<PAGE> 1
This filing is made pursuant to
Rule 424(b)(1) under the
Securities Act of 1933 in
connection with Registration
No. 333-2389 and Registration
No. 333-4429 filed on
May 24, 1996
PROSPECTUS
MAY 24, 1996
3,600,000 SHARES
LOGO
MOLECULAR BIOSYSTEMS, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Molecular Biosystems, Inc. (the "Company"). The Company's Common Stock
is listed on the New York Stock Exchange under the symbol "MB." On May 22, 1996,
the closing price of the Company's Common Stock on the New York Stock Exchange
was $10 3/4 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS WHICH
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share........................ $9.00 $0.63 $8.37
Total (3)........................ $32,400,000 $2,268,000 $30,132,000
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days hereof, to purchase up to an aggregate of 540,000 additional shares of
Common Stock at the Price to the Public, less Underwriting Discounts and
Commissions, for the purpose of covering over-allotments, if any. If such
option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $37,260,000,
$2,608,200 and $34,651,800, respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale when, as and if delivered to and accepted by the
Underwriters and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York on or about May 30, 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
OPPENHEIMER & CO., INC.
VECTOR SECURITIES INTERNATIONAL, INC.
<PAGE> 2
MOLECULAR BIOSYSTEMS, INC.
A LEADER IN ULTRASOUND IMAGING AGENTS
ALBUNEX(R)
This illustration shows a patient's
pre-contrast and peak-contrast
image of the heart using
ALBUNEX(R). After ALBUNEX(R) is
administered in the arm, it travels
[PHOTO] [PHOTO] through the right side of the heart
into the pulmonary bed and then
into the left side of the heart.
Echocardiographers use ALBUNEX(R)
to help define the borders of the
left ventricle, and chamber wall
thickening, important indicators of
heart function.
FS069 MYOCARDIAL PERFUSION
This illustration shows a normal
volunteer's pre-contrast and
peak-contrast image of perfusion of
the heart using FS069 and
conventional ultrasound. This
second generation agent is designed
to detect compromised areas of the [PHOTO] [PHOTO]
heart muscle due to coronary artery
stenosis as well as detecting the
lack of blood flow in the heart
muscle, as in acute myocardial
infarction, (heart attack).
FS069 RADIOLOGY
This preclinical illustration shows
a pre-contrast image, and a
peak-contrast image of a dog kidney
while receiving FS069. These color-
coded images are obtained using an
[PHOTO] [PHOTO] ultrasound technique called power
Doppler. Power Doppler is used to
study blood flow. The technique is
used to detect blocked arteries and
veins, and other abnormal vascular
patterns, such as tumors.
ALBUNEX and ORALEX are registered trademarks of Molecular Biosystems, Inc.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus or incorporated into it by
reference. Investors should carefully consider the information set forth in
"Risk Factors."
THE COMPANY
Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents. These
contrast agents are used to improve the real-time images of organs and body
structures, especially the heart, obtained through ultrasound examinations.
MBI's products are designed to increase the diagnostic usefulness of ultrasound
examinations through enhanced visualization of structures and vasculature, and
to reduce the need for diagnostic procedures that may be more expensive,
time-consuming, or invasive. MBI's first product, ALBUNEX, is the first and only
ultrasound contrast agent approved for marketing by the United States Food and
Drug Administration ("FDA"). ALBUNEX is used to detect heart disease by
assessing blood flow within the heart chambers and identifying the location of
the chamber borders and the movement of the chamber walls ("cardiac function").
MBI's second generation product, FS069, is currently in Phase 3 clinical trials
for the cardiac function indication and in Phase 2 clinical trials to evaluate
its efficacy in determining whether the heart muscle is receiving an adequate
blood supply ("myocardial perfusion"). The Company believes that this
information will enable cardiologists to diagnose heart attacks and coronary
artery disease more accurately and safely than is currently feasible. The
Company is also conducting preclinical studies using FS069 to detect
abnormalities in other organs, such as the liver and kidneys.
Ultrasound imaging is a widely-used and cost-effective technique to examine
soft tissues, internal body organs and blood flow. Ultrasound systems use
low-power, high-frequency sound waves that are reflected by tissues and fluids
to produce real-time images. Over 49 million ultrasound imaging procedures were
performed in the United States in 1994, of which approximately 12.5 million
procedures were used to examine the heart ("echocardiograms"). Unlike other
imaging modalities, such as magnetic resonance imaging, computed tomography and
nuclear imaging, ultrasound imaging procedures could not be performed with
contrast agents to enhance images until the approval of ALBUNEX. Non-contrast
ultrasound, while very good in delineating anatomy, often results in poor image
quality and is unable to demonstrate actual blood flow within organ tissue.
MBI's contrast agents are designed to enhance existing ultrasound
procedures by improving their ability to image blood flow and by providing
clearer images of body structures and organs. ALBUNEX and FS069 consist of human
albumin microspheres made using MBI's patented process. The microspheres are
injected intravenously into the bloodstream and transported to the heart and
other organs. Because the microspheres are highly reflective to the ultrasound
beam, organs and structures containing blood will appear brighter and clearer
than they would in the absence of the contrast agent. Albumin is a protein
naturally found in human blood and has been used for many years as a blood
expander. ALBUNEX, which has been marketed since October 1993, has been given to
over 10,000 patients with no clinically significant side effects, and FS069 has
exhibited a safety profile in clinical studies equivalent to that of ALBUNEX.
ALBUNEX permits cardiologists to see blood flow in the chambers of the
heart and to better discern the motion of the heart muscle using ultrasound.
Cardiologists are particularly interested in the chamber of the heart called the
"left ventricle," which pumps oxygenated blood arriving from the lungs to all
other parts of the body. In approximately 10-15% of patients undergoing an
echocardiogram, the wall of the left ventricle (the "endocardial border") cannot
be detected or its location appears ambiguous on the ultrasound image. When
ALBUNEX enters the left ventricle, however, the endocardial border can be
visualized because of the reflectivity of the ALBUNEX microspheres in the blood.
When the endocardial border is visible, cardiologists can observe its motion and
may be able to infer cardiac function, which is critical in diagnosing cardiac
disease, including damage from a heart attack. While ALBUNEX is able to enter
the heart chamber, it has a relatively short circulation time in the body and
thus is not able to enter the heart muscle in quantities
3
<PAGE> 4
sufficient to be detected by ultrasound. Without an agent that will enter the
heart muscle, cardiologists are not able to use ultrasound imaging directly to
assess myocardial perfusion.
FS069 is designed to permit cardiologists to evaluate myocardial perfusion.
Unlike ALBUNEX, which is air-filled, FS069 microspheres contain an insoluble
gas, perfluoropropane. Because of their composition, FS069 microspheres remain
in the bloodstream for more than five minutes, as opposed to 35-40 seconds in
the case of ALBUNEX. As a result, FS069 is able to perfuse into tissues,
including the heart muscle, highlighting areas of normal and abnormal blood
flow. The Company believes that if its clinical trials for myocardial perfusion
are successful, FS069 will provide important diagnostic benefits, including
detecting areas of the heart muscle compromised due to coronary artery stenosis
as well as detecting the lack of blood flow in the heart muscle resulting from a
complete occlusion of a coronary artery (heart attack). The Company believes
that FS069 may have much greater market potential than ALBUNEX because of the
greater diagnostic importance of the indications for which FS069 is suitable
(such as myocardial perfusion).
MBI completed enrollment in its Phase 3 clinical trials for FS069 for
cardiac function in March 1996, and expects to file for approval for this
indication by the end of 1996. For myocardial perfusion, Phase 1 safety and
preliminary efficacy studies were completed in July 1995. In March 1996, the
Company announced that preliminary analysis of Phase 2 results indicated a 92%
concordance between diagnoses of patients with known or suspected heart disease
made using dipyridamole-stress nuclear imaging, the current perfusion "gold
standard," and dipyridamole-stress harmonic ultrasound imaging using FS069. The
Company believes that the use of FS069 in routine diagnostic as well as
emergency room procedures may significantly reduce the overall cost of patient
care by substituting ultrasound for more expensive diagnostic methods such as
nuclear imaging and by enabling more accurate screening of patients to determine
whether follow-up diagnostic or surgical procedures are required.
The Company's objective is to remain a leader in the development and
commercialization of ultrasound contrast agents. MBI intends to achieve this
objective by implementing the following strategy:
- Develop FS069 worldwide for multiple indications, beginning with cardiac
function and myocardial perfusion.
- Maximize the commercial value of ALBUNEX.
- Demonstrate the cost-effectiveness of the Company's contrast agents to
clinicians and third-party payors.
- Continue to develop new ultrasound contrast imaging products.
MBI is collaborating with Mallinckrodt Medical, Inc. ("Mallinckrodt") in
the development and commercialization of ALBUNEX and FS069. Mallinckrodt is one
of the world leaders in the marketing of contrast imaging agents, with 1995
contrast imaging agent sales of approximately $675 million. The Company has
granted Mallinckrodt exclusive marketing rights to ALBUNEX and FS069 in the
United States and certain other territories. The relationship began in 1988 with
the execution of distribution and investment agreements pursuant to which
Mallinckrodt paid the Company $30.0 million.
The Company and Mallinckrodt expanded their original agreement in September
1995 to increase the geographic scope and extend the exclusivity of
Mallinckrodt's marketing rights. Mallinckrodt at that time also made a $13.0
million equity investment in MBI and committed $20.0 million to the clinical
development of FS069 and related projects. MBI may receive up to an additional
$14.5 million upon meeting certain territorial and product development
milestones.
Under the distribution agreement, the Company is responsible for
manufacturing the licensed products for Mallinckrodt and is generally entitled
to payments of 40% of net product sales. The Company is responsible for
conducting clinical trials and securing regulatory approvals of the licensed
products in the United States for cardiac indications. Mallinckrodt is
responsible for conducting clinical trials and securing approvals of the
licensed products in the United States for non-cardiac indications and is
responsible for conducting all clinical trials and securing approvals in the
other countries in Mallinckrodt's territory.
4
<PAGE> 5
MBI's principal offices are located at 10030 Barnes Canyon Road, San Diego,
California 92121. The Company's telephone number is (619) 824-2200.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................... 3,600,000 shares
Common Stock to be outstanding after the Offering...... 16,896,186 shares(1)
Use of proceeds........................................ For research and development activities,
including preclinical and clinical studies,
and general corporate purposes.
New York Stock Exchange symbol......................... MB
</TABLE>
- ------------------------------
(1) Excludes options outstanding as of March 31, 1996 under the Company's stock
option plans to purchase 2,227,955 shares of Common Stock at a weighted
average exercise price of $11.50 per share and a warrant to purchase 14,524
shares of Common Stock at an exercise price of $14.61 per share.
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences,
include, but are not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," and "Business." Except as otherwise specified, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary consolidated financial and operating
data of the Company for the periods indicated. The consolidated financial data
have been derived from the Consolidated Financial Statements of the Company. The
following financial and operating data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Consolidated Financial Statements and the other
information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Revenues under collaborative agreements................... $ 5,713 $ 15,132 $ 2,412
Product revenues.......................................... 1,056 1,769 647
License fees.............................................. 2,015 40 25
-------- -------- --------
Total revenues....................................... 8,784 16,941 3,084
Operating expenses:
Research and development costs............................ 18,110 18,743 13,588
Costs of products sold.................................... 580 1,608 1,553
Selling, general and administrative expenses.............. 5,743 5,864 5,862
Other expenses............................................ 4,726 3,403 3,110
-------- -------- --------
Total expenses....................................... 29,159 29,618 24,113
Loss from operations......................................... (20,375) (12,677) (21,029)
Interest expense............................................. (327) (694) (786)
Interest income.............................................. 1,902 1,189 1,102
-------- -------- --------
Net loss..................................................... $(18,800) $(12,182) $(20,713)
======== ======== ========
Loss per common share........................................ $ (1.58) $ (1.02) $ (1.62)
Weighted average common shares outstanding................... 11,905 11,999 12,758
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities................ $20,570 $ 50,302
Working capital................................................. 18,601 48,333
Total assets.................................................... 43,829 73,561
Long-term debt, including current portion....................... 9,872 9,872
Total stockholders' equity...................................... 28,962 58,694
</TABLE>
- ------------------------------
(1) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 3,600,000 shares of Common Stock offered hereby. See "Use of Proceeds"
and "Capitalization."
6
<PAGE> 7
RISK FACTORS
In addition to the other information contained in or incorporated by
reference into this Prospectus, the following factors should be carefully
considered in evaluating an investment in the Common Stock offered by this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed in these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the following section and in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred substantial losses during its history. As of March
31, 1996, the Company's cumulative losses were approximately $62.2 million. The
Company's continuing operations have been profitable in only two years and have
not been profitable since the Company's fiscal year ended March 31, 1992. The
Company expects continued operating losses at least through its fiscal year
ended March 31, 1998. During the Company's fiscal years ended March 31, 1995 and
1996, product revenues accounted for only 10% and 21%, respectively, of the
Company's total revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company will incur substantial additional losses until such time, if
any, that it can achieve significant sustained commercial sales of its
second-generation ultrasound contrast agent, FS069, which will be dependent upon
a number of factors, including receipt of regulatory approval for the sale of
FS069 for myocardial perfusion. The Company believes that the potential market
for its first-generation ultrasound contrast agent, ALBUNEX, is limited because
of the short length of time that ALBUNEX microspheres remain intact in the
bloodstream. In addition, if the Company is able to achieve commercial sales of
FS069 for cardiac function, the Company expects that demand for ALBUNEX would
decline. There can be no assurance that FS069 or any other product of the
Company under development will be approved for sale, that FS069 or any other
product of the Company under development can be successfully commercialized or
that the Company will achieve significant revenues from either domestic or
international sales of FS069 or any other product, including ALBUNEX. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. Failure to achieve significant revenues or
profitability would have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, results of operations
have varied and are expected to fluctuate significantly from quarter to quarter
depending upon a number of factors, including the results of clinical trials,
the timing of milestone payments, the introduction and market acceptance of
products by the Company or competitors, the results of regulatory and
reimbursement actions, the timing of orders by distributors, expenditures
incurred in the research and development of new products, competitive pricing
and the expansion of manufacturing capacity.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's research and development programs currently require, and its
manufacturing activities are expected to require, substantial capital
expenditures. The Company's capital requirements are dependent upon a number of
factors, including, but not limited to, the progress and magnitude of its
research and development programs, the progress of preclinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights, competing technological and market developments,
changes in the Company's existing collaborative research and development
relationships, the ability of the Company to establish additional relationships,
the cost and timing of commercialization activities and arrangements, and the
purchase of additional facilities and capital equipment. The Company believes
that the net proceeds of the Offering, together with its existing resources,
will be adequate to meet the Company's capital requirements for at least the
next 24 months. The Company's cash requirements may increase significantly in
the future, and there can be no assurance that such requirements will be met on
satisfactory terms or at all.
There can be no assurance that product revenues or revenues under
collaborative agreements will be available or adequate to meet the Company's
long-term capital requirements. The Company may be required to seek additional
funds through debt or equity financings. There can be no assurance that such
financing will
7
<PAGE> 8
be available at all or on acceptable terms, or adequate to meet the Company's
long-term capital requirements. Issuance of additional equity securities could
result in substantial dilution to shareholders. If adequate funds are not
available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research and development programs, to reduce the
scope of or eliminate its manufacturing activities, or attempt to obtain funds
by entering into arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain technologies or products
that the Company would not otherwise issue or relinquish. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
UNCERTAINTY OF CLINICAL TRIALS
The Company's products under development will be required successfully to
complete extensive clinical trials in order to obtain regulatory approval for
commercial sale. The United States Food and Drug Administration ("FDA") and
other regulatory authorities require that the safety and efficacy of the
Company's products be supported by results from adequate and well-controlled
clinical trials before being approved for sale. There can be no assurance that
clinical trials will demonstrate the safety and efficacy of these products. If
the results of the Company's clinical trials do not demonstrate the safety and
efficacy of a product, the Company will not be able to obtain regulatory
approval for the sale of that product. Even if the Company believes that
clinical trials demonstrate the safety and efficacy of its product, the FDA and
other regulatory authorities may not accept the Company's assessment. In
addition, clinical trials may identify significant technical or other obstacles
to be overcome prior to obtaining necessary regulatory approvals. There can be
no assurance that the results of any of the Company's current or future clinical
trials will demonstrate the safety and efficacy of the Company's products or
that the FDA and other regulatory authorities will agree with the Company's
assessment of the results. If FS069 does not prove to be safe and effective in
clinical trials or if the Company is otherwise unable to commercialize FS069,
the Company's business, financial condition and results of operations would be
materially adversely affected and cessation of the Company's business could
occur.
DEPENDENCE ON PRINCIPAL PRODUCTS
The Company has only one product, ALBUNEX, the Company's first-generation
ultrasound contrast agent, which has been approved for sale. It has been
approved for sale in the United States, Japan and certain countries in Europe
for only one indication. Product revenues from sales of ALBUNEX for this
indication are not expected to increase significantly, if at all, or to result
in profitable operations. Additional regulatory approvals will be needed in
order to obtain approval to market ALBUNEX in other countries and to increase
the number of indications for which ALBUNEX may be marketed in the countries
where it is already approved for sale. There can be no assurance as to whether
or when such approvals will be obtained. Approval for only one additional
indication, fallopian tube patency, is currently being pursued.
The Company's second-generation ultrasound contrast agent, FS069, is the
principal focus of the Company's product development activities. While clinical
results to date have been encouraging, future clinical trials of FS069 may not
demonstrate the desired results. No assurance can be given that FS069 will be
more effective than competing contrast agents that may be developed in the
future or that FS069 will reach commercialization or be accepted by the medical
community. If FS069 is approved for cardiac function, the Company expects that
sales of ALBUNEX for the same indication will be adversely affected. Similarly,
the availability of ALBUNEX for cardiac function may adversely affect sales of
FS069 for the same indication. The failure of the Company to achieve significant
commercial success for FS069, in particular for the myocardial perfusion
indication, would have a material adverse effect on the Company's business,
financial condition and results of operations and cessation of the Company's
business could occur. See "Business -- Products and Markets -- ALBUNEX" and
"Business -- Products and Markets -- FS069."
The Company's other products under development are either in earlier stages
of development or are expected to have smaller potential markets than FS069, and
there can be no assurance that these products will be successfully developed,
demonstrate efficacy, be approved by regulatory authorities or be successfully
marketed. In addition, there can be no assurance that the Company will be able
to develop any additional products or that the approval of its current products
will not be revoked.
8
<PAGE> 9
UNCERTAINTY OF SUCCESSFUL COMMERCIALIZATION
Approval of the Company's products for marketing and sale by the FDA and
comparable foreign agencies does not assure the products' commercial success.
The commercial success of the Company's products is dependent upon many factors.
These factors include, but are not limited to, safety, efficacy, pricing,
competition, technological change, government policy, physician education and
preference and the sales efforts of the Company's marketing partners.
The Company's ultrasound contrast agents are among the first products of
their kind. As such, they face the risk of limited or gradual acceptance simply
because clinicians are unfamiliar with their use, benefits or even their
existence. There can be no assurance that the Company's products will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary regulatory and reimbursement approvals are
obtained. The Company believes that recommendations by physicians and health
care payors will be essential for market acceptance of the Company's products,
and there can be no assurance that any such recommendations will be obtained.
Physicians will not recommend the Company's products unless they conclude, based
on clinical data and other factors, that they represent an acceptable
alternative to other products or techniques which have already gained acceptance
in the medical community. In the Company's judgment, the marketing program for
the Company's products must contain a major, expensive and sustained educational
component. This requirement to educate the marketplace may mean that clinician
acceptance of the Company's products will be slow and uncertain, if it occurs at
all. Failure of the Company's products to achieve any significant market
acceptance would have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company has not evaluated the effectiveness of FS069 in assessing
myocardial perfusion in patients using conventional (non-harmonic) ultrasound
imaging. While preliminary results indicate that FS069 may be effective in
assessing myocardial perfusion in such patients using harmonic ultrasound
imaging, there can be no assurance that FS069 will be demonstrated to be
effective for this indication using conventional imaging. Harmonic ultrasound
imaging is not commercially available at present, and there can be no assurance
that it will be commercially available at all or used in significant numbers if
and when FS069 is approved for the assessment of myocardial perfusion. Among the
factors that may affect the commercial availability and use of harmonic
ultrasound imaging are the cost of adapting existing ultrasound machines for
harmonic imaging or of acquiring new machines capable of harmonic imaging, the
inability of the manufacturers of ultrasound machines to obtain regulatory
approval (if necessary), and the existence of patents that may require such
manufacturers to acquire licenses from third parties in order to exploit
harmonic imaging technology. See "Business -- Industry Background -- Ultrasound
Imaging."
UNCERTAINTY OF PRODUCT DEVELOPMENT GENERALLY
With the exception of ALBUNEX, which has received regulatory approval in
the United States and several other countries for one indication, all of the
Company's other products are in various stages of development and are yet to
receive regulatory approval for commercial development or sale. The successful
commercialization of each of these products is subject to many uncertainties.
The products under development by the Company will require significant
additional research and development efforts, including extensive clinical
testing and regulatory approval, prior to commercial use. Even if the Company's
potential products receive regulatory approval, the Company's products are
subject to the risks of failure inherent in the commercialization of medical
products based on new technologies. These risks include the possibilities that
any or all of the Company's potential products will be found to be unsafe,
ineffective or otherwise fail to meet applicable regulatory standards or receive
necessary regulatory clearances; that the potential products, if safe and
effective, will be difficult to develop into commercially viable products,
difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company from marketing
such products; that third parties will market superior or equivalent products;
that changes in the Company's business strategy may dictate changes in the mix
of products under development; that the Company's strategic marketing partners
may change their marketing focus or do an inadequate job in marketing; or that
other unpredictable difficulties may arise. There can be no assurance that any
of the Company's products under development will be successfully commercialized.
9
<PAGE> 10
RELIANCE ON MARKETING PARTNERS
The Company does not currently maintain, nor does it intend to develop, its
own marketing organization but instead relies, and expects to continue to rely,
on its strategic partners to market and sell its products. There can be no
assurance that the Company will continue to attract large corporate partners to
promote and distribute the Company's products. Mallinckrodt Medical, Inc.
("Mallinckrodt") is the Company's principal strategic marketing partner for its
ALBUNEX and FS069 microsphere ultrasound contrast agents. See
"Business -- Marketing and License Agreements." Mallinckrodt has exclusive
distribution rights for ALBUNEX and FS069 in North and South America, the Far
East (except for Japan, Taiwan and Korea) and certain other countries. Under
this arrangement, Mallinckrodt has almost complete control over all aspects of
marketing the Company's products in Mallinckrodt's territories, including market
identification, marketing methods, pricing, composition of sales force,
promotional activities and the like. Accordingly, the Company is highly
dependent on Mallinckrodt's marketing efforts, resources and commitment to the
Company's products for success in marketing ALBUNEX and FS069. The Company
manufactures all licensed products for sale to Mallinckrodt at a price generally
equal to 40% of Mallinckrodt's quarterly average selling price to end users. If
the Company declines to manufacture ALBUNEX or FS069 for Mallinckrodt because
the quarterly average selling price falls below a level specified in the
Company's distribution agreement with Mallinckrodt or the proposed initial price
in a new market or for a new indication is below the specified level, or if the
Company is unable to manufacture ALBUNEX or FS069 in sufficient quantities to
satisfy Mallinckrodt's orders on a timely basis, Mallinckrodt may exercise
certain contingent manufacturing rights. MBI will receive a royalty of 5-10% on
Mallinckrodt's sales of ALBUNEX or FS069 which Mallinckrodt has manufactured. As
a result the Company's revenues from sales to Mallinckrodt are directly
dependent upon Mallinckrodt's pricing decisions. There can be no assurance that
these pricing decisions, which Mallinckrodt will make in its best interests,
will operate to maximize the Company's potential revenues on sales of the
licensed products. In addition, there can be no assurance that Mallinckrodt will
market the licensed products effectively. Under the distribution agreement, the
Company is responsible for conducting clinical trials and securing regulatory
approvals of the licensed products in the United States for cardiac indications,
and Mallinckrodt is responsible for conducting clinical trials and securing
regulatory approvals in the United States for non-cardiac indications and is
responsible for conducting all clinical trials and securing approvals in the
other countries in Mallinckrodt's territory. Mallinckrodt has substantial
discretion in determining the clinical trials that it will conduct and the
regulatory approvals that it will attempt to secure, and there can be no
assurance that Mallinckrodt will conduct appropriate clinical trials in order to
secure, or, having conducted appropriate clinical trials, that it will attempt
to secure, regulatory approval of the particular non-cardiac and foreign cardiac
indications of ALBUNEX and FS069 that the Company believes will maximize the
Company's potential revenues on sales of the licensed products to Mallinckrodt.
