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 September 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
---------------------------------------------------------
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 November 5, 1996, there were 22,795,300 shares of common stock
outstanding.
-1-
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 Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit Index 17
-2-
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 34,344,300 $ 41,618,800
Investments 1,004,600 3,977,400
Accounts receivable, net 502,700 802,500
Interest receivable 132,900 60,000
Inventories 2,961,000 2,165,100
Other 6,084,500 6,922,200
---------------- ----------------
Total current assets 45,030,000 55,546,000
Property, plant and equipment at cost, less accumulated depreciation 6,182,900 6,334,300
---------------- ----------------
Total assets $ 51,212,900 $ 61,880,300
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,319,900 $ 1,937,600
Accrued clinical grants payable 1,214,900 716,300
Accrued product manufacturing costs payable 667,000 384,300
Accrued marketing costs payable 320,600 125,900
Accrued professional fees payable 314,000 393,200
Line of Credit 633,900 676,000
Current Maturities of long-term debt 719,300 721,300
Accounts payable and other accrued liabilities 2,292,900 8,014,400
---------------- ----------------
Total current liabilities 7,482,500 12,969,000
Long-term liabilities:
Long-term debt, net of current maturities 1,289,000 2,587,600
Convertible Debentures -- 16,500,000
Other long-term liabilities 2,030,100 1,035,800
---------------- ----------------
Total long-term liabilities 3,319,100 20,123,400
---------------- ----------------
Total liabilities 10,801,600 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; 22,793,300
shares issued and outstanding at September 30, 1996, and 21,046,900 shares
issued and outstanding at December 31, 1995 227,900 210,500
Additional paid-in capital 150,813,400 133,157,700
Deficit accumulated during the development stage (110,708,300) (104,929,800)
Foreign currency translation adjustment 78,300 349,500
---------------- ----------------
Total stockholders' equity 40,411,300 28,787,900
---------------- ----------------
Total liabilities and stockholders' equity $ 51,212,900 $ 61,880,300
================ ================
-3-
U.S. BIOSCIENCE, INC.
( A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net sales $ 1,785,100 $ 2,271,500 $ 8,430,300 $ 6,631,800
Net investment income 538,600 256,600 1,801,900 926,400
Licensing, royalty and other income 4,331,500 89,300 5,094,100 1,313,200
-------------- -------------- -------------- --------------
6,655,200 2,617,400 15,326,300 8,871,400
Expenses:
Cost of sales 563,000 885,000 2,259,000 2,075,900
Selling, general and administrative costs 2,015,800 4,662,100 8,968,000 10,548,600
Research and development costs 3,569,200 2,904,500 9,387,100 8,670,700
Provision for litigation - - - -
Interest expense 61,300 53,300 490,700 93,600
-------------- -------------- -------------- -------------
6,209,300 8,504,900 21,104,800 21,388,800
-------------- -------------- -------------- -------------
Net income (loss) $ 445,900 $ (5,887,500) $ (5,778,500) $ (12,517,400)
============== ============== ============== =============
Net income (loss) per common outstanding share $ 0.02 $ (0.29) $ (0.26) $ (0.61)
============== ============== ============= =============
Weighted average number of common shares outstanding 22,781,900 20,430,100 22,251,400 20,401,400
============== ============== ============= =============
PERIOD MAY 7, 1987
(INCEPTION)
THROUGH
SEPTMEBER 30, 1996
------------------
Revenues:
Net sales $ 33,583,500
Net investment income 26,851,900
Licensing, royalty and other income 30,833,400
-------------
91,268,800
Expenses:
Cost of sales 8,785,400
Selling, general and administrative costs 86,618,000
Research and development costs 94,550,200
Provision for litigation 10,165,000
Interest expense 1,858,500
-------------
201,977,100
-------------
Net income (loss) $ (110,708,300)
=============
U.S. BIOSCIENCE, INC.
