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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
[ ] Transaction Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-12648
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3078632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10030 Barnes Canyon Road, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 452-0681
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Common Stock, $.01 par value registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $135,350,587 as of May 16, 1997 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported on the New York Stock Exchange).
There were 17,750,897 shares outstanding of the registrant's Common Stock as
of May 16, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Items 10, 11, 12 and 13 of this Report is
incorporated by reference to the registrant's definitive proxy statement for the
1997 Annual Meeting of Stockholders to be held August 20, 1997.
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PART I
ITEM 1. BUSINESS
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 THIS ITEM AND IN
ITEM 7, "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 ("moving
pictures") 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-Registered Trademark-, is the first
and only ultrasound contrast agent approved for marketing by the United
States Food and Drug Administration ("FDA"). ALBUNEX-Registered Trademark- 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,
OPTISON-TM- (formerly known by its code name, FS069), is under review by the
Food and Drug Administration 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 studies using OPTISON-TM-
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 51 million ultrasound imaging procedures were
performed in the United States in 1996, of which approximately 14.2 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-Registered
Trademark-. 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-Registered Trademark- and
OPTISON-TM- 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-Registered Trademark-, which has been
marketed since October 1993, has been given to over 30,000 patients with no
clinically significant side effects, and OPTISON-TM- has exhibited a safety
profile in clinical studies equivalent to that of ALBUNEX-Registered
Trademark-.
ALBUNEX-Registered Trademark- 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-Registered Trademark- enters the left ventricle, however, the
endocardial border can be visualized because of the reflectivity of the
ALBUNEX-Registered Trademark- microspheres in the blood. When the endocardial
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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-Registered Trademark- 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 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.
OPTISON-TM- is designed to permit cardiologists to evaluate myocardial
perfusion. Unlike ALBUNEX-Registered Trademark-, which is air-filled,
OPTISON-TM- microspheres contain an insoluble gas, perfluoropropane. Because of
their composition, OPTISON-TM- microspheres remain in the bloodstream for more
than 5 minutes, as opposed to 35-40 seconds in the case of ALBUNEX-Registered
Trademark-. As a result, OPTISON-TM- 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, OPTISON-TM- 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 OPTISON-TM- may have much greater market potential than ALBUNEX-Registered
Trademark- because of the greater diagnostic importance of the indications for
which it may be suitable (such as myocardial perfusion, when used in
conjunction with new ultrasound imaging modalities such as harmonic imaging).
MBI completed enrollment in its Phase 3 clinical trials for OPTISON-TM- for
cardiac function in March 1996. In October 1996, the Company filed a Pre-Market
Approval ("PMA") application with the U.S. Food and Drug Administration and on
February 24, 1997, the FDA's advisory Radiological Devices Panel recommended
approval of the Company's PMA for OPTISON-TM-. The FDA is currently enjoined
from continuing any approval or review procedures relating to the Company's PMA
until 10 days after the FDA resolves the merits of certain citizens petitions
previously filed with the FDA by competitors of the Company. See "Item 3 - Legal
Proceedings." Additionally, in March 1997, the Company received acceptance for
its OPTISON-TM- Marketing Authorization application in the European Union. 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 OPTISON-TM-. The Company believes that the use
of OPTISON-TM- 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-Registered
Trademark-, which may be used to image the abdominal area for stomach lesions
and pancreatic tumors. ORALEX-Registered Trademark- is currently in Phase 2
clinical trials.
MBI is collaborating with Mallinckrodt Medical, Inc. ("Mallinckrodt") in
the development and commercialization of ALBUNEX-Registered Trademark- and
OPTISON-TM-. 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-Registered Trademark- and OPTISON-TM- in the
United States, Europe, and certain other territories. The relationship began
in 1988 with the execution of a distribution agreement for North and South
America and a related investment agreement pursuant to which Mallinckrodt
paid the Company approximately $30.0 million.
The Company and Mallinckrodt expanded their original agreement in
September 1995 when the parties entered into an Amended and Restated
Distribution Agreement ("ARDA"). ARDA expands the geographic scope and
extends 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 OPTISON-TM- and related
projects. MBI may receive up to an additional $14.5 million upon meeting
certain territorial and product development milestones, of which $3.0 million
have been received to date. There can be no assurances, however, that future
milestones will be met.
In December 1996, the Company and Mallinckrodt amended ARDA to further
expand the geographical scope of Mallinckrodt's exclusive marketing and
distribution rights for ALBUNEX-Registered Trademark-, OPTISON-TM- and
related products. The amendment extended Mallinckrodt's exclusive territory
to include the territory that the Company had formerly licensed to Nycomed
consisting of Europe, Africa, India and parts of Asia.
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
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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 leader in the development and
commercialization of contrast imaging agents. MBI intends to achieve this
objective by implementing the following strategy.
DEVELOP OPTISON-TM- FOR MULTIPLE INDICATIONS. MBI's primary clinical
developmental objective is to gain regulatory approval in the United States and
abroad for OPTISON-TM- for the diagnosis of multiple cardiac indications, such
as cardiac function and myocardial perfusion. Thereafter the Company intends to
expand the application of OPTISON-TM- 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-Registered
Trademark- regarding the requirements of the medical and third-party payor
communities may allow for the more rapid and effective commercialization of
OPTISON-TM- and future products.
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-Registered Trademark-,
OPTISON-TM- and ORALEX-Registered Trademark- can significantly reduce the
overall cost of patient care by substituting ultrasound for more expensive
diagnostic 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-Registered
Trademark- and OPTISON-TM-. 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 1996, approximately 23.5
million CT examinations were performed in the United States, approximately 44%
of which employed a contrast agent. While CT is
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effective in revealing anatomic detail, it is expensive, does not generally
provide real-time images ("moving pictures") 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 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 1996, approximately
8.5 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
10 million nuclear imaging procedures were performed in the United States in
1994, approximately 3.0 million of which were cardiac perfusion studies. In
1996, 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 1996,
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 advantages 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.
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- LARGE INSTALLED BASE. There is a large installed base of ultrasound
machines throughout the world. In 1995, there were approximately
56,000 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.
- 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-Registered Trademark-, 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, although
currently not widely available, 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. Acuson's Sequoia-Registered
Trademark- system currently in use was designed to perform harmonic imaging.
Hewlett-Packard Company's Sonos 2500 LE is currently undergoing 510k review by
the Food and Drug Administration for its harmonic-imaging capabilities.
PRODUCTS AND MARKETS
ALBUNEX-Registered Trademark- AND OPTISON-TM- MICROSPHERE TECHNOLOGY
Both ALBUNEX-Registered Trademark- and OPTISON-TM- 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-Registered Trademark- microspheres are air-filled, while
OPTISON-TM- microspheres are filled with an insoluble gas, perfluoropropane. The
use of ALBUNEX-Registered Trademark- and OPTISON-TM- 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-Registered Trademark- or
OPTISON-TM- 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
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blood flow using ultrasound imaging and permits the resolution of subtle
differences in the density of the target tissue structures.
ALBUNEX-Registered Trademark- 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-Registered Trademark- is compatible with the human body and is
rapidly metabolized by the liver, and has been given to over 30,000 patients
worldwide with no clinically significant side effects. OPTISON-TM-, which uses a
1% albumin solution, has exhibited a safety profile in clinical studies
equivalent to that of ALBUNEX-Registered Trademark-.
ALBUNEX-Registered Trademark-
ALBUNEX-Registered Trademark- 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-Registered
Trademark- was approved for marketing in Japan in October 1993 and launched
shortly thereafter by Shionogi & Co., Ltd. ("Shionogi"). In February 1996 the
Committee for Proprietary Medicinal Products of the European Agency for the
Evaluation of Medicinal Products recommended the approval of ALBUNEX-Registered
Trademark- (as developed by MBI's former marketing partner Nycomed Imaging AS)
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-Registered Trademark- microspheres reach the left ventricle,
the acoustical reflectivity of ALBUNEX-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- using stress echo is
explained by the faster passage of ALBUNEX-Registered Trademark- through the
lungs to the left ventricle in the course of a stress echo exam which allows
more ALBUNEX-Registered Trademark- microspheres to reach the heart chamber.
FALLOPIAN TUBE PATENCY. MBI and Mallinckrodt have identified fallopian
tube patency ("FTP") as a promising radiology application for ALBUNEX-Registered
Trademark-. 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-Registered Trademark- 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. In February of 1997, Mallinckrodt
received unanimous recommendation for approval from the Radiology Device
Advisory Panel of the United States Food and Drug Administration for
ALBUNEX-Registered Trademark- for assessment of FTP. Mallinckrodt received an
approvable letter on March 20, 1997 from the FDA for ALBUNEX-Registered
Trademark- for the assessment of FTP.
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OPTISON-TM-
OPTISON-TM- consists of perfluoropropane-filled albumin microspheres of
approximately the same size and concentration as ALBUNEX-Registered Trademark-.
Because perfluoropropane is insoluble in blood, the microspheres in OPTISON-TM-
have greater durability and remain intact in the bloodstream for over 5 minutes,
versus 35 to 40 seconds for ALBUNEX-Registered Trademark-. 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, OPTISON-TM- is superior to ALBUNEX-Registered Trademark- in
its ability to measure endocardial border delineation and regional wall motion
using ultrasound. More importantly, the durability of the OPTISON-TM-
microspheres allow them to circulate into the heart muscle and may permit the
assessment of myocardial perfusion using ultrasound.
CARDIAC FUNCTION. Clinical studies have demonstrated that OPTISON-TM- is
more effective than ALBUNEX-Registered Trademark- in visualizing blood flow
in the chambers of the heart, including the delineation of endocardial
borders and the assessment of regional wall motion. Clinical studies
demonstrated a high success rate for this indication in cases of suboptimal
chamber wall imaging in both stressed and non-stressed patients. OPTISON-TM-
has demonstrated efficacy at a much lower dose than is required for
ALBUNEX-Registered Trademark-, with an equivalent safety profile. The Company
received an unconditional recommendation for approval from the Radiology
Device Panel of the FDA for OPTISON-TM-.
MYOCARDIAL PERFUSION. Clinical studies indicate that the longer
circulation time of the perfluoropropane-filled microspheres in OPTISON-TM-
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-Registered Trademark- to assess cardiac function.
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 OPTISON-TM-. 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 OPTISON-TM- 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 OPTISON-TM-
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 OPTISON-TM-. If no perfusion defect is seen in the heart, a
myocardial infarction may be ruled out. Where a perfusion defect is detected
using OPTISON-TM-, 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 OPTISON-TM- 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 OPTISON-TM-
echocardiogram shows that the muscle has reperfused, the physician would not
have to order any additional emergency procedures and conventional treatment
might begin. Subsequent OPTISON-TM- 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 OPTISON-TM-
echocardiogram may be safely administered to assist the physician in making this
determination.
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Commercialization of OPTISON-TM- for myocardial perfusion may require the
conversion of present ultrasound equipment to harmonic imaging frequencies.
Although the Company is aware of efforts to develop commercial harmonic modules
for attachment to existing ultrasound machines as well as efforts to develop new
harmonic imaging machinery by several hardware manufacturers, there can be no
assurance that any of these current efforts will be successfully commercialized.
RADIOLOGY INDICATIONS. The stability of the OPTISON-TM- microspheres
renders the product potentially suitable for a much greater range of indications
than ALBUNEX-Registered Trademark-. In preclinical studies, OPTISON-TM- has been
shown to perfuse the liver, permitting the detection of tumors and lesions using
ultrasound. Preliminary animal studies have shown OPTISON-TM- is able to perfuse
the kidneys, ovaries, prostate, testes and peripheral intracranial vessels.
Clinical studies are planned to evaluate the use of OPTISON-TM- in the detection
of liver pathology relative to the current imaging "gold standard" for analyzing
liver pathology.
OPTISON-TM- enjoys several other potential advantages. In clinical studies,
OPTISON-TM- has achieved greater efficacy at a fraction of the dose of
ALBUNEX-Registered Trademark- required for the assessment of cardiac function.
The Company expects that this low dosage will make OPTISON-TM- attractive to the
patient as well as the doctor. In addition, OPTISON-TM- uses a 1% albumin
solution, compared to a 5% albumin solution required for ALBUNEX-Registered
Trademark-. 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 OPTISON-TM- than ALBUNEX-Registered Trademark- using equivalent
manufacturing capacity. The stability of the OPTISON-TM- microsphere also makes
the product easier to manufacture than ALBUNEX-Registered Trademark-.
ORALEX-Registered Trademark-
The Company is developing ORALEX-Registered Trademark-, 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-Registered Trademark-
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-Registered Trademark- 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-Registered Trademark- is presently in a Phase 2 safety and efficacy
study. This study, which is expected to be completed by the end of 1997 is
designed to evaluate the use of ORALEX-Registered Trademark- 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 marketing and development partner for
ORALEX-Registered Trademark-. Because of the Company's primary commitment to
ALBUNEX-Registered Trademark- and OPTISON-TM-, it has determined that it will
begin Phase 3 clinical trials for ORALEX-Registered Trademark- only when it has
found a collaborative partner to fund a significant portion of the necessary
clinical and regulatory activities.
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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 and is actively pursuing a marketing and development
partner.
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-Registered Trademark- and OPTISON-TM-.
In December 1988, the Company entered into a distribution agreement with
Mallinckrodt granting it the exclusive marketing and distribution rights for
ALBUNEX-Registered Trademark- 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-Registered Trademark- or OPTISON-TM- 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-Registered Trademark- or OPTISON-TM- 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-Registered
Trademark- or OPTISON-TM- 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-Registered Trademark- 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-Registered Trademark- in the United States.
The Company's relationship with Mallinckrodt was strengthened and expanded
in September 1995 when the parties entered into an Amended and Restated
Distribution Agreement ("ARDA"). ARDA 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 then
existing 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
OPTISON-TM- 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 OPTISON-TM-,
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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.
ARDA requires the Company to spend at least $10.0 million for clinical
trials to support regulatory filings with the FDA for cardiac indications of
OPTISON-TM-. 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 OPTISON-TM-.
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. In addition, ARDA 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 OPTISON-TM-
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 ARDA.
In December 1996, the Company and Mallinckrodt amended ARDA to expand the
geographical scope of Mallinckrodt's exclusive marketing and distribution rights
for ALBUNEX-Registered Trademark-, OPTISON-TM- and related products. The
amendment extended Mallinckrodt's exclusive territory to include the territory
that the Company had formerly licensed to Nycomed consisting of Europe, Africa,
India and parts of Asia. Under the amendment to ARDA, Mallinckrodt agreed to pay
fees of up to $12.9 million plus 40 percent of product sales to cover royalties
and manufacturing. Mallinckrodt made an initial payment of $7.1 million,
consisting of reimbursement to the Company of $2.7 million that the Company paid
to Nycomed to reacquire the exclusive product rights in Nycomed's territory,
payment of $3 million to the Company under the terms of ARDA upon the extension
of Mallinckrodt's exclusive rights to Nycomed's former territory, and payment of
$1.4 million to Nycomed in satisfaction of the Company's obligation to pay 45%
of any amounts that the Company receives in excess of $2.7 million upon the
licensing of the former Nycomed territory to a third party. Of the remaining
$5.8 million that may be paid, Mallinckrodt will pay $4 million to the Company
(upon the achievement of the specified product development milestone) and $1.8
million to Nycomed (representing 45% of the $4 million payment to the Company).
