key personnel and collaborative partners.
Operations for the six months ended June 30, 1996, consisted primarily of
preparations for and the launch of Ethyol in the United States with co-promotion
partner ALZA Corporation ("ALZA"), ongoing marketing of Hexalen(R) and
NeuTrexin(R) in the United States, the preparation of and follow-up activities
on regulatory filings for Ethyol(R) in the United States, Canada and Europe,
continuing clinical trials and product development of Ethyol, NeuTrexin,
Hexalen, AZQ and FddA, and business development activities in the United States,
Europe and Japan.
The company received FDA approval of it's New Drug Application ("NDA") for
Ethyol in December 1995 and the company began co-promotion of the product with
co-promotion partner ALZA in April 1996 concurrent with the commercial
availability of Ethyol in the U.S. market.
The company has also received regulatory approval for Ethyol in several
European countries, and received approval to expand the labelled indication in
July 1996. The company's marketing partner for European territories, Scherico
Ltd. ("Scherico"), an affiliate of Schering-Plough Corporation, launched Ethyol
in Germany, the United Kingdom, France, Austria, Belgium, Portugal, Sweden,
Switzerland and The Netherlands, and plans to begin sales and marketing efforts
in other European countries when regulatory approvals and, if necessary, local
pricing and reimbursement approvals, are received. Ethyol was approved by
Canadian regulatory authorities in late April 1996, where Eli Lilly has
marketing rights to the product and plans to launch Ethyol in the third quarter
of 1996.
The company believes that its expenditures for research and development,
marketing and administration, capital equipment and facilities will continue to
exceed revenues as a result of (i) further clinical trials and the pursuit of
regulatory approvals for Ethyol, NeuTrexin and Hexalen, (ii) the marketing of
Hexalen, NeuTrexin and Ethyol and marketing preparation for its other drugs,
(iii) expansion of clinical and preclinical testing of drug compounds, including
expanded indications for existing drugs and (iv) development and enhancement of
manufacturing and analytical capabilities.
Results of Operations
Three months ended June 30, 1996
Product sales increased 70% to $3,682,600 in the three months ended June
30, 1996 as compared to $2,160,100 in the prior year period, principally due to
the shipment of Ethyol, the company's cytoprotective agent, to ALZA Corporation,
the company's U.S. co-promotion partner, in preparation for the launch of Ethyol
in the United States in April 1996.
Net investment income increased to $579,400 in the second quarter of 1996
as compared to $290,400 in the corresponding 1995 period due to increased
interest income resulting from the increased portfolio balance. The increased
portfolio balance reflects the initial distribution fee received from ALZA as
part of a U.S. co-promotion agreement for Ethyol and a private placement
completed in December 1995.
Licensing, royalty and other income declined to $582,600 for the three
month period ended June 30, 1996 from $1,161,500 in the prior year , primarily
due to the receipt in the 1995 period of a one-time $710,000 payment from an
affiliate of Eli Lilly and Company for product distribution rights in Canada.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased with the increase in sales. As a
percentage of sales, cost of sales in the three month period ended June 30,
1996, increased slightly to 22% from 21% in the prior year period.
Selling, general and administrative costs for the second quarter of 1996
increased to $3,660,400 from $2,639,100 in the corresponding 1995 period. The
increase is principally due to the accrual of the company's share of the
European second quarter 1996 operating loss of $476,000 under its agreement with
Scherico, higher personnel costs of $281,200 and travel expenses of $56,970
reflecting the enlarged U.S. sales force and increased corporate expenditures of
$179,900 in connection with the company's annual report and the reverse stock
split.
Research and development costs increased marginally, to $3,053,300 for the
three months ended June 30, 1996 from $2,977,600 for the same period of the
prior year. The $75,700 increase is principally attributable to increased
clinical grants reflecting patient enrollment in the company's Phase III
clinical trials for NeuTrexin in colorectal cancer and for Ethyol used in
radiation therapy.
Interest expense increased to $99,600 for the second quarter of 1996 from
$20,500 in the prior year second quarter due principally to interest payable on
the unsecured convertible debentures issued in the December 1995 private
placement, which were subsequently converted to equity during the period.
