SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) EXCHANGE ACT OF 1934 OF THE
SECURITIES
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) EXCHANGE ACT OF 1934 OF
THE SECURITIES
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
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(Address of principal executive offices) (Zip Code)
(610) 832-0570
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(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 4, 1999 there were 27,360,400 shares of common stock outstanding.
-1-
U.S. BIOSCIENCE, INC.
INDEX
Page
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
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U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 14,739,900 $ 6,771,000
Investments 12,689,700 18,114,200
Accounts receivable, net of allowances of $727,000 in
both 1999 and 1998 3,828,800 1,729,600
Interest receivable 27,400 29,400
Inventories 2,681,400 2,873,200
Other 898,100 707,100
-------------- -----------------
Total current assets 34,865,300 30,224,500
Investments in long-term securities 29,468,500 17,063,700
Property, plant and equipment at cost, less accumulated depreciation 5,040,400 5,433,700
-------------- -----------------
Total assets $ 69,374,200 $ 52,721,900
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payab $ 1,669,800 $ 1,183,000
Accrued clinical grants payable 5,344,400 4,167,100
Accrued product manufacturing costs payable 576,200 795,400
Accrued marketing costs payable 211,400 390,300
Accrued professional fees payable 1,238,600 1,478,500
Line of credit 745,800 849,300
Current maturities of long-term debt 335,600 645,800
Accounts payable and other accrued liabilities 2,483,000 2,035,100
-------------- -----------------
Total current liabilities 12,604,800 11,544,500
Long-term liabilities:
Long-term debt, net of current maturities 406,000 522,600
Other long-term liabilities 1,878,000 1,921,600
-------------- -----------------
Total long-term liabilities 2,284,000 2,444,200
-------------- -----------------
Total liabilities 14,888,800 13,988,700
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued --- ---
Common stock, $.01 par value-50,000,000 shares authorized; 27,350,400
shares issued at June 30, 1999, and 24,363,200 shares
issued at December 31, 1998 273,500 243,600
Additional paid-in capital 192,288,800 170,645,100
Deferred compensation (353,600) ---
Accumulated deficit (136,521,500) (131,580,200)
Accumulated other comprehensive loss (953,600) (430,700)
-------------- -----------------
54,733,600 38,877,800
Less cost of treasury stock - 23,900 and 13,600 shares respectively (248,200) (144,600)
-------------- -----------------
Total stockholders' equity 54,485,400 38,733,200
-------------- -----------------
Total liabilities and stockholders' equity $ 69,374,200 $ 52,721,900
============== =================
See accompanying notes.
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U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -------------------------------
JUNE 30, JUNE 30,
--------------------- ----------------------
1,999 1,998 1,999 1,998
Revenues:
Net sales $ 5,137,300 $ 4,171,900 $ 11,589,900 $ 8,422,100
Net investment income 732,900 690,100 1,382,900 1,446,700
Licensing, royalty and other income 3,218,600 251,800 3,532,900 5,584,100
------------ ------------ ------------- -------------
9,088,800 5,113,800 16,505,700 15,452,900
Expenses:
Cost of sales 964,300 1,255,600 2,560,400 2,581,700
Selling, general and administrative costs 3,706,700 2,755,700 7,146,100 7,029,800
Research and development costs 6,212,700 4,198,900 11,686,900 9,032,000
Interest expense 24,200 39,400 53,600 81,900
------------ ------------ ------------- -------------
10,907,900 8,249,600 21,447,000 18,725,400
------------ ------------ ------------- -------------
Net loss $ (1,819,100) $ (3,135,800) $ (4,941,300) $ (3,272,500)
============ ============ ============= =============
Basic and diluted loss per common share $ (0.07) $ (0.13) $ (0.19) $ (0.13)
Weighted average number of common shares outstanding 27,248,400 24,303,700 26,671,900 24,267,300
See accompanying notes
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U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------- -------------