There can be no assurance, however, that this milestone will be satisfied.
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-Registered Trademark- 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
had been paid as of March 31, 1996) over the next several years based on
Shionogi's successful completion of certain product development and regulatory
milestones. In September 1996, the Company and Shionogi entered into an
agreement pursuant to which the Company reacquired all product rights from
Shionogi. Under this agreement, which also settled pending claims by the
parties against each other, the Company paid $3 million to Shionogi and will pay
an additional $5.5 million over the next three years. See "Item 3 -- 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-Registered Trademark- 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-Registered Trademark- (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 21/2% on the first $30.0 million of annual sales of
licensed products and 31/2% on any annual sales in excess of $30.0 million.
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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 21/2% to 11/4% 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 21/2% to 6% on net sales of licensed products,
depending upon the jurisdiction and status of the particular product, and also
agreed to make annual minimum royalty payments increasing from $25,000 to
$150,000.
PATENTS AND TRADEMARKS
The Company considers the protection of its proprietary technologies to be
material to its business prospects. The Company pursues a comprehensive program
of patent and trademark prosecution for its products both in the United States
and in other countries where the Company believes that significant market
opportunities exist.
The Company has an exclusive license to certain United States and foreign
patents relating to gas-filled sonicated albumin microspheres from Steven B.
Feinstein, M.D. See "Business - Marketing and Licensing Agreements - Feinstein
License." The Company itself owns additional United States and foreign patents
covering ALBUNEX-Registered Trademark- that broaden the product coverage of its
license. Certain of these additional patents cover the Company's continuous flow
sonication manufacturing process. The European equivalents of these
manufacturing patents were challenged in an opposition proceeding brought by
Andaris Ltd. which was decided in the Company's favor in January 1996. Andaris
has appealed the decision. Andaris has also filed an opposition against the
Company's ALBUNEX-Registered Trademark- composition patent in Europe, and
Andaris and two other parties have filed a similar opposition in Japan. No
hearing date has been set in these latter two oppositions.
The Company has also filed several United States and foreign patent
applications relating specifically to OPTISON-TM- and associated products. The
Company has received notices of allowances of certain of the United States
applications. The Company is not aware of any opposition proceedings relating to
its foreign applications.
The Company has received a patent covering its method of manufacturing
gas-filled albumin microspheres using a milling process under development. The
Company believes that this process may be more reliable and efficient than the
sonication process that the Company currently uses. The Company has also
received patents on other perfluorocarbon-based technology.
The Company owns a United States patent covering ORALEX-Registered
Trademark- and has several foreign applications pending. The Company has also
filed patent applications relating to several early-stage development products.
The Company is uncertain whether these applications will result in issued
patents or whether the covered products can or will be commercialized.
The last-to-expire of the Company's key United States patents covering
ALBUNEX-Registered Trademark-and OPTISON-TM- expires in 2008, and subject to
the outcome of the oppositions previously described, the last-to-expire of the
Company's key European patents covering ALBUNEX-Registered Trademark- and
OPTISON-TM- expires in 2009. If patents issue on the Company's pending
applications, the Company's patent protection for OPTISON-TM- will be extended
beyond 2008 in the United States and beyond 2009 in Europe. In the United
States, a patent issued on an application filed before June 8, 1995 is
enforceable for 17 years from the date of issuance or 20 years from the
effective date of filing, whichever is longer. A patent issued
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on an application filed on or after June 8, 1995 is enforceable for 20 years
from the effective date of filing.
The patent position of medical and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the Company will receive patents for all or any of the claims
included in its pending or future patent applications, that any issued patents
will provide the Company with competitive advantages or will not be challenged
by third parties, or that existing or future patents of third parties will not
have an adverse effect on the Company's ability to commercialize its products.
Moreover, there can be no assurance that third parties will not independently
develop similar products, duplicate one or more of the Company's products or
design around the Company's patents.
The Company's commercial success also will depend in part upon the
Company's not infringing patents issued to third parties. There can be no
assurance that patents issued to third parties will not require the Company
to alter its products or manufacturing processes, pay licensing fees, or
cease development of its current or future products.
Litigation or administrative proceedings may be necessary to enforce the
Company's patents, to defend the Company against infringement claims or to
determine the priority, scope and validity of the proprietary rights of third
parties. Any such litigation or administrative proceedings could result in a
substantial cost to the Company, and an unfavorable outcome could have a
material adverse effect on the Company's business, financial condition and
results of operation. Moreover, there can be no assurance that, in the event
of an unfavorable outcome in any litigation or administrative proceedings
involving infringement claims against the Company, the Company would be able
to license any proprietary rights that it requires on acceptable terms or at
all. The Company's failure to obtain a license that it requires to
commercialize one of its products could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has become aware of several United States patents issued to
other companies covering various attributes of perfluorocarbon-containing
imaging agents such as OPTISON-TM-. Certain of these companies also are
pursuing foreign patent protection. Some of these companies are developing or
may be developing ultrasound contrast imaging agents that would compete with
OPTISON-TM-.
The patents and patent applications of these other companies involve a
number of complex legal and factual issues that are currently unresolved. The
Company believes that there may be a substantial overlap among many of the
claims in their patents and that it is likely that there will be administrative
proceedings or litigation in the United States and abroad to adjudicate their
conflicting rights. The Company believes that it could become a party to one or
more of these actions, which could take several years to conclude and could
result in a substantial cost to the Company.
The Company believes that, for a variety of reasons, its commercialization
of OPTISON-TM- will not infringe any valid patent held by one of these other
companies. Depending upon the particular patent claim, these reasons include
(i) differences between OPTISON-TM- and the subject of the claim, (ii) the
invalidity of the claim due to the existence of prior art, (iii) the inadequacy
of the claim's specifications and (iv) lack of enablement. The Company intends
to challenge the validity of any such patent granted to one of the other
companies if the patent is asserted against the Company, and the Company will
enforce its own patents if any product of one of the other companies infringes
the Company's patent claims.
If any patent granted to one of the other companies is asserted against the
Company, litigation or administrative proceedings may be necessary to defend the
Company against infringement claims or to determine the priority, scope and
validity of the other company's proprietary rights. Any such litigation or
administrative proceedings could result in a substantial cost to the Company;
and given the complexity of the legal and factual issues, the inherent
vicissitudes and uncertainty of litigation, and other factors, there can be no
assurance of a favorable outcome. An unfavorable outcome could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, there can be no assurance that, in the event of an
unfavorable outcome, the Company would be able to obtain a license to any
proprietary rights that may be necessary to commercialize OPTISON-TM-, either on
acceptable terms or at all. If the Company were required to obtain a license
necessary to commercialize OPTISON-TM-, the Company's failure or
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inability to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has obtained registered trademarks for "ALBUNEX" and "ORALEX"
in the United States and in various foreign countries. Additionally Malinckrodt
has filed for a trademark for "OPTISON". There can be no assurance that the
Company's registered or unregistered trademarks and trade names will not
infringe on the proprietary rights of third parties.
The Company also relies on unpatented trade secrets, proprietary know-how
and continuing technological innovation which it seeks to protect by, in part,
confidentiality agreements with its employees, consultants, investigators and
others. There can be no assurance that these agreements will not be breached,
that the Company would have an adequate remedy for any breach or that the
Company's trade secrets or know-how will not otherwise become known or
independently discovered by third parties.
MANUFACTURING
The Company manufactures ALBUNEX-Registered Trademark- for commercial sale
in the United States and Japan in its aseptic plant at its principal 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-Registered Trademark- for the foreseeable future. The Company has also
completed construction of additional capacity at its aseptic plant for the
production of OPTISON-TM- and believes that this new facility will provide
production capacity for the foreseeable future.
The Company has been able to meet all orders for ALBUNEX-Registered
Trademark- received to date from Mallinckrodt. 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-Registered
Trademark- in compliance with the FDA's Good Manufacturing Practices.
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 the Company's operations, or that the FDA will
approve the process.
The Company currently manufactures ORALEX-Registered Trademark- 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
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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-Registered
Trademark-, 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-Registered Trademark- or OPTISON-TM-, 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 OPTISON-TM-. 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.
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-Registered Trademark-
and OPTISON-TM- 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 can be no
assurance that the FDA will continue to classify ALBUNEX-Registered Trademark-
and OPTISON-TM- as devices rather than as drugs. See "Item 3 - Legal
Proceedings."
On April 14, 1997, three lawsuits were filed by Bracco Diagnostics, Inc.,
DuPont Merck Pharmaceutical Co., ImaRx Pharmaceutical Corp. and Sonus
Pharmaceuticals, Inc. against the United States Food and Drug Administration
(the "FDA") seeking a preliminary and permanent injunction to keep the FDA from
approving the Company's pre-market approval application ("PMA") for OPTISON-TM-.
The lawsuits allege that the FDA acted in an arbitrary and capricious manner in
its review of the parties' ultrasound contrast agents and requested the FDA to
review all ultrasound contrast agents in a consistent manner.
On April 21, 1997, United States District Court Judge Paul L. Friedman of
the United States District Court for the District of Columbia entered an order
enjoining the FDA from continuing any approval or review procedures relating to
the Company's PMA for OPTISON-TM-, the Company's second-generation contrast
agent for cardiac ultrasound imaging, until 10 days after the FDA resolves the
merits of citizen petitions previously filed with the FDA by the plaintiffs.
These citizen petitions requested the FDA to regulate all ultrasound imaging
contrast agents either as drugs (as the plaintiff's contrast agents under
development are currently classified) or as medical devices (as the Company's
ALBUNEX-Registered Trademark- and OPTISON-TM- are currently classified). On
February 24, 1997, the FDA's advisory Radiological Devices Panel had recommended
approval of the Company's PMA for OPTISON-TM-. As described in Judge Friedman's
opinion
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accompanying his order, the purpose of the order was to grant "a limited
injunction to preserve the status quo pending a decision by the FDA as to how to
treat all ultrasound contrast agents, whether as medical devices or as drugs, or
to provide a rational explanation for the different treatment of the products at
issue". Judge Friedman's order thus identically enjoins the FDA from continuing
any approval or review procedures relating to any of the plaintiff's respective
products until 10 days after the FDA resolves the merits of the plaintiff's
citizen petitions.
The process of obtaining FDA approval of new products like
ALBUNEX-Registered Trademark-, OPTISON-TM-, and ORALEX-Registered Trademark-,
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-Registered Trademark- and OPTISON-TM- 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.
Any devices manufactured or distributed by the Company pursuant to FDA
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-Registered Trademark-, to conduct
postmarketing surveillance studies following PMA approval to
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further evaluate the safety and effectiveness of the device. Foreign and
domestic regulatory approvals, if granted, may include significant limitations
on the indicated use 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-Registered Trademark- and
OPTISON-TM- 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-Registered Trademark- is currently approved for export to Japan.
Labeling, advertising and other 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.
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
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<PAGE>
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 third-party payors 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.
EMPLOYEES
As of March 31, 1997, the Company had 140 full-time employees, including 7
officers. Approximately 35 of the Company's employees 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.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
In February and March 1996, Shionogi, the Company's former marketing
partner for ALBUNEX-Registered Trademark- and OPTISON-TM- in Japan, Taiwan
and South Korea, and the Company respectively served each other with notices
of breach of the MBI-Shionogi license and cooperative development agreement,
and in early April 1996, Shionogi purported to terminate the agreement. In
April 1996, Shionogi filed a demand with the American Arbitration Association
("AAA") for arbitration of Shionogi's claim for damages. The Company in turn
filed a demand with AAA for arbitration of the Company's claims for
compensatory and consequential damages.
In September 1996, the Company and Shionogi entered into a settlement
agreement and mutual release ("Settlement Agreement"), whereby the parties
settled all the issues pending in the arbitration without an admission of
liability or fault by either party. Under the terms of the Settlement
Agreement, the Company reacquired all of its rights to manufacture, market and
sell ALBUNEX-Registered Trademark- and OPTISON-TM- in the territory, consisting
of Japan, South Korea
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and Taiwan previously licensed to Shionogi. Pursuant to the Settlement
Agreement, the Company paid $3 million to Shionogi and will pay an additional
$5.5 million over the next three years.
On April 14, 1997, three lawsuits were filed by Bracco Diagnostics, Inc.,
DuPont Merck Pharmaceutical Co., ImaRx Pharmaceutical Corp. and Sonus
Pharmaceuticals, Inc. against the United States Food and Drug Administration
(the "FDA") seeking a preliminary and permanent injunction to keep the FDA from
approving the Company's pre-market approval application ("PMA") for OPTISON-TM-.
The lawsuits allege that the FDA acted in an arbitrary and capricious manner in
its review of the parties' ultrasound contrast agents and requested the FDA to
review all ultrasound contrast agents in a consistent manner.
On April 21, 1997, United States District Court Judge Paul L. Friedman of
the United States District Court for the District of Columbia entered an order
enjoining the FDA from continuing any approval or review procedures relating to
the Company's PMA for OPTISON-TM- until 10 days after the FDA resolves the
merits of citizen petitions previously filed with the FDA by the plaintiffs.
These citizen petitions requested the FDA to regulate all ultrasound imaging
contrast agents either as drugs (as the plaintiff's contrast agents under
development are currently classified) or as medical devices (as the Company's
ALBUNEX-Registered Trademark- and OPTISON-TM- are currently classified). On
February 24, 1997, the FDA's advisory Radiological Devices Panel had recommended
approval of the Company's PMA for OPTISON-TM-. As described in Judge Friedman's
opinion accompanying his order, the purpose of the order was to grant "a limited
injunction to preserve the status quo pending a decision by the FDA as to how to
treat all ultrasound contrast agents, whether as medical devices or as drugs, or
to provide a rational explanation for the different treatment of the products at
issue". Judge Friedman's order thus identically enjoins the FDA from continuing
any approval or review procedures relating to any of the plaintiff's respective
products until 10 days after the FDA resolves the merits of the plaintiff's
citizen petitions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information concerning the names, ages and titles of the
Company's executive officers as of the date of this report, is included in
accordance with General Instruction G(3) of Form 10-K:
NAME AGE POSITION
Kenneth J. Widder, M.D. . . 44 Chairman of the Board
Bobba Venkatadri. . . . . . 53 President and Chief Executive Officer
Gerard A. Wills . . . . . . 40 Vice President, Finance, Chief Financial
Officer
James L. Barnhart, Ph.D . . 54 Vice President, Research
Allan H. Mizoguchi, Ph.D. . 52 Vice President, Clinical and Quality
William I. Ramage, D. Phil. 43 Vice President, Marketing
Howard Dittrich, M.D. . . . 43 Vice President, Research/Medical &
Regulatory Affairs
As of March 31, 1997, Dr. Widder also served as the Company's Chief
Executive Officer and Mr. Venkatadri served as the Company's Chief Operating
Officer. The other officers held the offices as shown above.
