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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 June 30, 1999
Commission File Number 0-15313
BIO-TECHNOLOGY GENERAL CORP.
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(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
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(Address of principal executive offices)
(732) 632-8800
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(Registrant's telephone number, including area code)
Former address: Not Applicable
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(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 August 9, 1999:
52,531,626
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INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998 ................... 3
Consolidated Statements of Operations
for the three and six months ended
June 30, 1999 and 1998 ................................ 4
Consolidated Statement of Changes in
Stockholders' Equity for the
six months ended June 30, 1999 ........................ 5
Consolidated Statements of Cash Flows
for the six months ended
June 30, 1999 and 1998 ................................ 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................... 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
2
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1999
(Unaudited) December 31, 1998
------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 8,410 $ 9,431
Short-term investments ........................... 65,604 37,602
Accounts receivable - trade ...................... 45,525 52,429
- other ...................... 695 15,968
Inventories ...................................... 5,702 4,978
Deferred income taxes ............................ 2,637 5,407
Prepaid expenses and other current assets ........ 498 344
--------- ---------
Total current assets .......................... 129,071 126,159
Severance pay funded ................................ 2,266 2,233
Property and equipment, net ......................... 17,063 9,442
Intangibles, net .................................... 1,447 1,728
Patents, net ........................................ 377 404
Other assets ........................................ 2,507 2,629
--------- ---------
Total assets .................................. $ 152,731 $ 142,595
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans ............................ $ 550 $ 288
Accounts payable ................................. 5,166 5,359
Other current liabilities ........................ 10,572 10,153
--------- ---------
Total current liabilities ..................... 16,288 15,800
--------- ---------
Long-term liabilities ............................... 3,924 3,818
--------- ---------
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: 52,218,000
(51,934,000 at December 31, 1998) ............... 522 519
Capital in excess of par value ................... 162,439 161,164
Deficit .......................................... (27,290) (36,396)
Less - treasury stock at cost, 83,000 shares ..... (340) (340)
Accumulated other comprehensive income ........... (2,812) (1,970)
--------- ---------
Total stockholders' equity .................... 132,519 122,977
--------- ---------
Total liabilities and stockholders' equity .... $ 152,731 $ 142,595
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
------ ------- ------- -------
Revenues:
Product sales....................... $35,248 $32,659 $19,381 $16,923
Contract fees....................... 4,633 1,744 1,727 740
Other revenues...................... 1,216 275 719 125
Interest income..................... 2,011 1,408 1,053 858
------ ------ ------ ------
43,108 36,086 22,880 18,646
------ ------ ------ ------
Expenses:
Research and development............ 8,977 8,973 4,359 3,717
Cost of product sales............... 6,122 5,006 3,868 2,488
General and administrative.......... 5,895 4,381 3,231 2,329
Marketing and sales................. 8,324 5,950 3,765 3,303
Commissions and royalties........... 717 343 396 217
Interest and finance................ 60 40 57 19
------ ------ ------ ------
30,095 24,693 15,676 12,073
------ ------ ------ ------
Income before income taxes............. 13,013 11,393 7,204 6,573
Income taxes........................... 3,907 3,485 2,104 2,030
------ ------ ------ ------
Net income............................. $ 9,106 $ 7,908 $ 5,100 $ 4,543
====== ====== ====== ======
Earnings per common share:
Basic............................... $ 0.18 $ 0.17 $ 0.10 $ 0.09
===== ===== ===== =====
Diluted............................. $ 0.17 $ 0.16 $ 0.10 $ 0.09
===== ===== ===== =====
Weighted average number of common and
common equivalent shares:
Basic............................... 52,014 47,810 52,086 48,292
====== ====== ====== ======
Diluted............................. 53,217 50,893 53,358 50,514
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
4
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
Common Stock Other
-------------- Capital in Comprehensive Total
Par Excess of Treasury Income Stockholders'
Shares Value Par Value Deficit Stock (Loss) Equity
------ ----- ----------- ------- --------- -------------- -------------
Balance, December 31, 1998......... 51,934 $519 $161,164 $(36,396) $(340) $(1,970) $122,977
Comprehensive income:
Net income for six months
ended June 30, 1999.......... 9,106 9,106
Unrealized loss on marketable