( A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
1996 1995
----------- ------------
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net loss $ (5,778,500) $ (12,517,400)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 854,000 875,900
Compensation element of stock option grants -- --
Loss (gain) on investments (4,600) --
Amortization of debenture interest 154,300 --
Change in accounts receivable 299,700 (100,900)
Change in interest receivable (72,800) 51,500
Change in inventories (844,400) (97,900)
Change in other current assets 824,000 (435,600)
Change in current liabilities (5,406,300) 1,145,900
Provision for litigation -- (59,500)
Change in other long-term liabilities 253,300 97,100
----------- ------------
Total adjustments (3,942,800) 1,476,500
----------- ------------
Net cash provided by (used in) operating activities (9,721,300) (11,040,900)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 36,314,500 12,754,200
Purchase of investments (33,337,200) (4,508,200)
Purchase of property, plant and equipment (1,002,800) (624,800)
----------- ------------
Net cash provided by (used in) investing activities 1,974,500 7,621,200
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 191,900 --
Proceeds from exercise of stock options 826,900 188,700
Proceeds from loan -- 2,841,700
Proceeds from line of credit -- --
Repayment of long-term debt (518,700) --
----------- ------------
Net cash provided by (used in) financing activities 500,100 3,030,400
Foreign currency translation adjustment (27,800) (476,800)
----------- ------------
Net (decrease) increase in cash and cash equivalents (7,274,500) (866,100)
Cash and cash equivalents-beginning of period 41,618,800 11,681,900
----------- ------------
Cash and cash equivalents-end of period $ 34,344,300 $ 10,815,800
Supplemental cash flow disclosure: =========== ============
Interest paid to affiliate -- --
PERIOD MAY 7, 1987
(INCEPTION)
THROUGH
SEPTEMBER 30, 1996
------------------
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net loss $ (110,708,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,852,200
Compensation element of stock option grants 5,303,400
Loss (gain) on investments 134,800
Amortization of debenture interest 198,700
Change in accounts receivable (502,600)
Change in interest receivable (132,800)
Change in inventories (3,019,700)
Change in other current assets (6,061,100)
Change in current liabilities 6,058,000
Provision for litigation 10,000,000
Change in other long-term liabilities 1,289,000
------------------
Total adjustments 18,119,900
------------------
Net cash provided by (used in) operating activities (92,588,400)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 3,150,718,600
Purchase of investments (3,151,853,200)
Purchase of property, plant and equipment (10,837,000)
------------------
Net cash provided by (used in) investing activities (11,971,600)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 128,496,200
Proceeds from exercise of stock options 7,043,100
Proceeds from loan 3,219,100
Proceeds from line of credit 676,000
Repayment of long-term debt (733,400)
------------------
Net cash provided by (used in) financing activities 138,701,000
Foreign currency translation adjustment 203,300
------------------
Net (decrease) increase in cash and cash equivalents 34,344,300
Cash and cash equivalents-beginning of period --
------------------
Cash and cash equivalents-end of period $ 34,344,300
==================
Supplemental cash flow disclosure:
Interest paid to affiliate $ 1,005,800
See accompanying notes.
-5-
U.S. BIOSCIENCE, INC.
( A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MAY 7, 1987 (INCEPTION) THROUGH SEPTEMBER 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 42,090,800 210,500 -- --
Proceeds from exercise of stock options 265,900 1,600 -- --
Conversion of warrants 200 -- -- --
Conversion of debentures 2,655,000 15,800 -- --
Net loss for the nine months ended September 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 September 30, 1996 22,793,300 $ 227,900 -- $ --
=========== ======== ======== ========
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 825,300 -- -- 826,900
Conversion of warrants 4,500 -- -- 4,500
Conversion of debentures 16,825,900 -- -- 16,841,700
Net loss for the nine months ended September 30, 1996 (5,778,500) -- (5,778,500)
Foreign currency translation adjustment -- -- (271,200) (271,200)
Conversion of shares to reflect the 1 for 2 reverse
stock split effective April 22, 1996 -- -- -- --
------------- ------------ -------- ------------
Balance at September 30, 1996 $ 150,813,400 $(110,708,300) $ 78,300 $ 40,411,300
============= ============ ======== ============
See accompanying notes.