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.
Prior to May 1997, Dr. Widder also served as the Company's Chief Executive
Officer. He currently serves as a director of Titan Pharmaceuticals, Wilshire
Technologies, and Digivision, Inc.
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BOBBA VENKATADRI has served as the Company's President and Chief Executive
Officer since May 1997. He served as the Company's President and Chief
Operating Officer from October 1995 until May 1997. Mr. Venkatadri 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, most recently
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 and
Chief Financial Officer since January 1995. He served as the Company's Chief
Financial Officer from August 1994 to January 1995 and as its 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.
JAMES L. BARNHART, PH.D., has served as the Company's Vice President -
Research since November 1996. He served as the Company's Vice President of
Research and Development from October 1992 to November 1996 and as 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 Affairs and Quality Assurance 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.
WILLIAM I. RAMAGE, D. PHIL., has served as the Company's Vice President -
Marketing since September 1996. From 1979 to 1996, he was employed by DuPont
Merck Pharmaceutical Company where he served as Vice President of Business
Development and Customer Services of the Radiopharmaceutical Division from 1995
to 1996 and Director of Business Segments from 1994 to 1995. From 1979 to 1994,
he served in other management positions with DuPont Merck in Billerica, MA,
Houston, TX and Wilmington, DE.
HOWARD DITTRICH, M.D., has served as the Company's Vice President -
Research/Medical & Regulatory Affairs since November 1996. He served as the
Company's Executive Director of Medical Affairs from May 1996 to November 1996.
He served as a Consultant to the Company from 1989 to 1996. Dr. Dittrich was a
full-time faculty member of the University of California, San Diego, Department
of Medicine from 1984 to May 1996. Currently, Dr. Dittrich practices part-time
with the University of California, San Diego where he holds an appointment as
Clinical Professor of Medicine.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MB." As of May 1, 1997, there were approximately 2,102 holders of
record of the Company's Common Stock, representing approximately 9,273
beneficial owners. The Company has not paid dividends on its Common Stock. The
following table sets forth the quarterly high and low last sale price for a
share of the Company's Common Stock for the three fiscal years ended March 31,
1997, 1996, and 1995, respectively, as reported by the New York Stock Exchange.
FISCAL 1997 HIGH LOW
---- ---
First Quarter (4/1 to 6/30) 11-7/8 8-1/2
Second Quarter (7/1 to 9/30) 9-1/8 7-1/2
Third Quarter (10/1 to 12/31) 8-3/4 6-1/2
Fourth Quarter (1/1 to 3/31) 14-1/2 7
FISCAL 1996 HIGH LOW
---- ---
First Quarter (4/1 to 6/30) 8 6-1/4
Second Quarter (7/1 to 9/30) 10 6-1/4
Third Quarter (10/1 to 12/31) 9-1/2 6
Fourth Quarter (1/1 to 3/31) 10 6-3/8
FISCAL 1995 HIGH LOW
---- ---
First Quarter (4/1 to 6/30) 18 10-7/8
Second Quarter (7/1 to 9/30) 13-7/8 9-5/8
Third Quarter (10/1 to 12/31) 14-1/8 9-1/8
Fourth Quarter (1/1 to 3/31) 11-3/8 7
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
FISCAL YEARS ENDED MARCH 31, 1993 1994 1995 1996 1997
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Revenues under collaborative
agreements $ 3,439 $ 5,713 $ 15,132 $ 2,412 $ 4,500
Product and royalty revenues - 1,056 1,769 647 626
License Fees 250 2,015 40 25 5,725
-------- -------- -------- -------- --------
Total Revenues 3,689 8,784 16,941 3,084 10,851
Operating expenses:
Research and development costs 14,640 18,110 18,743 13,588 9,902
Costs of products sold - 580 1,608 1,553 4,748
Selling, general and
administrative expenses 4,863 5,743 5,864 5,862 8,052
Other expense - 4,726 3,403 3,110 3,000
-------- -------- -------- -------- --------
Total Expenses 19,503 29,159 29,618 24,113 25,702
Loss from operations (15,814) (20,375) (12,677) (21,029) (14,851)
Interest expense (340) (327) (694) (786) (810)
Interest income 3,144 1,902 1,189 1,102 2,377
(Provision) credit for income taxes 1,197 - - - -
-------- -------- -------- -------- --------
Income (loss) from continuing operations (11,813) (18,800) (12,182) (20,713) (13,284)
Loss from discontinued operations (2,255) - - -
Net loss $(14,068) (18,800) $(12,182) $(20,713) $(13,284)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings (loss) per common share:
Continuing operations $ (1.01) $ (1.58) $ (1.02) $ (1.62) $ (0.78)
Discontinued operations (0.19) - - - -
Net loss $ (1.20) $ (1.58) $ (1.02) $ (1.62) $ (0.78)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common
shares outstanding 11,690 11,905 11,999 12,758 16,926
AS OF MARCH 31, 1993 1994 1995 1996 1997
- --------------- ---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Cash, cash equivalents and
marketable securities $ 51,218 $ 29,500 $ 19,718 $ 20,570 $ 41,414
Working capital 51,761 28,117 20,927 18,601 43,843
Total assets 71,758 56,051 50,639 43,829 70,159
Long-term debt 3,965 3,917 8,408 8,610 7,349
Total stockholders' equity 64,891 48,076 36,424 28,962 51,746
</TABLE>
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ITEM 7. 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.)
OVERVIEW
Molecular Biosystems, Inc. ("MBI" or the "Company") is a leader in the
development, manufacture and sale of ultrasound contrast imaging agents. The
Company'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-Registered Trademark- 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.
While ALBUNEX-Registered Trademark- represents a major breakthrough in
ultrasound imaging because it improves visualization of the left side of the
heart, the potential markets for ALBUNEX-Registered Trademark- are limited
because of the short duration of ALBUNEX-Registered Trademark- in the
bloodstream. This short duration prevents the use of ALBUNEX-Registered
Trademark- for the assessment of myocardial perfusion (blood flow in the
heart muscle). OPTISON-TM-, the Company's second-generation ultrasound
contrast agent, remains in the bloodstream for over 5 minutes versus 35-40
seconds for ALBUNEX-Registered Trademark- As a result, OPTISON-TM- is
superior to ALBUNEX-Registered Trademark- for the assessment of cardiac
function. More importantly, the enhanced duration of OPTISON-TM- in the
bloodstream may permit the assessment of myocardial perfusion which the
Company believes has a significantly greater market potential than cardiac
function. Accordingly, the Company is focusing its product development
activities on OPTISON-TM-.
In October 1996, the Company filed a Pre-Market Approval ("PMA")
application for OPTISON-TM- with the U.S. Food and Drug Administration
("FDA"). The application was accepted and in February 1997, the FDA's
advisory Radiological Devices Panel recommended unconditional approval of the
Company's PMA for OPTISON-TM-. The FDA is currently enjoined from continuing
any approval or review procedures relating to the Company's PMA until 10 days
after the FDA resolves the merits of certain citizens petitions previously
filed with the FDA by potential competitors of the Company. Additionally, in
March 1997 the Company received acceptance for its OPTISON-TM- Marketing
Authorization application in the European Union.
The Company is currently conducting Phase 2 clinical trials to evaluate
the efficacy of OPTISON-TM- in determining whether the heart muscle is
receiving an adequate blood supply ("myocardial perfusion"). Preliminary
results indicate that OPTISON-TM-, when used in conjunction with harmonic
imaging techniques, is as effective in assessing myocardial perfusion as
nuclear imaging which is the current "gold standard". The Company is also
conducting studies using OPTISON-TM- to detect abnormalities in other organs,
such as the liver and kidneys. The Company believes that the use of
OPTISON-TM- 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.
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-Registered Trademark- and the regulatory approval and
market acceptance of OPTISON-TM- 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.
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<PAGE>
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 Medical, Inc. ("Mallinckrodt") under
the Company's Amended and Restated Distribution Agreement ("ARDA") to support
clinical trials, regulatory submissions and product development and (iii)
bonus payments to the Company equivalent to Mallinckrodt's first year's sales
of ALBUNEX-Registered Trademark- at Mallinckrodt's sales price to end users
of the product.
PRODUCT AND ROYALTY REVENUES. Product revenues have been based upon
MBI's sales to Mallinckrodt and Shionogi & Co., Ltd. ("Shionogi") and were
recognized upon shipment of the product. The transfer prices for MBI's sales
of ALBUNEX-Registered Trademark- to Mallinckrodt and Shionogi were 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
to its end users. Royalty revenues are pursuant to a licensing agreement
between the Company and Abbott Laboratories.
LICENSE FEES. License fees are recognized at the time of receipt and are
generally received in conjunction with the grant of product development,
marketing and/or distribution rights to one of the Company's technologies.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996. Revenues under
collaborative agreements were $4.5 million for the fiscal year ended March 31,
1997, compared to $2.4 million for the fiscal year ended March 31, 1996. This
increase was due to the receipt of 4 quarterly payments from Mallinckrodt to
support clinical trials versus 2 quarterly payments in the prior year. These
revenues in the current year consist solely of quarterly payments to support
clinical trials, regulatory submissions and product development received from
Mallinckrodt under the Company's amended agreement with Mallinckrodt which the
Company entered into in September 1995.
Product and royalty revenues were $626,000 for fiscal year 1997, compared
to $647,000 for the prior year. Product revenues are based on the Company's
sales to Mallinckrodt and Shionogi and are recognized upon shipment of the
product. Royalty revenues are pursuant to a license agreement between the
Company and Abbott Laboratories.
License fees were $5.7 million and $25,000 in fiscal year 1997 and 1996,
respectively. The revenues in the current year consist of payments from
Mallinckrodt pursuant to the amendment to ARDA that the Company entered into
with Mallinckrodt in December 1996. The amendment extended Mallinckrodt's
exclusive territory to include the territory that the Company had formerly
licensed to Nycomed Imaging AS ("Nycomed") consisting of Europe, Africa, India
and parts of Asia.
Costs of products sold totaled $4.7 million for fiscal year 1997,
resulting in a negative gross profit margin. This negative gross profit
margin was due to the fact that the current low levels of production are
insufficient to cover the Company's fixed manufacturing overhead expenses.
For the year ended March 31, 1996, costs of products sold totaled $1.6
million. In fiscal 1996, certain expenses related to the development of the
manufacturing process were recorded as research and development costs.
Because the Company has left the pilot manufacturing phase, these costs are
now classified as costs of goods sold. The Company anticipates an increase in
gross profit margins if and when ALBUNEX-Registered Trademark- sales volumes
increase and if and when OPTISON-TM-, the Company's second generation
ultrasound imaging agent, receives regulatory approval and obtains market
acceptance. The increase in sales volume would permit the fixed costs
included in manufacturing overhead to be allocated over a larger number of
vials produced. Manufacturing fixed costs are currently running at an annual
rate of approximately $5 million. The amount of any increase in the
Company's margins and the time required by the Company to achieve higher
margins are highly dependent on the regulatory approval and market acceptance
of current and future products and are therefore uncertain.
The Company's research and development costs totaled $9.9 million for the
year ended March 31, 1997 as compared to $13.6 million for the year ended March
31, 1996. The decrease of 27% is due to the classification in fiscal year 1996
of certain expenses associated with the manufacturing of the product as research
and development costs as they represented the cost of developing the Company's
manufacturing process.
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<PAGE>
Selling, general and administrative expenses totaled $8.1 million in fiscal
year 1997 as compared to $5.9 million in fiscal year 1996. This increase is due
in part to increased litigation expenses related to the arbitration with
Shionogi. The increase is also due to increased compensation costs.
During fiscal year 1997, the Company's other expenses totaled $3 million as
compared to $3.1 million for the prior year. In December 1996, the Company and
Mallinckrodt amended ARDA to expand the geographical scope of Mallinckrodt's
exclusive marketing and distribution rights for ALBUNEX-Registered Trademark-,
OPTISON-TM- and related products. This amendment extended Mallinckrodt's
exclusive territory to include the territory the Company had previously licensed
to Nycomed. As a result of the amendment, the Company recorded a one-time
charge of $3 million related to the reacquisition of its license rights from
Nycomed. In fiscal year 1996, the Company recorded one-time charges related to
the conclusion of arbitration with Bracco S.p.A., the write off of license fees
associated with discontinued products and a write down to the sale price of two
buildings that were subsequently sold in March 1996.
Interest expense for fiscal years 1997 and 1996 amounted to $810,000 and
$786,000, respectively. Interest expense consists of mortgage interest on the
Company's manufacturing building and interest related to a note payable 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
9.50% in March 1997.
Interest income for fiscal year 1997 was $2.4 million compared to $1.1
million in fiscal year 1996. This significant increase is due to the interest
earned related to higher average cash balances and marketable securities
balances as a result of the Company's public offering in May 1996.
No tax benefit has been recognized for fiscal 1997 or 1996 as the Company
had fully utilized its operating loss carryback ability in 1993. As of March 31,
1997, the Company had federal and state operating loss carryforwards of
approximately $84.4 million and $26.6 million, respectively. Realization of
future tax benefits from utilization of net operating loss carryforwards is
uncertain.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995. Revenues under
collaborative agreements were $2.4 million during the fiscal year ended March
31, 1996 as 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-Registered
Trademark- in the United States and the release of ALBUNEX-Registered Trademark-
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.
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-Registered Trademark- in the United States and the
initial release of the product to Mallinckrodt's sales force.
License fees were $25,000 and $40,000 in fiscal year 1996 and 1995,
respectively. 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-Registered Trademark- by the FDA, certain expenses
associated with the manufacturing of the product had been recorded as research
and development costs.
25
<PAGE>
The Company's research and development costs totaled $13.6 and $18.7
million for fiscal years 1996 and 1995, respectively. This decrease of 27% 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 in fiscal year 1996 amounted
to $5.9 million and was substantially unchanged from the prior fiscal year.
The Company recorded one-time charges in fiscal year 1996 related to the
conclusion of arbitration with Bracco S.p.A., the write-off of license fees
associated with discontinued products and a write down to the sale price of
two buildings that were subsequently sold in March 1996. As a result, the
Company recorded a charge of approximately $3.1 million which was included in
other expenses. During the fiscal year 1995, the Company received a bonus
from Mallinckrodt of approximately $3.0 million related to the approval of
ALBUNEX-Registered Trademark- for marketing in the United States which was
awarded to MBI's employees pursuant to the terms of the agreement. As a
result, the Company recorded a charge of approximately $3.4 million in fiscal
year 1995.
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 1996
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. 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 1996 was 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.
LIQUIDITY AND CAPITAL RESOURCES
On May 30, 1996, the Company completed a follow-on public offering of 4.1
million shares of Common Stock at $9.00 per share. Net proceeds from this
offering (after deducting underwriting discounts and commissions and offering
expenses) amounted to approximately $34.1 million. The Company's net working
capital at March 31, 1997 was $43.8 million including cash, cash equivalents and
marketable securities of $41.4 million.