The Company is currently without a strategic marketing partner for Europe,
the former Soviet Union, Africa, the Middle East and India. In October 1995, the
Company reacquired distribution rights in these territories from Nycomed Imaging
AS ("Nycomed"). See "Business -- Marketing and License Agreements." The Company
is in an advanced stage of negotiations with a large pharmaceutical company for
the transfer of exclusive marketing rights to the Company's ALBUNEX and FS069
ultrasound contrast agents in the territories that were formerly licensed to
Nycomed. If the Company does not conclude this agreement or a similar agreement
with another major pharmaceutical company, the Company's ability to market these
products in these territories will be materially reduced.
The Company is currently engaged in a dispute with Shionogi & Co., Inc.
("Shionogi"), its ALBUNEX and FS069 marketing partner for Japan, Taiwan, and
South Korea. This dispute is the subject of cross-demands for arbitration which
the Company and Shionogi have filed with the American Arbitration Association.
See "-- Arbitration Proceedings," "Business -- Marketing and Licensing
Agreements" and "Business -- Legal Proceedings."
The Company is presently without a strategic marketing partner for ORALEX
or its computed tomography liver agent. While the Company is actively seeking
development and marketing partners for these products, there can be no assurance
that the Company will be successful in entering into collaborative agreements
for each product. If the Company cannot enter into collaborative agreements with
capable
10
<PAGE> 11
partners on commercially reasonable terms, the commercialization of these
products will be delayed and possibly postponed indefinitely.
ARBITRATION PROCEEDINGS
On April 11, 1996, Shionogi filed a demand with the American Arbitration
Association ("AAA") for arbitration of Shionogi's claim for damages in excess of
$37 million, representing Shionogi's license fees paid under the MBI-Shionogi
license and cooperative development agreement and associated development
expenses for ALBUNEX, plus punitive damages. Shionogi claims that the Company
failed to provide Shionogi with ALBUNEX meeting the required quality and
performance standards and that the Company wrongfully attempted to withhold
rights to FS069 from Shionogi. The Company believes that Shionogi's claims are
without merit, and it will shortly file a response denying all of Shionogi's
material allegations and denying that there is any factual or legal basis for
any liability of the Company to refund any of the license fees paid by Shionogi
or to reimburse any of Shionogi's ALBUNEX development expenses. The Company's
dispute with Shionogi may have the effect of interrupting or suspending sales of
ALBUNEX in Japan, of further delaying the marketing of ALBUNEX in South Korea
and Taiwan and of further delaying the development of FS069 throughout
Shionogi's territory, and carries with it the risk of monetary damages being
awarded against the Company. On April 16, 1996, the Company filed a demand with
the AAA for arbitration of the Company's claim for compensatory and
consequential damages in excess of $45 million plus punitive damages for
Shionogi's breach of the MBI-Shionogi license and cooperative development
agreement. The Company claims that Shionogi breached its obligations under that
agreement by failing diligently to develop the market for ALBUNEX and FS069 in
its territory, failing to make a required minimum payment of $3.0 million (less
earned royalties paid) and delaying the commercialization of ALBUNEX in its
territory. The results of the arbitration proceedings cannot be predicted. It is
possible that Shionogi could be awarded some portion or all of the damages that
it is seeking. Moreover, there can be no assurance that the Company will be
awarded all or any portion of the damages that it is seeking. A ruling adverse
to MBI in the arbitration proceeding filed by Shionogi would have a material
adverse effect on the Company's business, financial condition and results of
operations. If Shionogi were awarded all of the damages that it is seeking, the
Company would have difficulty meeting its anticipated capital requirements and
might be required to reduce the scope of or eliminate its manufacturing
activities, or attempt to obtain funds by entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain technologies or products that the Company would not otherwise
relinquish. The Company's inability to fund its capital requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Legal Proceedings."
DEPENDENCE ON PATENT PROTECTION
The Company's success will depend, in part, upon its ability to develop
patentable products and technologies and to obtain patent protection for its
products and technologies both in the United States and in other countries. The
Company's products are covered by a number of issued United States and foreign
patents, and the Company has filed a number of United States and counterpart
patent applications in other countries. The Company owns some of these patents
and is the exclusive licensee of others. See "Business -- Patents." The Company
believes that its patents are critical to its prospects for success. There can
be no assurance that the Company's United States and foreign issued patents or
pending applications will offer any protection or that they will not be
challenged, invalidated or circumvented. In addition, there can be no assurance
that competitors will not obtain patents that will prevent, limit or interfere
with the Company's ability to make, use or sell its products either in the
United States or in international markets.
The Company's patent estate is subject to numerous potential threats.
Critical patent applications may not issue or may issue with limitations which
materially reduce their coverage; competitors may challenge the validity of the
Company's patents through challenges within the United States Patent and
Trademark Office and its foreign equivalents or through lawsuits in the courts;
or competitors may claim that the Company's products infringe the competitors'
patents. The Company is aware of three oppositions to certain of the Company's
foreign ultrasound patents. See "Business -- Ultrasound Patents and Trademarks."
Several competitors are developing microsphere- or microbubble-based products
for ultrasound contrast imaging and have filed patent applications for these
products. There is the possibility that in the future one or more of these
11
<PAGE> 12
competitors may challenge the Company's patents in this subject matter area.
Patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. In addition, patents issued and patent applications
filed relating to medical devices are voluminous. Accordingly, there can be no
assurance that current and potential competitors or other third parties have not
filed or will not file applications for, or have not received or will not
receive, patents and will not obtain additional proprietary rights relating to
materials or processes used or proposed to be used by the Company.
Governmental patent agencies have considerable discretion over their
internal processes, and their decisions are given great weight by the courts.
There can be no assurance that the Company's pending applications will issue, or
issue with satisfactory coverage, or that the Company's issued patents will not
be successfully challenged by a competitor.
It is possible that the Company's products or processes will infringe, or
will be found to infringe, patents not owned or controlled by the Company. The
Company is aware of three U.S. patents with respect to which no assurance can be
given that any ultrasound product of the Company does not infringe under the
doctrine of equivalents. If any relevant claims of third-party patents are
upheld as valid and enforceable, the Company could be prevented from practicing
the subject matter claimed in such patents, or would be required to obtain
licenses or to redesign its products or processes to avoid infringement. There
can be no assurance that such licenses would be available at all or on terms
acceptable to the Company or that the Company could redesign its products or
processes to avoid infringement. Litigation may be necessary to defend against
claims of infringement, to enforce patents issued to the Company or to protect
trade secrets and could result in a substantial cost to and diversion of efforts
by the Company.
The Company also relies on trade secrets, proprietary know-how and
continuing technological innovation which it seeks to protect with
confidentiality agreements with collaborators, employees and consultants. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach or that the Company's trade secrets
and proprietary know-how will not otherwise become known to or be independently
discovered by competitors.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development activities, including its preclinical studies and
clinical trials, are subject to extensive regulation by numerous federal, state
and local governmental authorities in the United States and by similar
regulatory agencies in other countries where the Company tests and markets, or
intends to test and market, its current or future products. There can be no
assurance that the Company will obtain further regulatory approvals to conduct
clinical trials or to market its current products or that the Company will
obtain on a timely basis, or at all, regulatory approvals to conduct clinical
trials or to market products that may be developed in the future. Prior to
marketing any product developed by the Company or marketed under license, the
Company must undergo an extensive regulatory approval process by the FDA and
comparable regulatory authorities in foreign countries. The regulatory process
can take many years and require the expenditure of substantial resources.
The Company must demonstrate through preclinical studies and clinical
trials that its products are safe and efficacious for use in each proposed
indication. The results from preclinical animal studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products. A number of companies in the biopharmaceutical industry have suffered
significant setbacks in advanced clinical trials, even after experiencing
promising results in early animal and human testing. In addition, the rate of
completion of the Company's clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the size of the patient population, the nature of the
protocol, the Company's ability to manage the clinical trial, the proximity of
patients to clinical sites and the eligibility criteria for the study. Several
factors, such as delays in planned patient enrollment, may result in increased
costs and delays or termination of clinical trials prior to completion, which
could have a material adverse effect on the Company. Preclinical studies must
also be conducted in conformity with the FDA's good laboratory practice
regulations. Clinical trials generally must meet requirements for institutional
review board oversight and informed consent, as well as regulatory agency prior
review, oversight and good clinical practice requirements.
12
<PAGE> 13
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejections may be encountered based upon changes in the
policies of regulatory authorities for new product approval during the period of
product development and regulatory review of each submitted pre-market approval
application, new drug application or other required approval application. There
can be no assurance that, even after such time and expenditures, regulatory
approvals will be obtained for any products developed by the Company. Moreover,
if FDA approval of a product is granted, such approval will entail limitations
on the indicated uses for which it may be marketed and may impose labeling
requirements which may adversely affect the Company's ability to market its
products.
The Company cannot control the classification of its products by the FDA
for review purposes. The Company's first generation ultrasound contrast agent,
ALBUNEX, has been classified as a medical device rather than as a drug. There
can be no assurance that the FDA will continue to classify ALBUNEX as a device
or that the FDA will review the Company's second generation ultrasound contrast
agent, FS069, as a medical device. If ALBUNEX were reclassified as a drug or if
FS069 were reviewed as a drug, the Company could be required to undertake
additional clinical tests and other activities which could result in delay and
additional expense in obtaining regulatory approval, and which may increase the
risk that regulatory approval will not be obtained.
The Company's products are also regulated in other countries by foreign
agencies comparable in authority to the FDA. The process of obtaining regulatory
approval in these countries is often as costly, time-consuming and uncertain as
it is in the United States. In addition, foreign agencies may apply different or
more stringent standards than the FDA and require additional or different
clinical studies. Foreign agencies also may fail to approve the products even if
the FDA has done so.
Any products manufactured and sold by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. In addition, the FDA and certain foreign
regulatory authorities impose numerous other requirements with which medical
device manufacturers must comply. Product approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following initial marketing. The Company will also be required to
adhere to applicable FDA regulations setting forth current Good Manufacturing
Practices ("GMP") requirements, which include testing, control and documentation
requirements. The Company is also required to provide the FDA with information
relating to any death or serious injury that it may have caused or to which it
may have contributed, and any product malfunction that, if it were to recur,
would likely cause or contribute to death or serious injury. Ongoing compliance
with GMP and other applicable regulatory requirements is monitored through
periodic inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Changes in existing regulations or the
adoption of new regulations or policies could prevent the Company from
obtaining, or affect the timing of, future regulatory approvals.
Failure to comply with applicable regulatory requirements can result in,
among other things, fines, suspension of regulatory approvals, product recalls,
seizure of products, imposition of operating restrictions or civil penalties,
FDA refusal to approve marketing applications, and criminal prosecutions.
Further, FDA policy or similar policies of regulatory agencies in other
countries may change and additional government regulations may be established
that could prevent or delay regulatory approval of the Company's products. See
"Business -- Government Regulation."
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT
In both domestic and foreign markets, the ability of the Company to
commercialize its products will depend, in part, on the availability of
reimbursement from third-party payors, such as government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price and cost-effectiveness of medical
products. Use of contrast agents, including the Company's agents, adds to the
cost of a routine ultrasound examination. There can be no assurance that the
Company's products will be considered cost effective. Significant uncertainty
exists as to the reimbursement status of newly-approved healthcare products.
There can be no assurance that adequate third-party insurance coverage will be
available for the Company's products to establish and maintain price levels
sufficient for realization of an appropriate return to the Company on its
investment in developing new products.
13
<PAGE> 14
Government and other third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new products approved for marketing by the FDA and by refusing, in some cases,
to provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payors for
uses of the Company's products, the market acceptance of these products and
clinical use of these products would be adversely affected.
COMPETITION
In general, competition in the field of contrast agents is based on such
factors as product performance and safety, product acceptance by physicians,
patent protection, manner of delivery, ease of use, price, distribution and
marketing. The Company's products compete or may compete with new or improved
contrast agents. The Company's products and potential products are in various
stages of development, and no assurance can be given that any of these products
or potential products will sufficiently enhance the use of existing ultrasound
imaging to generate meaningful commercial demand.
The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. The Company expects to compete against a number of companies, many of
which have substantially greater financial, technical and human resources than
the Company and may be better able to develop, manufacture and market products.
In addition, many of the Company's existing or potential competitors have
extensive experience in research, preclinical testing and human clinical trials,
obtaining FDA and other regulatory approvals, and manufacturing and marketing
their products, or are allied with major pharmaceutical companies that can
afford them these advantages. As a result, competitors may develop and introduce
competitive or superior products more rapidly than the Company. While the
Company was the first to obtain FDA approval of an ultrasound contrast agent,
ALBUNEX, the Company expects that one or more of these competitors will develop
products that will be approved for an indication or indications covered by
ALBUNEX or FS069, including the assessment of cardiac function and myocardial
perfusion. One or more of these products may prove superior to the Company's
products or may be approved for sale prior to the approval for sale of FS069.
There can be no assurance that existing products or new products developed by
the Company's competitors will not be more effective than any products that may
be developed by the Company. See "Technological Obsolescence."
Any product developed by the Company that gains regulatory approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and the regulatory approval process, gain
reimbursement acceptance and supply commercial quantities of the product for
distribution to the market are expected to be important competitive factors. In
addition, the Company believes that the primary competitive factors in the
market for ultrasound imaging agents are safety, efficacy, ease of delivery,
reliability, innovation and price. The Company also believes that physician
relationships and customer support are important competitive factors.
TECHNOLOGICAL OBSOLESCENCE
The biopharmaceutical industry is subject to rapid and significant
technological change. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any technologies and products which are being developed by the Company or
that would render the Company's technology and products obsolete and
noncompetitive. For example, ultrasound machines may be developed which are
sufficiently sensitive so as to eliminate or reduce the need for contrast
agents. Software may be developed which has the ability to process standard
ultrasound images in such a way as to retrieve information previously available
only through the use of contrast agents. Superior contrast agent technologies
may emerge which, unlike the Company's, do not rely on microsphere or
gas-displacement technology. In addition, other imaging methods may be developed
which are equivalent or superior to ultrasound imaging in terms of quality of
image, cost, ease of use and non-invasiveness. There can be no assurance that
the Company's products under development will be able to compete successfully
with existing products or products under development by other companies,
universities and other institutions. If the Company's products are rendered
obsolete or noncompetitive, the Company's business, financial condition and
14
<PAGE> 15
results of operations would be materially adversely affected and cessation of
the Company's business could occur.
MANUFACTURING LIMITATIONS
The Company has only manufactured FS069 in limited quantities to support
clinical trials and has no experience in manufacturing FS069 in commercial
quantities. There can be no assurance that the Company would be able to
manufacture ALBUNEX in adequate quantities if demand were to increase more
rapidly than the Company anticipates or that the Company will be able to
manufacture FS069 in high-volume quantities.
The Company has one manufacturing facility, located in San Diego,
California. The manufacture of the Company's products involves a number of steps
and requires compliance with stringent quality control specifications imposed by
the Company itself and by the FDA. Moreover, the Company's products can only be
manufactured in a facility approved by the FDA. For these reasons, the Company
would not be able quickly to replace its manufacturing capacity if it were
unable to use its sole manufacturing facility as a result of a fire, natural
disaster (including an earthquake), equipment failure or other difficulty, or if
it is deemed not in compliance with the FDA's GMP requirements and the
non-compliance could not be rapidly rectified. The Company's inability or
reduced capacity to manufacture its products would have a material adverse
effect on the Company's business and results of operations.
The Company may enter into arrangements with contract manufacturing
companies to expand its own production capacity in order to meet requirements
for its products, or to attempt to improve manufacturing efficiency. If the
Company chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Moreover, contract manufacturers must operate in compliance with the FDA's GMP
requirements. The Company's potential dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver such products on a timely and competitive
basis.
AVAILABILITY OF RAW MATERIALS
Both the Company's ALBUNEX and FS069 ultrasound contrast agents require
high-quality human albumin to manufacture, and FS069 requires the gas
perfluoropropane. These raw materials are available from only a limited number
of sources. The FDA regulatory approvals pursuant to which the Company currently
manufactures ALBUNEX and FS069 require that the Company use human albumin
purchased from a particular fractionator; in effect, this fractionator is
currently the Company's sole source for human albumin. While the Company has
been able to secure supplies of necessary raw materials in adequate quantities
and on acceptable terms, there can be no assurance that the Company will
continue to be able to do so. The Company's inability to obtain any raw material
on commercially reasonable terms could result in reductions or delays in product
shipments or manufacturing cost increases which could have a material adverse
effect on the Company's business.
ENVIRONMENTAL MATTERS
Because of the nature of its manufacturing processes and the use of
hazardous substances in its ongoing research and development activities, the
Company is subject to stringent federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. The Company has been notified from time to time of violations of such
environmental laws and of its effluent discharge permit. However, the Company
has corrected in all material respects the environmental violations of which it
is aware. There can be no assurance that the Company's business, financial
condition and results of operations will not be materially adversely affected by
current or future environmental laws, rules, regulations and policies or by
liability arising out of any releases or discharges of materials that could be
hazardous.
15
<PAGE> 16
PRODUCT LIABILITY
There have been no product liability claims against the Company since
commercial sales of ALBUNEX began in the United States and Japan. However, the
clinical use and sale of the Company's products involve significant risk of
product liability claims. It is probable that the Company would be named as one
of the defendants in any lawsuit in which the plaintiff suffered any type of
injury during or following a procedure in which one of the Company's products
was used, regardless of any causal relationship between the product's use and
the plaintiff's injury. The Company thus faces an inherent risk of financial
exposure to product liability claims, and there can be no assurance that the
Company will not experience losses due to product liability claims in the
future. In addition, the Company has agreed to indemnify its marketing partners
for product liability claims relating to the Company's products. The Company
currently maintains product liability insurance, but there can be no assurance
that such coverage will continue to be available, either on acceptable terms or
at all, or that the coverage limits will be adequate. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the principal members of its senior management
and key members of its scientific staff, the loss of any of whose experience
could adversely affect the Company's achievement of its product development and
commercial objectives. The Company is also dependent on its ability to attract
and retain additional qualified scientific, manufacturing and technical
personnel. There is significant competition for such personnel, and there can be
no assurance that the Company will be able to hire and retain the qualified
employees that it requires. The Company does not maintain any key-man life
insurance policies.
VOLATILITY OF STOCK PRICE
The market price for securities of biopharmaceutical companies like the
Company have been highly volatile, and the market price of the Company's Common
Stock may be highly volatile. Announcements by the Company or its competitors of
events including, but not limited to, the results of preclinical studies and
clinical trials or of new commercial products, developments or disputes
concerning patent or proprietary rights, developments in the Company's
relationships with its strategic marketing partners, and adverse litigation, as
well as period-to-period fluctuations in the Company's operating results, stock
market conditions in general and market perceptions of the biopharmaceutical
industry in particular, and economic and other external factors, may have a
significant impact on the market price of the Company's Common Stock. See "Price
Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of the Company's Common Stock in the
public market after the Offering could adversely affect the market price of the
Common Stock. Upon completion of the Offering, the Company will have 16,896,186
shares of Common Stock outstanding (based upon shares outstanding as of March
31, 1996). Of these shares, approximately 14,397,579 shares including the
3,600,000 shares offered hereby (or approximately 14,937,579 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). Taking into consideration the effect of the 120-day lock-up
agreements with the Underwriters entered into by all of the Company's officers
and directors and one of the Company's stockholders, approximately 708,000
additional shares of Common Stock will be freely tradable subject to compliance
with the provisions of Rule 144 under the Securities Act, and approximately
1,790,607 additional shares will become eligible for sale upon expiration of the
lock-up agreements 120 days from the date of this Prospectus. As of March 31,
1996, options to purchase a total of 2,227,955 shares were outstanding under the
Company's stock option plans, of which options for a total of 1,079,478 shares
were then exercisable. Shares of Common Stock issued upon the exercise of such
options are available for immediate resale in the open market subject, in the
case of sales by affiliates, to the volume, manner of sale, notice and public
information requirements of Rule 144. Officers and directors subject to lock-up
agreements with the Underwriters held exercisable options for 276,125 shares of
Common Stock as of March 31, 1996. See "Shares Eligible for Future Sale."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,600,000 shares of
Common Stock offered hereby are estimated to be approximately $29.7 million
($34.3 million if the Underwriter's over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company currently anticipates using the net
proceeds of the Offering for research and development activities, including
preclinical and clinical studies, and general corporate purposes. The cost,
timing and amount of funds required for such uses by the Company cannot be
precisely determined at this time and will be based upon competitive
developments, the rate of the Company's progress in research and development,
the results of preclinical studies and clinical trials, the timing of regulatory
approvals of FS069 and ORALEX, payments under collaborative agreements and the
availability of alternative methods of financing. The Company anticipates that
its existing resources, including the net proceeds of the Offering and interest
thereon, plus payments under its existing collaborative agreements, will enable
the Company to fund its operations for at least the next 24 months. The Company
may seek financing from additional sources, such as borrowings, lease
arrangements, additional equity financing or partnering arrangements, as capital
requirements change as a result of strategic, competitive, technological and
regulatory factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Where appropriate, the proceeds of the Offering may be used to acquire
products or technologies to expand the Company's business. The Company currently
has no agreement or understanding with respect to any such acquisition. Pending
the foregoing uses, the Company intends to invest the net proceeds of the
Offering in investment-grade, interest-bearing marketable securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "MB." The following tables set forth, for the periods
indicated, the high and low closing prices for the Company's Common Stock, as
reported by the NYSE.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-----------------
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED MARCH 31, 1994:
1st Quarter.............................................. $23 $16 5/8
2nd Quarter.............................................. 26 1/2 19 1/2
3rd Quarter.............................................. 26 3/4 18
4th Quarter.............................................. 20 1/2 17
YEAR ENDED MARCH 31, 1995:
1st Quarter.............................................. $18 $10 7/8
2nd Quarter.............................................. 13 7/8 9 5/8
3rd Quarter.............................................. 14 1/8 9 1/8
4th Quarter.............................................. 11 3/8 7
YEAR ENDED MARCH 31, 1996:
1st Quarter.............................................. $ 8 $ 6 1/4
2nd Quarter.............................................. 10 6 1/4
3rd Quarter.............................................. 9 1/2 6
4th Quarter.............................................. 10 6 3/8
YEAR ENDED MARCH 31, 1997:
1st Quarter through May 22, 1996......................... $11 7/8 $ 8 1/2
</TABLE>
On May 22, 1996, the closing price for the Company's Common Stock, as
reported on the NYSE, was $10 3/4 per share.