The net loss for the three months ended June 30, 1996 was $2,791,200 or
$0.12 loss per common share as compared to $2,474,000 or $0.12 loss per common
share in the 1995 period.
Six months ended June 30, 1996
Product sales revenue increased 52% to $6,645,200 for the six month period
ended June 30, 1996 as compared to the prior year period. The $2,284,900
increase is attributed to the sales of Ethyol to ALZA in preparation for the
launch of Ethyol by ALZA in the United States in April of this year.
Net investment income increased to $1,263,300 in the first half of 1996 as
compared to $669,800 in the first half of 1995 due to increased interest income
resulting from the higher portfolio balance. The higher balance reflects the
initial distribution fee received from ALZA as part of the Ethyol U.S. co-
promotion agreement and the December 1995 private placement.
Licensing, royalty and other income declined to $762,600 for the six month
period ended June 30, 1996 from $1,223,900 in the prior year. The $461,300
decline principally reflects the 1995 period receipt of a one-time payment from
an affiliate of Eli Lilly and Company for product distribution rights in Canada.
Cost of sales increased, in dollar terms, due to the increase in sales. As
a percentage of product sales, cost of sales marginally decreased to 26% of
sales as compared to 27% in the prior year period. The decrease is attributed
to the initial sales of Ethyol to ALZA in the first half of 1996.
Selling, general and administrative costs increased to $6,952,200 in the
first six months of 1996 as compared to $5,886,500 in the prior year period.
The increase is principally due to the accrual of $892,000 reflective of the
company's estimated share of the operating losses incurred under the company's
distribution agreement for Ethyol in Europe with Scherico. In addition,
$428,300 in additional costs were incurred relative to the company's enlarged
U.S. sales force. These increases were partly offset by lower administration
and marketing personnel costs of $245,000 and reduced facility and depreciation
expense $207,400 reflective of the internal restructuring undertaken in early
1995.
Research and development expenditures increased by $51,700 during the first
half of 1996 from $5,766,200 in the first of 1995 to $5,817,900 in the 1996
period. The small increase is due to the net effect of an increase in personnel
costs of $226,200, preclinical expenses for FddA of $128,000 and an increase in
travel expenditures of $107,500, mostly offset by reductions in consulting
expenses of $128,000, process development expense of $127,400, stability testing
costs of $80,400 and regulatory fees of $84,400.
Interest expense increased to $429,400 for the first six months of 1996 as
compared to $40,300 in the prior year period. The increase is attributed to the
interest payable on $16.5 million in convertible debentures issued as part of
the December 1995 private placement which have subsequently been converted to
equity.
The net loss for the first six months of 1996 was $6,224,400 or $0.28 per
common share. This compares to a net loss of $6,629,900 or $0.33 per common
share in the 1995 period.
Liquidity and Capital Resources
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, issuance of unsecured and
secured debt, investment income, sales of its drug products, Hexalen, NeuTrexin
and Ethyol, and revenues received through distribution and sublicense
agreements. As of June 30, 1996, the company's cash and cash equivalents and
marketable securities totaled $41,576,700. The company's investment portfolio
consists of securities issued by the U.S. Government or its agencies and
investment grade corporate debt instruments.
During the first six months of 1996, net cash used by operations amounted
to $4,302,500 principally due to the net effect of the factors discussed above
under "Results of Operations", the receipt of the final $6 million installment
of the initial distribution fee paid by ALZA pursuant to the U.S. Ethyol
distribution agreement, and the payment to Scherico of $4.2 million for the
company's share of Ethyol European launch expenses through December 1995. Until
such time as one or more of the company's currently approved products achieves
significant sales or other revenue and such products receive regulatory approval
to expanded indications currently under development which result in increased
revenues, the company's cash position will continue to be reduced due
principally to expenditures in research, product development, marketing, and
selling and administrative activities. Failure to obtain additional regulatory
approvals on products currently in development and to achieve significant sales,
will have a material adverse effect on the company. Additionally, the level of
future product sales will also depend on several factors, including product
acceptance, market penetration, competitive products, the performance of the
company's licensees and distributors, and the health care system existing in
each market where the company's products are or may become commercially
available.