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net (loss) income $ (4,941,300) $ (3,272,500)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 483,000 431,500
Compensation element of stock option grants / awards 43,700 ---
(Gain) loss on investments (53,700) 8,400
Change in accounts receivable (2,099,200) (208,700)
Change in interest receivable 2,000 62,600
Change in inventories 97,800 (60,800)
Change in other current assets (190,200) 157,100
Change in current liabilities 1,653,600 260,600
Change in other long-term liabilities (43,700) 51,000
------------- -------------
Total adjustments (106,700) 701,700
------------- -------------
Net cash provided by (used in) operating activities (5,048,000) (2,570,800)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 76,791,100 25,368,100
Purchase of investments (83,771,400) (26,316,900)
Purchase of property, plant and equipment (630,700) (314,900)
------------- -------------
Net cash provided by (used in) investing activities (7,611,000) (1,263,700)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 19,974,100 77,600
Purchase of treasury stock (103,600) (144,600)
Proceeds from exercise of stock options 1,302,000 554,400
Proceeds from line of credit --- 1,600
Repayment of long-term debt (370,800) (375,500)
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Net cash provided by (used in) financing activities 20,801,700 113,500
Effect of exchange rate changes on cash (173,800) (75,200)
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Net increase (decrease) in cash and cash equivalents 7,968,900 (3,796,200)
Cash and cash equivalents-beginning of period 6,771,000 26,569,400
------------- -------------
Cash and cash equivalents-end of period $ 14,739,900 $ 22,773,200
============= =============
Supplemental cash flow disclosure:
Interest paid $ 35,400 $ 66,500
See accompanying notes
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U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED TREASURY DEFERRED
SHARES AMOUNT CAPITAL DEFICIT STOCK COMPENSATION
----------- ------------- ------------- -------------- ------------- ----------------
Balance at December 31, 1996 22,879,900 $ 228,800 $ 151,244,400 $ (114,617,200 $ --- ---
Proceeds from exercise of stock options 149,300 1,500 728,800 --- --- ---
Compensation related to stock options --- --- 40,000 --- --- ---
Issuance of shares ($18.256 per shares,
less costs) 1,178,900 11,800 17,892,000 --- --- ---
Conversion of warrants --- --- 600 --- --- ---
Comprehensive loss:
Net loss for the year ended
December 31, 1998 --- --- --- (7,909,100) --- ---
Foreign currency translation adjustment --- --- --- --- --- ---
Unrealized gain (loss) on investments --- --- --- --- --- ---
Comprehensive loss
----------- ------------- ------------- -------------- ------------- ----------------
Balance at December 31, 1997 24,208,100 $ 242,100 $ 169,905,800 $ (122,526,300 $ 0 0
Proceeds from exercise of stock options 154,800 1,500 694,200 --- --- ---
Compensation related to stock options --- --- 40,000 --- --- ---
Treasury stock --- --- --- --- (144,600) ---
Conversion of warrants 300 --- 5,100 --- --- ---
Comprehensive loss:
Net loss for the year ended
December 31, 1998 --- --- --- (9,053,900) --- ---
Foreign currency translation adjustment --- --- --- --- --- ---
Unrealized gain (loss) on investments --- --- --- --- --- ---
Comprehensive loss
----------- ------------- ------------- -------------- ------------- ----------------
Balance at December 31, 1998 24,363,200 $ 243,600 $ 170,645,100 $ (131,580,200 $ (144,600) 0
Proceeds from exercise of stock options 264,800 2,700 1,299,500 --- --- ---
Issuance of shares ($7.44 per shares,
less costs) 2,686,700 26,900 19,947,200 --- --- ---
Treasury stock --- --- --- --- (103,600) ---
Compensation related to stock options --- --- 40,000 --- --- ---
Deferred compensation resulting
from grant of stock awards 35,700 300 357,000 --- --- (357,300)
Compensation expense relating to
stock awards --- --- --- --- --- 3,700
Comprehensive loss:
Net loss for the six months ended
June 30, 1999 --- --- --- (4,941,300) --- ---