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock. The current
policy of the Company's Board of Directors is to retain any earnings to finance
the Company's operations and development of the Company's business. The Company
does not anticipate paying any dividends in the foreseeable future.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the cash, cash equivalents and marketable
securities, and total capitalization of the Company at March 31, 1996 and as
adjusted to reflect the sale of 3,600,000 shares of Common Stock and the
application of the net proceeds therefrom, estimated to be approximately $29.7
million (after deducting underwriting discounts and commissions and estimated
offering expenses). See "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and related Notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities...................... $ 20,570 $ 50,302
======== ========
Long-term debt, including current portion(1).......................... $ 9,872 $ 9,872
Stockholders' equity:
Common Stock, $.01 par value, 20,000,000 shares authorized,
13,296,186 shares issued and outstanding; 16,896,186 shares
issued and outstanding as adjusted(2)............................ 133 169
Additional paid-in capital.......................................... 91,468 121,164
Accumulated deficit................................................. (62,185) (62,185)
Unrealized loss on available-for-sale securities.................... (6) (6)
Less notes receivable from sale of Common Stock..................... (281) (281)
Less treasury stock, at cost........................................ (167) (167)
-------- --------
Total stockholders' equity.................................. 28,962 58,694
-------- --------
Total capitalization.................................................. $ 38,834 $ 68,566
======== ========
</TABLE>
- ------------------------------
(1) See Note 5 of Notes to the Consolidated Financial Statements for a
description of the Company's long-term debt.
(2) Excludes options outstanding as of March 31, 1996 under the Company's stock
option plans to purchase 2,227,955 shares of Common Stock at a weighted
average exercise price of $11.50 per share and a warrant to purchase 14,524
shares of Common Stock at an exercise price of $14.61 per share.
18
<PAGE> 19
DILUTION
As of March 31, 1996, the net tangible book value of the Company was
approximately $28.7 million, or $2.16 per share. Net tangible book value per
share represents the amount of total assets of the Company less total
liabilities and intangible assets (consisting primarily of long-term capitalized
patents and license rights), divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 3,600,000 shares of Common
Stock offered hereby (and after deducting underwriting discounts and commissions
and estimated offering expenses), and the receipt of proceeds therefrom, the pro
forma net tangible book value of the Company as of March 31, 1996, would have
been approximately $58.4 million, or $3.46 per share. This represents an
immediate increase in net tangible book value of $1.30 per share to existing
shareholders and an immediate dilution of $5.54 per share to new investors
purchasing shares in the Offering. Dilution per share represents the difference
between the price per share to be paid by the new investors and the net tangible
book value per share of Common Stock after giving effect to the Offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share........................................... $ 9.00
Net tangible book value per share before the Offering................... $ 2.16
Increase in net tangible book value per share attributable to the
Offering............................................................. 1.30
Pro forma net tangible book value per share, as adjusted for the
Offering................................................................ 3.46
------
Dilution per share to new investors(1).................................... $ 5.54
======
</TABLE>
At March 31, 1996, there were options outstanding under the Company's stock
option plans to purchase 2,227,955 shares of Common Stock at a weighted average
exercise price of $11.50 per share and a warrant to purchase 14,524 shares of
Common Stock at an exercise price of $14.61 per share. The foregoing
computations assume no exercise of these options. To the extent these options
are exercised, there may be further dilution to new investors. See
"Capitalization" and Note 7 of Notes to the Consolidated Financial Statements.
- ------------------------------
(1) If the Underwriter's over-allotment option is exercised in full, the pro
forma net tangible book value will be approximately $3.61 per share,
resulting in dilution to new investors in the Offering of $5.39 per share.
See "Underwriting."
19
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the years in the three-year
period ended March 31, 1996, and with respect to the consolidated balance sheets
at March 31, 1995 and 1996, are derived from the Consolidated Financial
Statements of the Company that have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated statement of operations for the
two years ended March 31, 1993, and the consolidated balance sheet data at March
31, 1992, 1993 and 1994 are derived from financial statements that have been
audited by Arthur Andersen LLP and which have not been included in this
Prospectus. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Revenues under collaborative agreements........... $ 9,193 $ 3,439 $ 5,713 $ 15,132 $ 2,412
Product revenues.................................. -- -- 1,056 1,769 647
License fees...................................... -- 250 2,015 40 25
------- -------- -------- -------- --------
Total revenues............................... 9,193 3,689 8,784 16,941 3,084
Operating expenses:
Research and development costs.................... 9,330 14,640 18,110 18,743 13,588
Costs of products sold............................ -- -- 580 1,608 1,553
Selling, general and administrative expenses...... 2,408 4,863 5,743 5,864 5,862
Other expense..................................... -- -- 4,726 3,403 3,110
------- -------- -------- -------- --------
Total expenses............................... 11,738 19,503 29,159 29,618 24,113
Loss from operations................................. (2,545) (15,814) (20,375) (12,677) (21,029)
Interest expense..................................... (460) (340) (327) (694) (786)
Interest income...................................... 3,620 3,144 1,902 1,189 1,102
(Provision) Credit for income taxes.................. (248) 1,197 -- -- --
------- -------- -------- -------- --------
Income (Loss) from continuing operations............. 367 (11,813) (18,800) (12,182) (20,713)
Loss from discontinued operations(1)................. (924) (2,255) -- -- --
------- -------- -------- -------- --------
Net loss............................................. $ (557) $(14,068) $(18,800) $(12,182) $(20,713)
======= ======== ======== ======== ========
Earnings (loss) per common share:
Continuing operations............................. $ .03 $ (1.01) $ (1.58) $ (1.02) $ (1.62)
Discontinued operations........................... (.08) (.19) -- -- --
------- -------- -------- -------- --------
Net loss.......................................... $ (.05) $ (1.20) $ (1.58) $ (1.02) $ (1.62)
======= ======== ======== ======== ========
Weighted average common shares outstanding........... 11,235 11,690 11,905 11,999 12,758
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $67,541 $51,218 $29,500 $19,718 $20,570
Working capital........................................... 65,094 51,761 28,117 20,927 18,601
Total assets.............................................. 87,034 71,758 56,051 50,639 43,829
Long-term debt............................................ 4,001 3,965 3,917 8,408 8,610
Total stockholders' equity................................ 77,153 64,891 48,076 36,424 28,962
</TABLE>
- ------------------------------
(1) Prior to September 1992, the Company was involved in the development,
manufacture and sale of diagnostic DNA probes and research in areas
unrelated to the Company's current business. The Company discontinued its
diagnostic DNA probe business in September 1992. Accordingly, the Company
has classified the DNA probe business as a discontinued operation in its
consolidated statements of operations for all periods presented.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(REFERENCES TO YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31.)
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Business" and "Risk
Factors," as well as those discussed elsewhere in this Prospectus and any
document incorporated herein by reference.
OVERVIEW
The Company is a world leader in the development, manufacture and sale of
ultrasound contrast imaging agents. ALBUNEX, the Company's first-generation
ultrasound contrast agent, was first approved for sale in Japan in October 1993
and in the United States in August 1994 for the assessment of cardiac function.
The Company believes that sales of ALBUNEX have been below the Company's
original expectations due primarily to the short length of time that ALBUNEX
microspheres remain intact in the bloodstream and the lack of clinical data to
support the Company's belief that the use of ALBUNEX can reduce healthcare costs
through the avoidance of more expensive diagnostic procedures. The Company
believes that Mallinckrodt, its principal marketing partner, will begin a
post-approval clinical study in 1996 designed to demonstrate the cost-
effectiveness of ALBUNEX for stress echocardiograms and has completed Phase 3
clinical trials for a second indication for ALBUNEX, the assessment of fallopian
tube patency, in order to broaden the potential uses of the product.
While ALBUNEX represents a major breakthrough in ultrasound imaging because
it improves visualization of the left side of the heart, the potential markets
for ALBUNEX are limited because of the short duration of ALBUNEX in the
bloodstream. This short duration prevents the use of ALBUNEX for the assessment
of myocardial perfusion (blood flow in the heart muscle). The Company believes
that myocardial perfusion has a significantly greater market potential than
cardiac function, and accordingly, the Company is focusing its product
development activities on FS069, the Company's second-generation ultrasound
contrast agent which remains intact in the bloodstream for a much longer period
of time. Clinical studies to date suggest that FS069 may be effective for the
assessment of both cardiac function and myocardial perfusion.
The Company does not foresee ALBUNEX sales alone as resulting in profitable
operations for the Company. Operating losses may occur for at least the next
several years due to continued requirements for research and development
including preclinical testing and clinical trials, regulatory activities and the
costs of commercializing new products. The magnitude of the losses and the time
required by the Company to achieve profitability are highly dependent on the
market acceptance of ALBUNEX and the regulatory approval and market acceptance
of FS069 and are therefore uncertain. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis or at all. Results of
operations may vary significantly from quarter to quarter depending on, among
other things, the progress, if any, of the Company's research and development
efforts, the timing of milestone payments, the timing of certain expenses and
the establishment of collaborative research agreements.
REVENUE RECOGNITION
Historically the Company has earned revenues from three sources: revenues
under collaborative agreements, product revenues and license fee revenues. See
Note 1 of Notes to the Consolidated Financial Statements included elsewhere in
this Prospectus.
Revenues Under Collaborative Agreements. Revenues under collaborative
agreements have been the primary source of revenues for the Company in the past.
They consist of three types of revenues: (i) milestone payments which are earned
on the achievement of certain product development and territorial milestones;
(ii) payments received from Mallinckrodt under the Company's amended agreement
to support clinical trials, regulatory submissions and product development; and
(iii) a bonus paid by Mallinckrodt equivalent to Mallinckrodt's first year
product sales of ALBUNEX at its sales price to end users of the product.
21
<PAGE> 22
Product Revenues. Product revenues are based upon MBI's sales to
Mallinckrodt and Shionogi and are recognized upon shipment of the product. The
transfer prices for MBI's sales of ALBUNEX to Mallinckrodt and Shionogi are
determined under the respective agreements and are equal to 40% of
Mallinckrodt's net sales price to its end users of the product and 30% of
Shionogi's net sales price to its end users.
License Fees. License fees are recognized at the time of receipt and are
generally received in connection with the grant of product development,
marketing and/or distribution rights to one of the Company's technologies.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995.
Revenues under collaborative agreements were $2.4 million for the fiscal
year ended March 31, 1996, compared to $15.1 million for the fiscal year ended
March 31, 1995. This decrease was due primarily to non-recurring milestones
earned in fiscal year 1995 associated with receiving approval to market ALBUNEX
in the United States and the release of ALBUNEX to Mallinckrodt's sales force.
For fiscal year 1996, $2.0 million of the revenues under collaborative
agreements was attributable to the receipt of the first two quarterly payments
from Mallinckrodt to support clinical trials, related regulatory submissions and
associated product development (discussed above under "Revenues Under
Collaborative Agreements" and below under "Liquidity and Capital Resources").
The remaining $412,000 for fiscal year 1996 was the first year's sales bonus
which Mallinckrodt agreed to pay to MBI (discussed above under "Revenues Under
Collaborative Agreements").
Product revenues were $647,000 for fiscal year 1996, compared to $1.8
million for the prior year. The majority of this decrease was due to greater
product shipments in the prior year as a result of receiving the initial
approval to market ALBUNEX in the United States and the initial release of the
product to Mallinckrodt's sales force.
License fees were $25,000 in fiscal year 1996, compared to $40,000 in
fiscal year 1995. These fees were the result of a non-exclusive license entered
into in fiscal year 1993 granting rights for certain of the Company's patents
which it is no longer exploiting. The Company received an initial license fee of
$250,000 in fiscal year 1993 and continues to receive an annual license
maintenance fee.
Cost of products sold totaled $1.6 million for fiscal year 1996, resulting
in a negative gross profit margin. This was due to the fact that the current low
levels of production were insufficient to cover the Company's fixed
manufacturing overhead expenses. For fiscal year 1995, cost of products sold
totaled $1.6 million, resulting in a gross profit margin of 9.1%. Prior to the
approval of ALBUNEX by the FDA, certain expenses associated with the
manufacturing of the product had been recorded as research and development
costs. The Company anticipates an increase in its gross profit margins at such
time as ALBUNEX sales volume increases and thus the fixed costs included in
manufacturing overhead will be allocated over a larger number of vials produced.
The amount of any increase and the time required by the Company to achieve
higher margins are highly dependent on the market acceptance of ALBUNEX and are
therefore uncertain.
The Company's research and development costs totaled $13.6 million for the
year ended March 31, 1996, as compared to $18.7 million for the year ended March
31, 1995. This decrease of 27% in the current year is due in large part to the
decision the Company made in February 1995 to focus its research and development
efforts primarily on its ultrasound contrast agents and to reduce its staffing
by 25% or 47 employees. This decision was made to reduce the Company's cash burn
rate and additionally focus the Company on those markets where it felt it would
earn the greatest return on its invested capital. As a result, the Company
discontinued research on non-ultrasound products and terminated those employees
who worked on these projects along with corresponding reductions in
administrative staffing.
Selling, general and administrative expenses totaled $5.9 million in fiscal
year 1996 and were substantially unchanged from the prior fiscal year.
During fiscal year 1996, the Company's other expenses totaled $3.1 million
as compared to $3.4 million for the prior year. In the current year, the Company
recorded the following charges: $1.4 million related to legal settlements and
related costs; $1.0 million related to the write-off of license fees related to
technologies
22
<PAGE> 23
no longer being developed; and $667,000 due to the write-down of real estate
which was sold in March 1996. The legal settlement and related costs were the
result of the Bracco arbitration. See "Business -- Legal Proceedings." In
November 1995, the Company entered into a contract for the sale of the two
buildings and underlying land that the Company purchased in December 1993. In
anticipation of the sale, the Company wrote-down the carrying value of the
buildings by $667,000 to the net amount that it then expected to receive from
the sale. The sale of the buildings was completed in March 1996 for $6.5 million
after deducting costs related to the sale. During fiscal year 1995, the Company
received a bonus from Mallinckrodt of approximately $3.0 million related to the
approval of ALBUNEX for marketing in the United States. Under the terms of the
distribution agreement with Mallinckrodt, this bonus was awarded to MBI's
employees. As a result, the Company recorded a charge of approximately $3.0
million, included under other expenses. Of this amount, approximately $1.7
million was paid in cash, and the balance represented forgiveness of
indebtedness.
Interest expense for fiscal years 1996 and 1995 amounted to $786,000 and
$694,000, respectively, and consisted primarily of mortgage interest on the
Company's manufacturing building. Interest expense increased $92,000 during the
current year due to a loan that the Company obtained in May 1994 to finance the
purchase of two unimproved buildings and underlying land in December 1993. In
March 1996, the loan was restructured into a new note payable in the amount of
$6.0 million which bears interest at prime plus 1% and is payable in monthly
installments of principal plus interest over five years. The interest rate on
the note was 9.25% in March 1996.
Interest income for fiscal years 1996 and 1995 was $1.1 million and $1.2
million, respectively. The decrease in interest income in the current year is
due to lower average cash and marketable securities balances.
No tax benefit has been recognized for fiscal years 1996 or 1995 as the
Company had fully utilized its operating loss carryback ability in fiscal year
1993. As of March 31, 1996, the Company had federal and state operating loss
carryforwards of approximately $71.1 million and $34.6 million, respectively,
and realization of future tax benefits from utilization of net operating loss
carryforwards is uncertain.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994.
Revenues under collaborative agreements were $15.1 million during the
fiscal year ended March 31, 1995 as compared to $5.7 million for the fiscal year
ended March 31, 1994. Revenues in both years were the result of milestone
payments primarily due to the marketing approval of ALBUNEX in the United States
in fiscal year 1995 and in Japan in fiscal year 1994. Of the fiscal 1995 total,
$11.8 million were milestone payments which resulted from the marketing approval
of ALBUNEX in the United States in July 1994 and approximately $3.0 million
resulted from the first commercial shipment of ALBUNEX in the United States in
October 1994. The remaining $345,000 was the first year's sales bonus which
Mallinckrodt agreed to pay to MBI (discussed above under "Revenues Under
Collaborative Agreements"). Of the milestones received for the marketing
approval of ALBUNEX, approximately $3.0 million was awarded to company employees
as provided in the Company's distribution agreement with Mallinckrodt. Included
in fiscal year 1995 are both the income and the offsetting expense associated
with the receipt from Mallinckrodt and the subsequent award to employees of
these bonuses. The expense related to this distribution is included under other
expenses. For fiscal year 1994, the revenues under collaborative agreements were
all earned under the Shionogi agreement and consisted primarily of milestone
payments ($5.0 million) associated with receiving approval to market ALBUNEX in
Japan in October 1993.
Product revenues were $1.8 million for fiscal year 1995, compared to $1.1
million in the prior year. Product revenues in fiscal year 1995 include $1.1
million earned from Mallinckrodt since the first commercial shipment of ALBUNEX
in the United States in October 1994. The remainder of product revenues in
fiscal years 1994 and 1995 consist of sales to Shionogi. See "Marketing and
License Agreements -- Shionogi & Co., Ltd."
License fees were $40,000 for fiscal year 1995, compared to approximately
$2.0 million in fiscal year 1994. License fee revenues in fiscal year 1994
include $2.0 million earned in connection with a license agreement granting
exclusive marketing and distribution rights for the Company's oral ultrasound
agent in Europe. See "Business -- Legal Proceedings." The fees in fiscal year
1995 were royalties related to a non-exclusive license entered into in fiscal
year 1993 granting rights for certain of the Company's patents which it is no
longer exploiting.
23
<PAGE> 24
In fiscal years 1995 and 1994 cost of products sold totaled $1.6 million
and $580,000, resulting in gross profit margins of 10% and 45%, respectively.
The decrease in gross profit margin percentage is due to the higher proportion
of United States sales in 1995 which are currently at a negative margin due to
the high amount of fixed overhead and low amount of production volume.
Additionally, the gross profit margin for ALBUNEX sales in Japan is higher due
to the higher Japanese sales price per unit volume.
Research and development costs in fiscal year 1995 remained substantially
unchanged from fiscal year 1994. Increases in preclinical trials expenses and
the amortization of license fees paid by the Company were offset by a decrease
in compensation. Increased preclinical trials costs resulted primarily from
studies done for FS069. License fee amortization, which is calculated by using
the ratio of current contract revenues earned to total expected contract
revenues related to the licensed products, increased as a result of increased
ALBUNEX development milestones during the year.
Selling, general and administrative expenses in fiscal year 1995 amounted
to $5.9 million and was substantially unchanged from the fiscal year 1994 total
of $5.7 million.
During fiscal year 1995, the Company received a bonus from Mallinckrodt of
approximately $3.0 million related to the approval of ALBUNEX for marketing in
the United States. Under the terms of the distribution agreement with
Mallinckrodt, this bonus was awarded to MBI's employees. As a result, the
Company recorded a charge of approximately $3.0 million, included under other
expenses. Of this amount, approximately $1.7 million was paid in cash, and the
balance represented forgiveness of indebtedness. Additionally, in fiscal year
1994, the Company agreed without admitting liability to the settlement of a
class action complaint against the Company. The Company agreed to pay $3.0
million in cash (of which the Company's directors and officers liability insurer
contributed $800,000), and shares of the Company's Common Stock worth $1.5
million (172,414 shares valued at the time of distribution, March 31, 1995) into
a settlement fund. The expense related to this settlement and its related costs
is included under other expenses in fiscal year 1994.
Interest expense for fiscal years 1995 and 1994 amounted to $694,000 and
$327,000, respectively. Interest expense increased in fiscal year 1995 owing to
a note payable which the Company entered into in May 1994 to finance the
purchase of two unimproved buildings and underlying land in December 1993. The
remainder of the interest in both years consists of mortgage interest on the
Company's manufacturing building.
The decrease in interest income, from $1.9 million in fiscal year 1994 to
$1.2 million in fiscal year 1995 was due to lower average cash and marketable
securities balances as well as lower interest rates.
No tax benefit has been recognized in fiscal years 1995 or 1994 as the
Company had fully utilized its operating loss carryback ability in fiscal year
1993. As of March 31, 1995, the Company had federal and state operating loss
carryforwards of approximately $53.3 million and $25.4 million, respectively,
and realization of future tax benefits from utilization of net operating loss
carryforwards is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
On September 7, 1995, the Company entered into an amended and restated
distribution agreement and a related investment agreement with Mallinckrodt
which will provide the Company with between $33.0 million and $47.5 million.
Under the terms of the agreement, Mallinckrodt is obligated to make payments to
the Company totaling $20.0 million over four years to support clinical trials,
related regulatory submissions and associated product development of the
licensed products, which include, but are not limited to, ALBUNEX and FS069.
These payments will be made in 16 quarterly installments of $1.0 million for the
first four quarters, $1.25 million for the following eight quarters and $1.5
million for the final four quarters. The payments may be accelerated in the
event that the Company's cumulative outlays for clinical trials are in excess of
the amounts received at any point in time. However, the quarterly payments may
not be postponed. The first three quarterly payments have been received by the
Company.
The amended distribution agreement also provides for potential payments to
the Company of up to $14.5 million upon the satisfaction of certain territorial
and product development milestones. There can be no assurance, however, that all
or any of these milestones will be met.
In connection with the amended distribution agreement, the Company also
entered into an investment agreement on September 7, 1995, whereby Mallinckrodt
made an equity investment in the Company by
24
<PAGE> 25
purchasing 1,118,761 unregistered shares of Common Stock for $13.0 million. The
price paid by Mallinckrodt, $11.62 per share before related costs, represented a
40% premium over the then-prevailing market price.
Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $2.4 million, $2.5 million and $8.2 million for fiscal years 1996,
1995 and 1994, respectively. The fiscal year 1994 expenditures consisted
primarily of the purchase of two unimproved buildings and the underlying land
for $7.1 million. The fiscal years 1996 and 1995 expenditures consisted
primarily of building improvements and equipment for aseptic manufacturing
facilities being constructed for the manufacture of ALBUNEX and other products.
The Company sold the two unimproved buildings purchased in December 1993. The
sale of the buildings was completed in March 1996 for approximately $6.5 million
after deducting costs related to the sale. Approximately $4.6 million of the
proceeds from the sale was used to pay a note payable, which was subsequently
replaced with a $6.0 million note discussed below, and the remainder was added
into the Company's working capital.
In March 1996, the Company entered into a note payable with a bank for $6.0
million. The loan bears interest at a variable rate based upon the bank's prime
rate plus one percent and is payable in monthly installments of $100,000 plus
accrued interest through March 2001. The loan contains covenants relating to
cash flow coverage, minimum cash balances and requires a compensating balance of
$3.0 million. The loan is secured by the tangible assets of the Company.
The Company is currently engaged in a dispute with Shionogi. In April 1996,
the Company and Shionogi filed cross-demands for arbitration of their respective
claims against each other. The Company is seeking in excess of $45 million in
compensatory and consequential damages plus punitive damages for Shionogi's
breach of the MBI-Shionogi license and cooperative development agreement.
Shionogi is seeking in excess of $37 million plus punitive damages on its claim
that MBI has breached the agreement. The Company's dispute with Shionogi may
have the effect of interrupting or suspending sales of ALBUNEX in Japan
(approximately $264,000 in revenue to the Company for fiscal year 1996), of
further delaying the marketing of ALBUNEX in South Korea and Taiwan, and of
further delaying the development of FS069 throughout Shionogi's territory, and
carries with it the risk of monetary damages being awarded against the Company.
See "Business -- Legal Proceedings."
The Company currently leases one of its operating facilities in San Diego.
The lease requires aggregate payments of approximately $3.9 million through
fiscal year 2003.
At March 31, 1996, the Company had net working capital of $18.6 million
compared to $20.9 million at March 31, 1995. Cash, cash equivalents and
marketable securities were $20.6 million at March 31, 1996 compared to $19.7
million at March 31, 1995. For the next several years, the Company expects to
incur substantial additional expenditures associated with product development.