securities, net............... (842) (842)
--------
Total comprehensive income: 8,264
--------
Issuance of common stock. ......... 120 1 647 648
Exercise of stock options.......... 164 2 628 630
-------- ----- -------- --------- ------ -------- --------
Balance, June 30, 1999............. 52,218 $ 522 $162,439 $(27,290) $(340) $(2,812) $132,519
======== ===== ======== ========= ====== ======== ========
The accompanying notes are an integral part of this consolidated statement.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months
Ended June 30,
----------------------
1999 1998
--------- ----------
Cash flows from operating activities:
Net income ............................................ $ 9,106 $ 7,908
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................... 1,692 1,440
Provision for severance pay ......................... 106 (142)
Gain (loss) on sales of short-term investments ...... 174 (220)
(Loss) on sales of fixed assets ..................... (5) --
Deferred income taxes ............................... 2,770 3,248
Common stock as payment for services ................ 30 29
Changes in: receivables ............................. 22,177 (4,897)
inventories .............................. (724) (500)
prepaid expenses and other current assets (154) (8)
accounts payable ......................... (193) 219
other assets ............................. (36) (4)
other current liabilities ................ 681 1,597
-------- --------
Net cash provided by operating activities ................ 35,624 8,670
-------- --------
Cash flows from investing activities:
Short-term investments ................................ (39,597) (16,178)
Capital expenditures .................................. (8,629) (1,224)
Changes in patents .................................... (108) --
Changes in intangibles ................................ (149) --
Severance pay used (funded) ........................... (33) 82
Proceeds from sales of fixed assets ................... 44 --
Proceeds from sales of short-term investments ......... 10,579 7,564
-------- --------
Net cash used in investing activities ................... (37,893) (9,756)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................ 1,248 5,574
-------- --------
Net (decrease) increase in cash and cash equivalents ..... (1,021) 4,488
Cash and cash equivalents at beginning of year ........... 9,431 9,329
-------- --------
Cash and cash equivalents at end of period ............... $ 8,410 $ 13,817
======== ========
Supplementary Information
- -------------------------
Other information:
Income tax paid ....................................... $ 789 $ 185
The accompanying notes are an integral part of these consolidated statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Statement on Adjustments
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, 1998. 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,
1998.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three and six months ended June 30, 1999
compared with three and six months ended June 30, 1998
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, 1998.
OVERVIEW
The Company 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 six products that have received regulatory approval for sale, of which
five are currently being marketed. The Company seeks both broad markets for its
products as well as specialized markets where it can seek Orphan Drug status and
potential marketing exclusivity.
The Company was founded in 1980 to develop, manufacture and market
novel therapeutic products. The Company's overall administration, licensing,
human clinical studies, marketing activities, quality assurance and regulatory
affairs are primarily coordinated at the Company's headquarters in Iselin, New
Jersey. Pre-clinical studies, research and development activities and
manufacturing of the Company's genetically engineered products are primarily
carried out through its wholly owned subsidiary in Rehovot, Israel.
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
statement of operations.
8
Six Months Ended Three Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Product sales........................... 81.8% 90.5% 84.7% 90.7%
Contract fees........................... 10.7 4.8 7.6 4.0
Other revenues.......................... 2.8 0.8 3.1 0.7
Interest income......................... 4.7 3.9 4.6 4.6
------ ------ ------ ------
Total.............................. 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Expenses:
Research and development................ 20.8% 24.9% 19.1% 19.9%
Cost of product sales................... 14.2 13.9 16.9 13.3
General and administrative.............. 13.7 12.1 14.1 12.5
Marketing and sales..................... 19.3 16.5 16.5 17.7
Commissions and royalties............... 1.7 0.9 1.7 1.2
Interest and finance.................... 0.1 0.1 0.2 0.1
------ ------ ------ ------
Total............................... 69.8 68.4 68.5 64.7
------ ------ ------ ------
Income before taxes....................... 30.2 31.6 31.5 35.3
Income taxes.............................. 9.1 9.7 9.2 10.9
------ ------ ------ ------
Net income................................ 21.1% 21.9% 22.3% 29.4%
====== ====== ====== ======
The Company 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 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, 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.