On September 7, 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA") 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-Registered Trademark- and OPTISON-TM-. 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 seven quarterly payments have been received by
the Company.
26
<PAGE>
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 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.
In December 1996, the Company and Mallinckrodt amended ARDA to expand the
geographical scope of Mallinckrodt's exclusive marketing and distribution rights
for ALBUNEX-Registered Trademark-, OPTISON-TM- and related products. The
amendment extended Mallinckrodt's exclusive territory to include the territory
that the Company had formerly licensed to Nycomed consisting of Europe, Africa,
India and parts of Asia.
Under the amendment to ARDA, Mallinckrodt agreed to pay fees of up to $12.9
million plus 40 percent of product sales to cover royalties and manufacturing.
Mallinckrodt made an initial payment of $7.1 million, consisting of
reimbursement to the Company of $2.7 million that the Company paid to Nycomed to
reacquire the exclusive product rights in Nycomed's territory, payment of $3
million to the Company under the terms of ARDA upon the extension of
Mallinckrodt's exclusive rights to Nycomed's former territory, and payment of
$1.4 million to Nycomed in satisfaction of the Company's obligation to pay 45%
of any amounts that the Company receives in excess of $2.7 million upon the
licensing of the former Nycomed territory to a third party. Of the remaining
$5.8 million that may be paid, Mallinckrodt will pay $4 million to the Company
(upon the achievement of the specified product development milestone) and $1.8
million to Nycomed (representing 45% of the $4 million payment to the Company).
There can be no assurance, however, that this milestone will be satisfied.
In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture, market and
sell its ALBUNEX-Registered Trademark- family of products in the territory,
consisting of Japan, Taiwan and South Korea, formerly exclusively licensed to
Shionogi. This agreement settled an outstanding dispute between the two
companies concerning the license and distribution agreement for
ALBUNEX-Registered Trademark- and resulted in the dismissal of all claims raised
by the companies against each other. Under the agreement, the Company paid $3
million to Shionogi and will pay an additional $5.5 million over the next three
years.
Capital expenditures for facilities, laboratory equipment, furniture and
fixtures were $726,000, $2.4 million and $2.5 million for fiscal years 1997,
1996 and 1995, respectively. Expenditures in all three fiscal years consisted
primarily of building improvements and equipment for aseptic manufacturing
facilities being constructed for the manufacture of ALBUNEX-Registered
Trademark- and other products.
The Company currently leases one of its operating facilities in San Diego.
The lease requires aggregate payments of approximately $3 million through fiscal
year 2003.
At March 31, 1997, the Company had net working capital of $43.8 million
compared to $18.6 million at March 31, 1996. Cash, cash equivalents and
marketable securities were $41.4 million at March 31, 1997 compared to $20.6
million at March 31, 1996. For the next several years, the Company expects to
incur substantial additional expenditures associated with product development.
The Company anticipates that its existing resources 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.
27
<PAGE>
The Company believes that inflation and changing prices have not had a
material effect on operations for fiscal years 1997, 1996 and 1995 and that the
impact of government regulation on the Company is not materially different from
the impact on other similar enterprises.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants 30
Consolidated Balance Sheets as of March 31, 1996 and 1997 31
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1995, 1996 and 1997 32
Consolidated Statements of Stockholders'
Equity for the Fiscal Years Ended March 31, 1995, 1996 and 1997 33
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1995, 1996 and 1997 34
Notes to Consolidated Financial Statements 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE>
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, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
May 6, 1997
30
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,542 $ 587
Marketable securities, available-for-sale (Note 2) 8,028 40,827
Accounts and notes receivable 260 902
License rights (Note 7) 3,000 8,500
Inventories 622 342
Prepaid expenses and other assets 406 249
--------- ---------
Total current assets 24,858 51,407
--------- ---------
Property and equipment, at cost:
Building and improvements 14,158 14,544
Equipment, furniture and fixtures 3,943 4,567
Construction in progress 941 511
--------- ---------
19,042 19,622
Less: Accumulated depreciation and amortization 5,322 6,434
--------- ---------
Total property and equipment 13,720 13,188
--------- ---------
Other assets:
Patents and license rights, net of amortization $917 and
$191, respectively (Notes 5 and 8) 297 341
Certificate of deposit, pledged (Note 2 and 4) 3,000 3,000
Other assets, net 1,954 2,223
--------- ---------
Total other assets 5,251 5,564
--------- ---------
$ 43,829 $ 70,159
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,262 $ 1,267
Accounts payable and accrued liabilities (Notes 1 and 5) 3,964 4,684
Compensation accruals 1,031 1,613
--------- ---------
Total current liabilities 6,257 7,564
--------- ---------
Long-term debt, net of current portion (Note 4) 8,610 7,349
--------- ---------
Other noncurrent liabilities - 3,500
--------- ---------
Commitments and contingencies (Note 5)
Stockholders' equity (Note 6):
Common Stock, $.01 par value, 20,000,000 and 40,000,000 shares
authorized, 13,296,186 and 17,745,897 shares
issued and outstanding, respectively 133 177
Additional paid-in capital 91,468 127,483
Accumulated deficit (62,185) (75,469)
Unrealized loss on available-for-sale securities (6) (82)
Less notes receivable from sale of Common Stock (281) -
Less 18,970 and 40,470 shares of treasury stock, at cost, respectively (167) (363)
--------- ---------
Total stockholders' equity 28,962 51,746
--------- ---------
$ 43,829 $ 70,159
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (Note 7):
Revenues under collaborative agreements $ 15,132 $ 2,412 $ 4,500
Product revenues 1,769 647 626
License fees 40 25 5,725
-------- -------- --------
16,941 3,084 10,851
-------- -------- --------
Operating expenses:
Research and development costs (Note 7) 18,743 13,588 9,902
Costs of products sold 1,608 1,553 4,748
Selling, general and administrative expenses 5,864 5,862 8,052
Other expenses (Note 8) 3,403 3,110 3,000
-------- -------- --------
29,618 24,113 25,702
-------- -------- --------
Loss from operations (12,677) (21,029) (14,851)
Interest expense (694) (786) (810)
Interest income 1,189 1,102 2,377
-------- -------- --------
Net loss $(12,182) $(20,713) $(13,284)
-------- -------- --------
-------- -------- --------
Loss per common share $ (1.02) $ (1.62) $ (0.78)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding $ 11,999 12,758 16,926
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE>
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, 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) - - (188)
Forgiveness of notes
receivable - - - - - 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 6) - - (79) - - 188 (108) 1
Issuance of shares in settle-
ment of stockholder suit 172,414 2 1,498 - - - - 1,500
Proceeds from sale of
Common Stock (Note 7) 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
Unrealized gain on available-
for-sale securities - - - - (76) - - (76)
Proceeds from Public
Offering (Note 6) 4,140,000 41 34,045 - 34,086
Purchase of treasury stock (Note 6) - - (85) - - 281 (196) -
Exercise of stock options 295,500 3 1,928 1,931
Issuance of stock grants 14,211 - 127 127
Net loss - - - (13,284) - - - (13,284)
---------- ----- -------- -------- ------ ------ ----- -------
Balance at March 31, 1997 17,745,897 $ 177 $127,483 $(75,469) $ (82) $ - $(363) $51,746
---------- ----- -------- -------- ------ ------ ----- -------
---------- ----- -------- -------- ------ ------ ----- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
33
<PAGE>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (12,182) $(20,713) $(13,284)
Adjustments to reconcile net loss to net cash
used operating a activities:
Depreciation and amortization 3,022 2,217 1,435
Loss on disposals of property and equipment 35 680 1
Loss on write-off of license fees related to discontinued products - 1,025 -
Write-off of former Nycomed territory license rights - - 3,000
Forgiveness of note receivable from sale of Common Stock 1,319 56 109
Changes in operating assets and liabilities:
Receivables (4,889) 4,863 29
Inventories (225) 773 280
Prepaid expenses and other assets (81) 36 (623)
Accounts payable and accrued liabilities 1,670 (1,626) 721
Compensation accruals (175) 620 582
---------- ---------- ---------
Cash used in operating activities (11,056) (12,069) (7,750)
---------- ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment (2,528) (2,397) (726)
Proceeds from sale of property and equipment - 6,484 4
Additions to patents and license rights (634) (1,045) (226)
Acquisition of license rights from Shionogi - - (3,000)
Acquisition of license rights from Nycomed - - (2,000)
(Increase) decrease in other assets 75 (28) (269)
(Increase) decrease in marketable securities 11,989 4,920 (32,876)
---------- ----------- ---------
Cash provided by (used for) investing activities 8,902 7,934 (39,093)
---------- ------------ ---------
Cash flows from financing activities:
Net proceeds from public offering of Common Stock - - 34,086
Net proceeds from issuance of Common Stock 183 11,638 2,058
Long-term debt proceeds 5,000 1,438 -
Principal payments on long-term debt (254) (281) (1,256)
---------- ---------- --------
Cash provided by financing activities 4,929 12,795 34,888
---------- ---------- --------
Increase (decrease) in cash and cash equivalents 2,325 8,660 (11,955)
Cash and cash equivalents, beginning of year 1,557 3,882 12,542
---------- --------- --------
Cash and cash equivalents, end of year $ 3,882 $ 12,542 $ 587
---------- --------- ---------
---------- --------- ---------
Supplemental cash flow disclosures:
Interest income received $ 1,433 $ 1,141 $ 1,609
--------- --------- ---------
--------- --------- ---------
Interest paid $ 688 $ 780 $ 804
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
34
<PAGE>
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-Registered
Trademark-, 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 regulatory approval and market acceptance of current and future
products 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. 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 terms of the Amended and Restated Distribution
Agreement ("ARDA") entered into in September 1995, Mallinckrodt Medical,
Inc. ("Mallinckrodt") will pay the Company $20.0 million over four years to
further the development of OPTISON-TM- (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.
Finally, under the original Mallinckrodt agreement (see note 7),
Mallinckrodt agreed to pay a bonus to MBI equivalent to Mallinckrodt's
first year product sales of ALBUNEX-Registered Trademark- at its sales
price to end users of
35
<PAGE>
the product. MBI recorded this bonus each quarter based upon Mallinckrodt's
sales to its customers. This is the third type of revenues included under
the caption "Revenues Under Collaborative Agreements."
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.
INVENTORIES-
Inventories are stated at lower of cost (first-in, first-out) or market,
and consist of the following major classes (in thousands):
MARCH 31,
-----------------
1996 1997
Raw materials and supplies $ 558 $ 253
Work in process 3 45
Finished goods 61 44
------ ------
$ 622 $ 342
------ ------
------ ------
Work in process and finished goods include the cost of materials, direct
labor and manufacturing overhead.
36
<PAGE>
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-Registered Trademark- and OPTISON-TM- in
the United States. Included in other assets at March 31, 1996 and 1997 is
approximately $1.9 million which is the portion of this prepayment which
has not yet been expensed. Additionally, other assets at March 31, 1997
include $300,000 of real estate investment related to an employment
agreement with one of the Company's officers.
The Company periodically reevaluates the original assumptions and rationale
utilized in the assessment of the carrying value and estimated lives of
these and other long-lived 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.
IMPAIRMENT OF LONG-LIVED ASSETS-
Effective April 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). The
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not by fully recoverable. The adoption of
this statement had no material effect on the Company's financial
statements.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES-
Accounts payable and accrued liabilities consist of the following major
classes (in thousands):
MARCH 31,
--------------------
1996 1997
Accrued legal and professional fees 500 1,250
License rights payable and related fees (Note 7) 2,300 2,000
Accounts payable - trade 1,028 1,162
Other miscellaneous accruals 136 272
-------- --------
$ 3,964 $ 4,684
-------- --------
-------- --------
37
<PAGE>
STOCK BASED COMPENSATION-
The Company has elected to adopt the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). Accordingly the Company will
continue to account for its stock based compensation plans under the
provisions of APB No. 25. Therefore, the adoption of SFAS 123 by the
Company had no material effect on the Company's financial position and
results of operations.
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. In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128), which changes the method of calculating earnings per
share. SFAS 128 is effective for financial statements issued after
December 15, 1997. The earnings per share of the Company for the years
ended March 31, 1996 and 1997 would not be materially different under SFAS
128 as that presented therein.
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, 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.
The following table summarizes available-for-sale securities at March 31,
1997 (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 $ 3,503 $ - $ (8) $ 3,495
Corporate obligations 37,406 - (74) 37,332
----------- ---------- ---------- ---------
Marketable securities available-for-sale $ 40,909 $ - $ (82) $ 40,827
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
There were no gross realized gains or losses on sales of available-for-sale
securities for the year ended March 31, 1997.
38
<PAGE>
The amortized cost and estimated fair value of debt and marketable
securities at March 31, 1997, 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.
COST LESS
PREMIUMS/ ESTIMATED
DISCOUNTS FAIR
AMORTIZED VALUE
Due in one year or less $ 31,284 $ 31,231
Due after one year through three years 9,625 9,596
--------- ---------
$ 40,909 $ 40,827
--------- ---------
--------- ---------
At March 31, 1997 a $3 million certificate of deposit was held as a
compensating balance under the Company's debt agreement (see note 4).
3. 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):
FISCAL YEARS ENDED MARCH 31,
-------------------------------------
1995 1996 1997
Computed statutory tax $ (3,992) $ (7,036) $ (4,517)
State income taxes (729) (1,270) (843)
Tax exempt interest (5) (74) (29)
Losses without income tax benefit 4,715 8,376 5,362
Other 11 4 27
--------- --------- ---------
Provision for income taxes $ - $ - $ -
--------- --------- ---------
--------- --------- ---------
At March 31, 1997, the Company has deferred tax assets of approximately $
34.0 million relating to the following tax loss carryforwards for income
tax purposes (in thousands):
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
<S> <C> <C>
Federal ($84,400) and state ($26,600) net operating losses $ 111,000 1998-2012
Research and development credit - federal $ 1,800 1998-2012
Research and development credit - state $ 600 Indefinite
Alternative minimum tax credit $ 300 Indefinite
</TABLE>
39
<PAGE>
For financial reporting purposes, a valuation allowance has been recognized
to offset the deferred tax assets related to the carryforwards. If
realized, approximately $2.2 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.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,
------------------------
1996 1997
Net payable - due 2004 $ 3,872 $ 3,816
Net payable - due 2001 6,000 4,800
---------- ----------
9,872 8,616
Less - current portion 1,262 1,267
---------- ----------
$ 8,610 $ 7,349
---------- ----------
---------- ----------
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, 1996 and 1997. 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: $67,000, $73,000, $79,000, $85,000 and $92,000.
The note payable due in 2001 bears interest at the prime rate plus one
percent (9.50 percent at March 31, 1997) 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.