The Company anticipates that its existing resources, including the proceeds of
the Offering and interest thereon, plus payments under its existing
collaborative agreements, will enable the Company to fund its operations for at
least the next 24 months. The Company continually reviews its product
development activities in an effort to allocate its resources to those products
that the Company believes have the greatest commercial potential. Factors
considered by the Company in determining the products to pursue may include but
are not limited to the projected markets, potential for regulatory approval,
technical feasibility and estimated costs to bring the product to the market.
Based upon these factors, the Company may from time to time reallocate its
resources among its product development activities. The Company may pursue a
number of options to raise additional funds, including borrowings; lease
arrangements; collaborative research and development arrangements with
pharmaceutical companies; the licensing of product rights to third parties; or
additional public and private financing, as capital requirements change as a
result of strategic, competitive, technological and regulatory factors. There
can be no assurance that funds from these sources will be available on favorable
terms, if at all.
The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 1996, 1995 and 1994 and that the
impact of government regulation on the Company is not materially different from
the impact on other similar enterprises.
25
<PAGE> 26
BUSINESS
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this "Business" section and
in "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GENERAL
Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents. These
contrast agents are used to improve the real-time images of organs and body
structures, especially the heart, obtained through ultrasound examinations.
MBI's products are designed to increase the diagnostic usefulness of ultrasound
examinations through enhanced visualization of structures and vasculature, and
to reduce the need for diagnostic procedures that may be more expensive,
time-consuming, or invasive. MBI's first product, ALBUNEX, is the first and only
ultrasound contrast agent approved for marketing by the United States Food and
Drug Administration ("FDA"). ALBUNEX is used to detect heart disease by
assessing blood flow within the heart chambers and identifying the location of
the chamber borders and the movement of the chamber walls ("cardiac function").
MBI's second-generation product, FS069, is currently in Phase 3 clinical trials
for the cardiac function indication and in Phase 2 clinical trials to evaluate
its efficacy in determining whether the heart muscle is receiving an adequate
blood supply ("myocardial perfusion"). The Company believes that this
information will enable cardiologists to diagnose heart attacks and coronary
artery disease more accurately and safely than is currently feasible. The
Company is also conducting preclinical studies using FS069 to detect
abnormalities in other organs, such as the liver and kidney.
Ultrasound imaging is a widely-used and cost-effective technique to examine
soft tissues, internal body organs and blood flow. Ultrasound systems use
low-power, high-frequency sound waves that are reflected by tissues and fluids
to produce real-time images. Over 49 million ultrasound imaging procedures were
performed in the United States in 1994, of which approximately 12.5 million
procedures were used to examine the heart ("echocardiograms"). Unlike other
imaging modalities, such as magnetic resonance imaging, computed tomography and
nuclear imaging, ultrasound imaging procedures could not be performed with
contrast agents to enhance images until the approval of ALBUNEX. Non-contrast
ultrasound, while very good in delineating anatomy, often results in poor image
quality and is unable to demonstrate actual blood flow within organ tissue.
MBI's contrast agents are designed to enhance existing ultrasound
procedures by improving their ability to image blood flow and by providing
clearer images of body structures and organs. ALBUNEX and FS069 consist of human
albumin microspheres made using MBI's patented process. The microspheres are
injected intravenously into the bloodstream and transported to the heart and
other organs. Because the microspheres are highly reflective to the ultrasound
beam, organs and structures containing blood will appear brighter and clearer
than they would in the absence of the contrast agent. Albumin is a protein
naturally found in human blood and has been used for many years as a blood
expander. ALBUNEX, which has been marketed since October 1993, has been given to
over 10,000 patients with no clinically significant side effects, and FS069 has
exhibited a safety profile in clinical studies equivalent to that of ALBUNEX.
ALBUNEX permits cardiologists to see blood flow in the chambers of the
heart and the motion of the heart muscle using ultrasound. Cardiologists are
particularly interested in the chamber of the heart called the "left ventricle,"
which pumps oxygenated blood arriving from the lungs to all other parts of the
body. In approximately 10-15% of patients undergoing an echocardiogram, the wall
of the left ventricle (the "endocardial border") cannot be detected or its
location appears ambiguous on the ultrasound image. When ALBUNEX enters the left
ventricle, however, the endocardial border can be visualized because of the
reflectivity of the ALBUNEX microspheres in the blood. When the endocardial
border is visible, cardiologists can observe its motion and may be able to infer
cardiac function, which is critical in diagnosing cardiac disease, including
damage from a heart attack. While ALBUNEX is able to enter the heart chamber, it
has a
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relatively short circulation time in the body and thus is not able to enter the
heart muscle in quantities sufficient to be detected by ultrasound. Without an
agent that will enter the heart muscle, cardiologists are not able to use
ultrasound imaging directly to determine myocardial perfusion.
FS069 is designed to permit cardiologists to evaluate myocardial perfusion.
Unlike ALBUNEX, which is air-filled, FS069 microspheres contain an insoluble
gas, perfluoropropane. Because of their composition, FS069 microspheres remain
in the bloodstream for more than five minutes, as opposed to 35-40 seconds in
the case of ALBUNEX. As a result, FS069 is able to perfuse into tissues,
including the heart muscle, highlighting areas of normal and abnormal blood
flow. The Company believes that if its clinical trials for myocardial perfusion
are successful, FS069 will provide important diagnostic benefits, including
detecting areas of the heart muscle compromised due to coronary artery stenosis
as well as detecting the lack of blood flow in the heart muscle resulting from a
complete occlusion of a coronary artery (heart attack). The Company believes
that FS069 may have much greater market potential than ALBUNEX because of the
greater diagnostic importance of the indications for which it may be suitable
(such as myocardial perfusion).
MBI completed enrollment in its Phase 3 clinical trials for FS069 for
cardiac function in March 1996, and expects to file for approval for this
indication by the end of 1996. For myocardial perfusion, Phase 1 safety and
preliminary efficacy studies were completed in July 1995. In March 1996, the
Company announced that preliminary analysis of Phase 2 results indicated a 92%
concordance between diagnoses of patients with known or suspected heart disease
made using dipyridamole-stress nuclear imaging, the current perfusion "gold
standard" and dipyridamole-stress harmonic ultrasound imaging using FS069. The
Company believes that the use of FS069 in routine diagnostic as well as
emergency room procedures may significantly reduce the overall cost of patient
care by substituting ultrasound for more expensive diagnostic methods such as
nuclear imaging and by enabling more accurate screening of patients to determine
whether follow-up diagnostic or surgical procedures are required.
MBI is also developing an oral ultrasound agent, ORALEX, which may be used
to image the abdominal area for stomach lesions and pancreatic tumors. ORALEX is
currently in Phase 2 clinical trials.
MBI is collaborating with Mallinckrodt Medical, Inc. ("Mallinckrodt") in
the development and commercialization of ALBUNEX and FS069. Mallinckrodt is one
of the world leaders in the marketing of contrast imaging agents, with 1995
contrast imaging agent sales of approximately $675 million. The Company has
granted Mallinckrodt exclusive marketing rights to ALBUNEX and FS069 in the
United States and certain other territories. The relationship began in 1988 with
the execution of distribution and investment agreements pursuant to which
Mallinckrodt paid the Company $30.0 million.
The Company and Mallinckrodt expanded their original agreement in September
1995 to increase the geographic scope and to extend the exclusivity of
Mallinckrodt's marketing rights. Mallinckrodt at that time also made a $13.0
million equity investment in MBI and committed $20.0 million to the clinical
development of FS069 and related projects. MBI may receive up to an additional
$14.5 million upon meeting certain territorial and product development
milestones.
Under the distribution agreement, the Company is responsible for
manufacturing the licensed products for Mallinckrodt and is generally entitled
to payments of 40% of net product sales. The Company is responsible for
conducting clinical trials and securing regulatory approvals of the licensed
products in the United States for cardiac indications. Mallinckrodt is
responsible for conducting clinical trials and securing approvals of the
licensed products in the United States for non-cardiac indications and is
responsible for conducting all clinical trials and securing approvals in the
other countries in Mallinckrodt's territory.
BUSINESS STRATEGY
The Company's objective is to remain a world leader in the development and
commercialization of contrast imaging agents. MBI intends to achieve this
objective by implementing the following strategy.
Develop FS069 for Multiple Indications. MBI's primary clinical
developmental objective is to gain regulatory approval in the United States and
abroad for FS069 for the diagnosis of multiple cardiac indications, such as
cardiac function and myocardial perfusion. Thereafter the Company intends to
expand the
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application of FS069 by seeking approval for non-cardiac (radiology)
indications. The Company believes that the extensive knowledge that it and
Mallinckrodt have gained through the marketing of ALBUNEX regarding the
requirements of the medical and third-party payor communities may allow for the
more rapid and effective commercialization of FS069 and future products.
Maximize the Commercial Value of ALBUNEX. MBI and Mallinckrodt will
continue to collaborate to maximize the acceptance of ALBUNEX in the medical
community and among third-party payors. The Company is working with Mallinckrodt
to identify and exploit the markets and uses for which ALBUNEX is best suited,
including stress echo, fallopian tube patency and other applications. See
"Products and Markets -- ALBUNEX."
Demonstrate Cost-Effectiveness. The Company and Mallinckrodt will continue
to design studies to demonstrate the overall cost-effectiveness of using the
Company's ultrasound contrast agents. The Company believes that such studies may
establish that use of ALBUNEX, FS069 and ORALEX can significantly reduce the
overall cost of patient care by substituting ultrasound for more expensive
modalities, and by enabling more accurate screening of patients to determine
whether follow-up diagnostic or therapeutic procedures are required.
New Product Development. The Company has established significant clinical,
regulatory and manufacturing expertise in the development of ALBUNEX and FS069.
The Company intends to utilize this expertise in the development of new,
proprietary imaging products.
INDUSTRY BACKGROUND
NON-ULTRASOUND IMAGING TECHNIQUES
Since the discovery of x-rays, medical imaging has been used extensively to
diagnose and guide the treatment of diseases and injuries to internal organs.
Medical imaging can be used to identify high-risk patients, to make initial
diagnoses, to confirm diagnoses based on other information, to formulate
treatment plans, and to evaluate the effectiveness of treatment and detect the
recurrence of a medical problem. Generally, imaging improves patient care and
lowers health care costs by enabling the detection of disease or abnormal
structures not apparent by routine physical examination.
There are a variety of medical imaging methods, or "modalities," available
to the physician. The choice of modality by the physician depends on a number of
factors, including the part of the body to be imaged, the suspected condition to
be investigated, the cost of the procedure, the diagnostic usefulness of the
image and the condition of the patient. Other important factors in determining
the selection of a modality are the availability of equipment and trained
operators and the ability to schedule time on the equipment. The major
non-ultrasound modalities are:
Computed Tomography ("CT"). CT employs x-rays aimed into the body from
several different angles to create a computerized static "snapshot" image of
soft tissue and bones. CT is used extensively to image the head and neck for
injury and disease, and is also used to detect liver cancer and other
hepatobiliary diseases. CT may employ injectable contrast agents which absorb
x-rays and thereby enhance structural imaging. In 1994, approximately 21.1
million CT examinations were performed in the United States, approximately 44%
of which employed a contrast agent. While CT is effective in revealing anatomic
detail, it is expensive, does not generally provide real-time images or permit
the assessment of blood flow, and exposes patients to radiation. CT is rarely
used to image the heart.
Conventional X-ray. Familiar procedures such as chest x-rays and mammograms
use x-rays aimed from only a single angle and do not require computer
reconstruction to create an image. In 1994, approximately 5.2 million abdominal
x-rays performed in the United States employed barium as a contrast agent to
examine the gastrointestinal system. Conventional x-ray is not used to assess
heart function.
Magnetic Resonance Imaging ("MRI"). MRI creates an image by exposing the
body to a radio frequency pulse to which the body's hydrogen atoms respond in a
way detectable by the MRI equipment. This information is analyzed by computer
and a cross-sectional image is produced. MRI is used primarily to image
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soft tissues in order to detect tumors, lesions, and injuries. An accurate image
is produced, but as with CT, the images are not real-time. In addition, MRI does
not generally provide information on blood flow or perfusion of blood into
organs and tissues, and is not used to image the heart. In 1994, approximately
7.4 million MRI procedures were performed in the United States, approximately
29% of which used a contrast imaging agent. In 1994, MRI equipment cost up to $2
million.
Nuclear Imaging. Nuclear imaging requires the injection of radioactive
substances into the body. It is typically preceded by a stress echo exam. The
radiation is detected by a special camera and analyzed by computer, resulting in
a static image that does not depict blood flow. Great care is required in the
handling and disposal of radioactive contrast agents. It is used primarily to
detect cardiovascular disease, malignancies and soft-tissue tumors. It is also
the current "gold standard" used to detect myocardial perfusion. Approximately
9.1 million nuclear imaging procedures were performed in the United States in
1994, approximately 2.5 million of which were cardiac perfusion studies. In
1994, the median Health Care Finance Administration ("HCFA") reimbursement rate
for a nuclear cardiac exam was $850, excluding the cost of any preceding
echocardiogram.
X-ray Angiography. Angiography is used to visualize real-time blood flow in
the body's vasculature in order to determine the presence of blockages or
occlusions in the vessels leading to the heart prior to performing bypass
surgery or balloon angioplasty. A catheter is inserted into a vessel or directly
into the heart chamber and a contrast agent that is visible using special x-ray
detection equipment is injected. This procedure requires a specially-equipped
laboratory. It is effective in locating blockages and occlusions, but it is
expensive, invasive, and exposes the patient to x-ray radiation. In 1994,
approximately 4.5 million angiographic examinations were performed in the United
States, with a median HCFA reimbursement rate for a heart angiogram and
catheterization procedure of approximately $2,000, excluding the cost of any
preceding echocardiogram.
ULTRASOUND IMAGING
Ultrasound employs low-power, high-frequency sound waves which are directed
at the organ to be imaged by placing a generating instrument called a
"transducer" on the body near the organ. The sound waves are reflected off of
the organ or tissue back to the ultrasound machine. The ultrasound machine reads
the reflected sound waves and produces a cross-sectional real-time "moving
picture" image of the targeted organ. Ultrasound is used to image the heart,
liver, kidneys, gall bladder, pancreas, other abdominal structures, blood
vessels, and the reproductive system, and is also being investigated for use
with brain and breast examinations. Cardiac ultrasound examinations are called
"echocardiograms." Non-cardiac diagnostic ultrasound examinations are referred
to as "radiology" indications or applications. The strengths of ultrasound
include:
- Price. Ultrasound is a relatively inexpensive procedure. In 1994, the
HCFA reimbursement rate for a typical echocardiogram was approximately
$570, while that for a cardiac exam using nuclear imaging was
approximately $850. A heart angiogram and catheterization cost
approximately $2,000. The average cost of an ultrasound machine was
$120,000, while the average cost of nuclear imaging equipment was
approximately $450,000.
- Large Installed Base. There is a large installed base of ultrasound
machines throughout the world. In 1994, there were approximately 55,000
machines installed in the United States. Several large manufacturers
such as Hewlett-Packard, ATL, Acuson and Toshiba compete in the
ultrasound hardware market.
- Real-Time Images. Unlike the other imaging modalities (with the
exception of x-ray angiography), ultrasound creates a "moving picture"
of the targeted organ. The organ under study may be safely examined over
any period of time selected by the physician. This feature is especially
important in heart examinations, where the dynamics of the beating heart
are of diagnostic importance to the cardiologist.
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- Safety. The sound waves employed by ultrasound have no noticeable
medical effect on the body. The same organs or sections of the body may
be imaged repeatedly for long periods of time with no adverse effects.
Ultrasound is routinely used in fetal examinations.
- Ease of Use. Ultrasound exams are relatively simple to perform and
require little patient preparation. Unlike machines used for MRI, CT,
nuclear imaging and x-ray angiography, ultrasound machines are compact
and mobile and do not require specially-equipped facilities or housing.
Although ultrasound is a widely-used imaging modality, the visual clarity
of non-contrast-enhanced ultrasound images is generally inferior to that
obtainable using certain of the other modalities. With each of the other
modalities, contrast agents are frequently used, and in nuclear imaging and
x-ray angiography, an imaging agent is required to create the images. Until the
introduction of ALBUNEX, no imaging agents were available in the United States
for use with ultrasound.
"Conventional" ultrasound imaging sends and receives sound waves at a
single frequency; this is called the "fundamental" frequency. The Company's
products are being tested with new ultrasound techniques which may find
acceptance in diagnostic imaging over the next several years. The most
significant of these new techniques is "harmonic imaging." Researchers have
discovered that if the ultrasound machine's transducer is modified to read the
sound waves returning from the imaged area at a multiple ("harmonic") of the
outgoing fundamental frequency, and if a contrast agent is used, the resulting
image can provide more complete information on blood flow and structures in the
scanned area than is available with a standard ultrasound exam. This is because
the microspheres generate a harmonic signal significantly stronger than that
generated by the tissue, resulting in a significantly enhanced signal-to-noise
ratio. No ultrasound machines employing harmonic imaging are currently
commercially available.
PRODUCTS AND MARKETS
ALBUNEX AND FS069 MICROSPHERE TECHNOLOGY
Both ALBUNEX and FS069 are ultrasound contrast imaging agents consisting of
gas-filled human albumin microspheres manufactured using MBI's proprietary
process. They are injected into an arm vein and pass through the bloodstream to
the right atrium and ventricle of the heart, where they are pumped through the
lungs and into the left atrium and ventricle of the heart. The left ventricle is
the chamber of the heart that pumps oxygenated blood arriving from the lungs out
to the rest of the body and is the portion of the heart that is of the greatest
clinical interest in the diagnosis of heart disease.
ALBUNEX microspheres are air-filled, while FS069 microspheres are filled
with an insoluble gas, perfluoropropane. The use of ALBUNEX and FS069 as
ultrasound imaging contrast agents relies on the greater acoustic reflectivity
of the microspheres relative to blood, which does not reflect sound waves well
and is effectively invisible to ultrasound imaging, and relative to the tissues
to which the blood carries the microspheres. Areas where ALBUNEX or FS069 are
present will appear brighter and clearer than areas where no agent is present.
The contrast effect between the blood containing the microspheres and the
surrounding tissues enhances the ability to detect blood flow using ultrasound
imaging and permits the resolution of subtle differences in the density of the
target tissue structures.
ALBUNEX consists of a 5% albumin solution (in saline) in which the
air-filled microspheres are suspended. Human albumin is a protein extracted from
human blood which has been used as a blood expander for many years. ALBUNEX is
compatible with the human body and is rapidly metabolized by the liver, and has
been given to over 10,000 patients worldwide with no clinically significant side
effects. FS069, which uses a 1% albumin solution, has exhibited a safety profile
in clinical studies equivalent to that of ALBUNEX.
ALBUNEX
ALBUNEX is the first and only ultrasound contrast imaging agent approved by
the FDA. It was approved for marketing in the United States in August 1994 for
intravenous use to assess cardiac function in suboptimal (diagnostically
inconclusive) echocardiograms. ALBUNEX was approved for marketing in Japan in
October 1993 and launched shortly thereafter by Shionogi. In February 1996 the
Committee for Proprietary
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Medicinal Products of the European Agency for the Evaluation of Medicinal
Products recommended the approval of ALBUNEX (as developed by MBI's former
marketing partner Nycomed) for marketing authorization in the European Union.
See "Marketing and License Agreements" and "Government Regulation."
In 10-15% of the echocardiograms performed annually in the United States,
the location of the wall of the left ventricle, or "endocardial border," cannot
be satisfactorily visualized or its location appears ambiguous. When sufficient
numbers of ALBUNEX microspheres reach the left ventricle, the acoustical
reflectivity of ALBUNEX in the chamber permits the endocardial border to be seen
by defining the walls of the chamber, or "endocardial border delineation." This
delineation in turn permits visualization of the movement of the walls of the
chamber as the heart beats, or "regional wall motion." Information regarding
endocardial border delineation and regional wall motion are important for
diagnostic purposes. If the chamber walls appear thicker than normal or are not
moving normally, it is a potential indicator that the surrounding heart muscle
is not receiving sufficient blood or is abnormal in some other way, which, in
turn, may indicate an infarction (heart attack), stenosis (partial blockage of
an artery) or other abnormal condition.
Stress Echo. ALBUNEX is effective in assessing endocardial border
definition and regional wall motion in only approximately 60% of patients with
cardiovascular disease and other cardiac conditions when administered under
resting conditions. The Company believes that ALBUNEX improves the assessment of
cardiac function in a significantly greater percentage of patients in "stress
echo" exams. A "stress echo" exam is an echocardiogram in which the patient is
subjected to a treadmill or other stimulus that increases his or her heart rate.
The Company believes that the enhanced efficacy of ALBUNEX using stress echo is
explained by the faster passage of ALBUNEX through the lungs to the left
ventricle in the course of a stress echo exam which allows more ALBUNEX
microspheres to reach the heart chamber.
Approximately 900,000 stress echo exams were performed in the United States
in 1994, of which approximately 15-20% resulted in suboptimal images. The
Company believes that Mallinckrodt will begin a post-approval study in 1996 with
300-500 patients to assess the cost-effectiveness of using ALBUNEX in all stress
echo exams. This pharmacoeconomic study would be designed to determine whether
the increased cost of using ALBUNEX routinely in stress echo exams will be
exceeded by the savings realized through eliminating additional, more expensive
diagnostic procedures when they otherwise appear to be warranted by
false-positive or inconclusive readings of the stress echo exams.
Fallopian Tube Patency. MBI and Mallinckrodt have identified fallopian
tube patency ("FTP") as a promising radiology application for ALBUNEX.
Physicians attempting to diagnose female infertility must determine whether the
fallopian tubes are patent (open) or occluded (blocked). The two primary
procedures used to assess FTP are hysterosalpingography ("HSG") and
chromolaparoscopy. HSG involves the injection of an x-ray contrast agent or dye
into the uterus to allow observation and evaluation by x-ray of the flow through
the fallopian tubes. This procedure exposes the patient to radiation, which may
cause an adverse reaction, and also frequently requires sedation or anesthesia.
If HSG is inconclusive, a chromolaparoscopy may be ordered. This procedure
exposes the patient to the risk of bleeding, infection, injury to internal
structures, and reaction to the anesthetic.
ALBUNEX may permit the use of ultrasound imaging to assess FTP, potentially
avoiding both surgery and the introduction of radiation into the patient's
reproductive system. Mallinckrodt is currently evaluating the results of its
Phase 3 clinical trials of ALBUNEX in the United States for FTP, and the Company
believes that Mallinckrodt will file for FDA approval during the second half of
1996.
FS069
FS069 consists of perfluoropropane-filled albumin microspheres of
approximately the same size and concentration as ALBUNEX. Because
perfluoropropane is insoluble in blood, FS069's microspheres have greater
durability and remain intact in the bloodstream for over 5 minutes, versus 35 to
40 seconds for ALBUNEX. This greater durability permits more of the microspheres
to pass from the right side of the heart, through the microvasculature of the
lungs, and into the left side of the heart. As a result, FS069 is superior to
ALBUNEX in its ability to measure endocardial border delineation and regional
wall motion using
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ultrasound. More importantly, the durability of the FS069 microspheres allow
them to circulate into the heart muscle, thus permitting the assessment of
myocardial perfusion using ultrasound.
Cardiac Function. The Company believes that FS069 will be more effective
than ALBUNEX in visualizing blood flow in the chambers of the heart, including
the delineation of endocardial borders and the assessment of regional wall
motion. The Company expects that its clinical studies will demonstrate a high
success rate for this indication in cases of suboptimal chamber wall imaging in
both stressed and non-stressed patients. The Company believes that this level of
efficacy will be achieved at a much lower dose than is required for ALBUNEX,
with an equivalent safety profile. The Company has completed enrollment for its
Phase 3 clinical studies using FS069 for cardiac function.