Foreign currency translation adjustment --- --- --- --- --- ---
Unrealized gain (loss) on investments --- --- --- --- --- ---
Comprehensive loss
----------- ------------- ------------- -------------- ------------- ----------------
Balance at June 30, 1999 (Unaudited) 27,350,400 $ 273,500 $ 192,288,800 $ (136,521,500 $ (248,200) (353,600)
=========== ============= ============= ============== ============= ================
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
(LOSS) EQUITY
-------------- ---------------
Balance at December 31, 1996 $ 38,300 $ 36,894,300
Proceeds from exercise of stock options --- 730,300
Compensation related to stock options --- 40,000
Issuance of shares ($18.256 per shares, --- 17,903,800
less costs)
Conversion of warrants --- 600
Comprehensive loss:
Net loss for the year ended
December 31, 1998 --- (7,909,100)
Foreign currency translation adjustment (663,100) (663,100)
Unrealized gain (loss) on investments 27,000 27,000
Comprehensive loss (8,545,200)
---------------
Balance at December 31, 1997 $ (597,800) $ 47,023,800
-------------- ---------------
Proceeds from exercise of stock options --- 695,700
Compensation related to stock options --- 40,000
Treasury stock --- (144,600)
Conversion of warrants --- 5,100
Comprehensive loss:
Net loss for the year ended
December 31, 1998 --- (9,053,900)
Foreign currency translation adjustment 185,100 185,100
Unrealized gain (loss) on investments (18,000) (18,000)
---------------
Comprehensive loss (8,886,800)
-------------- ---------------
Balance at December 31, 1998 $ (430,700) $ 38,733,200
Proceeds from exercise of stock options --- 1,302,200
Issuance of shares ($7.44 per shares,
less costs) --- 19,974,100
Treasury stock --- (103,600)
Compensation related to stock options --- 40,000
Deferred compensation resulting
from grant of stock awards --- 0
Compensation expense relating to
stock awards --- 3,700
Comprehensive loss:
Net loss for the six months ended
June 30, 1999 --- (4,941,300)
Foreign currency translation adjustment (469,300) (469,300)
Unrealized gain (loss) on investments (53,600) (53,600)
-------------- ---------------
Comprehensive loss (5,464,200)
---------------
Balance at June 30, 1999 (Unaudited) $ (953,600) $ 54,485,400
-------------- ---------------
See accompanying notes.
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U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS -- The company is a pharmaceutical company specializing in the
development and commercialization of products for patients with cancer and
allied diseases. Through June 30, 1999, the company's revenues have been
derived principally from product sales of Ethyol/(R)/, NeuTrexin/(R)/, and
Hexalen/(R)/, licensing and distribution fees for rights to develop and market
certain products principally in the United States, payments for achieving
certain clinical development milestones and investment income. Expenses
incurred have been primarily for the development of its drugs and related
therapies, marketing and sales activities, and corporate and administrative
activities.
UNAUDITED INFORMATION -- The financial information for the three and six
month periods ended June 30, 1999 and 1998, 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 Limited. All significant intercompany accounts
and transactions are eliminated in consolidation.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORIES -- Inventories are stated at the lower of cost (first in, first
out) or fair value. Inventories consist of:
June 30, December 31,
1999 1998
----------- -------------
Raw materials $ 751,200 $1,086,900
Work-in-process 1,684,700 1,014,700
Finished goods 245,500 771,600
------------ -------------
Total $2,681,400 $2,873,200
============ =============
PROPERTY, PLANT AND EQUIPMENT -- Buildings, equipment and furniture and
fixtures are depreciated by the straight-line method over their useful lives for
financial reporting purposes and under accelerated methods for federal income
tax purposes. Leasehold improvements are depreciated by the straight-line
method over the shorter of their useful lives or the life of the lease for
financial reporting purposes and under an accelerated method for federal income
tax purposes.