5. COMMITMENTS AND CONTINGENCIES
LEASES
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 noncancelable operating leases that have initial
or remaining lease terms in excess of one year are as follows (in
thousands):
FISCAL YEAR ENDED MARCH 31, AMOUNT
1998 436
1999 688
2000 715
2001 744
2002 383
--------
Total minimum lease payments $2,966
--------
--------
40
<PAGE>
The lease expires in fiscal 2003 and contains a renewal provision of up
to ten years at the end of the lease term. The Company is obligated to pay
real estate taxes, insurance and utilities on its portion of the leased
property. Rental expense for the years ended March 31, 1995, 1996 and 1997
was $508,000, $350,000 and $194,000, respectively.
LICENSE AGREEMENTS
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, $500,000 for 1998, $600,000 for 1999 and for each succeeding year.
In May 1993 the Company entered into an exclusive license agreement with
Bracco S.p.A. of Milan, Italy, for the distribution rights in a specified
territory. In March 1994, Bracco notified the Company that it desired to
rescind the agreement and demanded the return of the license fee. The
Company 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 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. In
November 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, who affirmed the award in a
decision. 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).
In April 1996 Shionogi filed a demand for arbitration seeking damages
in excess of $37 million plus punitive damages. Shionogi had been
disappointed with ALBUNEX-Registered Trademark- sales in Japan and has
blamed "quality" problems. In response, the Company also filed a
demand for arbitration seeking in excess of $45 million plus punitive
damages. In September 1996, the Company entered into an agreement with
Shionogi pursuant to which the Company reacquired all rights to
manufacture, market and sell its ALBUNEX-Registered Trademark- family
of products in the territory, consisting of Japan, Taiwan and South
Korea, formerly exclusively licensed to Shionogi. This agreement
settled the outstanding dispute between the two companies concerning
the license and distribution agreement for ALBUNEX-Registered
Trademark- and resulted in the dismissal of all claims raised by the
companies against each other in the pending arbitration proceeding
discussed above. Under the agreement the Company paid $3 million to
Shionogi in fiscal year 1996 and will pay an additional $5.5 million
over the next three years (see note 7). The Company is currently in
discussions with potential licensees for Shionogi's territory.
PATENT MATTERS
The Company has become aware of several United States patents issued to
other companies covering various attributes of perfluorocarbon-containing
imaging agents such as OPTISON-TM-. Certain of these companies also are
pursuing foreign patent protection. Some of these companies are developing
or may be developing ultrasound contrast imaging agents that would compete
with OPTISON-TM-.
The patents and patent applications of these other companies involve a
number of complex legal and factual issues that are currently unresolved.
The Company believes that there may be a substantial overlap among many of
the claims in their patents and that it is likely that there will be
administrative proceeding or litigation in the United States and abroad to
adjudicate their conflicting rights. The Company believes
41
<PAGE>
that it could become a party to one or more of these actions, which could
take several years to conclude and could result in a substantial cost to
the Company.
The Company believes that, for a variety of reasons, its commercialization
of OPTISON-TM- will not infringe any valid patent held by one of these
other companies. Depending upon the particular patent claim, these reasons
include (i) differences between OPTISON-TM- and the subject of the claim,
(ii) the invalidity of the claim due to the existence of prior art, (iii)
the inadequacy of the claim's specifications and (iv) lack of enablement.
The Company intends to challenge the validity of any such patent granted to
one of the other companies if the patent is asserted against the Company,
and the Company will enforce its own patents if any product of one of the
other companies infringes the Company's patent claims.
If any patent granted to one of the other companies is asserted against the
Company, litigation or administrative proceedings may be necessary to
defend the Company against infringement claims or to determine the
priority, scope and validity of the other company's proprietary rights.
Any such litigation or administrative proceedings could result in a
substantial cost to the Company; and given the complexity of the legal and
factual issues, the inherent vicissitudes and uncertainty of litigation,
and other factors, there can be no assurance of a favorable outcome. An
unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, there
can be no assurance that, in the event of an unfavorable outcome, the
Company would be able to obtain a license to any proprietary rights that
may be necessary to commercialize OPTISON-TM-, either on acceptable terms
or at all. If the Company were required to obtain a license necessary to
commercialize OPTISON-TM-, the Company's failure or inability to do so
would have a material adverse effect on the Company's business, financial
condition and results of operations.
FDA PROCEEDINGS
On April 21, 1997, the United States District Court for the District of
Columbia entered an order enjoining the United States Food and Drug
Administration (the "FDA") from continuing any approval or review
procedures relating to the Company's Pre-Market Approval application
("PMA") for OPTISON-TM-, until ten days after the FDA resolves the merits
of citizen petitions previously filed with the FDA by the plaintiffs.
These citizen petitions requested the FDA to regulate all ultrasound
imaging contrast agents either as drugs (as the plaintiffs' contrast agents
under development are currently classified) or as medical devices (as the
Company's ALBUNEX-Registered Trademark- and OPTISON-TM- are currently
classified). In February 1997, the FDA's advisory Radiological Devices
Panel had recommended approval of the Company's PMA for OPTISON-TM-.
As described in the court's opinion accompanying its order, the purpose of
the order was to grant "a limited injunction to preserve the status quo
pending a decision by the FDA as to how to treat all ultrasound contrast
agents, whether as medical devices or as drugs, or to provide a rational
explanation for the different treatment of the products at issue". The
court's order thus identically enjoins the FDA from continuing any approval
or review procedures relating to any of the plaintiffs' respective products
until ten days after the FDA resolves the merits of the plaintiffs' citizen
petitions.
OTHER
The Company is periodically a defendant in other legal actions incidental
to its business activities. 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.
42
<PAGE>
6. STOCKHOLDERS' EQUITY
On May 30, 1996, the Company completed a public offering of 4.1 million
shares of Common Stock at $9.00 per share. Net proceeds from this offering
(after deducting underwriting discounts and commissions and offering
expenses) amounted to approximately $34.1 million.
In August 1996, the Shareholders approved the Company's Board of Director's
recommendation to increase the maximum number of shares of Common Stock
from 20,000,000 shares to 40,000,000 shares.
In June 1989, 1990 and 1991 the Company issued warrants to Nycomed
exercisable through June 1994, 1995 and 1996 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 1996, all warrants had expired.
Mallinckrodt has certain registration rights with respect to the Common
Stock issued and issuable to them.
State Farm Mutual 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):
MARCH 31,
----------------------------
1996 1997
Warrants 15 -
Options Granted 2,228 2,685
Future Grants of Options 1,063 994
----------------------------
3,306 3,679
----------------------------
----------------------------
STOCK OPTIONS-
In 1997, the Board of Directors approved the adoption of the 1997
Directors' Option Plan and authorized the issuance of options for 300,000
shares pursuant to the plan. The plan is subject to approval by the
Company's shareholders at the annual meeting scheduled for August 1997.
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 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.
43
<PAGE>
During fiscal 1997, the shareholders approved the Company's Board of
Directors recommendation to amend the Company's 1993 Stock Option Plan to
increase the maximum number of shares from 2,500,000 shares to 3,250,000
shares.
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 was 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 pursuant to the
terms in the applicable plan. The options were granted at amounts per
share which were not less than the fair market value at the date of grant.
Additional information with respect to the Company's option plans is as
follows:
<TABLE>
<CAPTION>
EMPLOYEE OPTION PLANS DIRECTORS' OPTION PLAN
------------------------------------------- ----------------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
--------------- -------------------------- ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Options Outstanding at March 31, 1994 2,297,740 $13.38 - $31.13 20,000 $17.00
Granted 451,406 7.00 - 15.63 20,000 8.13
Exercised (10,200) 13.75 - 16.50 -
Expired or lapsed (666,467) 8.75 - 28.75 -
--------------- ---------- --------------- ------------ --------- -----------
Options Outstanding at March 31, 1995 2,072,479 7.00 - 31.13 40,000 8.13 - 17.00
Granted 723,602 6.00 - 8.63 20,000 8.63
Exercised (5,450) 6.38 - 7.38 -
Expired or lapsed (622,676) 6.38 - 28.75 -
--------------- ---------- --------------- ------------ --------- -----------
Options Outstanding at March 31, 1996 2,167,955 6.00 - 31.13 60,000 8.13 - 17.00
Granted 914,375 6.50 - 11.13 15,000 6.88
Exercised (295,500) 6.00 - 10.63 -
Expired or lapsed (176,760) 6.00 - 31.13 -
--------------- ---------- --------------- ------------ --------- -----------
Options Outstanding at March 31, 1997 2,610,070 6.00 - 22.25 75,000 6.88 - 17.00
--------------- ------------ --------- -----------
Options exercisable at March 31, 1997 1,171,920 60,000
--------------- ------------
Reserved for future grants at
March 31, 1997 968,730 25,000
--------------- ------------
</TABLE>
44
<PAGE>
As permitted, the Company has adopted the disclosure only provisions of
SFAS 123 effective April 1, 1996. Accordingly, no compensation expense has
been recognized for the stock option plans. Had compensation cost for the
Company's 1997 grants for stock-based compensation plans been determined
consistent with SFAS 123, the Company's net income, net income applicable
to common share owners, and net income per common share for March 31, 1996
and 1997 would approximate the pro forma amounts below (in thousands,
except per share amounts).
FISCAL YEARS ENDED MARCH 31,
-----------------------------
1996 1997
Net income (loss) - as reported $ (20,713) $ (13,284)
Net income (loss) - pro forma $ (21,274) $ (14,559)
Earning per share (loss) - as reported $ (1.62) $ (0.78)
Earning per share (loss) - pro forma $ (1.67) $ (0.86)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years. The fair
value of each option grant was estimated on the date of grant using the
Black Scholes option-pricing model with following weighted average
assumptions used for grant in fiscal year 1997: risk free rate of 6.26%,
expected option life of 4 years, expected volatility of 55% and a dividend
rate of zero. The weighted average fair value of options granted from the
Employee stock option plans during fiscal 1996 and 1997 was $6.93 and
$9.29, respectively. The weighted average fair value of options granted
from the Outside Director stock option plan during fiscal 1996 and 1997 was
$8.63 and $6.88, respectively.
NOTES RECEIVABLE FROM SALE OF COMMON STOCK-
During fiscal year 1997, the Company repurchased 21,500 shares of Common
Stock and forgave notes receivable from related parties of approximately
$390,000 relating to the exercise of options to purchase common stock of
the Company by officers and other employees. Of this amount, approximately
$109,000 was 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.
During fiscal year 1996, the Company repurchased 15,000 shares of Common
Stock in a similar transaction whereby the Company forgave notes receivable
of $244,000. Of this amount, approximately $56,000 was included in
accounts receivable that related to taxes payable by the individuals at the
time of the option exercise date, accrued interest thereon, and accrued
interest on the notes receivable.
7. 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
45
<PAGE>
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.
In September 1995, the Company entered into an Amended and Restated
Distribution Agreement ("ARDA"), as well as a related investment
agreement, with Mallinckrodt. Under ARDA, 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 OPTISON-TM- for an intravenous
myocardial perfusion indication.
The agreement provides the Company with between $33.0 million and
$47.5 million in financing (including the $13.0 million common stock
investment discussed below). Under the terms of the agreement,
Mallinckrodt must 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-Registered Trademark- and OPTISON-TM-. 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, 1997 the
first six quarterly payments had been received by the Company.
ARDA 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 OPTISON-TM- by
enabling the parties to share their expertise relating to clinical
trials and the regulatory approval process. The Company and
Mallinckrodt have each appointed three of the six members of the joint
steering committee.
In connection with ARDA, 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, ARDA 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 OPTISON-TM- 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
OPTISON-TM- for an intravenous myocardial perfusion. If the Company
exercises this option, the Company may co-market ALBUNEX-Registered
Trademark-, OPTISON-TM- and related products in all of the countries
covered by the amended distribution agreement.
46
<PAGE>
In December 1996, the Company and Mallinckrodt amended ARDA to expand
the geographical scope of Mallinckrodt's exclusive marketing and
distribution rights for ALBUNEX-Registered Trademark-, OPTISON-TM- and
related products. The amendment extended Mallinckrodt's exclusive
territory to include the territory that the Company had formerly
licensed to Nycomed consisting of Europe, Africa, India and parts of
Asia. Under the amendment to ARDA, Mallinckrodt agreed to pay fees up
to $12.9 million plus 40 percent of product sales to cover royalties
and manufacturing. Mallinckrodt made an initial payment of $7.1
million, consisting of reimbursement to the Company of $2.7 million
that the Company paid to Nycomed to reacquire the exclusive product
rights in Nycomed's territory, payment of $3 million to the Company
under the terms of ARDA upon the extension of Mallinckrodt's exclusive
rights to Nycomed's former territory, and payment of $1.4 million to
Nycomed in satisfaction of the Company's obligation to pay 45 percent
of any amounts that the Company receives in excess of $2.7 million
upon the licensing of the former Nycomed territory to a third party.
Of the remaining $5.8 million that may be paid, Mallinckrodt will pay
$4 million to the Company (upon the achievement of the specified
product development milestone) and $1.8 million to Nycomed
(representing 45% of the $4 million payment to the Company). There can
be no assurance, however, that this milestone will be satisfied. The
Company has included all costs related to the reacquisition of its
license rights from Nycomed in other expenses in the financial
statements. Of these costs, approximately $1 million was paid in
fiscal 1996 and the remainder was paid in fiscal 1997.
Mallinckrodt is the Company's principal strategic marketing partner
for its ALBUNEX-Registered Trademark- and OPTISON-TM- ultrasound
contrast agents. Under the Company's arrangements with Mallinckrodt,
Mallinckrodt has substantial control over all aspects of marketing the
Company's product in its territories.
In October 1995, the Company entered into an agreement whereby it
reacquired all rights to INFOSON (the European designation for
ALBUNEX-Registered Trademark-), OPTISON-TM- 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. As stated above, the license rights were resold to
Mallinckrodt for amounts stipulated in the amendment to ARDA.
In September 1996, the Company entered into an agreement with Shionogi
pursuant to which the Company reacquired all rights to manufacture,
market and sell its ALBUNEX-Registered Trademark- family of products
in the territory, consisting of Japan, Taiwan and South Korea,
formerly exclusively licensed to Shionogi. This agreement settled an
outstanding dispute between the two companies concerning the license
and distribution agreement for ALBUNEX-Registered Trademark- and
resulted in the dismissal of all claims raised by the companies
against each other. Under the agreement the Company paid $3 million
to Shionogi and will pay an additional $5.5 million over the next
three years. The Company is currently in discussions with potential
licensees for Shionogi's territory.