The company's net capital expenditures were $302,800 in the first six
months of 1996 and total $10,137,000 since inception. In April 1993, the
company purchased a sterile products production facility in The Netherlands.
Validation work and pilot production on this new facility were completed in
1995. The facility received regulatory approval for product manufacture and
distribution from the Dutch regulatory authority in June 1994 to manufacture the
company's products for distribution in the European Community, and the facility
was approved by the FDA to manufacture NeuTrexin for the U.S. market in May
1995. The manufacturing facilities of the company and its third party suppliers
used to produce its products are required to continually comply with all
applicable FDA requirements, including Good Manufacturing Practices, and are
subject to FDA inspection to determine compliance with those requirements.
There can be no assurance that the manufacturing facilities for the company's
products will comply with applicable requirements. A mortgage loan of
approximately $680,000 relating to the company's facility in the Netherlands was
obtained in May 1994. The purchase price for this facility was $2,250,000 and
$2,950,300 in capital improvements have been made since its purchase to make the
facility operational and expand its production capacity. Further capital
expenditures, estimated at $200,000, are planned during the remainder of 1996.
The funds raised in the December 1995 private placement ($19 million, net)
and the initial distribution fees from ALZA ($20 million) provided the company
with approximately $39 million in working capital, which the company believes
will be sufficient to cover operating expenses at current levels for the
foreseeable future. The company is hopeful that its products will, in the near
future, generate sufficient sales to provide meaningful cash resources, although
no assurance can be given that they will do so. The company is also hopeful
that it will in the future receive further regulatory approvals and that such
approvals will increase sales. However, no assurance can be given that further
regulatory approvals will be obtained in a timely manner, if ever, or that
product sales will be sufficient to cover operating expenses or that the company
will have adequate financial resources to commercialize its potential products
that may be approved. Although the company will from time to time explore
additional sources of financing, there can be no assurance that the company will
be successful in obtaining such financing on terms acceptable to the company.
The company's future liquidity and capital requirements are dependent upon
several factors, including, but not limited to, its success in generating
significant revenues from sales; the performance of its sublicensees and
distributors under sublicense and distribution arrangements for sales of its
products; the time and cost required to manufacture and market its products; the
time and cost required to obtain regulatory approvals, including expanded
labelling for its products which are already commercially available; obtaining
the rights to additional commercially viable compounds; competitive
technological developments; additional government-imposed regulation and
control; and changes in health care systems which affect reimbursement, pricing
or availability of drugs and market acceptance of drugs.
The above factors may also affect realization of certain assets currently
held by the company, principally investments in plant, equipment and inventory.
In 1995, Scherico, the company's European distributor for its
cytoprotective agent, Ethyol, launched Ethyol in several European markets where
regulatory approvals had been received. Under the terms of its agreement with
Scherico, the company shares in operating profits/losses generated from
marketing and sales of Ethyol in Germany, the United Kingdom, Spain, Italy and
France (the "Major Markets") for a period of up to two years from November 23,
1994, the date of regulatory approval of Ethyol in the United Kingdom. The
company's share of operating losses generated from the Major Markets was
approximately $4.2 million in 1995. With respect to 1996, the company's limit
on operating losses, if any, generated in the Major Markets is approximately
$1.7 million, as determined by the operating plan for 1996. The company paid
the 1995 operating loss share ($4.2 million) in April 1996 and has accrued
$892,000 during the first six months of 1996, reflecting its estimated share of
operating losses through the period. The company will share in operating
profits, if any, generated from sales of Ethyol in the other countries in the
European territories outside the Major Markets in which Ethyol is launched by
Scherico, but is not exposed to operating losses, if any, generated in such
countries. Profits or losses under the agreement with Scherico
are affected by the same uncertainties noted in the preceding paragraphs. The
company is hopeful that the commercialization of its drug product Ethyol will be
financially successful in Europe. However, no assurance can be given that the
company will achieve meaningful revenues under this agreement.