The following table summarizes the Company's sales of its commercialized
products as a percentage of total product sales for the periods indicated:
Six Months Ended Three Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
----- ----- ------ -----
Oxandrin.................................. 38.5% 60.7% 35.3% 62.1%
Bio-Tropin................................ 37.7 27.0 42.6 26.6
BioLon.................................... 11.5 9.3 9.1 9.2
Delatestryl............................... 11.0 1.3 12.0 1.3
Other..................................... 1.3 1.7 1.0 0.8
------ ------ ------ ------
Total............................... 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
9
The Company believes that its product mix will fluctuate from quarter to quarter
as it continues to focus on: (i) increasing market penetration of its existing
products; (ii) expanding into new markets; and (iii) commercializing additional
products.
As previously announced, as a result of a slowing in the rate of
increase of Oxandrin prescriptions, Olsten Health Services, Inc., BTG's
distributor for Oxandrin, has decided to adjust future purchases to effect an
adjustment in inventory. The timing and magnitude of the adjustment are the
subject of ongoing discussions between Olsten and BTG, and will depend in large
part on end-user demand for Oxandrin. As a result, purchases of Oxandrin by
Olsten are expected to be lower than in 1998. The Company expects during 1999 to
introduce Oxandrin to promote weight gain in patients with involuntary weight
loss and pressure ulcers. Successful penetration of this new market could lead
to a more rapid rate of Oxandrin prescription growth.
The following table summarizes the Company's U.S. and international
product sales as a percentage of total product sales for the period indicated:
Six Months Ended Three Months Ended
June 30, June 30,
------------------ ----------------------
1999 1998 1999 1998
------ ------ ------ -------
United States ............ 45.3% 62.0% 37.2% 63.0%
International ............ 54.7 38.0 62.8 37.0
----- ----- ----- -----
Total .............. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Comparison of Six Months Ended June 30, 1999 and June 30, 1998
Revenues. Total revenues increased 19% in the first half of 1999 to
$43,108,000 from $36,086,000 in the first half of 1998. Product sales increased
by $2,589,000, or 8%, in the first half of 1999 from the comparable prior
period, as increased sales of human growth hormone ("hGH"), BioLon and
Delatestryl to BTG's distributors were partially offset by decreased sales of
Oxandrin. Oxandrin sales to Olsten Corporation ("Olsten"), the Company's
wholesale and retail distributor of Oxandrin in the United States, decreased
$8,265,000, or 42%, in the first half of 1999 compared to the first half of
1998. The decrease in sales to Olsten was due to Olsten's change in policy to
reduce the amount of Oxandrin inventory it carries; however, end-user sales of
Oxandrin by Olsten increased in the first half of 1999 compared to the first
half of 1998. The decrease in sales to Olsten was partially offset by $2,153,000
of sales of Oxandirin to a third party for distribution overseas. Product sales
of hGH, BioLon and Delatestryl increased $4,470,000, $1,015,000 and $3,457,000
or 51%, 33% and 810%, respectively. The increase in sales of hGH were primarily
due to increased sales in Japan resulting from Sumitomo Pharmaceutical Co., Ltd.
commencing distribution of the Company's hGH in Japan in January 1999. The
increase in sales of Delatestryl, which is also distributed on behalf of the
Company by Olsten, is primarily the result of the U.S. Food and Drug
Administration stopping production of a competing injectable testosterone
product currently used to treat men with hypogonadism (testosterone deficiency).