During the years ended March 31, 1995, 1996 and 1997, the Company received
contract research payments and earned revenue under the above agreements as
follows (in thousands):
47
<PAGE>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1995 1996 1997
Contract payments received:
Nycomed $ 733 $ - $ -
Mallinckrodt 10,554 6,257 10,200
----------- --------- -----------
Total $ 11,287 $ 6,257 $ 10,200
----------- --------- -----------
----------- --------- -----------
Contract payments earned:
Nycomed $ 733 $ - $ -
Mallinckrodt 14,399 2,412 10,200
----------- --------- -----------
Total $ 15,132 $ 2,412 $ 10,200
----------- --------- -----------
----------- --------- -----------
8. OTHER EXPENSES
Other expenses include the following for the years presented:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
1995 1996 1997
<S> <C> <C> <C>
Legal settlements and related costs (Note 5) $ 350 $ 1,418 $ -
Write-off of license rights of former Nycomed territory (Note 7) - - 3,000
Write-off of license fees related to discontinued products - 1,025 -
Loss on sale of real estate - 667 -
Approval bonus paid by U.S. marketing partner 3,053 - -
-------- -------- --------
$ 3,403 $ 3,110 $ 3,000
-------- -------- --------
-------- -------- --------
</TABLE>
In September 1996, the Company entered into an agreement with Nycomed for
the repurchase of the rights to manufacture, market and sell its
ALBUNEX-Registered Trademark- family of products in the territory formerly
exclusively licensed to Nycomed (see note 7). As a result, during fiscal
year 1997 the Company wrote off the license rights of the former Nycomed
territory in the amount of $3 million.
The Company recorded one-time charges in fiscal year 1996 related to the
conclusion of arbitration with Bracco S.p.A., the write off of license fees
associated with discontinued products and a write down to the sale price of
two buildings that were subsequently sold in March 1996.
During fiscal year 1995, the Company received a bonus from Mallinckrodt of
approximately $3.0 million related to the approval of ALBUNEX-Registered
Trademark- for marketing in the United States which was awarded to MBI's
employees pursuant to the terms of the agreement. As a result, the Company
recorded a charge of approximately $3.0 million, included under other
expenses.
48
<PAGE>
9. SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for the years ended March 31, 1997 and 1996 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
JUN 30 SEP 30 DEC 31 MAR 31
-------- -------- -------- -------
<S> <C> <C> <C> <C>
QUARTER ENDED:
Fiscal 1997
Revenues $ 1,178 $ 1,216 $ 7,007 $ 1,450
Research and Development Costs 2,636 2,328 2,354 2,584
Total Operating Costs and Expenses 5,691 5,465 8,298 6,248
Net Loss (4,384) (3,693) (879) (4,328)
Loss Per Common Share (.30) (.21) (.05) (.24)
Weighted Average Common Shares Outstanding 14,787 17,560 17,572 17,711
JUN 30 SEP 30 DEC 31 MAR 31
------ ------ -------- -------
QUARTER ENDED:
Fiscal 1996
Revenues $ 350 $ 348 $ 1,245 $ 1,141
Research and Development Costs 3,196 3,386 3,276 3,730
Total Operating Costs and Expenses 4,890 5,528 8,039 5,656
Net Loss (4,518) (5,135) (6,645) (4,415)
Loss Per Common Share (.37) (.42) (.50) (.33)
Weighted Average Common Shares Outstanding 12,113 12,196 13,291 13,293
</TABLE>
10. SUBSEQUENT EVENTS
On April 27, 1997, the United States District Court entered an order
enjoining the FDA from continuing any approval or review procedures
relating to the Company's PMA for OPTISON-TM-, until ten days after the
FDA resolves the merits of citizen petitions previously filed with the FDA
by the plaintiffs. These citizen petitions requested the FDA to regulate
all ultrasound imaging contrast agents either as drugs (as the plaintiffs'
contrast agents under development are currently classified) or as medical
devices (as the Company's ALBUNEX-Registered Trademark- and OPTISON-TM- are
currently classified). In February 1997, the FDA's advisory Radiological
Devices Panel had recommended approval of the Company's PMA for
OPTISON-TM-.
As described in the court's opinion accompanying its order, the purpose of
the order was to grant "a limited injunction to preserve the status quo
pending a decision by the FDA as to how to treat all ultrasound contrast
agents, whether as medical devices or as drugs, or to provide a rational
explanation for the different treatment of the products at issue". The
court's order thus identically enjoins the FDA from continuing any approval
or review procedures relating to any of the plaintiffs' respective products
until ten days after the FDA resolves the merits of the plaintiffs' citizen
petitions.
On May 12, 1997, the Board of Directors of the Company implemented its
previously adopted plan of management succession. As part of the
transition plan, Kenneth J. Widder, M.D. relinquished the office of Chief
Executive Officer and will remain Chairman of the Board. Dr. Widder will
continue to be responsible for the Company's strategic planning and
corporate development activities. The Company's Board elected Bobba
Venkatadri, currently President and Chief Operating Officer, to the
additional office of Chief Executive Officer.
49
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated in this report by
reference to the information contained under the caption "Election of
Directors" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders to be held on August 20, 1997 ("1997 Proxy Statement").
Information concerning executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated in this
report by reference to the information contained under the caption "Executive
Compensation" in the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership is incorporated in this report by
reference to the information contained under the caption "Stock Ownership" in
the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated in this report by reference to the information contained under the
caption "Certain Relationships and Related Transactions" in the Company's 1997
Proxy Statement.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(2) The financial statements and financial statement schedules filed as a part
of this Report are listed in the "Index to Consolidated Financial
Statements and Schedules" on page 29.
(3) Exhibits -Exhibits marked with an asterisk are filed with this Report; all
other Exhibits are incorporated by reference. Exhibits marked with a
dagger are management contracts or compensatory plans or arrangements.
3.1 Certificate of Incorporation of the Company, as amended to date
(by amendments filed March 4, 1981, March 30, 1982, March 14,
1983, April 18, 1983, and November 20, 1987). (Incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1988.)
3.2 Certificate of Incorporation of Syngene, Inc. as amended
September 20, and December 31, 1989. (Incorporated by reference
from Exhibit 3.2 to the Company's Annual Report of Form 10-K for
the fiscal year ended March 31, 1990.)
3.3 By-Laws of the Company, as amended and restated September 18,
1990. (Incorporated by reference from Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991).
3.4 First Amendment, dated August 20, 1992 to the By-Laws of the
Company, as amended and restated September 18, 1990.
(Incorporated by reference from Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.)
3.5 By-Laws of Syngene, Inc. (Incorporated by reference from
Exhibit 3.4 to the Company's Annual Report on form 10-K for
the fiscal year ended March 31, 1990.)
10.1 Restated License Agreement dated June 1, 1989 between the
Company and Steven B. Feinstein, M.D., and related Research
and Supply Agreement dated June 1, 1989. (Incorporated by
reference from Exhibits 10.1 and 10.2 to the Company's
Current Report on Form 8-K filed on June 9, 1989.)
10.2 Amendment to Research Support and Supply Agreement dated
December 15, 1992 between the Company and Steven B.
Feinstein, M.D. (Incorporated by reference from Exhibit 10.2
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1993.)
10.3 License and Cooperative Development Agreement dated December
31, 1987 between the Company and Nycomed AS ("Nycomed"), and
related Investment
51
<PAGE>
Agreement dated December 31, 1987, Registration Agreement dated
December 31, 1987 and Common Stock Purchase Warrant dated January
19, 1988. (Incorporated by reference from Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1988.)
10.4 Amendment to License and Cooperative Development Agreement
dated June 15, 1989 between the Company and Nycomed.
(Incorporated by reference from Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1989.)
10.5 Amendment No. 3 to License and Cooperative Development
Agreement dated October 24, 1995 between the Company and
Nycomed Imaging AS. (Incorporated by reference from Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended December 31, 1995.)
10.6 Amended and Restated Distribution Agreement dated September
7, 1995 between the Company and Mallinckrodt Medical, Inc.
(Incorporated by reference from Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 1995.)
10.7* Amendment to Amended and Restated Distribution Agreement
dated November 4, 1996 between the Company and Mallinckrodt
Medical, Inc.
10.8 Investment Agreement dated December 7, 1988 between the Company
and Mallinckrodt Medical, Inc.(Incorporated by reference from
Exhibit 10.9 to the Company's Annual Report on form 10-K for the
fiscal year ended March 31, 1989.)
10.9 Investment Agreement dated September 7, 1995 between the Company
and Mallinckrodt Medical, Inc. (Incorporated by reference from
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended December 31, 1995.)
10.10 Letter Agreement dated February 18, 1991 between the Company
and Schering Aktiengesellschaft. (Incorporated by reference
from Exhibit 10.9 to the Company's Annual Report of Form
10-K for the fiscal year ended March 31, 1991.)
10.11* Settlement Agreement and Mutual Release dated September 10, 1996
between the Company and Shionogi & Co., Ltd.
10.12 Exclusive License Agreement dated April 1, 1992 between the
Company and The Regents of the University of California.
(Incorporated by reference from Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1992.)
10.13 License Agreement dated August 23, 1991 between the Johns Hopkins
University, Towson State University and the Company.
(Incorporated by reference from Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)
52
<PAGE>
10.14 License Agreement dated November 11, 1991 between the
Company and the Regents of the University of Michigan.
(Incorporated by reference from Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1992.)
10.15 Exclusive License Agreement dated July 31, 1990 between the
Company and the Regents of the University of California, and
Amendment Agreement dated April 1, 1992. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.16 License Option Agreement dated January 29, 1993 between the
Company and Abbott Laboratories. (Incorporated by reference from
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
January 29, 1993.)
10.17 License Termination Agreement dated September 18, 1995
between Dendritech, Inc., Michigan Molecular Institute and
the Company. (Incorporated by reference from Exhibit 10.24
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996.)
10.18+ Molecular Biosystems, Inc. Pre-1984 Nonstatutory Stock
Option Plan. (Incorporated by reference from Exhibit 10.11
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1989.)
10.19+ Molecular Biosystems, Inc. 1984 Incentive Stock Option Plan
and 1984 Nonstatutory Stock Option Plan, as amended by First
and Second Amendments. (Incorporated by reference from
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1988.)
10.20+ Third and Fourth Amendments to Molecular Biosystems, Inc.
1984 Incentive Stock Option Plan and 1984 Nonstatutory Stock
Option Plan. (Incorporated by reference from Exhibit 10.13
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1989.)
10.21+ Fifth Amendment to Molecular Biosystems, Inc. 1984 Incentive
Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
(Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1990.)
10.22+ Sixth and Seventh Amendments to Molecular Biosystems, Inc.
1984 Incentive Stock Option Plan and 1984 Nonstatutory Stock
Option Plan. (Incorporated by reference from Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1991.)
10.23+ Eighth and Ninth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
10.24+ Form of Stock Option Agreement used with the Company's 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by
53
<PAGE>
reference from Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1988.)
10.25+ Molecular Biosystems, Inc. 1993 Stock Option Plan. (Incorporated
by reference from Exhibit 4.2 to the Company's Registration
Statement No. 33-78572 on Form S-8, dated May 3, 1994, filed on
May 5, 1994.)
10.26+ Form of Stock Option Agreement used with the Company's 1993 Stock
Option Plan. (Incorporated by reference from Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.)
10.27+ Molecular Biosystems, Inc. 1993 Outside Directors Stock Option
Plan. (Incorporated by reference from Exhibit 4.2 to the
Company's Registration Statement No. 33-78564 on Form S-8, dated
May 3, 1994, filed on May 5, 1994.)
10.28+ Form of Stock Option Agreement used with the Company's 1993
Outside Directors Stock Option Plan. (Incorporated by
reference from Exhibit 10.35 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1994.)
10.29+ Employment Agreement dated April 25, 1995 between the
Company and Kenneth J. Widder, M. D. (Incorporated by
reference from Exhibit 10.30 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995.)
10.30+ Employment Agreement dated October 1, 1992 between the Company
and James L. Barnhart, Ph.D. (Incorporated by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.)
10.31+ Employment Agreement dated April 1, 1994 between the Company and
Gerard A. Wills. (Incorporated by reference from Exhibit 10.39
to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.)
10.32+ Employment Agreement dated August 1, 1994 between the
Company and Allan H. Mizoguchi. (Incorporated by reference
from Exhibit 10.41 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995.)
54
<PAGE>
10.33+ Employment Agreement dated November 1, 1995 between the Company
and Bobba Venkatadri. (Incorporated by reference from Exhibit
10.41 to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996.)
10.34+* First Amendment to Employment Agreement dated April 30, 1996
between the Company and Bobba Venkatadri.
10.35 Separation Agreement effective May 10, 1996 as amended on June 6,
1996 between the Company and Steven Lawson. (Incorporated by
reference from Exhibit 10.45 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996).
10.36* Partnership Agreement dated October 18, 1996 between the Company
and Bobba and Annapurna Venkatadri.
10.37 Sublease dated February 6, 1992 between the Company and Sunward
Technologies, California. (Incorporated by reference from
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.)
10.38 Triple Net Lease dated June 19, 1995 between the Company and
Radnor/Collins/Sorrento Partnership. (Incorporated by reference
from Exhibit 10.43 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.)
10.39 First Amendment to Lease dated July 15, 1994 between the Company
and Principal Mutual life Insurance Company. (Incorporated by
reference from Exhibit 10.44 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.40 Office Lease dated September 9, 1991 between the Company and The
Principal Financial Group. (Incorporated by reference from
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.)
10.41 Promissory note dated December 31, 1993 between the Company
and James L. Barnhart. (Incorporated by reference from
Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.)
10.42 Second Amendment to Promissory note dated June 24, 1996 between
the Company and James L. Barnhart. (Incorporated by reference
from Exhibit 10.52 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996.)
10.43 Promissory note dated December 31, 1993 between the Company and
John W. Young. (Incorporated by reference from Exhibit 10.49 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.)
19 Documents not previously filed are marked with an asterisk
(*).
55
<PAGE>
23* Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated April 21,1997, was filed
on May 9, 1997, reporting (1) Stay of Action by the FDA, (2)
the brand name announced for FS069, and (3) the Company's
patent matters.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on
May 20, 1997.
MOLECULAR BIOSYSTEMS, INC.
By: /s/ Kenneth J. Widder, M.D.
-----------------------------------------
Kenneth J. Widder, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kenneth J. Widder, M.D. Chairman of the Board May 20, 1997
- ------------------------------
Kenneth J. Widder, M.D.
/s/ Bobba Venkatadri President, Chief Executive May 20, 1997
- ------------------------------ Officer
Bobba Venkatadri
/s/ Gerard A. Wills Vice President - Finance May 20, 1997
- ------------------------------ and Chief Financial Officer
Gerard A. Wills (Principal Financial and
Accounting Officer)
/s/ Robert W. Brightfelt Director May 20, 1997
- ------------------------------
Robert W. Brightfelt
/s/ Charles C. Edwards, M.D. Director May 20, 1997
- ------------------------------
Charles C. Edwards, M.D.
/s/ Gordon C. Luce Director May 20, 1997
- ------------------------------
Gordon C. Luce
/s/ David Rubinfien Director May 20, 1997
- ------------------------------
David Rubinfien
/s/ David W. Barry, M.D. Director May 20, 1997
- ------------------------------
David W. Barry, M. D.
/S/ Jerry Jackson Director May 20, 1997
- ------------------------------
Jerry Jackson
57
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
EXHIBIT DESCRIPTION PAGE
- ------------------- ----
Exhibits -Exhibits marked with an asterisk are filed with
this Report; all other Exhibits are incorporated by
reference. Exhibits marked with a dagger are management
contracts or compensatory plans or arrangements.