-7-
Property, plant and equipment consists of:
June 30, December 31,
1999 1998
------------ -------------
Land, buildings, and leasehold improvements $ 1,842,900 $ 2,034,900
Equipment, furniture and fixtures 10,112,300 10,131,200
Accumulated depreciation (6,914,800) (6,732,400)
------------ ------------
Property, plant and equipment, net $ 5,040,400 $ 5,433,700
============ ============
LONG-TERM DEBT -- Long-term debt consists of:
June 30, December 31,
1999 1998
----------- -------------
MELF Equipment Loan $ 69,500 $ 106,900
Mortgage Loan 381,500 456,000
Term Loan 200,000 500,000
Capital Lease Obligations 90,600 105,500
------------ ------------
$741,600 $1,168,400
Less Current Portion 335,600 645,800
------------ ------------
Long-Term Debt $406,000 $ 522,600
============ ============
ACCUMULATED OTHER COMPREHENSIVE LOSS -- The components of other
comprehensive loss consist of:
Unrealized Gain /
Currency (Loss) on
Translation Available-for-Sale
Adjustment Securities Total
-------------- -------------------- ----------
Balance at December 31, 1996 $ 48,200 ($9,900) $ 38,300
Currency translation adjustment (663,100) 0 (663,100)
Unrealized gain on investments 0 27,000 27,000
-------------- -------------------- ----------
Balance at December 31, 1997 (614,900) 17,100 (597,800)
Currency translation adjustment 185,100 0 185,100
Unrealized (loss) on investments 0 (18,000) (18,000)
-------------- -------------------- ----------
Balance at December 31, 1998 (429,800) (900) (430,700)
Currency translation adjustment (469,300) 0 (469,300)
Unrealized gain on investments 0 (53,600) (53,600)
-------------- -------------------- ----------
Balance at June 30, 1999 $(899,100) $(54,500) $(953,600)
============== ==================== ==========
-8-
SEGMENT DISCLOSURES -- The company operates in only one "dominant
segment," as substantially all of its consolidated revenues, losses and assets
are derived and utilized in the development and commercialization of
pharmaceutical products used in the treatment of cancer. The company had sales
revenue from two major customers which accounted for the following percentages
of total net sales revenue during the three and six month periods ended June 30:
Three Months ended Six Months ended
June 30, June 30,
----------- ----------
1999 1998 1999 1998
------- ----------- ------ ----------
Customer 1 54% 32% 54% 35%
Customer 2 18% 19% 19% 21%
A summary by geographic area of revenues from customers and net
income/(loss) for the three and six month periods ending June 30, and
identifiable assets as of the dates indicated, are as follows:
Three Months ended June 30, Six Months ended June 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- -------------
Revenues from customers:
United States $ 4,094,300 $ 3,416,700 $ 9,288,400 $11,694,800
International 4,261,600 1,007,000 5,834,400 2,311,400
------------ --------------- --------------- -------------
$ 8,355,900 $ 4,423,700 $15,122,800 $14,006,200
============== =============== =============== =============
Net income / (loss):
United States $(1,518,500) $(2,311,800) $(4,053,400) $(1,723,200)
International ( 300,600) (824,000) (887,900) (1,549,300)
----------- ----------- ----------- ------------
$(1,819,100) $(3,135,800) $(4,941,300) $(3,272,500)
=========== =========== =========== ============
June 30, December 31,
1999 1998
----------- -----------
Identifiable assets:
United States $63,045,100 $47,516,800
International 6,329,100 5,205,100
----------- -----------
$69,374,200 $52,721,900
=========== ===========
Additionally, all information in this quarterly report 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 Consolidated
Financial Statements included in the company's Annual Report on Form 10-K for
the year ended December 31, 1998. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be obtained in any other interim period or the entire year.