- 6 -
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 September 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 nine
month periods ended September 30, 1996 and 1995, and the period from May 7, 1987
(inception) through September 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:
September 30, December 31,
1996 1995
------------- ------------
Raw Materials $ 902,100 $ 813,300
Work-in-progress 1,575,600 893,000
Finished Goods 483,300 458,800
---------- ----------
Total $2,961,000 $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:
September 30, December 31,
1996 1995
---------------- --------------
Land, buildings, and leasehold improvements $ 1,961,000 $ 2,106,500
Equipment, furniture and fixtures 8,941,300 8,173,500
Accumulated depreciation (4,719,400) (3,945,700)
---------------- --------------
Property, plant and equipment, net $ 6,182,900 $ 6,334,300
================ ==============
-7-
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:
September 30, December 31,
1996 1995
-------------- -------------
MELF Equipment Loan $ 270,600 $ 323,600
Mortgage Loan 607,300 685,300
Term Loan 1,850,000 2,300,000
Convertible Debentures 0 16,500,000
Capital Lease Obligations 21,500 0
-------------- -------------
2,749,400 19,808,900
Less Current Portion 719,300 721,300
-------------- -------------
Long-Term Debt $2,030,100 $19,087,600
============== =============
During the first half of 1996, the investors who purchased the unsecured
convertible debentures in the company's 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
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 reports on Form 10-Q for the
interim periods ended March 31, 1996 and June 30, 1996. Operating results for
the three and nine month interim periods ended September 30, 1996 are not
necessarily indicative of the results that may be obtained for any other interim
period or the entire year.
-8-
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 success of the
company and its collaborative partners in marketing, manufacturing and selling
company's products, the availability of adequate funds for the company's
operations, the success of the company in obtaining timely regulatory approvals
to market its potential products in the United States and other major markets,
the success of the company in obtaining 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 incidence of diseases for which the
company's products are indicated, 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 nine months ended September 30, 1996, consisted
primarily of activities relating to the launch of Ethyol(R) in the United States
with co-promotion partner ALZA Corporation ("ALZA"), the marketing of Hexalen(R)
and NeuTrexin(R) in the United States, regulatory filings for Ethyol(R) in the
United States, Canada and Europe, continuing clinical trials of Ethyol and
NeuTrexin and product development of Ethyol, Neutrexin, AZQ and FddA, and
business development in the United States, Europe and Japan.
The company received United Stated Food and Drug Administration ("FDA")
approval of it's New Drug Application ("NDA") for Ethyol in December 1995 for
use in Ovarian Cancer and an accelerated approval for use in Lung Cancer in
March, 1996 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, has launched
Ethyol in Germany, the United Kingdom, France, Austria, Belgium, Portugal,
Sweden, Switzerland and The Netherlands, and plans to begin sales 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 launched Ethyol during 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 and NeuTrexin, (ii) the marketing of Hexalen,
NeuTrexin and Ethyol, (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.
-9-
Results of Operations
Three months ended September 30, 1996
Product sales declined 21% to $1,785,100 in the three months ended
September 30, 1996 as compared to $2,271,500 in the prior year period,
principally resulting from reduced sales of Hexalen and Neutrexin. The company
believes that the reduction in sales resulted primarily from the promotional
emphasis placed on Ethyol, the company's cytoprotective product, which was
launched in the United States with co-promotion partner ALZA in April 1996. In
addition, the company believes that during 1996, the launch of competitive
products may have had a negative impact on sales of Hexalen. The company
further believes that sales of Neutrexin have been adversely affected by a
decline in the incidence of Pneumocystis carinii pneumonia ("PCP") due to
improvements in treatment for human immunodeficiency virus (HIV) and
prophylactic treatment for patients at risk for PCP.
Net investment income increased to $538,600 in the third quarter of 1996
as compared to $256,600 in the corresponding 1995 period due to increased
interest income resulting from the increased portfolio balance. The increased
portfolio balance reflects the initial distribution fees received from ALZA as
part of the U.S. co-promotion agreement for Ethyol and funds the company raised
in a private placement completed in December 1995.
Licensing, royalty and other income increased to $4,331,500 in the three
months period ended September 30, 1996 from $89,300 in the prior year period, as
a result of a $4.2 million accrual reflecting the amount due from Scherico under
the amendment to the company's 1993 European distribution agreement for Ethyol
(the "Scherico Amendment"). In addition, as part of a separate agreement,
another Schering-Plough affiliate paid the company a $200,000 milestone payment
related to the regulatory approval of Ethyol in Australia which was received
during the third quarter.