3.1 Certificate of Incorporation of the Company, as amended to date
(by amendments filed March 4, 1981, March 30, 1982, March 14,
1983, April 18, 1983, and November 20, 1987). (Incorporated by
reference from Exhibit 3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1988.)
3.2 Certificate of Incorporation of Syngene, Inc. as amended
September 20, and December 31, 1989. (Incorporated by
reference from Exhibit 3.2 to the Company's Annual Report of
Form 10-K for the fiscal year ended March 31, 1990.)
3.3 By-Laws of the Company, as amended and restated September
18, 1990. (Incorporated by reference from Exhibit 3.3 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1991).
3.4 First Amendment, dated August 20, 1992 to the By-Laws of the
Company, as amended and restated September 18, 1990.
(Incorporated by reference from Exhibit 3.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1994.)
3.5 By-Laws of Syngene, Inc. (Incorporated by reference from
Exhibit 3.4 to the Company's Annual Report on form 10-K for
the fiscal year ended March 31, 1990.)
10.1 Restated License Agreement dated June 1, 1989 between the
Company and Steven B. Feinstein, M.D., and related Research
and Supply Agreement dated June 1, 1989. (Incorporated by
reference from Exhibits 10.1 and 10.2 to the Company's
Current Report on Form 8-K filed on June 9, 1989.)
10.2 Amendment to Research Support and Supply Agreement dated
December 15, 1992 between the Company and Steven B.
Feinstein, M.D. (Incorporated by reference from Exhibit 10.2
to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1993.)
10.3 License and Cooperative Development Agreement dated December 31,
1987 between the Company and Nycomed AS ("Nycomed"), and related
Investment Agreement dated December 31, 1987, Registration
Agreement dated December 31, 1987 and Common Stock Purchase
Warrant dated January 19, 1988. (Incorporated by reference from
Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1988.)
58
<PAGE>
Sequentially
Numbered
EXHIBIT DESCRIPTION PAGE
- ------------------- ----
10.4 Amendment to License and Cooperative Development Agreement dated
June 15, 1989 between the Company and Nycomed. (Incorporated by
reference from Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1989.)
10.5 Amendment No. 3 to License and Cooperative Development Agreement
dated October 24, 1995 between the Company and Nycomed Imaging
AS. (Incorporated by reference from Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q/A for the quarterly period ended
December 31, 1995.)
10.6 Amended and Restated Distribution Agreement dated September 7,
1995 between the Company and Mallinckrodt Medical, Inc.
(Incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995.)
10.7* Amendment to Amended and Restated Distribution Agreement dated
November 4, 1996 between the Company and Mallinckrodt Medical,
Inc.
10.8 Investment Agreement dated December 7, 1988 between the Company
and Mallinckrodt Medical, Inc.(Incorporated by reference from
Exhibit 10.9 to the Company's Annual Report on form 10-K for the
fiscal year ended March 31, 1989.)
10.9 Investment Agreement dated September 7, 1995 between the Company
and Mallinckrodt Medical, Inc. (Incorporated by reference from
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q/A for
the quarterly period ended December 31, 1995.)
10.10 Letter Agreement dated February 18, 1991 between the Company and
Schering Aktiengesellschaft. (Incorporated by reference from
Exhibit 10.9 to the Company's Annual Report of Form 10-K for the
fiscal year ended March 31, 1991.)
10.11* Settlement Agreement and Mutual Release dated September 10, 1996
between the Company and Shionogi & Co., Ltd.
10.12 Exclusive License Agreement dated April 1, 1992 between the
Company and The Regents of the University of California.
(Incorporated by reference from Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)
10.13 License Agreement dated August 23, 1991 between the Johns Hopkins
University, Towson State University and the Company.
(Incorporated by reference from Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1992.)
59
<PAGE>
Sequentially
Numbered
EXHIBIT DESCRIPTION PAGE
- ------------------- ----
10.14 License Agreement dated November 11, 1991 between the Company and
the Regents of the University of Michigan. (Incorporated by
reference from Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.15 Exclusive License Agreement dated July 31, 1990 between the
Company and the Regents of the University of California, and
Amendment Agreement dated April 1, 1992. (Incorporated by
reference from Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1992.)
10.16 License Option Agreement dated January 29, 1993 between the
Company and Abbott Laboratories. (Incorporated by reference from
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
January 29, 1993.)
10.17 License Termination Agreement dated September 18, 1995 between
Dendritech, Inc., Michigan Molecular Institute and the Company.
(Incorporated by reference from Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1996.)
10.18+ Molecular Biosystems, Inc. Pre-1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)
10.19+ Molecular Biosystems, Inc. 1984 Incentive Stock Option Plan and
1984 Nonstatutory Stock Option Plan, as amended by First and
Second Amendments. (Incorporated by reference from Exhibit 10.15
to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1988.)
10.20+ Third and Fourth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989.)
10.21+ Fifth Amendment to Molecular Biosystems, Inc. 1984 Incentive
Stock Option Plan and 1984 Nonstatutory Stock Option Plan.
(Incorporated by reference from Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1990.)
10.22+ Sixth and Seventh Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991.)
10.23+ Eighth and Ninth Amendments to Molecular Biosystems, Inc. 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
60
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10.24+ Form of Stock Option Agreement used with the Company's 1984
Incentive Stock Option Plan and 1984 Nonstatutory Stock Option
Plan. (Incorporated by reference from Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1988.)
10.25+ Molecular Biosystems, Inc. 1993 Stock Option Plan. (Incorporated
by reference from Exhibit 4.2 to the Company's Registration
Statement No. 33-78572 on Form S-8, dated May 3, 1994, filed on
May 5, 1994.)
10.26+ Form of Stock Option Agreement used with the Company's 1993 Stock
Option Plan. (Incorporated by reference from Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.)
10.27+ Molecular Biosystems, Inc. 1993 Outside Directors Stock Option
Plan. (Incorporated by reference from Exhibit 4.2 to the
Company's Registration Statement No. 33-78564 on Form S-8, dated
May 3, 1994, filed on May 5, 1994.)
10.28+ Form of Stock Option Agreement used with the Company's 1993
Outside Directors Stock Option Plan. (Incorporated by reference
from Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1994.)
10.29+ Employment Agreement dated April 25, 1995 between the
Company and Kenneth J. Widder, M. D. (Incorporated by
reference from Exhibit 10.30 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995.)
10.30+ Employment Agreement dated October 1, 1992 between the Company
and James L. Barnhart, Ph.D. (Incorporated by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.)
10.31+ Employment Agreement dated April 1, 1994 between the Company
and Gerard A. Wills. (Incorporated by reference from
Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.)
10.32+ Employment Agreement dated August 1, 1994 between the Company and
Allan H. Mizoguchi. (Incorporated by reference from Exhibit 10.41
to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995.)
10.33+ Employment Agreement dated November 1, 1995 between the Company
and Bobba Venkatadri. (Incorporated by reference from Exhibit
10.41 to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996.)
61
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10.34+* First Amendment to Employment Agreement dated April 30, 1996
between the Company and Bobba Venkatadri.
10.35 Separation Agreement effective May 10, 1996 as amended on
June 6, 1996 between the Company and Steven Lawson.
(Incorporated by reference from Exhibit 10.45 to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996).
10.36* Partnership Agreement dated October 18, 1996 between the Company
and Bobba and Annapurna Venkatadri.
10.37 Sublease dated February 6, 1992 between the Company and Sunward
Technologies, California. (Incorporated by reference from
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.)
10.38 Triple Net Lease dated June 19, 1995 between the Company and
Radnor/Collins/Sorrento Partnership. (Incorporated by reference
from Exhibit 10.43 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995.)
10.39 First Amendment to Lease dated July 15, 1994 between the Company
and Principal Mutual life Insurance Company. (Incorporated by
reference from Exhibit 10.44 to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.40 Office Lease dated September 9, 1991 between the Company and The
Principal Financial Group. (Incorporated by reference from
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992.)
10.41 Promissory note dated December 31, 1993 between the Company and
James L. Barnhart. (Incorporated by reference from Exhibit 10.48
to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.)
10.42 Second Amendment to Promissory note dated June 24, 1996 between
the Company and James L. Barnhart. (Incorporated by reference
from Exhibit 10.52 to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996.)
10.43 Promissory note dated December 31, 1993 between the Company and
John W. Young. (Incorporated by reference from Exhibit 10.49 to
the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994.)
62
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19 Documents not previously filed are marked with an asterisk (*).
23* Consent of Arthur Andersen LLP.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated April 21,1997, was filed on May 9,
1997, reporting (1) Stay of Action by the FDA, (2) the Brand Name
announced for FS069, and (3) the Company's patent matters.
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Exhibit 10.7
AMENDMENT NO. 1 TO
AMENDED AND RESTATED DISTRIBUTION AGREEMENT
This Amendment is entered into as of November 4, 1996 by Mallinckrodt
Medical, Inc., a Delaware corporation having offices at 675 McDonnell Boulevard,
Post Office Box 5840, St. Louis, Missouri 63134 ("Mallinckrodt"), and Molecular
Biosystems, Inc., a Delaware corporation having offices at 10030 Barnes Canyon
Road, San Diego, California 92121 ("MBI").
PREAMBLE
A. Mallinckrodt and MBI are parties to an Amended and Restated
Distribution Agreement dated as of September 7, 1995 ("ARDA"). Capitalized
terms which are not defined in this Amendment have the same meanings that they
have in ARDA.
B. Section 3.03(a) of ARDA requires MBI to use reasonable efforts to
enter into the Nycomed License Amendment with Nycomed in order to obtain
Nycomed's ALBUNEX rights in the Nycomed Territory and, if successful, to
transfer those rights to Mallinckrodt on the terms agreed to in a Nycomed
Territory Amendment.
C. MBI and Nycomed have entered into Amendment No. 3 to License and
Cooperative Development Agreement, dated as of October 24, 1995 (the "Nycomed
License Amendment"), pursuant to which MBI reacquired substantially all of
Nycomed's ALBUNEX rights in the Nycomed Territory.
D. Mallinckrodt and MBI desire to enter into the Nycomed Territory
Amendment, as contemplated by Section 3.03 of ARDA, pursuant to the provisions
of Section 16.07 of ARDA, and to amend ARDA in certain other respects.
Now, therefore, in consideration and their mutual promises, the parties
agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Amendment, and as used in ARDA as amended by this
Amendment, the following terms have these meanings:
(a) AGGREGATE NET SALES, as used in Section 2.9 of this Agreement,
means the sum of Mallinckrodt's Net Sales of each Separate Product plus the
net sales (calculated in the same manner as Mallinckrodt's Net Sales) of
all other sellers of the Separate Product in question.
<PAGE>
(b) ARDA is defined in the Paragraph A of the Preamble to this
Amendment. Unless
<PAGE>
otherwise qualified, references to ARDA in this Amendment mean ARDA prior
to its amendment by this Amendment.
(c) CLINICAL REVIEW is defined in Section 2.16(1) of ARDA (as amended
by Article 3 of this Amendment).
(d) COMPETITIVE PRODUCT means, in respect of particular Related
Albunex Products, an IN VIVO contrast agent for ultrasound imaging which is
approved for sale in the Index Country by a third party for substantially
the same indication or indications for which the Related Albunex Products
are approved for sale. The term "Competitive Product" includes all
finishes of the product.
(e) CURRENT PRODUCT means ALBUNEX with substantially the same
specifications and other characteristics approved for sale in the United
States as of October 1, 1996, regardless of the indication for which it is
approved for used.
(f) DR. FEINSTEIN means Steven B. Feinstein, M.D., or, as the context
may require, his designee for payments under the Feinstein License.
(g) EFFECTIVE DATE, as used in this Amendment (but not as used in
ARDA), means the date that this Amendment is signed by both parties.
(h) FEINSTEIN LICENSE means the Restated License Agreement, dated as
of June 1, 1989, between MBI and Dr. Feinstein, as amended by a letter
agreement dated June 14, 1994 (relating to Dr. Feinstein's designation of a
different payee for MBI's payments).
(i) FS means ALBUNEX described as "FS069" in the second full
paragraph of Section 1.04 of ARDA.
(j) INDEX COUNTRY means France, Germany, Italy, Spain or the United
Kingdom or, collectively, all of the remaining countries in the Nycomed
Territory.
(k) JOINT MARKETING TEAM is defined in Section 2.16(e) of ARDA (as
amended by Article 3 of this Amendment).
(l) MARKETING REVIEW is defined in Section 2.16(2) of ARDA (as
amended by Article 3 of this Amendment).
(m) NYCOMED LICENSE AMENDMENT is defined in Paragraph C of the
Preamble to this Amendment.
(n) PRIMARY MEASUREMENT PERIOD means, in respect of any Related
Albunex Products, (i) the first to occur of:
(1) the period of 12 consecutive calendar months beginning with
the month
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which is the same number of months following the month of the first
commercial sale of any Related Albunex Product as the number of months
by which the month of the first commercial sale of a Competitive
Product preceded the month of the first commercial sale of the Related
Albunex Product, or
(2) the period of 12 consecutive calendar months beginning with
the month following the month of the first commercial sale of any
Related Albunex Product if, at the time of such sale, there have been
no commercial sales of any Competitive Product, and
(ii) each of the next two successive periods of 12 consecutive calendar
months. For purposes of clause (i)(1), each whole or partial month shall
count as one month.
(o) RELATED ALBUNEX PRODUCTS means, in respect of an Index Country,
all Albunex Products for a particular indication, of any vial size, which
are sold or offered for sale in that Index Country. For purposes of this
definition only, the term "Albunex Products" does not include Albunex
Products consisting of the Current Product or Infoson.
(p) SECONDARY MEASUREMENT PERIOD means, in respect of any Primary
Measurement Period, the period of six consecutive calendar months beginning
with the calendar month following the month in which, pursuant to Section
3.02B(b) of ARDA, MBI requests such period to start.
(q) SEPARATE PRODUCT is defined in Section 2.5 of this Amendment.
ARTICLE 2
NYCOMED TERRITORY AMENDMENT
2.1 IDENTIFICATION. This Amendment constitutes the "Nycomed Territory
Amendment" as that term is defined in Section 3.03(a) of ARDA. As of the
Effective Date, Mallinckrodt's appointment in Section 3.01(c) of ARDA as the
exclusive distributor and exclusive sales representative for ALBUNEX to be sold
in and throughout the Nycomed Territory, and all of the other provisions of ARDA
relating to the parties' respective rights and duties in the Nycomed Territory
(as those provisions may be amended by this Amendment), shall become effective,
without the necessity of any further action by either party.
2.2 UPFRONT PAYMENT. Pursuant to Section 3.1 of the Nycomed License
Amendment, MBI paid $700,000 to Nycomed upon the parties' execution of the
Nycomed License Amendment, and pursuant to Section 3.2 of the Nycomed License
Amendment, MBI paid an additional $2 million to Nycomed on or about March 31,
1996. On December 17, 1996, Mallinckrodt shall pay $2.7 million to MBI by wire
transfer.