-9-
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 prospects 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, those discussed in this
quarterly report and those discussed in the company's annual report on Form 10-K
for the fiscal year ended December 31, 1998 (including, without limitation, in
the section of Item 1 entitled "Risk Factors"). As a result, the reader is
cautioned not to rely on these forward-looking statements.
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages 3 to 9.
Operations for the six months ended June 30, 1999 consisted primarily of
activities relating to the promotion of Ethyol/(R)/ (amifostine) in the United
States with co-promotion partner ALZA Corporation ("ALZA"), the promotion and
marketing of Hexalen/(R)/ (altretamine) and NeuTrexin/(R)/ (trimetrexate
glucuronate) in the United States, the expansion of the company's sales force,
continuing clinical trials and regulatory activities for Ethyol, NeuTrexin and
lodenosine (FddA), product development activities for lodenosine, Ethyol and
NeuTrexin, and business development activities in the United States and Europe.
The company also completed, during the first quarter of 1999, a $20 million
equity placement with three venture capital funds (see "Liquidity and Capital
Resources" below.)
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 further clinical trials aimed at label expansion
and regulatory approvals for Ethyol and NeuTrexin, the marketing of Hexalen,
NeuTrexin and Ethyol in the United States, the continuation of clinical and
preclinical testing of lodenosine, the furtherance of product development
activities and the enhancement of manufacturing and analytical capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
Product sales increased to $5,137,300 for the three months ended June 30,
1999 as compared to $4,171,900 in the prior year period. Sales of Ethyol, the
company's cytoprotective product, increased due to higher sales revenue received
from both ALZA, the company's distribution partner in the United States, and
Schering-Plough, the company's European distribution partner. Sales of
NeuTrexin, the company's anti-folate, and Hexalen, the company's ovarian cancer
therapy, were lower than the prior year period. The company believes that sales
of NeuTrexin and Hexalen were negatively affected during the second quarter by
transitional factors relating to the assumption of full responsibility for
promotion of these products in the United States by the company.
Licensing, royalty and other income increased to $3,128,600 in the three
month period ending June 30, 1999 as compared to $251,800 in the 1998 period due
principally to a $3 million payment received from Schering-Plough for achieving
a unanimous approval through a European mutual recognition procedure for the
-10-
use of Ethyol in association with standard fractionated radiation therapy to
protect against acute and late xerostomia (dry mouth) in head and neck cancer.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, decreased despite the increase in sales due
to lower product manufacturing costs, which reflects increased factory
throughput, lower active drug substance costs, tight controls on expenses, a
favorable exchange rate between the Dutch Guilder and the U.S. Dollar and
increased revenues from purchases of Ethyol by ALZA. As a percentage of sales,
cost of sales in the three month period ended June 30, 1999, declined to 19% of
product sales from 30% in the prior year period, due to the factors mentioned
previously.
Selling, general and administrative costs for the second quarter of 1999
increased to $3,706,700 from $2,755,700 in the corresponding 1998 period. The
$951,000 increase is principally due to recruiting and staffing expenses
incurred in connection with the recent expansion of the company's sales force in
preparation for the company's assumption of full promotional responsibility for
NeuTrexin and Hexalen in the United States. Approximately $450,000 of the total
increase in selling, general and administrative costs relates to these expenses,
the remainder of the increase relate to higher promotional spending for
NeuTrexin and Hexalen of $229,000 and increased corporate and public relations
costs of $219,000.
Research and development costs for the three months ended June 30, 1999
increased to $6,212,700 from $4,198,900 in the second quarter of 1998. The
$2,013,800 increase principally resulted from $1,575,000 in clinical
expenditures related to the company's Phase II study of lodenosine (FddA), a
nucleoside reverse transcriptase inhibitor, which began in late 1998. In
addition, the increase reflects approximately $540,000 in higher clinical and
consulting costs related to the continuation of several Phase III clinical
trials investigating the use of Ethyol in radiation therapy and with various
chemotherapeutic regimens and the use of NeuTrexin as an additional agent in the
treatment of colorectal cancer.