Cost of sales, which consists of product manufacturing, testing, delivery
and royalty expenses, decreased due to the decline in sales. As a percentage of
sales, cost of sales in the three month period decreased to 31% of net sales as
compared to 39% of net sales in the prior year period due principally to
additional Ethyol sales revenue that was recorded as a result of the Scherico
Amendment.
Selling, general and administrative costs for the third quarter of 1996
decreased to $2,015,800 from $4,662,100 in the corresponding 1995 period. The
decrease is principally due to the reversal of $892,000 in accrued 1996
European losses as a result of the Scherico Amendment. Additionally, the third
quarter 1995 amount included a charge of $2.3 million for European losses
generated under the original Scherico agreement. Excluding these two items,
selling, general and administrative costs increased over the prior year period
by $586,500 due to higher personnel costs of $451,200 and increased Hexalen and
NeuTrexin marketing expenditures of $264,800.
Research and development costs increased to $3,569,200 in the third
quarter of 1996 as compared to $2,904,500 in the prior year period. The
$664,700 increase is principally attributable to increased personnel costs of
$367,800 and increased clinical grant expenses of $243,000 relating to the
company's Phase III clinical trial programs which are designed to support
applications for expansion of the therapeutic indications for Ethyol in
radiation protection and other chemotherapy regimes and for NeuTrexin in
colorectal cancer.
Net income for the three months ended September 30, 1996 was $445,900 or
$0.02 earnings per common share outstanding as compared to a net loss of
$5,887,500 or $0.29 loss per common share outstanding in the 1995 period.
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Nine months ended September 30, 1996
Product sales increased 27% to $8,430,300 in the nine months ended
September 30, 1996 as compared to $6,631,800 in the prior year period. The
$1,798,500 increase is principally due to initial sales of Ethyol to ALZA in the
first half of 1996 in preparation for the launch of Ethyol in the United States
in April of this year. Sales of the company's other two products, Hexalen and
NeuTrexin, declined from the prior year period. The company believes that this
decline is principally due to the promotional emphasis placed on the Ethyol
launch in 1996. In addition, the company believes that during 1996, the launch
of competitive products may have had a negative impact on sales of Hexalen. The
company further believes that sales of Neutrexin have been adversely affected by
a decline in the incidence of Pneumocystis carinii pneumonia ("PCP") due to
improvements in treatments for human immunodeficiency virus (HIV) and
prophylactic treatment for patients at risk for PCP.
Net investment income increased to $1,801,900 for the first nine months of
1996 as compared to $926,400 in the corresponding 1995 period due to increased
interest income resulting from the increased portfolio balance. The higher
balance reflects the initial distribution fees received from ALZA as part of the
U.S. co-promotion agreement for Ethyol and funds the company raised in a
December 1995 private placement.
Licensing, royalty and other income increased to $5,094,100 in the nine
month period ended September 30, 1996 from $1,313,200 in the prior year period,
as a result of a $4.2 million accrual reflecting the amount due to the company
under the Scherico Amendment.
Cost of sales, as a percentage of sales, decreased to 27% of net sales in
the nine month period as compared to 31% of net sales in the prior year period
due principally to the initial sales of Ethyol to ALZA in the first half of
1996.
Selling, general and administrative costs for the first nine months of 1996
decreased to $8,968,000 from $10,548,600 in the corresponding 1995 period. The
decrease is principally due to the inclusion in the 1995 period of a charge of
$2.3 million for European losses generated under the original Scherico
agreement. Excluding this item, selling, general and administrative costs
increased over the prior year period by $760,500 primarily the result of higher
personnel costs of $512,200, increased corporate expenses of $313,200 and higher
Hexalen and NeuTrexin marketing expenditures of $224,827.
Research and development costs increased to $9,387,100 in the nine month
period ended September 30, 1996 as compared to $8,670,700 in the prior year
period. The $716,400 increase is principally attributable to increased
personnel costs of $594,000, higher travel costs of $149,500 and increased
clinical grant expenses of $215,000 relating to the company's Phase III clinical
trial programs for Ethyol and NeuTrexin.