Contract fees and other revenues are primarily generated from licensing
and distribution arrangements and partial research and development funding by
the Chief Scientist of the State of Israel. Contract fees represented 10.7% of
total revenues in the first half of 1999 compared to 4.8% in the first half of
1998. Of the contract fees earned in the first half of 1999, $4,197,000, or 91%
of total contract fees, was earned in respect of the license of distribution
rights for Insulin on a substantially worldwide basis. Of the contract fees
earned in the first half of 1998, $500,000, or 29% of total contract fees, were
earned in respect of the license of distribution rights for BioLon in the United
States, and $425,000, $400,000 and $353,000, or 24%, 23% and 20% of total
contract fees, respectively, were earned in respect of the Company's oral
contraceptive regimen, hepatitis-B vaccine and insulin, respectively. Interest
income increased $603,000, or 43%, over the comparable prior period primarily as
a result of increased cash balances (including short-term investments) resulting
mainly from exercise of warrants (which expired December 31, 1998) and options
and cash flow from operations subsequent to June 30, 1998.
Research and Development Expense. Research and development expense was
essentially the same in the first half of 1999 and 1998. In the first half of
1998, the Company was conducting a Phase III clinical trial for its superoxide
dismutase product. This clinical trial, which was terminated in the second
quarter of 1998, is now being conducted as a Phase II trial. The decrease in
research and development expenses resulting from termination of the Phase III
trial was offset by increased salaries due to increased research and development
and other clinical activities.
10
Cost of Product Sales. Cost of product sales increased $1,116,000, or
22%, in the first half of 1999 to $6,122,000 from $5,006,000 in the first half
of 1998. Cost of product sales as a percentage of product sales increased to
17.4% as compared to 15.3% in the comparable period last year. Cost of product
sales increased, both in absolute terms and as a percentage of revenues,
primarily as a result of increased sales of Delatestryl. Oxandrin and human
growth hormone have a relatively low cost of manufacture as a percentage of
product sales, while Delatestryl and BioLon have 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
increased 35% in the first half of 1999 to $5,895,000 versus $4,381,000 in the
comparable prior period. As a percentage of revenues, general and administrative
expense increased to 13.7% of revenues in the first half of 1999 versus 12.1% of
revenues in the comparable prior year period. The increase derived mainly from
legal fees resulting from the reactivation in the fourth quarter of 1998 of the
Company's declaratory judgment action against Genentech in respect of the
Company's hGH in the United States.
Marketing and Sales Expense. Marketing and sales expense increased 40%
in the first half of 1999 to $8,324,000 from $5,950,000 for the prior year
period. As a percentage of revenues, marketing and sales expense increased to
19.3% from 16.5% for the first half of 1998. 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 additional marketing and sales expenses, primarily resulting
from increased personnel and increased advertising, promotional and market
research activities.
Commissions and Royalties. Commissions and royalties were $717,000 in
the first half of 1999, as compared to $343,000 in the first half of 1998. 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 six months ended June
30, 1999 was $3,907,000, representing 30.0% of income before income taxes as
compared to $3,485,000, or 30.6% of income before income taxes, in the six
months ended June 30, 1998. The Company's consolidated tax rate differs from the
statutory rate because of Israeli tax benefits, research and experimental tax
credits and similar items which reduce the tax rate.
Earnings per Common Share. The Company had approximately 4.2 million
and 2.3 million additional basic and diluted weighted average shares
outstanding, respectively, for the six month period ended June 30, 1999, as
compared to the same period in 1998. The increased number of basic shares was
primarily the result of the issuance, subsequent to June 30, 1998, of
approximately 3,146,000 shares upon the exercise of warrants that expired on
December 31, 1998. The increase in the number of diluted shares was the result
of the increased number of shares outstanding, partially offset by fewer
outstanding options being considered common equivalent shares because their
exercise price was above the average fair market value of the Common Stock for
the first half of 1999, which average fair market value was lower than in the
first half of 1998.