Myocardial Perfusion. Clinical studies indicate that the longer
circulation time of FS069's perfluoropropane-filled microspheres allows a
physician to assess myocardial perfusion using ultrasound. The Company conducted
a Phase 1 safety study which demonstrated a safe dosing range of many times the
expected efficacious dose and also showed myocardial perfusion in healthy
patients using a dose as low as 0.5 cc, versus 10-20 cc for an efficacious dose
of ALBUNEX to assess cardiac function. Preliminary analysis of Phase 2 results
indicated a 92% concordance between diagnoses of patients with known or
suspected heart disease made using dipyridamole-stress nuclear imaging, the
current perfusion "gold standard," and dipyridamole-stress harmonic ultrasound
imaging using FS069. The Company's remaining Phase 2 and future Phase 3 studies
will be designed to evaluate, among other things, myocardial perfusion in
cardiac patients using ultrasound at both fundamental and harmonic frequencies.
Myocardial perfusion is important because it provides oxygenated blood to
the heart muscle. If FS069 is not detected in a portion of the heart muscle, or
not detected with the expected level of intensity, it means that a portion of
the muscle is not receiving enough blood ("ischemia"). This finding may be
diagnostic of several conditions, including coronary arterial stenosis and
myocardial infarction.
The ability rapidly to assess the condition of the heart using FS069 may
also prove efficacious and cost-effective in the emergency room and in the
subsequent treatment of heart attacks. For example, a patient arriving at the
emergency room complaining of chest pain may be quickly assessed using
ultrasound with FS069. If no perfusion defect is seen in the heart, a myocardial
infarction may be ruled out. Where a perfusion defect is detected using FS069,
the Company believes that information regarding its severity, size and location
may assist the physician in determining the patient's condition. A patient with
an extensive infarction may be sent immediately for an angiogram and even
emergency angioplasty. A patient with a less severe infarction may be given a
thrombolytic (clot-dissolving) agent. This patient may then undergo an
additional FS069 echocardiogram to see whether the affected area of the heart
muscle has reperfused; that is, whether the thrombolytic agent was successful in
treating the condition. If the FS069 echocardiogram shows that the muscle has
reperfused, the physician would not have to order any additional emergency
procedures and conventional treatment might begin. Subsequent FS069
echocardiograms may be used to assess the effectiveness of the
post-emergency-room treatment; for example, how the heart muscle has responded
to different medications, changes in diet, exercise program, weight loss and
other therapies.
The Company believes that the assessment of myocardial perfusion may also
be important in screening high-risk patients prior to general surgery or other
potentially stressful treatment regimens. For example, a surgeon may wish to
assess whether an elderly or weakened patient is capable of surviving the
particular surgery or treatment without a cardiac incident. An FS069
echocardiogram may be safely administered to assist the physician in making this
determination.
Radiology Indications. The stability of the FS069 microspheres renders the
product potentially suitable for a much greater range of indications than
ALBUNEX. In preclinical studies, FS069 has been shown to perfuse the liver,
permitting the detection of tumors and lesions using ultrasound. Preliminary
animal studies have shown FS069 is able to perfuse the kidneys, ovaries,
prostate, testes and peripheral intracranial vessels. Clinical studies are
planned to evaluate the use of FS069 in the detection of liver pathology
relative to the current imaging "gold standard" for analyzing liver pathology.
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FS069 enjoys several other potential advantages. In clinical studies, FS069
has achieved greater efficacy at a fraction of the dose of ALBUNEX required for
the assessment of cardiac function. The Company expects that this low dosage
will make FS069 attractive to the patient as well as the doctor. In addition,
FS069 uses a 1% albumin solution, compared to a 5% albumin solution required for
ALBUNEX. The lower dose required and the lesser amount of albumin used may lower
MBI's per-unit manufacturing cost and may allow for the production of more doses
of FS069 than ALBUNEX using equivalent manufacturing capacity. The stability of
the FS069 microsphere also makes the product easier to manufacture than ALBUNEX.
ORALEX
The Company is developing ORALEX, an oral ultrasound contrast agent
intended to enhance images of the abdomen, including the small bowel, stomach
lining and structures adjoining the stomach, in particular the pancreas.
Gas in the stomach interferes with ultrasound images of the abdominal area
by reflecting nearly all of the sound waves. If the ultrasound "noise" caused by
this gas can be removed, the stomach wall can be more effectively visualized and
the stomach itself can become an "acoustic window" to organs next to it which
are difficult to visualize, such as the pancreas. ORALEX is a polydextrose
solution which is administered orally and which may displace gas in the stomach
for up to 30 minutes. This period of displacement could be sufficient to permit
effective ultrasound imaging. The Company is evaluating the use of ORALEX to
make ultrasound imaging as useful for diagnostic purposes as costlier and more
complex procedures such as CT and more invasive procedures such as endoscopy.
The ability to view the pancreas is of particular interest to physicians
because pancreatic cancer is very difficult to detect at an early stage, and
current imaging modalities are not effective for this purpose. By the time
pancreatic cancer tumors are sufficiently large to be detected using CT, for
example, the cancer has progressed to the point where the patient's condition is
terminal. In 1993, there were approximately 25,000 deaths in the United States
from pancreatic cancer.
ORALEX is presently in a Phase 2 safety and efficacy study. This study,
which is expected to be completed by the end of 1996, is designed to evaluate
the use of ORALEX for the visualization of the stomach lining and the early
detection of pancreatic disease. An earlier Phase 1 study did not reveal any
clinically significant side effects.
The Company is seeking a new marketing and development partner for ORALEX.
See "Business -- Legal Proceedings." Because of the Company's primary commitment
to ALBUNEX and FS069, it has determined that it will begin Phase 3 clinical
trials for ORALEX only when it has found a collaborative partner to fund a
significant portion of the necessary clinical and regulatory activities. The
Company is in active discussions with several companies that have expressed
interest in ORALEX.
OTHER RESEARCH AND DEVELOPMENT
The Company's research and development activities seek improvements to
existing products and development of new contrast agents. The Company also
continues to develop process improvements to secure the efficient supply of its
products for developmental and commercial use.
The Company has identified a non-ultrasound imaging agent employing
iodinated triglycerides ("ITG") to target hepatocytes (liver cells) to provide a
site-specific contrast agent for CT, which is not effective in identifying the
very early stages of liver cancer even with the use of traditional iodinated
x-ray contrast agents. The Company believes that ITG may have the potential to
be a contrast agent that would make consistent early identification by CT
possible. The Company holds an exclusive license from the University of Michigan
for patents relating to the ITG technology which requires the Company to
exercise diligence in the development and commercialization of ITG. In view of
this contractual requirement, if the Company does not enter into a collaborative
development relationship with a partner and determines that it will no longer
invest its own resources in the development of ITG, the Company's license from
the University of Michigan will terminate. At present, the Company continues to
develop the product.
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MARKETING AND LICENSE AGREEMENTS
Mallinckrodt Medical, Inc. MBI's distribution agreement with Mallinckrodt
forms the basis of its product development and marketing program for ALBUNEX and
FS069.
In December 1988, the Company entered into a distribution agreement with
Mallinckrodt granting it the exclusive marketing and distribution rights for
ALBUNEX and gas-filled albumin microspheres in North and South America.
Mallinckrodt paid the Company $6.0 million and agreed to pay the Company a
further $21.0 million based on the successful completion of certain product
development and regulatory milestones. Mallinckrodt also paid the Company $3.0
million for 181,818 unregistered shares of the Company's Common Stock. Under the
distribution agreement, the Company is responsible for conducting clinical
trials and securing regulatory approvals of the licensed products in the United
States for cardiac indications, and Mallinckrodt is responsible for conducting
clinical trials and securing regulatory approvals in the United States for
non-cardiac indications and is responsible for conducting all clinical trials
and securing approvals in the other countries in Mallinckrodt's territory. The
Company manufactures all licensed products for sale to Mallinckrodt at a price
generally equal to 40% of Mallinckrodt's quarterly average selling price to end
users. If the Company declines to manufacture ALBUNEX or FS069 for Mallinckrodt
because the quarterly average selling price falls below a level specified in the
Company's distribution agreement with Mallinckrodt or the proposed initial price
in a new market or for a new indication is below the specified level, or if the
Company is unable to manufacture ALBUNEX or FS069 in sufficient quantities to
satisfy Mallinckrodt's orders on a timely basis, Mallinckrodt may exercise
certain contingent manufacturing rights. MBI will receive a royalty of 5-10% on
Mallinckrodt's sales of ALBUNEX or FS069 which Mallinckrodt has manufactured.
The distribution agreement lasts for the life of the licensed patents and, prior
to amendment in September 1995, granted Mallinckrodt exclusive rights for five
years following the first commercial sale of ALBUNEX in the United States, after
which MBI was granted the assignable right to co-market the licensed products.
In accordance with the distribution agreement, the Company undertook to acquire
license rights from a third party to a United States patent for certain related
technology. The Company acquired these rights in February 1991, and in
connection with this acquisition the Company and Mallinckrodt agreed to pay
royalties to the licensor of 0.8% and 1.2%, respectively, on the net sales of
ALBUNEX in the United States.
The Company's relationship with Mallinckrodt was strengthened and expanded
in September 1995 when the parties entered into an amended distribution
agreement. The amended agreement expands the geographic scope of Mallinckrodt's
exclusive right to market the licensed products to include all of the countries
of the world other than those covered by the Company's license agreements with
Shionogi and Nycomed and extends the duration of Mallinckrodt's exclusive rights
to the later of July 1, 2003 or three years after the date that the Company
obtains approval from the FDA to market FS069 for an intravenous myocardial
perfusion indication. Mallinckrodt agreed to pay the Company $20.0 million over
four years beginning in October 1995 to support clinical trials of FS069,
related regulatory submissions and associated product development and to pay up
to an additional $14.5 million upon the satisfaction of certain territorial and
product development milestones. Under a related investment agreement,
Mallinckrodt purchased 1,118,761 shares of the Company's Common Stock for $13.0
million at a premium of 40% above the then-prevailing market price. The amended
distribution agreement requires the Company to spend at least $10.0 million for
clinical trials to support regulatory filings with the FDA for cardiac
indications of FS069. The Company's expenditures will be made in accordance with
the directions of a joint steering committee which the Company and Mallinckrodt
have established in order to coordinate the development and regulatory approval
of FS069.
In addition, the amended distribution agreement grants the Company the
option to repurchase all of the shares of the Company's Common Stock that
Mallinckrodt purchased under the related investment agreement for $45.0 million,
subject to various price adjustments. This option is exercisable from the later
of July 1, 2000, or the date that the FDA approves FS069 for a myocardial
perfusion indication, through the later of the third anniversary of such
approval or June 30, 2003. If the Company exercises this option, the Company or
its assignee may co-market licensed products in all of the countries covered by
the amended distribution agreement.
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Shionogi & Co., Ltd. In March 1989, the Company entered into a license and
cooperative development agreement with Shionogi, of Osaka, Japan. Under this
agreement, the Company granted Shionogi exclusive marketing and distribution
rights for ALBUNEX and other gas-filled albumin microsphere products in Japan,
Taiwan and South Korea. Shionogi paid the Company $10.0 million and agreed to
pay a further $21.0 million (of which $13.0 million has been received as of the
date of this Prospectus) over the next several years based on Shionogi's
successful completion of certain product development and regulatory milestones.
Under the agreement as amended, the Company manufactures the ALBUNEX to be
marketed and distributed by Shionogi for which Shionogi pays MBI 30% of the
product price to end users. The agreement extends until the later of expiration
of the last to expire of the licensed patents or 15 years after the date that
ALBUNEX was first offered for sale in Japan. Shionogi's rights are exclusive
through October 1999, after which the Company has the assignable right to
co-market the licensed products in Shionogi's territory, subject to Shionogi's
right of first refusal to match the terms of any proposed transaction with an
assignee of those rights.
The Company is currently engaged in a dispute with Shionogi. In April 1996,
the Company and Shionogi filed cross-demands for arbitration of their respective
claims against each other. The Company is seeking in excess of $45 million in
compensatory and consequential damages plus punitive damages for Shionogi's
breach of the MBI-Shionogi license and cooperative development agreement.
Shionogi is seeking in excess of $37 million plus punitive damages on its claim
that MBI has breached the agreement. The Company's dispute with Shionogi may
have the effect of interrupting or suspending sales of ALBUNEX in Japan
(approximately $264,000 in revenue to the Company for the fiscal year ended
March 31, 1996), of further delaying the marketing of ALBUNEX in South Korea and
Taiwan, and of further delaying the development of FS069 throughout Shionogi's
territory, and carries with it the risk of monetary damages being awarded
against the Company. See "Business -- Legal Proceedings."
Nycomed Imaging AS. In December 1987, the Company entered into a license
agreement with Nycomed's predecessor, Nycomed AS, of Oslo, Norway. Under this
agreement, the Company granted Nycomed exclusive developmental, manufacturing,
and marketing rights for ALBUNEX and other gas-filled albumin microsphere
ultrasound imaging agents in the territory comprising Europe, the former Soviet
Union, Africa and the Middle East. India was later added to this territory.
While Nycomed performed substantial manufacturing and clinical development work
on ALBUNEX (called "Infoson" by Nycomed), the Company and Nycomed concluded that
their respective strategic interests were best served by the Company's
reacquisition of Nycomed's product rights, and in October 1995 the parties
entered into an amendment of their agreement that effectively returned these
rights to the Company. The Company agreed to pay Nycomed $2.7 million plus 45%
of any amounts in excess of $2.7 million that the Company receives in payment
for the transfer of marketing rights in the former Nycomed territory to a third
party. The Company also agreed to pay Nycomed a royalty of 2 1/2% on the first
$30.0 million of annual sales of licensed products and 3 1/2% on any annual
sales in excess of $30.0 million.
The Company is in an advanced stage of negotiations with a large
pharmaceutical company for the transfer of exclusive marketing rights in
Nycomed's former territory.
Feinstein License. In November 1986, the Company entered into a license
agreement under which it acquired the exclusive right to develop, use and sell
any products derived from patents and applications owned by Stephen B.
Feinstein, M.D. covering sonicated gas-filled albumin microspheres used for
imaging and any future related patents and applications. In June 1989, this
agreement was restructured. The Company paid the licensor $4.5 million as an
additional license fee and $2.0 million as a prepayment of royalties to be
earned on the first $66.7 million of sales of the licensed products in the
United States, and the royalty rate on sales of licensed products was reduced
from 6% to 3% on worldwide net sales by the Company (and United States sales by
a sublicensee) and from 2 1/2% to 1 1/4% on net sales by sublicensees outside of
the United States. Under the restructured agreement, the Company is required to
pay minimum royalties each year, increasing from $100,000 in 1994 to $600,000 in
1999 and subsequent years.
ITG Agent. In November 1991, the Company entered into an exclusive license
agreement with the University of Michigan for certain patents relating to the
Company's ITG CT agent under development. The Company paid a license fee of
$20,000 and pays an annual license maintenance fee of $15,000. The Company
agreed to pay a royalty of from 2 1/2% to 6% on net sales of licensed products,
depending upon the jurisdiction
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and status of the particular product, and also agreed to make annual minimum
royalty payments increasing from $25,000 to $150,000.
ULTRASOUND PATENTS AND TRADEMARKS
MBI considers the protection of its proprietary technologies to be material
to its business prospects. The Company pursues a comprehensive patent and
trademark prosecution program for its products in the United States and in other
countries where it believes that significant market opportunities exist.
MBI has licensed the seminal gas-filled sonicated albumin microsphere
patents, including numerous foreign equivalents, from Stephen B. Feinstein, M.D.
See "Business -- Marketing and License Agreements." MBI owns additional patents
covering ALBUNEX that broaden the original Feinstein product coverage and
certain of such patents cover MBI's continuous flow sonication manufacturing
process. The European equivalent of these patents was challenged in an
opposition proceeding brought by Andaris Ltd. In January 1996, the opposition
was decided in MBI's favor. Andaris has appealed the decision. Andaris has also
filed an opposition against MBI's ALBUNEX patent composition in Europe and
Andaris, Bracco Research SA and Eiichiro Awai have filed a similar opposition in
Japan. No hearing date has been set in these latter two oppositions.
MBI has also filed several United States and foreign patent applications
relating specifically to FS069 and associated products. The Company has received
notices of allowance of certain of the United States applications. MBI is not
aware of any adverse proceedings relating to these FS069 applications anywhere
in the world.
In addition, MBI has received a notice of allowance of a patent covering
its method of manufacturing gas-filled albumin microspheres using a milling
process currently in development. The Company believes this process may be more
reliable and efficient than the sonication process that it presently uses.
The last-to-expire of MBI's key United States patents covering ALBUNEX and
FS069 expires in 2008, subject to the payment of any required maintenance fees.
Subject to the outcome of the oppositions described above, the last-to-expire of
MBI's key European patents covering ALBUNEX and FS069 expires in 2009. If
patents issue on currently-pending applications in the United States and Europe,
MBI's patent protection for FS069 may be extended beyond 2008 and 2009,
respectively.
MBI also owns a United States patent which covers ORALEX. Its foreign
equivalents are pending.
MBI has filed patent applications on several discovery and early-stage
developmental products. MBI is uncertain whether these applications will result
in issued patents or whether the products covered thereby will be commercialized
or commercially successful, and MBI makes no representations with respect
thereto.
An issued patent grants to the owner the right to exclude others from
practicing the inventions claimed therein. In the United States, a patent filed
before July 8, 1995, is enforceable for 17 years from the date of issuance or 20
years from the deemed date of filing, whichever is longer. Patents based on
applications filed from July 8, 1995 expire 20 years from the deemed date. The
General Agreement on Tariffs and Trade provides that patents whose applications
were filed on or after June 8, 1996 are effective for 20 years from filing. This
new rule is generally regarded as unfavorable to pharmaceutical companies, where
the time period between patent filing and commercialization of the patented
product may be delayed many years because of the lengthy development cycle and
regulatory process. Some jurisdictions, including the United States, permit
pharmaceutical patent holders to seek extensions of their patents for products
subject to the regulatory process. However, there are significant limitations to
this benefit. MBI has sought to take advantage of patent term extension
procedures for its core patents and has been awarded extensions in some
jurisdictions. There can be no assurances, however, that regulatory delay, or
the failure of patent term extensions to issue, will not diminish the
effectiveness of the protection that MBI receives from its patents.
The patent position of medical and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that any claims which are included in pending or future patent
applications will be issued, that any issued patents will provide the Company
with competitive advantages or will not be challenged by third parties, or that
the existing or future patents of third parties will not have an adverse effect
on the ability of the Company to commercialize its products. Furthermore, there
can be no assurance that other companies will not independently develop similar
products, duplicate one or more of MBI's products, or design around patents that
may be issued to MBI. Litigation may be necessary to
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enforce any patents issued to the Company or to determine the scope and validity
of others' proprietary rights in court or administrative proceeding. Any
litigation or administrative proceeding could result in substantial cost to the
Company and distraction of the Company's management. An adverse ruling in any
litigation or administrative proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
The commercial success of the Company also will depend in part on the
Company's not infringing patents issued to competitors. There can be no
assurance that patents belonging to competitors will not require the Company to
alter its products or processes, pay licensing fees or cease development of its
current or future products. The Company is aware of three U.S. patents with
respect to which no assurance can be given that any ultrasound product of the
Company does not infringe under the doctrine of equivalents. Litigation may be
necessary to defend against infringement claims or to determine the scope and
validity of others' proprietary rights in court or in an administrative
proceeding. Any litigation or administrative proceeding could result in
substantial cost to the Company and distraction of the Company's management. An
adverse ruling in any litigation or administrative proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, there can be no assurance that the Company would
be able to license the other technology rights that it may require at a
reasonable cost or at all. Failure by the Company to obtain a license to any
technology that it may require to commercialize its products would have a
material adverse effect on the Company's business, financial condition, and
results of operations. In addition, to determine the priority of inventions or
patent applications the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or in
proceedings before foreign agencies, any of which could result in substantial
costs to the Company and distraction of the Company's management.
The Company has obtained registered trademarks for ALBUNEX and ORALEX in
the United States and in selected countries outside of the United States. There
can be no assurance that the registered or unregistered trademarks or trade
names of the Company will not infringe upon the rights of third parties. The
requirement to change the trademarks or trade names of the Company could entail
significant expenses and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies on unpatented trade secrets, proprietary know-how
and continuing technological innovation which it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, vendors, investigators and consultants. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets or knowhow will not
otherwise become known or independently discovered by third parties.
MANUFACTURING
The Company manufactures ALBUNEX for commercial sale in the United States
and Japan in its aseptic plant at its San Diego facility. The plant employs the
Company's patented continuous-flow sonication process in which air is introduced
to the sterile albumin solution and the mixture is subjected to high-energy
sound waves. This treatment denatures the albumin protein and facilitates a
process known as "cavitation" in which the stable air-filled microspheres are
created. The Company believes that its current facilities will provide
sufficient production capacity for ALBUNEX for the foreseeable future. The
Company has also recently completed construction of additional capacity at its
aseptic plant for the production of FS069.
The Company has been able to meet all orders for ALBUNEX received to date
from Mallinckrodt and Shionogi. Although occasional production difficulties have
been experienced, the Company believes these difficulties to be typical of the
startup commercial-scale manufacture of any new product, especially one that
relies on aseptic processes. The Company believes that its manufacturing
reliability will continue to improve and that it will not experience any
significant difficulty in manufacturing ALBUNEX in compliance with the FDA's
Good Manufacturing Practices.
Pursuant to the Company's license agreement with Nycomed, Nycomed developed
independent manufacturing capacity for Infoson (Nycomed's trade name for
ALBUNEX). The Company is currently considering whether to enter into an
agreement with Nycomed to supply Infoson to the Company or any new
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European marketing partner for commercialization in Europe. See
"Business -- Marketing and License Agreements."
The Company is also developing a method of manufacturing gas-filled albumin
microspheres using a milling process. The Company believes that this process may
be more reliable and efficient than the sonication process that it presently
uses. The milling process is in an early stage of development, and there can be
no assurance that the process will be successfully developed, that it can be
successfully integrated with its operation, or that the FDA will approve the
process.
The Company currently manufactures ORALEX in a pilot-scale plant at one of
the Company's San Diego facilities. The Company believes that this plant will be
capable of supplying sufficient quantities of the product for all future
clinical trials.
COMPETITION
In general, competition in the field of contrast agents is based on such
factors as product performance and safety, product acceptance by physicians,
patent protection, manner of delivery, ease of use, price, distribution and
marketing. The Company's products compete or may compete with new or improved
contrast agents.
The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. The Company expects to compete against a number of companies, many of
which have substantially greater financial, technical and human resources than
the Company and may be better able to develop, manufacture and market products.
In addition, many of the Company's existing or potential competitors have
extensive experience in research, preclinical testing and human clinical trials,
obtaining FDA and other regulatory approvals, and manufacturing and marketing
their products, or are allied with major pharmaceutical companies that can
afford them these advantages. As a result, competitors may develop and introduce
competitive or superior products more rapidly than the Company. While the
Company was the first to obtain FDA approval of an ultrasound contrast agent,
ALBUNEX, the Company expects that one or more of these competitors will develop
products that will be approved for an indication or indications covered by
ALBUNEX or FS069, including the assessment of cardiac function and myocardial
perfusion. One or more of these products may prove superior to the Company's
products or may be approved for sale prior to the approval for sale of FS069.
There can be no assurance that existing products or new products developed by
the Company's competitors will not be more effective than any products that may
be developed by the Company. Competitive products may render the Company's
technology and products obsolete or noncompetitive.
Any product developed by the Company that gains regulatory approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speed with which the Company can develop
products, complete clinical testing and the regulatory approval process, gain
reimbursement acceptance and supply commercial quantities of the product for
distribution to the market are expected to be important competitive factors. In
addition, the Company believes that the primary competitive factors in the
market for ultrasound imaging agents are safety, efficacy, ease of delivery,
reliability, innovation and price. The Company also believes that physician
relationships and customer support are important competitive factors.