The net loss for the first nine months of 1996 was $5,778,500 or $0.26 per
common share outstanding as compared to a net loss of $12,517,400 or $0.61 per
common share outstanding 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 September 30, 1996, the company's cash and investments
totaled $35,348,900. 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 nine months of 1996, net cash used by operations amounted
to $9,721,300 principally due to the net effect of the factors discussed above
under "Results of Operations" and the $4.2 million accrual for the amount due
under the Scherico Amendment which was paid to the company in early October
1996. Until such time
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as the company receives significantly increased revenues, the company's cash
position will continue to be reduced due principally to expenditures in
research, clinical development, product development, marketing, and selling and
administrative activities. Failure to achieve significant sales from the
company's currently approved products and to obtain additional regulatory
approvals on products currently in development will have a material adverse
effect on the company. The level of future product sales will depend on several
factors, including product acceptance, market penetration, competitive products,
the incidence of diseases for which the company's products are indicated, the
performance of the company's licensees and distributors, and the health care and
reimbursement system existing in each market where the company's products are or
may become commercially available.
The company's net capital expenditures were $1,002,800 in the first nine
months of 1996 and total $10,837,000 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 and those of regulatory authorities in other
countries including Good Manufacturing Practices, and are subject to inspection
by governmental agencies 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 $2,980,600 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 provided the company with
approximately $39 million in working capital, which the company believes will
remain 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 products. 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 for clinical development of products 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 Ethyol, launched
Ethyol in several European markets where regulatory approvals had been received.
Under the terms of its original agreement with Scherico, the company was to
share in operating profits/losses generated from marketing and sales of Ethyol
in Germany, the United Kingdom, Spain, Italy and France for a period of up to
two years from November 23, 1994. The company
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paid its share of the 1995 operating losses ($4.2 million) in April 1996 and had
accrued $892,000 during the first six months of 1996, for its estimated share of
operating losses through the period. In September 1996, the Scherico Amendment
was executed pursuant to which retroactive to January 1, 1996, Scherico began to
purchase Ethyol from the company at a price based on a percentage of net sales
and the company no longer shared in operating profits/losses previously shared
by the parties. In addition, as noted above, Scherico paid the company $4.2
million under the Amendment during October 1996.
In April of 1996, ALZA and the company launched Ethyol in the United
States. 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
initial five-year period, ALZA has an option to extend its exclusive rights for
one year. At the end of ALZA's exclusive period, all U.S. marketing rights to
Ethyol will revert to the company, and ALZA will receive payments from the
company for ten years based on net sales of the product. ALZA paid the company
an up-front payment and initial distribution fee totaling $20 million and the
agreement provides for $15 million in additional distribution fees during the
next few years based on the achievement of certain milestones related to the
company's clinical development of Ethyol.
As the company sells Ethyol to its partners, Scherico and ALZA, in
quantities, which may or may not correspond to the product's resale to the
pharmaceutical trade, the company's sales may fluctuate from period to period
dependent upon the timing of its partners' sales and delivery requirements as
well as the levels of inventory they stock and maintain. Sales of Ethyol are
also affected by the same factors noted elsewhere in this section on liquidity
and capital resources. The company is hopeful that the commercialization of
Ethyol in the United States and Europe will be successful. However, no
assurances can be given that the company will achieve meaningful revenues under
its agreements with ALZA and Scherico.
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 and the Company reported net earnings this quarter as a result of
non-recurring items relating to the Scherico Amendment noted herein. As the
company continues its commercialization, research and development activities,
such losses are expected to continue and may fluctuate from period to period.
There can be no assurance that the company will achieve significant revenues or
profitable operations. For the period from May 7, 1987 (inception) through
September 30, 1996, the company had an accumulated deficit of $110,708,300.
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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.
Not applicable.
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Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.20 Non-Executive Stock Option Plan,
as amended and restated
10.31 U.S. Bioscience, Inc. 1992
Stock Option Plan, as amended and restated
27 Financial Data Schedule
b. The company filed the following report on Form 8-K during the
quarter ended September 30, 1996:
Date of Report Items Covered
-------------- -------------
September 26, 1996 5
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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: November 13, 1996 By: /s/ Robert I. Kriebel
----------------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT PAGE NO.
------- --------
10.20 Non-Executive Stock Option Plan, 18
as amended and restated
10.31 U.S. Bioscience, Inc. 1992 35
Stock Option Plan as amended and
restated
27 Financial Data Schedule 60
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