Comparison of Three Months Ended June 30, 1999 and June 30, 1998
Revenues. Total revenues increased 23% in the second quarter of 1999 to
$22,880,000 from $18,646,000 in the second quarter of 1998. Product sales
increased by $2,458,000, or 15%, in the second quarter of 1999 from the
comparable prior period, as increased sales of human growth hormone, BioLon and
Delatestryl to BTG's distributors were partially offset by decreased sales of
Oxandrin. Oxandrin sales to Olsten Corporation, the Company's wholesale and
retail distributor of Oxandrin in the United States, decreased $5,663,000, or
54%, in the three months ended June 30, 1999 compared to the same period in
1998. The decrease in sales to Olsten was due to Olsten's change in policy to
reduce the amount of Oxandrin inventory it carries; however, end-user sales of
Oxandrin by Olsten increased in the second quarter of 1999 compared to the
second quarter of 1998 and the first quarter of 1999. The decrease in sales to
Olsten was partially offset by $2,083,000 of sales of Oxandrin to a third party
for distribution overseas. Product sales of hGH, BioLon and Delatestryl
increased $3,758,000, $203,000 and $2,102,000 or 83%, 13% and 877%,
respectively. The increase in sales of hGH were primarily due to increased sales
in Japan resulting from Sumitomo Pharmaceutical Co., Ltd. commencing
distribution of the Company's hGH in Japan in January 1999. The increase in
sales of Delatestryl, which is also distributed on behalf of the Company by
Olsten, is primarily the result of the U.S. Food and Drug Administration
stopping production of a competing injectable testosterone product currently
used to treat men with hypogonadism (testosterone deficiency).
Contract fees and other revenues are primarily generated from licensing
and distribution arrangements and partial research and development funding by
the Chief Scientist of the State of Israel. Contract fees represented 7.6% of
total
11
revenues in the second quarter of 1999 compared to 4.0% in the second quarter of
1998. Of the contract fees earned in the second quarter of 1999, $1,600,000, or
93% of total contract fees, was earned in respect of the license of distribution
rights for Insulin on a substantially worldwide basis. Of the contract fees
earned in the second quarter of 1998, $425,000 and $282,000, or 57% and 38% of
total contract fees, respectively, were earned in respect of the Company's oral
contraceptive regimen and insulin, respectively. Interest income increased
$195,000, or 23% over the comparable prior period primarily as a result of
increased cash balances (including short-term investments) resulting mainly from
exercise of warrants (which expired December 31, 1998) and options and cash flow
from operations subsequent to June 30, 1998.
Research and Development Expense. Research and development expense
increased 17% in the second quarter of 1999 to $4,359,000 from $3,717,000 in the
second quarter of 1998. The increase in research and development expenditures in
the three month ended June 30, 1999 is mainly attributable to increased salaries
due to increased research and development and other clinical activities.
Cost of Product Sales. Cost of product sales increased $1,380,000, or
55%, in the second quarter of 1999 to $3,868,000 from $2,488,000 in the second
quarter of 1998. Cost of product sales as a percentage of product sales
increased to 20.0% as compared to 14.7% in the comparable period last year. Cost
of product sales decreased, both in absolute terms and as a percentage of
revenues, primarily as a result of increased sales of Delatestryl. Oxandrin and
human growth hormone have a relatively low cost of manufacture as a percentage
of product sales, while Delatestryl and BioLon have 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
increased 39% in the second quarter of 1999 to $3,231,000 versus $2,329,000 in
the comparable prior period. As a percentage of revenues, general and
administrative expense increased to 14.1% of revenues in the second quarter of
1999 versus 12.5% of revenues in the comparable prior year period. The increase
derived mainly from legal fees resulting from the reactivation in the fourth
quarter of 1998 of the Company's declaratory judgment action against Genentech
in respect of the Company's hGH in the United States.
Marketing and Sales Expense. Marketing and sales expense increased 14%
in the second quarter of 1999 to $3,765,000 from $3,303,000 for the prior year
period. 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 additional marketing and
sales expenses, primarily resulting from increased personnel and increased
advertising, promotional and market research activities. As a percentage of
revenues, marketing and sales expense decreased to 16.5% from 17.7% for the
second quarter of 1998 due to the fact that revenues increased at a faster rate
than marketing and sales expense.