GOVERNMENT REGULATION
The Company's diagnostic products are subject to substantial regulation by
the FDA and comparable agencies in foreign countries. Pursuant to the federal
Food, Drug and Cosmetic Act, as amended, and the regulations promulgated
thereunder, the FDA regulates the research, development, clinical testing,
manufacture, labeling, distribution and promotion of medical products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal by the FDA to review premarket
approval applications ("PMA"), withdrawal of marketing approvals, a
recommendation by the FDA that the Company not be permitted to enter into
government contracts, and criminal prosecution.
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In the United States, medical devices are classified into one of three
classes (Class I, II, or III) based on the controls deemed necessary by the FDA
reasonably to assure their safety and efficacy. ALBUNEX and FS069 have been
classified as Class III devices, which means that they must receive extensive
premarketing review in which their safety and efficacy will be evaluated,
followed by formal approval by the FDA. There is no assurance that the FDA will
continue to classify ALBUNEX and FS069 as devices rather than as drugs, but the
Company believes that it is likely that the device classification will continue
for the foreseeable future.
The process of obtaining FDA approval of new products like ALBUNEX, FS069,
and ORALEX, involves many steps. Results of laboratory and animal tests to
determine efficacy and safety, including potential toxicity, are submitted to
the FDA as part of an application for an investigational device exemption
("IDE") before clinical trials on humans can begin. After completion of clinical
trials, a PMA, in the case of medical devices, must be submitted to the FDA for
review and approval before commercial marketing and sale may begin. In addition,
a supplement to a PMA, including supporting clinical data, is required before a
company may commercialize an approved medical device for a new indication.
As Class III devices, ALBUNEX and FS069 are required to undergo the PMA
process. A PMA must be supported by valid scientific evidence which typically
includes extensive data, including preclinical and human clinical trial data to
demonstrate the safety and efficacy of the device. If human clinical trials of a
device are required, the sponsor of the trial is required to file an IDE with
the FDA prior to beginning human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and the appropriate
institutional review boards, human clinical trials may begin at a specific sites
with a specific number of patients, as specified in the approved protocol. An
IDE supplement must be submitted to and approved by the FDA before a sponsor or
an investigator may make any change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.
In addition to the results of clinical trials, the PMA must also contain
the results of all relevant bench tests, laboratory and animal studies, a
complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any relevant training methods. Upon receipt of a PMA
application, the FDA makes a threshold determination whether the application is
sufficiently complete to permit a substantive review. If the FDA determines that
the PMA application is sufficiently complete to permit a substantive review, the
FDA will accept the application for filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the PMA. An FDA review of a PMA
application generally takes one to two years from the date that the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended as a result of the FDA asking for
more information or for clarification of information already provided in the
submission. During the review period, an advisory committee, typically a panel
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by the recommendations of the advisory panel.
Toward the end of the review process, the FDA generally will conduct an
inspection of the manufacturer's facility to ensure that the facilities are in
compliance with the applicable Good Manufacturing Practices ("GMP")
requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter, or, in
some cases, an "approvable letter" containing a number of conditions which must
be met in order to obtain final approval of the PMA. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA approval letter authorizing commercial marketing of the device for
the specified indications. If the FDA's evaluation of the PMA applications or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable" letter. The FDA may also determine that
additional clinical trials are necessary, in which case PMA approval could be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the PMA. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which approval has been
sought by other companies have never been approved for marketing.
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Any devices manufactured or distributed by the Company pursuant to FDA or
approvals are subject to pervasive and continuing regulations by the FDA and
certain state agencies. The FDA often requires device manufacturers, including
the Company in the case of ALBUNEX, to conduct postmarketing surveillance
studies following PMA approval to further evaluate the safety and effectiveness
of the device. Foreign and domestic regulatory approvals, if granted, may
include significant limitations on the indicated used for which the product may
be marketed. In addition, the FDA and certain foreign regulatory authorities
impose numerous other requirements with which medical device manufactures must
comply. Product approvals could be withdrawn for failure to comply with
regulatory standards or as a result of the occurrence of unforeseen safety or
effectiveness problems following initial marketing. The Company will also be
required to adhere to applicable FDA regulations setting forth current GMP
requirements, which include testing, control and documentation requirements. The
Company is also required to register with the FDA and with state agencies such
as the California Department of Health Services as a medical device manufacturer
and to list its products with the FDA. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
other countries. Changes in existing regulations or adoption of new regulations
could prevent the Company from obtaining, or affecting the timing of, future
approvals or clearances.
The FDA and equivalent foreign agencies have significant discretion in
their conduct of each stage of the regulatory process. Adverse decisions are
effectively unappealable, and agency delays are an unfortunate fact of life for
companies they regulate.
The Company also intends to sell ALBUNEX and FS069 in foreign countries.
The time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA approval, and the requirements may differ.
In addition, there may be foreign regulatory barriers other than premarket
approval and the FDA must approve the export of devices that require a PMA but
are not yet approved domestically. ALBUNEX is currently approved for export to
Japan.
ALBUNEX was approved for commercial marketing and sale by the FDA in August
1994. It was approved for sale in Japan in October 1993, in Sweden in February
1994 and in the United Kingdom in August 1994. In February 1996 the Committee
for Proprietary Medicinal Products ("CPMP") of the European Agency for the
Evaluation of Medicinal Products recommended the approval of ALBUNEX (in its
Nycomed-developed Infoson version) for marketing authorization in the European
Union, consisting of Germany, France, Belgium, Denmark, Spain, Greece, Ireland,
Italy, Luxembourg and the Netherlands. Member countries generally follow the
recommendation of the CPMP to allow marketing for the approved product, pending
approval of labeling and, if applicable, pricing.
Labeling, advertising and other and promotional activities are subject to
scrutiny by the FDA and in certain instances by the Federal Trade Commission.
The FDA actively enforces regulations prohibiting marketing of products for
unapproved uses, sometimes called "off-label" uses. The Company and its products
are also subject to a variety of state laws and regulations in those states or
localities where its products are or will be marketed. Any applicable state or
local regulations may hinder the Company's ability to market its products in
those states or localities.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company's ability to do business.
Changes in existing requirements or the adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
on the Company's business, financial condition, or results of operations.
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THIRD PARTY REIMBURSEMENT
In the United States, the Company's products will be purchased primarily by
medical institutions which will then bill various third-party payors such as
Medicare, Medicaid and other government programs and private insurance plans. In
considering reimbursement for a new medical product, these payors must decide
both whether to cover the product and how much to pay for it.
In general, to be covered by Medicare, a health care product or service
must be "reasonable and necessary" for the diagnosis or treatment of an illness
or injury. This requirement has been interpreted to mean that the product or
service must be safe and effective, not experimental or investigational (except
under certain limited circumstances involving devices furnished pursuant to an
FDA-approved clinical trial), and appropriate. Medicaid, Blue Cross and Blue
Shield plans, commercial insurers and other third-party payors generally have
limitations on coverage that are similar to those of Medicare.
Even if a device has received approval or clearance for marketing by the
FDA, there is no assurance that Medicare or other payor will cover the device or
related services. Also, Medicare may place certain restrictions on the
circumstances in which coverage will be available. In making such coverage
determinations, the Health Care Financing Administration ("HCFA"), which
administers the Medicare program, and HCFA's contractors consider, among other
things, peer-reviewed articles concerning the safety and effectiveness of the
device, the opinions of medical specialty societies, and input from the FDA, the
National Institutes of Health, and other government agencies. There is no
assurance that the Company's products will be covered by Medicare and other
third-party payors.
Failure by hospitals and physicians to receive what they consider to be
adequate reimbursement for procedures in which the Company's products are used
would have a material adverse effect on the Company's business, financial
condition and results of operations.
FACILITIES
The Company's corporate offices and laboratory, manufacturing and warehouse
facilities occupy a total of 62,800 square feet in San Diego, California. The
Company owns a 44,000 square-foot building purchased in 1989 and leases an
additional 18,800 square-foot facility under an agreement expiring in October
1997. The Company has entered into a new lease commencing in October 1997 for
the space it currently occupies plus an additional 35,912 square feet (54,712
square feet total) expiring in September 2002. The Company anticipates that
these facilities will be sufficient to meet its needs into the foreseeable
future.
HUMAN RESOURCES
As of March 27, 1996, the Company had 136 full-time employees, of whom 34
were involved directly in scientific research and development activities. Of
these employees, 14 held Ph.D. or M.D. degrees. The Company considers its
relations with its employees to be good, and none of its employees is a party to
a collective bargaining agreement.
LEGAL PROCEEDINGS
The Company is currently engaged in a dispute with Shionogi, the Company's
marketing partner for ALBUNEX and FS069 in Japan, Taiwan and South Korea.
Negotiations between the parties to resolve their dispute by terminating the
license and cooperative development agreement on mutually acceptable terms were
unsuccessful. In February and March 1996, Shionogi and the Company respectively
served each other with notices of breach of the agreement, and in early April
1996, Shionogi purported to terminate the agreement. On April 11, 1996, Shionogi
filed a demand with the American Arbitration Association ("AAA") for arbitration
of Shionogi's claim for damages in excess of $37 million, representing
Shionogi's license fees paid under the MBI-Shionogi license and cooperative
development agreement and associated development expenses for ALBUNEX, plus
punitive damages. Shionogi claims that the Company failed to provide Shionogi
with ALBUNEX meeting the required quality and performance standards and that the
Company wrongfully attempted to withhold rights to FS069 from Shionogi. The
Company believes that Shionogi's claims are without merit and that there is no
factual or legal basis for any liability of the Company to refund any of the
license fees paid by Shionogi or to reimburse any of Shionogi's ALBUNEX
development expenses.
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The Company's dispute with Shionogi may have the effect of interrupting or
suspending sales of ALBUNEX in Japan (approximately $264,000 in revenue to the
Company for the fiscal year ended March 31, 1996), of further delaying the
marketing of ALBUNEX in South Korea and Taiwan and of further delaying the
development of FS069 throughout Shionogi's territory, and carries with it the
risk of monetary damages being awarded against the Company. On April 16, 1996,
the Company filed a demand with the AAA for arbitration of the Company's claim
for compensatory and consequential damages in excess of $45 million plus
punitive damages for Shionogi's breach of the MBI-Shionogi license and
cooperative development agreement. The Company claims that Shionogi breached its
obligations under that agreement by failing diligently to develop the market for
ALBUNEX and FS069 in its territory, failing to make a required minimum payment
of $3.0 million (less earned royalties paid) and delaying the commercialization
of ALBUNEX in its territory. The results of the arbitration proceedings cannot
be predicted. It is possible that Shionogi could be awarded some portion or all
of the damages that it is seeking. Moreover, there can be no assurance that the
Company will be awarded all or any portion of the damages that it is seeking. A
ruling adverse to MBI in the arbitration proceeding filed by Shionogi could have
a material adverse effect on the Company's business, financial condition and
results of operations. If Shionogi were awarded all of the damages that it is
seeking, the Company would have difficulty meeting its anticipated capital
requirements and might be required to reduce the scope of or eliminate its
manufacturing activities, or attempt to obtain funds by entering into
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain technologies or products that the Company would
not otherwise relinquish. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
In May 1993, the Company entered into an exclusive license agreement with
Bracco S.p.A. ("Bracco") of Milan, Italy for distribution rights to the
Company's developmental oral contrast agent in Europe and the former Soviet
Union. Bracco paid the Company a license fee of $2.0 million and agreed to
perform certain developmental obligations in the territory in preparation to
market the product. The licensed patents under the agreement did not anticipate
the development of the product that eventually became ORALEX. When ORALEX was
developed and appeared to the Company to be the agent of choice, Bracco declined
the product and demanded rescission of the agreement and the return of its
license fee. The Company denied Bracco's claims, and in January 1995 Bracco
filed a demand for arbitration. The Company filed its own demand, claiming that
Bracco had breached the agreement because it had acquired rights to a competing
agent. In November 1995, an arbitrator awarded Bracco $1.7 million plus
approximately $274,000 in interest through March 29, 1996. The Company's initial
appeal of the decision was unsuccessful but a further appeal is pending. The
amount awarded has been paid to Bracco pending the outcome of this further
appeal.
42
<PAGE> 43
MANAGEMENT
The Company's officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ---------------------------------------------
<S> <C> <C>
Kenneth J. Widder, M.D. 43 Chairman of the Board, Chief Executive
Officer
Bobba Venkatadri 52 President and Chief Operating Officer
Gerard A. Wills 39 Vice President, Finance; Chief Financial
Officer
Steven Lawson 44 Vice President, Legal Affairs; General
Counsel
James L. Barnhart, Ph.D 53 Vice President, Research and Development
Allan H. Mizoguchi, Ph.D 51 Vice President, Clinical and Regulatory
Affairs
Robert W. Brightfelt 53 Director
Charles C. Edwards, M.D. 72 Director
Gordon C. Luce 70 Director
David Rubinfien 74 Director
</TABLE>
Kenneth J. Widder, M.D., a founder of the Company, has served as the
Company's Chairman of the Board and Chief Executive Officer since July 1981. He
currently serves as a director of Titan Pharmaceuticals, Wilshire Technologies
and Digivision, Inc.
Bobba Venkatadri has served as the Company's President and Chief Operating
Officer since October 1995. He served as Executive Vice President of the
Pharmaceutical Division of Centocor, Inc., from September 1992 until he joined
the Company, and as Vice President - Operations of Centocor's Pharmaceutical
Division from March 1992 to September 1992. He was employed by Warner-Lambert
Company from 1967 until February 1992, last serving as Senior Director,
Pharmaceutical Operations, at its manufacturing facility in Vegabaja, Puerto
Rico.
Gerard A. Wills has served as the Company's Vice President - Finance since
January 1995 and its Chief Financial Officer since August 1994. He served as the
Company's Controller from February 1993 to August 1994. From 1990 until joining
the Company in February 1993, Mr. Wills served as the Corporate Manager of
Finance for Maxwell Laboratories, Inc. From 1986 through 1990 Mr. Wills was
employed by Intermark, Inc. where he last served as the Corporate Controller.
Steven Lawson has served as the Company's Vice President - Legal Affairs
and General Counsel since January 1992. From 1981 until joining the Company, Mr.
Lawson was a partner with the law firm of Johnson and Colmar in Chicago,
Illinois.
James L. Barnhart, Ph.D., has served as the Company's Vice
President - Research and Development since October 1992. He served as the
Company's Director of Research and Development from February 1988 to October
1992. From 1979 until joining the Company in February 1988, Dr. Barnhart was an
Associate Adjunct Professor at the Department of Radiology at the University of
California, San Diego School of Medicine in La Jolla, California.
Allan H. Mizoguchi, Ph.D., has served as the Company's Vice
President - Clinical and Regulatory Affairs since July 1994. He joined the
Company in June 1989 as Director of Clinical Trials and served as its Director
of Clinical Research from April 1992 until February 1994 when he was appointed
Executive Director, Clinical Affairs and Quality Assurance.
Robert W. Brightfelt has served as a director of the Company since October
1987. He joined E.I. du Pont de Nemours and Company in 1967 and has held various
management positions in Du Pont's Medical Products Department. Mr. Brightfelt
currently serves as Business Director, Diagnostics, of Du Pont's Medical
Products Group.
Charles C. Edwards, M.D., has served as a director of the Company since
March 1987. In 1969 he was appointed by President Nixon as Commissioner of the
United States Food and Drug Administration, and in 1973 he was appointed
Assistant Secretary for Health in the United States Department of Health,
Education and Welfare. In 1991 he assumed the position of President and Chief
Executive Officer at Scripps Institutes of
43
<PAGE> 44
Medicine and Science, from which he retired in July 1993. Dr. Edwards currently
serves as a director of Bergen Brunswig Corporation and as a director of
Northern Trust of California. In addition, Dr. Edwards serves on the Board of
Directors of IDEC Pharmaceutical Corporation.
Gordon C. Luce has served as a director of the Company since June 1989. Mr.
Luce joined Great American First Savings Bank in San Diego, California in 1969
as its President and Chief Executive Officer and served as its Chairman of the
Board from 1979 until his retirement in July 1990. During 1982, he was an
Alternate Delegate to the United Nations and has served as member of three
Presidential commissions. He is a former Chairman of Scripps Clinic and Research
Foundation and is a director of the Scripps Institutes of Medicine and Science.
He is also currently serving as a director of two other publicly held companies,
PS Group and All American Communications, Inc.
David Rubinfien has served as a director of the Company since December
1985. He served as President and Chief Executive Officer of Systemix, Inc. from
January 1989 until January 1991, and from 1985 to 1988 he was Chairman and Chief
Executive Officer of Microgenics Corporation in Concord, California. Mr.
Rubinfien also currently serves as a director of three other publicly held
companies: ChemTrak, Inc., Biocircuits Corporation and Matritech, Inc.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of up to 20,000,000 shares of Common Stock, par value $.01 per share.
Common Stock is the only class of stock authorized to be issued.
As of March 31, 1996, 13,296,186 shares of Common Stock were outstanding,
and there were outstanding options for a total of 2,227,955 shares of Common
Stock issued under the Company's 1993 Stock Option Plan, 1993 Outside Directors
Stock Option Plan and three earlier stock option plans. All of the outstanding
shares of Common Stock are, and the shares of Common Stock issued pursuant to
the Offering will be when issued, fully paid and non-assessable.
Holders of Common Stock are entitled to receive dividends payable if, as
and when declared by the Company's Board of Directors out of legally available
funds. In the event of the liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets of
the Company remaining after the payment of debts and expenses. Holders of Common
Stock are entitled to one vote per share for the election of directors and on
all other matters but have not cumulative voting rights in the election of
directors. The Common Stock is not redeemable or convertible, and holders of
Common Stock have no pre-emptive or subscription rights to purchase any
securities of the Company.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in which
the person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision could have an
anti-takeover effect with respect to transactions not approved in advance by the
Company's Board of Directors, including discouraging attempts that might result
in a premium over the market price for the shares of Common Stock held by
stockholders.
The Company's stock transfer agent and registrar is Continental Stock
Transfer & Trust Company, New York, New York.
44
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,896,186 shares of
Common Stock outstanding (based upon shares outstanding as of March 31, 1996).
Of these shares, approximately 14,397,579 shares including the 3,600,000 shares
sold in the Offering (or approximately 14,937,579 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction under the Securities Act. The remaining 2,498,607 shares of Common
Stock will be either unregistered shares or shares issued to officers and
directors of the Company pursuant to the exercise of options granted under the
Company's stock option plans. These shares may be sold in the open market only
if the sale is registered or qualifies for an exemption from registration under
Rule 144.
In general, Rule 144 permits a person (or persons whose shares are required
to be aggregated) to sell during any three-month period a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the issuer or the average weekly trading volume of the issuer's stock during the
four calendar weeks preceding the date of sale. As currently in effect, Rule 144
generally is available only to a person who has beneficially owned the shares in
question for at least two years. There is no holding period requirement,
however, for officers and directors who acquired their shares pursuant to the
exercise of options under a stock option plan for which a registration statement
is in effect. Rule 144 also requires compliance with certain conditions relating
to the manner of sale, notice of sale and the availability of current public
information about the issuer. A person who is not an affiliate of the issuer and
who has beneficially owned the shares in question for at least three years may
sell the stock under Rule 144 without regard to any volume limitations or any of
the other conditions of the rule.
Of the 2,498,607 shares of Common Stock which are unregistered shares or
which have been issued to officers and directors of the Company pursuant to the
exercise of options granted under the Company's stock option plans, 490,028
shares are held by the Company's officers and directors and 1,300,579 shares are
held by one stockholder, all of whom have agreed with the Underwriters that for
a period of 120 days from the date of this Prospectus, they will not sell, offer
to sell or otherwise dispose of any such shares, or any shares acquired upon the
exercise of stock options, without the prior written consent of the
Representatives of the Underwriters.
As of March 31, 1996, options to purchase a total of 2,227,955 shares were
outstanding under the Company's stock option plans, of which options for a total
of 1,079,478 shares were then exercisable. Officers and directors subject to
lock-up agreements with the Underwriters held exercisable options for 276,125
shares of Common Stock. Shares of Common Stock issued upon the exercise of such
options are available for immediate resale in the open market subject, in the
case of sales by affiliates, to the volume, manner of sale, notice of sale and
current information requirements of Rule 144.
No prediction can be made regarding the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. Moreover, no prediction can be
made regarding the number of shares of Common Stock that may be sold in the
future pursuant to Rule 144 because these sales will depend upon the market
price of the Common Stock at the time, the individual circumstances of the
sellers and other factors. Nevertheless, any sales of substantial shares of
Common Stock in the public market could have a significant adverse effect on the
market price of the Common Stock.
45
<PAGE> 46
UNDERWRITING
The Underwriters named below, for whom Donaldson, Lufkin & Jenrette
Securities Corporation, Oppenheimer & Co., Inc. and Vector Securities
International, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of an Underwriting
Agreement (the "Underwriting Agreement"), to purchase 3,600,000 shares of Common
Stock from the Company. The number of shares that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------- ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............. 1,320,000
Oppenheimer & Co., Inc........................................... 660,000
Vector Securities International, Inc............................. 660,000
Bear, Stearns & Co. Inc. ........................................ 48,000
Alex. Brown & Sons Incorporated ................................. 48,000
Cowen & Company ................................................. 48,000
Dillon, Read & Co. Inc. ......................................... 48,000
Hambrecht & Quist LLC ........................................... 48,000
Lehman Brothers Inc. ............................................ 48,000
Montgomery Securities ........................................... 48,000
Morgan Stanley & Co. Incorporated ............................... 48,000
PaineWebber Incorporated ........................................ 48,000
Robertson, Stephens & Company LLC ............................... 48,000
Salomon Brothers Inc ............................................ 48,000
Smith Barney Inc. ............................................... 48,000
UBS Securities LLC .............................................. 48,000
Black & Company, Inc. ........................................... 24,000
J. C. Bradford & Co. ............................................ 24,000
Crowell, Weedon & Co. ........................................... 24,000
EVEREN Securities, Inc. ......................................... 24,000
First of Michigan Corporation ................................... 24,000
Furman Selz LLC ................................................. 24,000
Genesis Merchant Group Securities ............................... 24,000
Interstate/Johnson Lane Corporation ............................. 24,000
McDonald & Company Securities, Inc. ............................. 24,000
Ragen MacKenzie Incorporated .................................... 24,000
Roney & Co., LLC ................................................ 24,000
Sutro & Co. Incorporated ........................................ 24,000
Tucker Anthony Incorporated ..................................... 24,000
Wessels, Arnold & Henderson L.L.C. .............................. 24,000
----------
Total.................................................. 3,600,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel and
to various other conditions. The nature of the Underwriters' obligations is such
that they are committed to purchase all 3,600,000 shares of Common Stock if any
are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock in part directly to the public initially at
the Price to the Public set forth on the cover page of this Prospectus and in
part to certain dealers at such price less a concession not in excess of $0.36
per share; that the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share on sales to other dealers; and that
after the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 540,000 additional
shares of Common Stock, at the initial Price to the Public less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. The
Underwriters may exercise this option only for the purpose of covering
overallotments, if any, incurred in connection with the sale of the shares of
Common Stock offered hereby. If the Underwriters exercise their overallotment
option, each Underwriter will become obligated, subject to certain conditions,
to purchase the
46
<PAGE> 47
same proportion of such additional shares as the number of other shares to be
purchased by that Underwriter bears to the total number of shares set forth on
the cover page of this Prospectus.