In April of 1996, ALZA Corporation launched Ethyol in the United States
under the terms of its agreement with the company related to Ethyol. ALZA has
exclusive rights to market the product in the United States for five years and
will be responsible for sales and marketing. The company's U.S. sales force
will co-promote the product with ALZA during this period. After the five-year
period, which ALZA has an option to extend for one year, marketing rights to
Ethyol will revert to the company, and ALZA will receive payments from the
company for ten years based on sales of the product. ALZA paid the company an
up-front payment and initial distribution fee totaling $20 million, and will pay
$15 million in additional distribution fees during the next few years based on
the company's clinical activities relating to Ethyol. As the company sells
Ethyol to ALZA in manufacturing lot quantities, which may or may not correspond
to ALZA's resale to the pharmaceutical trade, the company's sales may fluctuate
from quarter to quarter dependent upon the timing of ALZA's sales and delivery
requirements as well as the levels of inventory it stocks and maintains. Sales
of Ethyol under the agreement with ALZA are also affected by the same
uncertainties noted in the preceding paragraphs. The company is hopeful that
the commercialization of Ethyol in the United States will be successful.
However, no assurances can be given that the company will achieve meaningful
revenues under this agreement.
The company has been unprofitable since its inception and expects to incur
additional operating losses until such time as substantial sales are realized
and further regulatory approvals are obtained, although the distribution fees
from ALZA Corporation did bring the company close to a break-even position for
calendar 1995. The company's losses may increase as the company continues its
commercialization, research and development activities, and such losses may
fluctuate from quarter to quarter. There can be no assurance that the company
will ever achieve significant revenues or profitable operations. For the
period from May 7, 1987 (inception) through June 30, 1996, the company had an
accumulated deficit of $111,154,200.
PART II - Other Information
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
On April 22, 1996 the stockholders of the company, at the annual
meeting of stockholders, approved an amendment to the Company's Certificate of
Incorporation pursuant to which the number of authorized shares of common stock
was reduced from 100,000,000 shares to 50,000,000 shares, and the par value of a
share of common stock was increased from $.005 per share to $.01 per share. In
connection with that amendment, there was a 1-for-2 reverse split of the common
stock, thereby reducing the number of outstanding shares of common stock by 50%.
All "share" and "per share" amounts reflected in this report on Form 10-Q have
been adjusted to reflect the 1-for-2 reverse stock split.
Each stock certificate representing outstanding shares of common stock
of the company also represents the same number of Rights (to purchase, under
certain circumstances, shares of Series A Junior Preferred Stock of the Company)
as the number of shares of common stock represented by such stock certificate.
Pursuant to the terms of the Rights Agreement governing the Rights, the effect
of the 1-for-2 reverse split of the Company's common stock was to increase the
number of shares of Series A Junior Preferred Stock of the Company purchasable
upon exercise of a Right, should it become exercisable, from one one-hundredth
(1/100) of a share of Series A Junior Preferred Stock to two one-hundredths
(2/100) of a share of Series A Junior Preferred Stock, and to increase the
exercise price of a Right from $15 to $30.
There are currently outstanding Warrants to purchase shares of common
stock of the Company. As a consequence of the 1-for-2 reverse split of the
Company's common stock, pursuant to the terms of the Warrant Agreement between
the Company and Chemical Mellon Shareholder Services, L.L.C., the warrant agent,
dated as of June 6, 1994, the Warrant exercise price and the number of Warrant
shares exercisable upon exercise of a Warrant certificate were automatically
proportionally adjusted to double the exercise price to purchase one share of
common stock from $9.20 per share to $18.40 per share, and to reduce the number
of shares purchasable upon exercise of a Warrant by one-half.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The information called for by this item is contained in the company's
report on Form 10-Q for the quarterly period ended March 31, 1996, and is hereby
incorporated by reference thereto.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Not applicable.
b. There were no reports on Form 8-K filed during the
quarter for which this report is filed.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
U.S. BIOSCIENCE, INC.
Date: August 14, 1996 By: /s/ Robert I. Kriebel
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Robert I. Kriebel
Senior Vice President
Finance and Administration