Commissions and Royalties. Commissions and royalties were $396,000 in
the second quarter of 1999, as compared to $217,000 in the second quarter of
1998. 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
June 30, 1999 was $2,104,000, representing 29.2% of income before income taxes
as compared to $2,030,000, or 30.9% of income before income taxes, in the second
quarter of 1998. The Company's consolidated tax rate differs from the statutory
rate because of Israeli tax benefits, research and experimental tax credits and
similar items which reduce the tax rate.
Earnings per Common Share. The Company had approximately 3.8 million
and 2.8 million additional basic and diluted weighted average shares
outstanding, respectively, for the three month period ended June 30, 1999, as
compared to the same period in 1998. The increased number of basic shares was
primarily the result of the issuance, subsequent to June 30, 1998, of
approximately 3,146,000 shares upon the exercise of warrants that expired on
December 31, 1998. The increase in the number of diluted shares was the result
of the increased number of shares outstanding, partially offset by fewer
outstanding options being considered common equivalent shares because their
exercise price was above the average fair market value of the Common Stock for
the second quarter of 1999, which average fair market value was lower than in
the second quarter of 1998.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 1999 was $112,783,000 as
compared to $110,359,000 at December 31, 1998.
The cash flows of the Company have fluctuated significantly due to the
impact of net income and losses, capital spending, working capital requirements,
the issuance of Common Stock and other financing activities. The Company 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
(decreased) increased by $(1,021,000) and $4,488,000 in the six months ended
June 30, 1999 and 1998, respectively. Short-term investments increased
$28,002,000 and $8,387,000, respectively, in these periods.
Net cash provided by operating activities was $35,624,000 and
$8,670,000 in the six months ended June 30, 1999 and 1998, respectively. Net
income was $9,106,000 and $7,908,000 in the same periods, respectively. In the
six months ended June 30, 1999 net cash provided by operating activities was
greater than net income primarily because of a decrease in receivables of
$22,177,000, deferred income taxes at $2,770,000 and depreciation and
amortization at $1,692,000. In the six months ended June 30, 1998, net cash
provided by operating activities was greater than net income primarily because
of a decease in deferred income taxes of $3,248,000, an increase in other
current liabilities of $1,597,000 and depreciation and amortization of
$1,440,000 partially offset by an increase in receivables and inventories of
$4,897,000 and $500,000, respectively.
Net cash used in investing activities was $37,893,000 and $9,756,000 in
the six months ended June 30, 1999 and 1998, respectively. Net cash used in
investing activities included capital expenditures of $8,629,000 and $1,224,000
in these periods, respectively, consisting in 1999 of approximately $6,250,000
to purchase a new manufacturing facility, with the remainder in both periods
primarily for laboratory and manufacturing equipment. 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 $1,248,000 and $5,574,000
in the six months ended June 30, 1999 and 1998, respectively, which are net
proceeds from issuances of Common Stock, primarily as a result of exercise of
stock options.
The Company purchased a manufacturing facility in Israel for
approximately $6,250,000. The Company will initially locate its production
activities for Bio-Hep-B and Fibrimage at this new facility, and will thereafter
move the remainder of its production activities to this facility. The Company
expects the initial production facility will be ready by the end of 2000. The
Company expects it will cost approximately $30 million to complete the
production facility (excluding the cost of purchasing the facility).
The Company maintains its funds in money market funds, commercial paper
and other liquid debt instruments.
The Company 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 7% in 1997
and 9% in 1998, while the Shekel was devalued by approximately 9% and 18%,
respectively. In the six months ended June 30, 1999 the consumer price index
decreased at the rate of approximately 1% while the Shekel's value in relation
to the U.S. dollar decreased by approximately 2%. As a result, for those
expenses linked to the Israeli Shekel, such as salaries and rent, this resulted
in corresponding decreases in these costs in U.S. dollars. 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.
At June 30, 1999, intangibles, net consist of (i) $1,083,000 (net of
amortization) relating to the repurchase of all rights to hGH previously
licensed to The DuPont Merck Pharmaceutical Company, together with all rights to
all data generated in pharmacological, toxicological and clinical studies and
encompassed in the Investigational New Drug Application and New Drug Application
files then pending with the U.S. Food and Drug Administration for the treatment
of human growth hormone-
13
deficient children and (ii) $214,000 (net of amortization) relating to the
reacquisition of all rights to human growth hormone licensed to Smithkline
Beecham.