The officers and directors of the Company have agreed that, for a period of
120 days from the date of this Prospectus, they will not directly or indirectly
sell, offer to sell or otherwise dispose of any additional shares of Common
Stock without the prior written consent of the Representatives. See "Shares
Eligible for Future Sale." The Company has agreed that, for a period of 120 days
from the date of this Prospectus, it will not, without the prior written consent
of the Representatives, issue, offer for sale, sell, transfer, grant options to
purchase or otherwise dispose of any shares of its Common Stock, or securities
convertible into or exchangeable for its Common Stock, with the exceptions that
(i) the Company may grant options under its 1993 Stock Option Plan and (ii) the
Company may issue shares upon the exercise of options granted under its 1993
Stock Option Plan and other stock option plans.
The Company has agreed to indemnify the Underwriters and their respective
controlling persons against certain liabilities, including liabilities under the
Securities Act, arising out of the Offering and to contribute to payments that
the Underwriters may be required to make in respect of such liabilities.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby is being
passed upon for the Company by Johnson and Colmar, Chicago, Illinois, who serve
as the Company's outside general counsel. Certain legal matters in connection
with the Offering are being passed upon for the Underwriters by Cooley Godward
Castro Huddleson & Tatum, San Diego, California.
Craig P. Colmar, who is a partner of Johnson and Colmar, is also the
Company's Assistant Secretary. Mr. Colmar owns of record and beneficially 1,000
shares of Common Stock, and other partners of Johnson and Colmar own of record
and beneficially a further 1,200 shares. In addition, Mr. Colmar holds stock
options to purchase 45,750 shares of Common Stock. These options were granted at
option prices equal to the fair market value of the Common Stock on the dates of
grant.
EXPERTS
The audited Consolidated Financial Statements of the Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
47
<PAGE> 48
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance with
such requirements files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company's filings can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, New York, New York 10048
and 500 West Madison Street, Chicago, Illinois 60611. Copies of this material
also can be obtained from the Commission's Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "MB." Reports, proxy statements and other information concerning the
Company can be inspected at the offices of the New York Stock Exchange at 11
Wall Street, New York, New York 10005.
This Prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act. In accordance with the Commission's rules and regulations,
this Prospectus omits certain of the information in the Registration Statement
and all of its exhibits. Copies of the Registration Statement and its exhibits
may be obtained from the Commission upon payment of the prescribed fee or may be
examined without charge at the Commission's public reference facilities
described above. Statements in this Prospectus concerning the provisions of any
document are not necessarily complete, and each such statement is qualified in
its entirety by reference to the copy of the relevant document filed as an
exhibit to the Registration Statement.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents which the Company has filed with the Commission are
incorporated in this Prospectus by reference: (i) the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995 (File No. 1-10546); (ii) the
Company's Quarterly Reports on Form 10-Q for the quarterly periods ended June
30, September 30 and December 31, 1995 and the Company's amended Quarterly
Report on Form 10-Q/A for the quarterly period ended December 31, 1995; (iii)
the Company's Current Reports on Form 8-K dated September 7 and November 22,
1995, and March 21, 1996, which were respectively filed on September 25 and
December 13, 1995, and March 26, 1996; (iv) the Company's Proxy Statement dated
June 28, 1995 for the 1995 Annual Meeting of Shareholders held on September 7,
1995; and (v) the description of the Company's Common Stock in the Registration
Statement on Form 8-A which the Company filed on July 9, 1984 (Registration No.
2-83721).
All documents which the Company files with the Commission pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus but prior to the termination of the Offering to which this Prospectus
relates shall be deemed to be incorporated in this Prospectus by reference from
their respective dates of filing.
Any statement in a document incorporated or deemed to be incorporated in
this Prospectus by reference shall be deemed to be modified or superseded for
purposes of this Prospectus and the Registration Statement to the extent that a
statement in this Prospectus or the Registration Statement, or in any document
filed after the date of this Prospectus which is deemed to be incorporated in
this Prospectus by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall be incorporated or deemed to be
incorporated in this Prospectus only as so modified or superseded.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on his or her written or oral request, copies of
all or any of the documents that have been or may be incorporated in this
Prospectus by reference (excluding the exhibits to any such documents, however,
unless the exhibits are specifically incorporated in this Prospectus). Requests
for copies should be directed to Investor Relations, Molecular Biosystems, Inc.,
at the Company's offices at 10030 Barnes Canyon Road, San Diego, California
92121 (telephone number: (619) 824-2248).
48
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996............................. F-3
Consolidated Statements of Operations for the Fiscal Years Ended March 31, 1994,
1995 and 1996....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended March 31,
1994, 1995 and 1996................................................................. F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1994,
1995 and 1996....................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Molecular Biosystems, Inc.:
We have audited the accompanying consolidated balance sheets of Molecular
Biosystems, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Molecular Biosystems, Inc.
and subsidiaries as of March 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
May 6, 1996
F-2
<PAGE> 51
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3,882 $ 12,542
Marketable securities, available-for-sale (Note 2)..................... 15,836 8,028
Accounts and notes receivable.......................................... 5,180 260
License rights (Note 3)................................................ -- 3,000
Inventories............................................................ 1,394 622
Prepaid expenses and other assets...................................... 442 406
-------- --------
Total current assets........................................... 26,734 24,858
-------- --------
Property and equipment, at cost:
Building and improvements.............................................. 18,125 14,158
Equipment, furniture and fixtures...................................... 5,216 3,943
Construction in progress............................................... 2,253 941
-------- --------
25,594 19,042
Less: Accumulated depreciation and amortization........................ 5,947 5,322
-------- --------
Total property and equipment................................... 19,647 13,720
-------- --------
Other assets:
Patents and license rights, net of amortization $1,224 and $917,
respectively (Notes 6 and 8)........................................ 1,724 297
Certificate of deposit, pledged (Note 5)............................... -- 3,000
Other assets, net...................................................... 2,534 1,954
-------- --------
Total other assets............................................. 4,258 5,251
-------- --------
$ 50,639 $ 43,829
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................... $ 307 $ 1,262
Accounts payable and accrued liabilities (Notes 1 and 6)............... 5,089 3,964
Compensation accruals.................................................. 411 1,031
-------- --------
Total current liabilities...................................... 5,807 6,257
-------- --------
Long-term debt, net of current portion (Note 5).......................... 8,408 8,610
-------- --------
Commitments and contingencies (Note 6)
Stockholders' equity (Note 7):
Common Stock, $.01 par value, 20,000,000 shares authorized, 11,999,561
and 13,296,186 shares issued and outstanding, respectively.......... 120 133
Additional paid-in capital............................................. 78,422 91,468
Accumulated deficit.................................................... (41,472) (62,185)
Unrealized loss on available-for-sale securities....................... (118) (6)
Less notes receivable from sale of Common Stock........................ (469) (281)
Less 3,970 and 18,970 shares of treasury stock, at cost,
respectively........................................................ (59) (167)
-------- --------
Total stockholders' equity..................................... 36,424 28,962
-------- --------
$ 50,639 $ 43,829
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 52
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------
1994 1995 1996
<S> <C> <C> <C>
Revenues (Note 3):
Revenues under collaborative agreements.................. $ 5,713 $ 15,132 $ 2,412
Product revenues......................................... 1,056 1,769 647
License fees............................................. 2,015 40 25
-------- -------- --------
8,784 16,941 3,084
-------- -------- --------
Operating expenses:
Research and development costs (Note 3).................. 18,110 18,743 13,588
Costs of products sold................................... 580 1,608 1,553
Selling, general and administrative expenses............. 5,743 5,864 5,862
Other expenses (Note 8).................................. 4,726 3,403 3,110
-------- -------- --------
29,159 29,618 24,113
-------- -------- --------
Loss from operations..................................... (20,375) (12,677) (21,029)
Interest expense........................................... (327) (694) (786)
Interest income............................................ 1,902 1,189 1,102
-------- -------- --------
Net loss................................................... $(18,800) $(12,182) $(20,713)
======== ======== ========
Loss per common share...................................... $ (1.58) $ (1.02) $ (1.62)
======== ======== ========
Weighted average common shares outstanding................. 11,905 11,999 12,758
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 53
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED NOTES
GAIN (LOSS) RECEIVABLE
COMMON STOCK ADDITIONAL ON AVAILABLE- FROM SALE
------------------- PAID-IN ACCUMULATED FOR-SALE OF COMMON TREASURY
SHARES AMOUNT CAPITAL DEFICIT SECURITIES STOCK STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993...... 11,850,986 $119 $ 76,015 $ (10,490) $ -- $(694) $ (59) $ 64,891
Exercise of stock options.... 138,375 1 2,244 -- -- (260) -- 1,985
Net loss..................... -- -- -- (18,800) -- -- -- (18,800)
---------- ---- ------- -------- ----- ----- ----- --------
Balance at March 31, 1994...... 11,989,361 120 78,259 (29,290) -- (954) (59) 48,076
Exercise of stock options.... 10,200 -- 163 -- -- 20 -- 183
Unrealized loss on
available-for-sale
securities................. -- -- -- -- (118) -- -- (118)
Forgiveness of notes
receivable
(Note 7)................... -- -- -- -- -- 465 -- 465
Net loss..................... -- -- -- (12,182) -- -- -- (12,182)
---------- ---- ------- -------- ----- ----- ----- --------
Balance at March 31, 1995...... 11,999,561 120 78,422 (41,472) (118) (469) (59) 36,424
Unrealized gain on
available-for-sale
securities................. -- -- -- -- 112 -- -- 112
Purchase of treasury stock
(Note 7)................... -- -- (79) -- -- 188 (108) 1
Issuance of shares in
settlement of stockholder
suit (Note 6).............. 172,414 2 1,498 -- -- -- -- 1,500
Proceeds from sale of Common
Stock (Note 3)............. 1,118,761 11 11,591 -- -- -- -- 11,602
Exercise of stock options.... 5,450 -- 36 -- -- -- -- 36
Net loss..................... -- -- -- (20,713) -- -- -- (20,713)
---------- ---- ------- -------- ----- ----- ----- --------
Balance at March 31, 1996...... 13,296,186 $133 $ 91,468 $ (62,185) $ (6) $(281) $ (167) $ 28,962
========== ==== ======= ======== ===== ===== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 54
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(18,800) $(12,182) $(20,713)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 2,195 3,022 2,217
Loss on disposals of property and equipment............. 18 35 680
Write-off of license fees related to discontinued
products.............................................. -- -- 1,025
Forgiveness of note receivable from sale of Common
Stock................................................. -- 1,319 56
Changes in operating assets and liabilities:
Receivables............................................. 543 (4,889) 4,863
Inventories............................................. (445) (225) 773
Prepaid expenses and other assets....................... 272 (81) 36
Accounts payable and accrued liabilities................ 1,797 1,670 (1,626)
Compensation accruals................................... 469 (175) 620
Deferred contract revenue............................... (713) -- --
-------- -------- --------
Cash used in operating activities.................. (14,664) (11,506) (12,069)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment........................ (8,208) (2,528) (2,397)
Proceeds from sale of property and equipment............... -- -- 6,484
Additions to patents and license rights.................... (786) (634) (1,045)
(Increase) decrease in other assets........................ -- 75 (28)
Decrease in marketable securities.......................... 20,511 11,989 4,920
-------- -------- --------
Cash provided by investing activities.............. 11,517 8,902 7,934
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of Common Stock................. 1,985 183 11,638
Long-term debt proceeds.................................... -- 5,000 1,438
Principal payments on long-term debt....................... (45) (254) (281)
-------- -------- --------
Cash provided by financing activities.............. 1,940 4,929 12,795
-------- -------- --------
Increase (decrease) in cash and cash equivalents............. (1,207) 2,325 8,660
Cash and cash equivalents, beginning of year................. 2,764... 1,557 3,882
-------- -------- --------
Cash and cash equivalents, end of year....................... $ 1,557 $ 3,882 $ 12,542
======== ======== ========
Supplemental cash flow disclosures:
Income tax refund received................................. $ 473 $ -- $ --
======== ======== ========
Interest income received................................... $ 2,623 $ 1,433 $ 1,141
======== ======== ========
Interest paid.............................................. $ 321 $ 688 $ 780
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 55
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Molecular Biosystems, Inc. ("MBI" or the "Company") discovers, develops and
manufactures proprietary diagnostic ultrasound imaging agents. The Company's
continuing operations have been unprofitable since 1992. The Company does not
foresee product revenues from sales of ALBUNEX, the Company's first product and
the first ultrasound imaging agent available in the United States, as resulting
in profitable operations for the Company. Operating losses may occur for at
least the next several years due to continued requirements for research and
development, including preclinical testing and clinical trials, regulatory
activities and the high costs of commercialization activities. The magnitude of
the losses and the time required by the Company to achieve profitability are
highly dependent on the market acceptance of ALBUNEX and the regulatory approval
and market acceptance of FS069, the Company's second generation agent and are
therefore uncertain. There is no assurance that the Company will be able to
achieve profitability on a sustained basis or at all.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Molecular
Biosystems, Inc. and its wholly owned subsidiaries, Syngene, Inc. and Scan
Pharmaceuticals, Inc. Syngene Inc. and Scan Pharmaceuticals, Inc. are currently
inactive corporations. All significant intercompany accounts and transactions
have been eliminated.
Certain amounts in the prior years' financial statements and notes have
been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Research and Development Costs
All research and development costs and related special purpose equipment
costs are charged to expense as incurred.
Revenues under Collaborative Agreements
Revenues under collaborative agreements, which have been the primary source
of revenues for the Company, consist of three types of revenues. The first type,
milestone payments, is earned in connection with research activities performed
under the terms of research and development license agreements. Revenue is
recognized on the achievement of certain milestones, some of which relate to
obtaining regulatory approvals. Accordingly, the estimated dates of the
milestone achievements are subject to revision based on periodic evaluations by
the Company and its partners of the attainment of specified milestones,
including the status of the regulatory approval process. Advance payments
received in excess of amounts earned are classified as deferred contract
revenues and the resulting revenues are recognized based on work performed at a
predetermined rate or level of expense reimbursement.
Additionally, under the original Mallinckrodt agreement (see note 3),
Mallinckrodt agreed to pay a bonus to MBI equivalent to Mallinckrodt's first
year product sales of ALBUNEX at its sales price to end users
F-7
<PAGE> 56
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the product. This is the second type of revenues included under the caption
"Revenues Under Collaborative Agreements." MBI recorded this bonus each quarter
based upon Mallinckrodt's sales to its customers. Finally, under the terms of
the amended distribution agreement entered into in September 1995, Mallinckrodt
will pay the Company $20.0 million over four years to further the development of
FS069 (the Company's second-generation product) and related products. These
payments will be made in 16 quarterly installments starting at $1.0 million for
the first four quarters, $1.25 million for the following eight quarters and $1.5
million for the final four quarters. Pursuant to the agreement, half of each
payment is designated for clinical development expenses and will be recorded as
deferred revenue until such expenses are incurred, and the remaining half of
each payment will be recognized as research revenue when received.
Revenue Recognition for Product Sold
The Company recognizes revenue when goods are shipped to the customers.
Revenue Recognition for License Fees
The Company recognizes revenue when license fees are received, provided the
Company has no future obligations.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred assets and liabilities for the expected future tax
consequences of events that have been recognized differently in the Company's
financial statements or tax returns.
Cash Equivalents
Cash equivalents include marketable securities with original maturities of
three months or less when acquired. The Company has not realized any losses on
its cash equivalents.
Marketable Securities
In April 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's management has classified its investment
securities as available-for-sale and records holding gains or losses as a
separate component of stockholders' equity. The cumulative effect of the change
was not material to the Company's financial statements.
Concentration of Credit Risk
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates.
At March 31, 1995 substantially all of the Company's receivables were from
Mallinckrodt Medical, Inc., the Company's exclusive ALBUNEX distributor in the
United States.
F-8
<PAGE> 57
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market,
and consist of the following major classes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
<S> <C> <C>
Raw materials and supplies................................. $1,215 $ 558
Work in process............................................ 133 3
Finished goods............................................. 46 61
------ ------
$1,394 $ 622
====== ======
</TABLE>
Work in process and finished goods include the cost of materials, direct
labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over estimated useful lives of five
years for equipment, 31 years for buildings and improvements and the term of the
lease for leasehold improvements.
Patents and License Rights and Other Assets
Patents and license rights are amortized on the straight-line method over
their estimated useful lives of five to ten years.
In June 1989, the Company prepaid $2.0 million in royalties on the first
$66.6 million of sales of ALBUNEX and FS069 in the United States. Included in
other assets at March 31, 1995 and 1996 is approximately $1.9 million which is
the portion of this prepayment which has not yet been expensed. Additionally,
other assets at March 31, 1995 and 1996 include $4.5 million (less amortization
of $3.9 million and $4.5 million at March 31, 1995 and 1996, respectively) paid
in connection with the Company's license for the right to make, have made, use
and sell ALBUNEX and other products using the licensed patents. Amortization was
calculated generally by using the ratio of current contract revenues earned to
total expected contract revenues related to the licensed products. These license
rights were fully amortized as of March 31, 1996.
The Company periodically reevaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated lives of these
assets. The determinants used for this evaluation include management's estimate
of the asset's ability to generate positive income and cash flow as well as the
strategic significance of the respective assets.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following major
classes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
<S> <C> <C>
Reserve for class action settlement stock (Note 6)......... $1,500 $ --
Reserve for litigation (Note 6)............................ 1,000 500
License rights payable and related fees (Note 3)........... -- 2,300
Accounts payable -- trade.................................. 1,390 1,028
Other miscellaneous accruals............................... 1,199 136
------ ------
$5,089 $3,964
====== ======
</TABLE>
F-9
<PAGE> 58
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Share
Loss per common share has been computed by dividing the loss by the
weighted average number of common shares outstanding during the years. Warrants
and options do not impact the per share loss since they would be antidilutive.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. The FASB has also issued SFAS 123
"Accounting for Stock-Based Compensation." This Statement provides companies the
option to account for employee stock compensation awards based on their
estimated fair value at the date of grant, resulting in a charge to income in
the period the awards are granted, or to present pro forma footnote disclosure
describing the effect to the Company's net income and net income per share data
as if the Company had adopted SFAS 123. SFAS 121 and SFAS 123 are effective for
companies with fiscal years beginning after December 15, 1995. The Company
intends to adopt SFAS 121 and SFAS 123 in fiscal 1997. The Company has not yet
determined what impact, if any, the adoption of SFAS 121 or SFAS 123 will have
on the Company's financial statements or related disclosures thereto.
2. MARKETABLE SECURITIES
Investments are recorded at estimated fair market value, and consist
primarily of treasury securities, government agency securities and corporate
obligations. The Company has classified all of its investments as
available-for-sale securities. The following table summarizes available-for-sale
securities at March 31, 1995 (in thousands):
<TABLE>
<CAPTION>
COST NET OF
PREMIUMS/ GROSS GROSS ESTIMATED
DISCOUNTS UNREALIZED UNREALIZED FAIR
AMORTIZED GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
government agencies........................... $ 6,856 $ -- $ (85) $ 6,771
Corporate obligations........................... 9,098 1 (34) 9,065
------- ------- ------ - -------
Marketable securities available-for-sale........ $15,954 $ 1 $ (119) $15,836
======= ======= ======= =======
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities totaled $24,000 and $205,000, respectively, for the year ended March
31, 1995. The proceeds on these sales totaled $3.1 million.
The following table summarizes available-for-sale securities at March 31,
1996 (in thousands):
<TABLE>
<CAPTION>
COST NET OF
PREMIUMS/ GROSS GROSS ESTIMATED
DISCOUNTS UNREALIZED UNREALIZED FAIR
AMORTIZED GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
government agencies........................... $ 3,289 $ -- $ (8) $ 3,281
Corporate obligations........................... 4,745 2 -- 4,747
------- ------- ------ - -------
Marketable securities available-for-sale........ $ 8,034 $ 2 $ (8) $ 8,028
======= ======= ======= =======
</TABLE>
The gross realized losses on sales of available-for-sale securities totaled
$36,000 for the year ended March 31, 1996. The proceeds on these sales totaled
$5.2 million.
F-10
<PAGE> 59
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of debt and marketable
securities at March 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
COST LESS
PREMIUMS/ ESTIMATED
DISCOUNTS FAIR
AMORTIZED VALUE
<S> <C> <C>
Due in one year or less................................. $ 7,732 $ 7,734
Due after one year through three years.................. -- --
Due after three years................................... 302 294
------ ------
$ 8,034 $ 8,028
====== ======
</TABLE>
As of March 31, 1996 a $3 million certificate of deposit was held as a
compensating balance under the Company's debt agreement (See note 5).
3. SIGNIFICANT RESEARCH CONTRACTS
The Company conducts all of its research and development activities on its
own behalf. Under the terms of its collaborative research agreements, the
Company retains all ownership rights to its proprietary technologies, subject to
licensing arrangements made with its licensees.
In December 1987, December 1988 and March 1989, the Company entered into
respective agreements (the Original Agreements) with Nycomed A.S. (Nycomed), a
Norwegian corporation, Mallinckrodt Medical, Inc. (Mallinckrodt), of St. Louis,
Missouri and Shionogi & Co., Ltd. (Shionogi), a Japanese corporation, under
which the Company granted exclusive licenses, restricted to certain geographic
areas, to test, evaluate, develop and sell products covered by specified patents
of the Company relating directly to the design, manufacture or use of
microspheres for ultrasound imaging in vascular applications. The Company also
granted rights to sublicense, use, make and sell the licensed products under
specified royalty arrangements.
Under the terms of the Original Agreements, as amended, the Company earned
and received license fees of $6.5 million. The Original Agreements also provide
for total payments to the Company aggregating up to $66.5 million, to continue
product development, clinical trials, preproduction and premarketing activities
relating to the Company's ultrasound imaging contrast agents for vascular
applications. These amounts are to be received in installments based on the
achievement of certain milestones by the Company. As of March 31, 1996, the
Company had earned revenues under the above agreements in the amount of $58.5
million of which $3.5 million had not been paid as of March 31, 1995 and is
included in accounts receivable as of that date. These amounts were received in
the first quarter of fiscal 1996. The Company does not anticipate earning the
remaining $8 million in milestones, all of which relate to the Shionogi
agreement (see note 6). Under the Mallinckrodt agreement, the Company was
entitled to receive additional payments in an amount equivalent to first year
product sales, up to a maximum of $30.0 million. The Company earned $345,000
through March 31, 1995 and earned an additional $412,000 through October 1995.
This bonus was paid in December 1995 and no future income will be earned under
this provision.
In September 1995, the Company entered into an amended and restated
distribution agreement, as well as a related investment agreement, with
Mallinckrodt. Under the amended distribution agreement, the geographical scope
of Mallinckrodt's exclusive right was expanded to include all of the countries
of the world other than those covered by the Company's license agreements with
Shionogi and Nycomed. Additionally, the duration of Mallinckrodt's exclusive
right was also extended from October 1999 until the later of July 1, 2003 or
three years after the date that the Company obtains approval from the United
States Food and Drug Administration ("FDA") to market FS069 for an intravenous
myocardial perfusion indication.
F-11
<PAGE> 60
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreement will provide the Company with between $33.0 million and $47.5
million in new financing (including the $13.0 million common stock investment
discussed below). Under the terms of the agreement, Mallinckrodt will make
guaranteed payments to the Company totaling $20.0 million over four years to
support clinical trials, related regulatory submissions and associated product
development of the licensed products, which include but are not limited to
ALBUNEX and FS069. These payments will be made in 16 quarterly installments of
$1.0 million for the first four quarters, $1.25 million for the following eight
quarters and $1.5 million for the final four quarters. The payments may be
accelerated in the event that the Company's cumulative outlays for clinical
trials are in excess of the amounts received at any point in time. However, the
quarterly payments may not be postponed. As of March 31, 1996 the first two
quarterly payments had been received by the Company.
The amended distribution agreement requires the Company to spend at least
$10.0 million of the $20.0 million it receives over four years on clinical
trials to support regulatory filings with the FDA for cardiac indications of the
licensed products. The Company's expenditure of this $10.0 million will be made
in accordance with the directions of a joint steering committee which the
Company and Mallinckrodt established in order to expedite the development and
regulatory approval of FS069 by enabling the parties to share their expertise
relating to clinical trials and the regulatory approval process. The Company and
Mallinckrodt have each appointed two of the four members of the joint steering
committee.