The net loss for the three months ended June 30, 1999 was $1,819,100 or
$0.07 basic and diluted net loss per common share as compared to a loss of
$3,135,800 or $0.13 basic and diluted net loss per common share in the 1998
period. The smaller loss for the 1999 period is principally attributable to the
$3 million milestone payment from Schering-Plough and higher Ethyol sales
revenue noted above.
SIX MONTHS ENDED JUNE 30, 1999
Product sales increased to $11,589,900 for the six months ended June 30,
1999 as compared to $8,422,100 in the prior year period. Sales of Ethyol
increased due to higher sales revenue received from both ALZA, the company's
U.S. distribution partner, and Schering-Plough, the company's distribution
partner in Europe. Sales of NeuTrexin and Hexalen were both lower than the
prior year period. The company believes that sales of NeuTrexin and Hexalen
were negatively affected during the second quarter by transitional factors
relating to the assumption of full responsibility for promotion of these
products in the United States by the company.
Licensing, royalty and other income declined to $3,532,900 in the
first half of 1999 as compared to $5,584,100 in the 1998 period due principally
to a $5 million payment received from ALZA in the first quarter of 1998 related
to the achievement of a clinical milestone for the development of the use of
Ethyol in conjunction with radiation therapy. This compares to a $3 million
payment received in May 1999 from Schering-Plough for achieving an approval for
the use of Ethyol in association with standard fractionated radiation therapy to
protect against acute and late xerostomia in head and neck cancer.
-11-
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, decreased slightly in the first half of 1999
despite the increase in sales. As a percentage of sales, cost of sales in the
six month period ended June 30, 1999, declined to 22% of product sales from 31%
in the prior year period, due principally to improved margins on Ethyol product
revenues received from ALZA and lower product manufacturing costs, which
reflects increased factory throughput, lower active drug substance costs, tight
controls on expenses and a favorable exchange rate between the Dutch Guilder and
the U.S. Dollar.
Selling, general and administrative costs for the first half of 1999
increased marginally to $7,146,100 from $7,029,800 in the first half of 1998.
The $116,300 increase is principally due to recruiting and staffing expenses
incurred in connection with the recent expansion of the company's sales force
which represents approximately $450,000 of the total increase and higher
corporate and public relations costs of $234,000. These increases are partly
offset by savings of approximately $339,000 in administrative personnel costs
resulting from the 1998 reorganization of several senior management positions.
Research and development costs for the six months ended June 30, 1999
increased to $11,686,900 from $9,032,000 in the first six months of 1998. The
$2,654,900 increase principally resulted from expenditures related to the
company's Phase II study of lodenosine (FddA) and from higher drug product
formulation expenses, also related to lodenosine, totaling $2,625,000. In
addition, the increase reflects approximately $1,116,000 in higher personnel and
consulting costs related to the continuation of several Phase III clinical
trials investigating the use of Ethyol in radiation therapy and with various
chemotherapeutic regimens and the use of NeuTrexin as an additional agent in the
treatment of colorectal cancer. The 1998 first quarter included a provision of
approximately $1 million for consulting and severance payments related to
internal reorganization activities.