The Company is party to several proceedings relating to patents owned
by it or others. The Company cannot predict the costs of such proceedings, and
there can be no assurance that such costs will not be significant. Should the
Company be unsuccessful in any of these proceedings, it may be unable to
commercialize the products which are the subject of such proceedings in certain
countries, and may be unable to produce the products in Israel, which could have
a material adverse effect on the Company's revenues and results of operations.
The Company believes that its remaining cash resources as of June 30,
1999, 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.
YEAR 2000
The Company uses and relies on a variety of information technologies,
computer systems and scientific and manufacturing equipment containing
computer-related components (such as programmable logic controllers and other
embedded systems). Certain of the Company's computer systems and equipment use
two digit fields rather than four digit fields to define the applicable year. As
a result, such systems may not be able to distinguish between dates in the 20th
century and the 21st century. This could cause system or equipment shutdowns,
failures or miscalculations resulting in inaccuracies in computer output or
disruptions of operations, including inaccurate processing of financial
information and/or temporary inabilities to process transactions, manufacture
products or engage in normal business activities.
The Company has conducted an evaluation of the actions necessary to
ensure that its business critical computer systems and equipment will be able to
function without disruption with respect to the application of dating systems in
the Year 2000. This evaluation was completed by the end of 1998, following which
the Company upgraded, replaced and tested its computer systems and equipment so
as to be able to operate without disruption due to Year 2000 issues. The Company
expects to complete all its remediation efforts before the end of 1999. However,
there can be no assurance that any required remedial actions will be able to be
completed on a timely basis. If the Company is unable to complete its remedial
actions in the necessary time frame, contingency plans will be developed to
address those business critical systems which may not be Year 2000 compliant.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a number of third parties that provide goods, services and
information to the Company. These include contract manufacturers, suppliers,
licensees, vendors, research partners and financial institutions. If any of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, which systems and equipment are outside the
control of the Company, it could affect the Company's ability to manufacture
products or engage in normal business activities. The Company has made contact
with all of its significant customers, suppliers, vendors and partners to
determine the extent to which the Company is vulnerable to their failures and to
ascertain their Year 2000 compliance and risk. Based on these responses, the
Company believes that its significant customers, suppliers, vendors and partners
will be Year 2000 compliant.
The total cost of the Year 2000 systems evaluation and remediation is
being funded through operating cash flows and the Company is expensing these
costs. While the total cost to obtain Year 2000 compliance is not known at this
time, the Company currently expects the cost to be less than $100,000, of which
approximately $50,000 has been expended through June 30, 1999. The actual cost,
however, could exceed this estimate. The Company believes that such cost will
not have a material effect on the Company's financial position, results of
operations or cash flows.
14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Stockholders of Bio-Technology General
Corp. was held on June 9, 1999.
(c) The following persons, comprising the entire Board of
Directors, were elected at the Annual Meeting pursuant to the
following vote tabulation:
Name Votes For Votes Withheld
---- --------- --------------
Herbert J. Conrad 46,415,277 571,874
Sim Fass 46,415,577 571,574
Carl Kaplan 46,415,777 571,374
Allan Rosenfield 46,415,777 571,374
David Tendler 46,415,777 571,374
Virgil Thompson 46,415,277 571,874
Dan Tolkowsky 46,410,017 577,134
Faye Wattleton 46,411,677 575,474
Herbert Weissbach 46,415,777 571,374
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
---------
10.1 Employment Agreement, dated as of July 23, 1999, between
Bio-Technology General Corp. and Robert M. Shaw
27. Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
None
15
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
----------------------------
Sim Fass
Chairman and
Chief Executive Officer,
Principal Executive Officer
/s/ YEHUDA STERNLICHT
----------------------------
Yehuda Sternlicht
Vice President-Finance and
Chief Financial Officer,
Principal Financial and Accounting Officer
Dated: August 11, 1999
16