The amended distribution agreement also provides for potential payments to
the Company of up to $14.5 million upon satisfaction of certain territorial and
product development milestones. There can be no assurance, however, that all or
any of these milestones will be met.
In connection with the amended distribution agreement, the Company also
entered into an investment agreement whereby the Company sold 1,118,761
unregistered shares of its common stock to Mallinckrodt for $13.0 million, or a
price of $11.62 per share before related costs. Combined with the 181,818 shares
of the Company's common stock that Mallinckrodt acquired in December 1988,
Mallinckrodt currently owns approximately 9.8% of the Company's issued and
outstanding shares.
In addition, the amended distribution agreement grants the Company the
option (at its own discretion) to repurchase all of the shares of the Company's
common stock that Mallinckrodt purchased under the investment agreement for
$45.0 million, subject to various price adjustments. This option is exercisable
beginning the later of July 1, 2000 or the date that the Company obtains
approval from the FDA to market FS069 for an intravenous myocardial perfusion
indication and ending on the later of June 30, 2003 or three years after the
date that the Company obtains approval from the FDA to market FS069 for an
intravenous myocardial perfusion. If the Company exercises this option, the
Company may co-market ALBUNEX, FS069 and related products in all of the
countries covered by the amended distribution agreement.
Mallinckrodt is the Company's principal strategic marketing partner for its
ALBUNEX and FS069 ultrasound contrast agents. Under the arrangements with
Mallinckrodt, Mallinckrodt has substantial control over all aspects of marketing
the Company's products in its territories.
In October 1995, the Company entered into an agreement whereby it
reacquired all rights to INFOSON (the European designation for ALBUNEX), FS069
and related products from Nycomed, the Company's European licensee. The Company
agreed to pay Nycomed $2.7 million and 45% of any amounts in excess of $2.7
million that the Company receives in payment for the transfer of marketing
rights in the former Nycomed territory to a third party. The Company also agreed
to pay Nycomed a royalty based on future sales, as defined in the agreement.
These license rights are recorded as a current asset at March 31, 1996 and
include costs associated with the reacquisition of these rights, of which
$700,000 which had been paid as of March 31, 1996 and $2.0 million which was
paid in April 1996 under this agreement. The Company intends to resell the
rights and is currently in discussions with a potential licensee for this
territory. Also included under license rights are
F-12
<PAGE> 61
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred fees of $300,000 which will be due and payable upon the signing of an
agreement with a third party for rights to this territory.
During the years ended March 31, 1994, 1995 and 1996, the Company received
contract research payments and earned revenue under the above agreements as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
<S> <C> <C> <C>
Contract payments received:
Nycomed..................................... $ -- $ 733 $ --
Mallinckrodt................................ -- 10,554 6,257
Shionogi.................................... 5,000 -- --
------ ------- ------
Total............................... $ 5,000 $11,287 $ 6,257
====== ======= ======
Contract payments earned:
Nycomed..................................... $ -- $ 733 $ --
Mallinckrodt................................ -- 14,399 2,412
Shionogi.................................... 5,713 -- --
------ ------- ------
Total............................... $ 5,713 $15,132 $ 2,412
====== ======= ======
</TABLE>
In May 1993 the Company entered into an exclusive license agreement for its
orally-administered abdominal ultrasound agent with Bracco S.p.A. of Milan,
Italy. The agreement granted Bracco exclusive marketing and distribution rights
to the product in Europe and the former Soviet Union. Under the terms of the
agreement, the Company received $2.0 million in license fees. In March 1994,
Bracco notified the Company that it desired to rescind the agreement and
demanded that the Company return the license fee (See note 6).
4. INCOME TAXES
As described in Note 1, the Company uses the asset and liability method of
computing deferred income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
The effective income tax rate on the loss before income taxes differs from
the statutory U.S. federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
<S> <C> <C> <C>
Computed statutory tax........................ $(6,392) $(3,992) $(7,036)
State income taxes............................ (1,160) (729) (1,270)
Tax exempt interest........................... (33) (5) (74)
Losses without income tax benefit............. 7,584 4,715 8,376
Other......................................... 1 11 4
------- ------- -------
Provision for income taxes.................... $ -- $ -- $ --
======= ======= =======
</TABLE>
F-13
<PAGE> 62
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 1996, the Company has deferred tax assets of approximately
$30.0 million relating to the following tax loss carryforwards for income tax
purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
<S> <C> <C>
Federal ($71,100) and state ($34,600) net operating
losses............................................. $105,700 1997-2010
Research and development credit -- federal........... $ 1,700 1997-2010
Research and development credit -- state............. $ 700 Indefinite
Alternative minimum tax credit....................... $ 300 Indefinite
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized
to offset the deferred tax assets related to the carryforwards. If realized,
approximately $2.0 million of the tax benefit for those items will be applied
directly to paid-in capital, related to deductible expenses reported as a
reduction of the proceeds from issuing common stock in connection with the
exercise of stock options.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
<S> <C> <C>
Note payable -- due 2004................................... $3,923 $3,872
Note payable -- due 2001................................... -- 6,000
Note payable -- due 2000................................... 4,792 --
------ ------
8,715 9,872
Less -- current portion.................................... 307 1,262
------ ------
$8,408 $8,610
====== ======
</TABLE>
The note payable due in 2004 bears interest at a variable rate based upon
the weighted average Eleventh District cost of funds plus 2.35 percent. The
interest rate on this note is adjusted semi-annually and was eight percent at
March 31, 1995 and 1996. The note is secured by the Company's manufacturing
facility and certain of the equipment contained therein and is payable in
monthly installments of principal and interest. As of March 31, 1996, maturities
of this note in each of the next five fiscal years are: $62,000, $67,000,
$73,000, $80,000 and $87,000.
The note payable due in 2001 bears interest at the prime rate plus one
percent (9.25 percent at March 31, 1996) and is payable in monthly installments
of $100,000 plus accrued interest through April, 2001. The loan contains
covenants relating to cashflow coverage, minimum cash balances and requires a
compensating balance of $3.0 million. The loan is secured by the tangible assets
of the Company. This note replaces a previously outstanding note (note
payable -- due 2000) which was retired in March 1996 in conjunction with the
sale of certain of the Company's buildings and underlying land. Proceeds from
the sale of the buildings were approximately $6.5 million after deducting costs
related to the sale. Approximately $4.6 million of the proceeds from the sale
was used to retire the existing note payable.
The note payable due in 2000 had an interest rate at the prime rate plus
one percent (10 percent at March 31, 1995) and was payable in monthly
installments of $20,800 plus accrued interest through April, 2000. In connection
with this financing, at March 31, 1995 the Company had a second line of credit
with available borrowings of up to $5.0 million. Both of these loans contained
covenants and were secured by the tangible assets of the Company. These notes
were refinanced in March 1996 in conjunction with the sale of certain of the
Company's buildings and underlying land. (See above note payable -- due 2001).
F-14
<PAGE> 63
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in leased premises. Terms of
the leases, including renewal options, vary by lease. Future minimum rental
commitments for all noncancellable operating leases that have initial or
remaining lease terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, AMOUNT
<S> <C>
1997........................................ $ 194
1998........................................ 426
1999........................................ 688
2000........................................ 715
2001........................................ 744
Thereafter.................................. 1,171
------
Total minimum lease payments................ $3,938
======
</TABLE>
The leases expire in fiscal 1997 and fiscal 2003 and contain renewal
provisions of up to ten years at the end of the lease terms. The Company is
obligated to pay real estate taxes, insurance and utilities on its portion of
the leased properties. Rental expense for the years ended March 31, 1994, 1995
and 1996 was $485,000, $508,000 and $350,000, respectively.
In December 1992, the Company entered into a license and collaborative
research agreement with Dendritech, Inc. and its affiliate Michigan Molecular
Institute. The license agreement granted the Company the exclusive worldwide
rights to use Dendritech's patented dendrimer technology to develop and
commercialize contrast agents for use with magnetic resonance imaging,
computerized tomography and ultrasound. Under this agreement, the Company was
committed to pay a license fee of $500,000 per year for five years beginning
December 1992. As of March 31, 1995, a total of $1.5 million in license fees had
been paid. In September 1995 the Company and Dendritech signed a license
termination agreement arising out of the Company's decision to concentrate on
its current ultrasound products. The agreement terminated all financial and
other obligations of MBI. The unamortized license fees which the Company had
previously capitalized of approximately $1.0 million were written off in the
year ended March 31, 1996 (See note 8).
The Company has entered into license agreements requiring future royalty
payments ranging from 1 1/4% to 3% of specified product sales relating to the
licensed technologies. Additionally, there is a minimum royalty payment due to
one licensor in each calendar year for the following amounts, $400,000 for 1997,
$500,000 for 1998 and $600,000 for each succeeding year.
In June 1994, the United State District Court for the Southern District of
California granted final approval to an agreement settling a class action
complaint against the Company, certain of its officers and all of the members of
its Board of Directors (Sherman v. Widder, et al., No. TS 92-1827-IEG (M)
alleging violations of the Securities Exchange Act of 1934 and California
securities laws. The Company agreed without admitting liability to pay $3.0
million in cash, and shares of MBI's common stock worth $1.5 million (172,414
shares valued as of March 31, 1995), into a settlement fund which was to be
distributed to qualifying class members. The Company's directors and officers
liability insurer contributed $800,000 of the cash payment. The expenses
associated with this settlement have been included in other expense during the
fiscal year ended March 31, 1994. Pursuant to the settlement order, the
distribution of cash and stock was administered by counsel for the plaintiff
class. Included in accrued liabilities at March 31, 1995 is a liability of $1.5
million for the issuance of this common stock. The shares were distributed to
qualifying class members in May, 1995.
In May 1993 the Company entered into an exclusive license agreement with
Bracco S.p.A. of Milan, Italy, for the distribution rights in Europe and the
former Soviet Union to the Company's proprietary oral ultrasound agent for
imaging the gastrointestinal tract. At that time Bracco paid the Company a
license fee of $2.0 million and undertook certain developmental obligations in
the territory. In March 1994, Bracco notified
F-15
<PAGE> 64
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company that it desired to rescind the agreement and demanded that the
Company return the license fee. The Company denied that Bracco was entitled to
rescind the agreement or to the return of any portion of the license fee, and
notified Bracco that it had regarded Bracco's notice of rescission as a breach
of contract. In January 1995, Bracco filed a demand for arbitration claiming
return of the $2.0 million license fee, in addition to other monetary relief.
The Company filed a response denying the material allegations of Bracco's
demand, and also filed a counterdemand asking for damages in the amount of at
least $5.5 million and other monetary relief, claiming that Bracco's purported
rescission was in bad faith and resulted from its acquisition of the exclusive
licensee of a competing agent. On November 22, 1995, the arbitrator awarded
Bracco $1.7 million plus statutory interest on a legal theory not advanced by
Bracco. MBI appealed the award to the Superior Court of Los Angeles County. The
court affirmed the award in a decision rendered on March 4, 1996. The Company
has appealed the award to the California Appellate Court, and paid the judgment
in March 1996 pending a final decision of the appeal. The Company has recognized
charges to operations aggregating approximately $2.4 million to reflect the
amount of the award, interest accrued thereon and related attorneys' fees.
Approximately $1.4 million of these charges were recorded during the year ended
March 31, 1996, and approximately $1.0 million was charged to operations in
prior years (See note 8).
The Company is currently engaged in a dispute with its licensee for Japan,
Shionogi. Shionogi has been disappointed with ALBUNEX sales in Japan and has
blamed "quality" problems. MBI denies the existence of any quality problems with
ALBUNEX and has charged Shionogi with failing to market the product properly,
failing to develop FS069, and failure to exploit the licensed products
throughout the territory. Negotiations aimed at an agreed termination of the
agreement with Shionogi broke off over Shionogi's monetary demands. As of March
31, 1996, the parties had served each other with notices of breach of the
agreement.
On April 11, 1996 Shionogi filed a demand for arbitration with the American
Arbitration Association seeking damages in excess of $37 million, representing
Shionogi's license fees paid under its license and cooperative development
agreement with the Company and additional development expenses for ALBUNEX
incurred by Shionogi, plus punitive damages. The Company believes that
Shionogi's claims are without merit, and that there is no factual or legal basis
for any liability of the Company. On April 16, 1996, the Company also filed a
demand for arbitration seeking in excess of $45 million plus punitive damages
for Shionogi's breach of its obligations under the license and cooperative
development agreement.
The results of the arbitration proceedings cannot be predicted. There can
be no assurance that the Company will be awarded all or any portion of the
damages that it is seeking. Moreover, it is possible that Shionogi could be
awarded some portion or all of the damages it is seeking. A ruling adverse to
MBI in the arbitration with respect to Shionogi's claim could have a material
adverse effect on the Company's business, financial condition and results of
operations. If Shionogi were awarded all the damages that it is seeking, the
Company would have difficulty meeting its anticipated cash requirements and may
be required to reduce the scope of or eliminate one or more of its research and
development programs, to reduce the scope of or eliminate its manufacturing
activities, or attempt to obtain funds by entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain technologies or products that the Company would not otherwise
relinquish. The Company's inability to fund its capital requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations. The dispute may also have the effect of interrupting
ALBUNEX sales in Japan, although to the best of MBI's knowledge Shionogi is
continuing to sell ALBUNEX. Net sales in Japan were approximately $264,000 for
the year ended March 31, 1996 and $688,000 for the fiscal year ended March 31,
1995. The dispute may also delay the development of FS069 in Shionogi's
territory.
While the Company believes its positions are proper and Shionogi's claims
are without merit, the ultimate resolution of this matter is uncertain at this
time. Management does not believe the resolution of this matter will have a
material adverse impact on the Company's financial position or results of
operations.
F-16
<PAGE> 65
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, no liability for potential loss, if any, has been provided for in
the accompanying Consolidated Financial Statements.
The Company is periodically a defendant in other legal actions incidental
to its business activities which may include challenges to its patent rights.
While any litigation has an element of uncertainty, the Company believes that
the outcome of any of these actions or all of them combined will not have a
materially adverse effect on its financial condition or results of operations.
7. STOCKHOLDERS' EQUITY
In June 1989, 1990 and 1991 the Company issued warrants to Nycomed for
14,381, 9,508 and 14,524 shares, respectively, exercisable through June 1994,
1995 and 1996 at $15.26, $17.56 and $14.61 per share, respectively, pursuant to
an agreement granting to Nycomed a right of first refusal to purchase additional
unregistered shares in connection with the private sale of shares by the
Company. As of June 1995, warrants for 23,889 shares had expired.
Mallinckrodt has certain registration rights with respect to the Common
Stock issued and issuable to them.
State Farm Mutual Automobile Insurance Company ("State Farm") has
registration rights under an agreement which the Company entered into in August
1990 to facilitate State Farm's purchase of Common Stock from E.I. du Pont de
Nemours and Company, the Company's collaborative partner in its now-discontinued
diagnostic DNA probe business. State Farm has certain registration rights with
respect to this Common Stock.
Common Shares Reserved
Common shares were reserved for the following purposes (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1995 1996
<S> <C> <C>
Warrants..................................................... 24 15
Options granted.............................................. 2,112 2,228
Future grants of options..................................... 1,701 1,063
----- -----
3,837 3,306
===== =====
</TABLE>
Stock Options
1993 Plans
In 1993 both the Board of Directors and the shareholders of the Company
approved the 1993 Stock Option Plan and the 1993 Outside Directors Stock Option
Plan (together, the 1993 Plans). The 1993 Plans were intended to replace the
Company's 1984 Incentive Stock Option Plan and the 1984 Nonstatutory Stock
Option Plan (together, the 1984 Plan), under which substantially all of the
options authorized to be granted have been granted. The 1993 Plans provide for
the grant of both qualified incentive stock options and nonstatutory stock
options to purchase Common Stock to employees (1993 Stock Option Plan) or non-
employee directors of the Company (1993 Outside Directors Stock Option Plan) at
no less than the fair value of the stock on the date of grant. Options granted
under these plans are exercisable per the terms specified in each individual
option, but not before one year (unless the option exercisability is accelerated
by the Company's Board of Directors), or later than ten years from the date of
grant.
F-17
<PAGE> 66
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1984 Plan
The Company had an Incentive Stock Option Plan and Nonstatutory Stock
Option Plan (together, the 1984 Plan) which provided for the grant of options to
purchase Common Stock to employees or non-employee directors of the Company at
no less than the fair value of the stock on the date of grant. Options granted
under the 1984 Plan were exercisable per the terms specified in each individual
option, but not before one year (unless the option exercisability is accelerated
by the Company's Board of Directors) or later than five years from the date of
grant. The 1984 Plan expired in July 1994 and there are no shares reserved for
future grants.
On May 11, 1995, the Board of Directors voted to offer the Company's
non-executive employees the opportunity to reprice certain stock options which
were originally granted under the 1984 Plan to the closing price on May 31,
1995. The Board approved this repricing because it believes retaining key
employees is in the best interests of the stockholders and the Company. During
the fourth quarter of fiscal 1995, following a decline in the stock price and a
restructuring which included a twenty-five percent staff reduction, key
employees were being contacted by other companies and agencies about employment
opportunities elsewhere. The Board believes the repricing of the options was the
most effective employment retention tool available.
Other option grants
The Company has granted to employees, consultants and scientific advisors
options to purchase shares of common stock. These options are exercisable per
the terms specified in each individual option and lapse five years after grant
date. The options were granted at amounts per share which were not less than the
fair market value at the date of grant.
F-18
<PAGE> 67
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information with respect to the Company's option plans is as
follows:
<TABLE>
<CAPTION>
1993 DIRECTORS' OPTION
1993 STOCK OPTION PLAN PLAN
---------------------------- ------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
<S> <C> <C> <C> <C>
Options Outstanding at March 31, 1993.... -- --
Granted.................................. 582,500 $16.63 - $22.25 20,000 $17.00
Expired or lapsed........................ (3,100) 19.13 - 20.28 --
--------- --------------- ------ ---------------
Options Outstanding at March 31, 1994.... 579,400 16.63 - 22.25 20,000 17.00
Granted.................................. 407,231 7.00 - 12.25 20,000 8.13
Expired or lapsed........................ (127,342) 8.75 - 22.25 --
--------- --------------- ------ ---------------
Options Outstanding at March 31, 1995.... 859,289 7.00 - 22.25 40,000 8.13 - 17.00
Granted.................................. 723,602 6.00 - 8.63 20,000 8.63
Exercised................................ (1,300) 7.00 - 7.38 --
Expired or lapsed........................ (104,386) 7.00 - 22.25 --
--------- --------------- ------ ---------------
Options Outstanding at March 31, 1996.... 1,477,205 6.00 - 22.25 60,000 8.13 - 17.00
--------- --------------- ------ ---------------
Options exercisable at March 31, 1996.... 454,528 40,000
--------- ------
Reserved for future grants at March 31,
1996................................... 1,022,795 40,000
--------- ------
</TABLE>
<TABLE>
<CAPTION>
1984 & OTHER STOCK OPTION
PLANS
----------------------------
OPTION PRICE
SHARES PER SHARE
<S> <C> <C>
Options Outstanding at March 31, 1993.... 1,799,385 $11.50 - $31.13
Granted.................................. 279,190 16.63 - 24.63
Exercised................................ (145,875) 11.50 - 22.50
Expired or lapsed........................ (214,360) 12.88 - 31.13
--------- ---------------
Options Outstanding at March 31, 1994.... 1,718,340 13.38 - 31.13
Granted.................................. 44,175 10.88 - 15.63
Exercised................................ (10,200) 13.75 - 16.50
Expired or lapsed........................ (539,125) 10.88 - 28.75
--------- ---------------
Options Outstanding at March 31, 1995.... 1,213,190 10.88 - 31.13
Exercised................................ (4,150) 6.38
Expired or lapsed........................ (518,290) 6.38 - 28.75
--------- ---------------
Options Outstanding at March 31, 1996.... 690,750 6.38 - 31.13
--------- ---------------
Options exercisable at March 31, 1996.... 584,950
---------
</TABLE>
Notes Receivable from Sale of Common Stock
At March 31, 1995, the Company had notes receivable from related parties of
approximately $586,000 relating to the exercise of options to purchase common
stock of the Company by officers and other employees. Of this amount,
approximately $117,000 is included in accounts and notes receivable and
represents taxes payable by the individuals at the time of these option
exercises plus accrued interest thereon, as well as accrued interest on purchase
price notes. The amounts relating to the purchase price of the common stock are
recorded as a reduction to stockholders' equity. The loans are secured by the
common stock purchased, accrue interest at a rate of 6% and are due by January
31, 1997. At March 31, 1996, the notes receivable from related parties were
approximately $370,000.
F-19
<PAGE> 68
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1995, the Company repurchased 15,000 shares of common stock
from an officer who was leaving the Company. In connection with this
transaction, a portion of his outstanding loan which was secured by the Common
Stock was forgiven. The total amount forgiven, $56,000, had previously been
included in notes receivable from sale of Common Stock.
In January 1995, the Company received an approval bonus payment of
approximately $3.0 million from Mallinckrodt. Per the Distribution Agreement
dated December 7, 1988 between Mallinckrodt and the Company, this payment was to
be distributed to "key employees." In February 1995, the Company's Board of
Directors approved the payment of bonuses of approximately $1.7 million to all
of the Company's employees. In connection with these bonuses, the Board of
Directors also approved the forgiveness of two loans (including accrued
interest) which the Company had previously extended to its chief executive and
chief operating officers to permit them to exercise certain stock options. The
total amount forgiven on the notes was $1.3 million of which $465,000 had
previously been included in notes receivable from sale of common stock and the
remainder, which represented taxes payable at the time of the option exercises
plus accrued interest, was included in accounts and notes receivable. The
approval bonus of approximately $3.0 million is included in revenues under
collaborative agreements and the expense related to the payment of the
approximately $1.7 million of bonuses, as well as the forgiveness of debt, is
included in other expenses (See notes 3 and 8).
8. OTHER EXPENSES
Other expenses include the following for the years presented:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
Legal settlements and related costs (Note 6)............. $ 4,726 $ 350 $ 1,418
Write-off of license fees related to discontinued
products (Note 6)...................................... -- -- 1,025
Loss on sale of real estate.............................. -- -- 667
Approval bonus paid by U.S. marketing partner (Note 7)... -- 3,053 --
------ ------ ------
$ 4,726 $ 3,403 $ 3,110
====== ====== ======
</TABLE>
In November 1995, the Company entered into a contract for the sale of the
two buildings and underlying land that the Company purchased in December 1993.
The sale of the buildings was completed in March 1996 (See note 5). As a result,
during the third quarter of fiscal 1996 the Company wrote-down the carrying
value of the buildings by $667,000, the net amount it estimated to be received
from the sale.
F-20
<PAGE> 69
MOLECULAR BIOSYSTEMS, INC.
A LEADER IN ULTRASOUND IMAGING AGENTS
[ARTWORK]
<PAGE> 70
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS
OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 17
Price Range of Common Stock............ 17
Dividend Policy........................ 17
Capitalization......................... 18
Dilution............................... 19
Selected Financial Data................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 21
Business............................... 26
Management............................. 43
Description of Capital Stock........... 44
Shares Eligible for Future Sale........ 45
Underwriting........................... 46
Legal Matters.......................... 47
Experts................................ 47
Available Information.................. 48
Documents Incorporated by Reference.... 48
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,600,000 SHARES
LOGO
MOLECULAR
BIOSYSTEMS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
OPPENHEIMER & CO., INC.
VECTOR SECURITIES INTERNATIONAL,
INC.
MAY 24, 1996
- ------------------------------------------------------
- ------------------------------------------------------