The net loss for the six months ended June 30, 1999 was $4,941,300 or $0.19
basic and diluted net loss per common share as compared to a loss of $3,272,500
or $0.13 basic and diluted net loss per common share in the 1998 period. The
smaller loss for the 1998 period is principally attributable to the $5 million
milestone payment from ALZA noted above.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, the issuance of unsecured and
secured debt, sales of its drug products, Hexalen, NeuTrexin and Ethyol,
investment income and revenues received through distribution and sublicense
agreements. As of June 30, 1999, the company's cash and investments totaled
$56,898,100. 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 half of 1999, net cash used in operations amounted to
$5,048,000 reflecting the net effect of the factors discussed above under
"Results of Operations" less non-cash charges of $526,700 and a net working
capital increase of $536,000, principally due to increased accounts receivable
reflective of the timing of and the increase in product sales levels. Until
such time as the company receives significantly increased revenues, the
company's cash position will continue to be reduced due to expenditures in
clinical research, product development, marketing, 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 would 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 and
severity of diseases and side effects for which the company's products are
indicated or used, the performance of the company's licensees and distributors,
and the health care and reimbursement systems existing in markets where the
company's products are, or may become, commercially available.
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In January 1999, the company entered into a $20,000,000 stock purchase
agreement with a group of private investors lead by Domain Partners IV L.P., a
leading health care venture capital fund, and Proquest Investments L.P., an
oncology focused venture capital fund. Pursuant to the agreement, the company
issued to the investors 2,686,728 shares of Common Stock at a price of $7.44
per share and warrants, exercisable for three years, to purchase 537,346
additional shares of Common Stock at an exercise price of $11.17 per share. The
shares were purchased at the average closing price of the company's Common Stock
for the 30-day period ending January 26, 1999. The warrant exercise price is a
50% premium over that 30-day average closing price. Except in certain change of
control situations, the agreement calls for the investors to hold the purchased
securities for at least one year.
The company invests its cash in a variety of financial instruments,
principally securities issued by the U.S. Government and its agencies,
investment grade corporate debt, and money market instruments. These
investments are denominated in U.S. dollars. Investments in both fixed rate and
floating rate interest-earning instruments carry a degree of interest rate risk.
Fixed rate securities may have their fair market value adversely impacted due to
rises in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. At June 30, 1999, a majority of the
company's investments were in floating rate instruments. The company does not
expect changes in interest rates to have a material impact on the results of
operations.
The company believes its current cash and investments coupled with
anticipated revenues generated from product sales and other sources, will be
sufficient to cover the company's anticipated level of cash requirements for a
period in excess of three years. However, the company's funding requirements
may change due to numerous factors, including but not limited to, sales of the
company's products, acquisition of new products and/or technologies, new
clinical development initiatives, manufacturing costs, reimbursement policies,
regulatory and intellectual property requirements, capital expenditures and
other factors as discussed herein. 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 the return on product sales will be sufficient to cover operating
expenses or that the company will have adequate financial resources to
commercialize its products.
To meet its capital requirements, the company may from time to time seek to
access public or private financing markets by issuing debt, common or preferred
stock, warrants or other securities, either separately or in combination. The
company may also seek additional funding through corporate collaborations or
other financing vehicles, potentially including "off-balance sheet" financing
through partnerships or corporations. There can be no assurance that such
financings will be available at all or on terms acceptable to the company. In
addition, market reaction to any such financings may adversely affect the price
of the company's outstanding securities or debt.
The company's net capital expenditures were $630,700 for the six month
period ended June 30, 1999. A majority of the company's plant, property and
equipment are located at the company's manufacturing facility located in
Nijmegen, The Netherlands. Further capital expenditures, estimated at $750,000
are planned during the remainder of 1999.
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
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to obtain regulatory approvals, including expanded labeling 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 healthcare
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.
As the company sells Ethyol to its distribution partners, ALZA and
Schering-Plough, 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' delivery
requirements and sales to the pharmaceutical trade 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
Schering-Plough or its other distribution arrangements.
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. As the company continues its
commercialization, research and development activities, losses are expected to
continue and may fluctuate from period to period. Although it is the company's
objective to become profitable, there can be no assurance that the company will
achieve significant revenues or profitable operations.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs and embedded
technology (such as microcontrollers in telephones or laboratory equipment) that
use two digits rather than four to define the applicable year. These computer
programs and equipment with this type of embedded technology may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations causing disruptions of normal business
activities, including, among others, a temporary inability to process
transactions and information, send invoices or engage in similar business
activities.
The company is implementing a readiness and remediation plan to address the
Year 2000 issue. The first part of this plan was an inventory of the critical
software systems and embedded technology at each of the company's facilities,
which the company started in the second quarter of 1998 and completed during the
first quarter of 1999. The second part of the plan was a detailed assessment of
the inventory results, which also was completed during the first quarter of
1999. The third part of the plan involves correcting or replacing the company's
software systems and equipment that cannot accurately identify the year 2000.
The last part of the plan is an analysis to determine the extent to which the
systems of the company's major vendors, customers and commercial partners will
be affected by the Year 2000 issue. The company has started work on these last
two phases of the plan and expects that they will be completed during the latter
half of 1999.
The Year 2000 readiness and remediation plan is being conducted by the
company using internal resources. As of June 30, 1999, the company had spent
less than $200,000 fixing Year 2000 issues, including modifying software systems
and replacing equipment, and these expenditures have been expensed or
capitalized by the affected departments within the company in the normal course
of business. The company estimates that the costs of completing its Year 2000
remediation plan will be less than $400,000 and expects to fund these costs from
currently available resources.
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The company does not anticipate that addressing the Year 2000 issue for its
internal software systems and equipment will delay the implementation of the
company's other planned information technology projects or have a material
impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The company is currently unable to predict the extent to which it
would be vulnerable to a failure by one or more other companies, such as its
vendors, customers and commercial partners, to remediate Year 2000 issues on a
timely basis. Any such failures could have a material adverse effect on the
company. The company is implementing a plan to increase its inventory levels of
key materials and components for its products during the last half of 1999 and
the first half of 2000. To date the company has not made any other contingency
plans to address Year 2000 risks. Further contingency plans will be developed if
it appears that the company or its key vendors, customers or commercial partners
will not be Year 2000 compliant and that such noncompliance can be expected to
have a material adverse impact on the company's operations. The Audit Committee
of the Board of Directors maintains an ongoing appraisal of the scope, estimated
costs and implementation of the company's Year 2000 remediation plan.
-15-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co.
("Ichthyol Gesellschaft") filed a complaint for refrain, information and damages
with the Regional Court of Hamburg against U.S. Bioscience, Inc. on the grounds
of trademark infringement in respect of the use of the trademark "Ethyol" in
Germany. On April 29, 1996, U.S. Bioscience filed a reply to Ichthyol
Gesellschaft's complaint stating U.S. Bioscience's position that the trademark
"Ethyol" does not infringe plaintiff's trademark rights in the trademark
"Ichthyol" nor Ichthyol Gesellschaft's firm right in the slogan "Ichthyol." The
suit was dismissed on January 29, 1997, by the Regional Court of Hamburg at
which time Ichthyol Gesellschaft. was given leave to appeal against the judgment
rendered in favor of U.S. Bioscience, Inc. Ichthyol Gesellschaft. filed an
appeal, and a judgment was rendered in favor of U.S. Bioscience in the appellate
proceedings. In January 1999, Ichthyol Gesellschaft filed an appeal on points
of law with the Federal Court of Justice and in June 1999, Ichthyol Gesellschaft
filed the grounds for the appeal on points of law. It is not possible to
predict the decision of the Federal Court of Justice with respect to this
appeal.
Item 2. Changes in Securities.
Not applicable.
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 was provided in the company's
report on Form 10-Q for the quarterly period ended March 31, 1999 and is
incorporated herein by reference.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27 Financial Data Schedule
b. The company filed no reports on Form 8-K during the quarter ended
June 30, 1999.
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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: August 5, 1999 By: /s/ Robert I. Kriebel
---------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
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U.S. BIOSCIENCE, INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
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Exhibit No. Page
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27 Financial Data
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