2.3 MILESTONE PAYMENTS. Sections 2.17(a) and (b) of ARDA provide that
Mallinckrodt shall pay to MBI "$3 million on the date when the Nycomed Territory
Amendment [I.E., this
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Amendment] becomes effective" and "$4 million upon the first commercial sale of
ALBUNEX in Germany by Mallinckrodt ... for an approved intravenous myocardial
perfusion indication ...." Section 3.3 of the Nycomed License Amendment
provides that MBI shall pay to Nycomed "45% of any amounts in excess of
$2,700,000 received by MBI in either up-front, milestone or similar payments
from third parties" in consideration for MBI's grant of ALBUNEX rights in the
Nycomed Territory. The payments that Mallinckrodt is required to make pursuant
to Sections 2.17(a) and (b) of ARDA will constitute "amounts in excess of
$2,700,000" for purposes of Section 3.3 of the Nycomed License Amendment.
Accordingly:
(a) on December 17, 1996, Mallinckrodt shall pay $3 million to MBI by
wire transfer, pursuant to Section 2.17(a) of ARDA;
(b) on or before January 16, 1997, Mallinckrodt shall pay $1.35
million (or 45% of $3 million) to Nycomed in satisfaction of Nycomed's
claims under Section 3.3 of the Nycomed License Amendment in respect of
Mallinckrodt's payment of $3 million to MBI pursuant to Section 2.17(a) of
ARDA;
(c) within five days after the date of the first commercial sale of
ALBUNEX in Germany by Mallinckrodt or an Affiliate of Mallinckrodt which is
specifically approved for an intravenous myocardial perfusion indication,
Mallinckrodt shall pay $4 million to MBI pursuant to Section 2.17(b) of
ARDA; and
(d) within 30 days after the date of the first commercial sale of
ALBUNEX in Germany by Mallinckrodt or an Affiliate of Mallinckrodt for an
approved intravenous myocardial perfusion indication, Mallinckrodt shall
pay $1.8 million (or 45% of $4 million) to Nycomed in satisfaction of
Nycomed's claims under Section 3.3 of the Nycomed License Amendment in
respect of Mallinckrodt's payment of $4 million to MBI pursuant to Section
2.17(b) of ARDA.
2.4 ROYALTIES TO MBI ON SALES OF INFOSON. Section 2.14 of ARDA deals with
the price to be paid by Mallinckrodt to MBI for ALBUNEX (including Infoson)
manufactured by MBI. ARDA does not deal with royalty payable by Mallinckrodt to
MBI in respect of Mallinckrodt's Net Sales of Infoson manufactured by Nycomed.
Section 7.01(c)(1)(E) of ARDA provides that the royalty payable by Mallinckrodt
to MBI in respect of Mallinckrodt's Net Sales of Infoson manufactured by
Mallinckrodt shall be the royalty agreed on in this Amendment. In regard to
these latter two royalties:
(a) Mallinckrodt shall pay MBI a royalty in respect of Mallinckrodt's
Net Sales of Infoson purchased from Nycomed equal to 40% of the amount
determined by subtracting from Mallinckrodt's gross profits in respect of
such sales the direct selling costs attributable to such sales (but not
including any royalties directly or indirectly payable to Nycomed pursuant
to Section 2.5 of this Amendment or to Dr. Feinstein pursuant to Section
2.6 of this Amendment), as Mallinckrodt's gross profits and direct selling
costs are determined using U.S. generally accepted accounting principles.
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(b) Mallinckrodt shall pay MBI a royalty in respect of Mallinckrodt's
Net Sales of Infoson manufactured by Mallinckrodt pursuant to Sections
2.05(c) and 7.01(c)(1)(E) of ARDA equal to 40% of the product determined by
multiplying each Infoson Product's Average Selling Price during the quarter
of sale by the number of vials of that product sold, less the sum of (i)
Mallinckrodt's fully allocated manufacturing cost for that Infoson Product
determined using U.S. generally accepted accounting principles and (ii)
until fully recovered, one-half of Mallinckrodt's Start-up Costs which are
not included in (i); but in no event shall the royalty be less than 15% or
more than 25%. "Infoson Products" shall be determined in the same manner
that Albunex Products are determined under Section 1.05 of ARDA, and the
"Average Selling Price" of Infoson Products shall be determined in the same
manner that the Average Selling Price of Albunex Products is determined
under Section 1.06 of ARDA.
(c) Royalties payable under this Section 2.4 shall be paid pursuant
to the procedures in Sections 7.01(c)(2)(E) and (F) of ARDA.
2.5 ROYALTIES TO NYCOMED. Section 3.5 of the Nycomed License Amendment
provides that, for the remaining term of the Nycomed License Amendment, MBI
shall pay Nycomed a royalty of 2.5% on the first $30 million of the Net Selling
Price of Licensed Products sold in the Nycomed Territory each year and 3.5% on
the Net Selling Price of Licensed Products on sales in excess of $30 million
each year (as "Net Selling Price" is defined in Section 3.5.1 of the Nycomed
License Amendment and "Licensed Product" is defined in Section I.B of the
Nycomed Agreement). Section 3.5 of the Nycomed License Amendment also provides
that "[a] separate royalty shall be payable in respect of each Licensed
Product." For purposes of this Amendment, the following products shall be
considered separate Licensed Products ("Separate Products"): (i) Infoson; (ii)
the Current Product and any substantially similar formulation; (iii) FS and any
substantially similar formulation; and (iv) any other formulation of ALBUNEX
which is not substantially similar to Infoson, the Current Product or FS.
Subject to Section 2.9 of this Amendment, Mallinckrodt shall pay to MBI, for
payment to Nycomed, the following royalty on Net Sales of ALBUNEX in the Nycomed
Territory:
(a) a royalty of 1.5% (= 2.5% x 0.60) on the first $30 million of Net
Sales of each Separate Product each calendar year; and
(b) a royalty of 2.1% (= 3.5% x 0.60) on Net Sales of each Separate
Product each calendar year in excess of $30 million.
Royalties payable under this Section 2.5 shall be paid pursuant to the
procedures in Section 7.01 (c)(2)(E) and (F) of ARDA.
2.6 ROYALTIES TO DR. FEINSTEIN. Section 5.2 of the Feinstein License
requires MBI to pay Dr. Feinstein a royalty of 1.25% of the Net Selling Price of
Licensed Products sold by sublicensees of MBI or by an affiliate of any such
sublicensee in any country other than the United States (as "Net Selling Price"
and "Licensed Products" are defined in Sections 1.4 and 1.2, respectively, of
the Feinstein License). Subject to Section 2.9 of this Amendment,
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<PAGE>
Mallinckrodt shall pay to MBI, for payment to Dr. Feinstein, a royalty of 0.75%
(= 1.25% x 0.60) on Net Sales of ALBUNEX in the Nycomed Territory. Royalties
payable under this Section 2.6 shall be paid pursuant to the procedures in
Section 7.01(c)(2)(E) and (F) of ARDA.
2.7 SUPPLY AGREEMENT WITH NYCOMED. Section 5 of Nycomed License Amendment
provides that, at MBI's option, MBI and Nycomed shall enter into a supply
agreement for Infoson. If MBI and Mallinckrodt determine that it is advisable
for Mallinckrodt to enter into such an agreement directly with Nycomed, and if
Mallinckrodt or Nycomed deems it necessary or advisable, MBI shall waive its
rights pursuant to Section 5 of Nycomed License Amendment.
2.8 SHIPMENT. MBI shall ship ALBUNEX for sale in the Nycomed Territory in
a commercially reasonable manner from MBI's warehouse to any one site in the
Nycomed Territory designated by Mallinckrodt. Mallinckrodt and MBI shall share
on a 60%-40% basis, respectively, in all shipping costs to any such designated
site and in all labelling costs of such ALBUNEX. Title to the product shipped
shall pass to Mallinckrodt upon shipment from MBI's warehouse.
2.9 SURVIVAL OF ROYALTY AND OTHER OBLIGATIONS.
(a) If Mallinckrodt exercises its manufacturing rights under Section
7.01(c)(1)(A) of ARDA:
(1) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.5
of this Amendment shall be considered modified to provide for a payment to
MBI, in respect of each Separate Product, of a percentage of the royalty
due to Nycomed under Section 3.5 of the Nycomed License Amendment in
respect of that Separate Product. This percentage shall be equal to the
product of (i) the quotient obtained by dividing Mallinckrodt's Net Sales
of the Separate Product by the Aggregate Net Sales of the Separate Product
multiplied by (ii) 100. The parties shall report their respective portions
of the Aggregate Net Sales of each Separate Product to one another for
purposes of calculating the applicable percentage under this Section
2.9(a)(1).
(2) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.6
of this Amendment, shall survive and continue, for as long as a royalty
remains payable by MBI under Section 5.2 of the Feinstein License, except
that Mallinckrodt's payments to MBI shall be the entire amount of the
royalty due to Dr. Feinstein under 5.2(b) of the Feinstein License in
respect of Licensed Products (as "Licensed Products" defined in Section 1.2
of the Feinstein License) manufactured and sold by Mallinckrodt in the
Nycomed Territory (as provided in Sections 4.03(a) and 14.04 of ARDA).
(b) If ARDA, as amended by this Amendment, terminates following notice
from Mallinckrodt pursuant to Sections 14.02(b), (c), or (e) of ARDA, then in
addition to the other effects described in Section 14.03 of ARDA:
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(1) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.4
of this Amendment shall survive and continue until the later of the third
anniversary of the date that the FDA approves an intravenous myocardial
perfusion indication of ALBUNEX for sale in the United States or July 1,
2003.
(2) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.5
of this Amendment shall survive and continue, for as long as a royalty
remains payable by MBI under Section 3.5 of the Nycomed License Amendment,
except that until the latest of (i) the third anniversary of the date that
the FDA approves an intravenous myocardial perfusion indication of ALBUNEX
for sale in the United States, (ii) July 1, 2003 or (iii) termination of
ARDA, the royalty payable by Mallinckrodt on Net Sales of ALBUNEX in the
Nycomed Territory shall be:
(a) on the first $30 million of Net Sales of each Separate
Product for each calendar year, the greater of (i) 1.5% or (ii) 2.5%
minus an amount equal to the royalty payable by Mallinckrodt to MBI
under Section 7.01(c)(1)(B) of ARDA in respect of that Separate
Product; and
(b) on Net Sales of each Separate Product for each calendar year
in excess of $30 million, the greater of (i) 2.1% or (ii) 3.5% minus
an amount equal to the royalty payable by Mallinckrodt to MBI under
Section 7.01(c)(1)(B) of ARDA in respect of that Separate Product.
After such date, Mallinckrodt shall pay MBI a percentage of the royalty due
to Nycomed under Section 3.5 of the Nycomed License Amendment in respect of
each Separate Product. For each Separate Product, this percentage shall be
equal to the product of (i) the quotient obtained by dividing
Mallinckrodt's Net Sales of the Separate Product by the Aggregate Net Sales
of the Separate Product multiplied by (ii) 100. The parties shall report
their respective portions of the Aggregate Net Sales of each Separate
Product to one another for purposes of calculating the applicable
percentage under this Section 2.9(b)(2).
(3) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.6
of this Amendment, shall survive and continue, for as long as a royalty
remains payable by MBI under Section 5.2 of the Feinstein License, except
that Mallinckrodt's payments to MBI shall be the entire amount of the
royalty due to Dr. Feinstein under 5.2(b) of the Feinstein License in
respect of Licensed Products (as "Licensed Products" defined in Section 1.2
of the Feinstein License) manufactured and sold by Mallinckrodt in the
Nycomed Territory.
(c) If ARDA, as amended by this Amendment, terminates following notice
from MBI pursuant to Sections 14.02(b), (d), or (f) of ARDA, then in addition to
the other effects described in Section 14.03 of ARDA:
(1) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.4
of this
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Amendment shall survive and continue until the expiration of the last
patent relating to ALBUNEX to expire.
(2) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.5
of this Amendment shall survive and continue, for as long as a royalty
remains payable by MBI under Section 3.5 of the Nycomed License Amendment,
except that Mallinckrodt's payments to MBI shall be a percentage of the
royalty due to Nycomed under Section 3.5 of the Nycomed License Amendment
in respect of each Separate Product. For each Separate Product, this
percentage shall be equal to the product of (i) the quotient obtained by
dividing Mallinckrodt's Net Sales of the Separate Product by the Aggregate
Net Sales of the Separate Product multiplied by (ii) 100. The parties
shall report their respective portions of the Aggregate Net Sales of each
Separate Product to one another for purposes of calculating the applicable
percentage under this Section 2.9(c)(2).
(3) Mallinckrodt's royalty obligation to MBI pursuant to Section 2.6
of this Amendment shall survive and continue, for as long as a royalty
remains payable by MBI under Section 5.2 of the Feinstein License, except
that Mallinckrodt's payments to MBI shall be the entire amount of the
royalty due to Dr. Feinstein under 5.2(b) of the Feinstein License in
respect of Licensed Products (as "Licensed Products" is defined in Section
1.2 of the Feinstein License) manufactured and sold by Mallinckrodt in the
Nycomed Territory.
2.10 MBI WAIVERS. If either Mallinckrodt or Nycomed considers it necessary
or advisable, in order to permit Mallinckrodt to enter into an agreement with
Nycomed to assume Nycomed's responsibility for product registration activities
or clinical studies, MBI shall (a) execute the notice required by Section 4.1 of
the Nycomed License Amendment to permit Nycomed to terminate all of its
registration activities and (b) execute the notice required by Section 4.2 of
the Nycomed License Amendment to permit Nycomed to discontinue work on the
clinical studies. In either case, the notice shall be effective as of the date
that Mallinckrodt assumes such responsibility.
2.11 MAINTENANCE OF AMENDMENT. MBI shall take such actions as are
necessary and advisable to maintain the Nycomed License Amendment in force,
including, but not limited to, paying all royalties and other sums due to
Nycomed. MBI shall give Mallinckrodt 10 business days' prior written notice of
any proposed amendment or modification of the Nycomed License Amendment and
shall not enter into any such amendment or modification that adversely affects
Mallinckrodt without Mallinckrodt's prior written consent.
ARTICLE 3
AMENDMENT OF ARTICLE 2 OF ARDA
Paragraph 2.16 of ARDA is amended to read as follows:
2.16 JOINT STEERING COMMITTEE. MBI and Mallinckrodt shall establish a
joint
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steering committee (the "Joint Steering Committee"), which shall have two
functions:
(1) to review, on a quarterly basis (or more frequently as requested
by either party), clinical trial programs relating to the development
and regulatory approval of ALBUNEX, with a particular emphasis on
reviewing the design and implementation of clinical trials and any
Investigational Device Exemption or Investigational New Drug
applications to the FDA (including related amendments and other
ancillary filings) and corresponding filings with foreign equivalents
of the FDA ("Clinical Review"); and
(2) to review, on a quarterly basis (or more frequently as requested
by either party), the development and implementation of marketing
plans, strategies and budgets in the Territory, the Additional
Territory and the Nycomed Territory ("Marketing Review").
In respect of Clinical Review, the Committee is intended to provide a
mechanism to enable the parties to share their expertise and concerns
relating to clinical programs, regulatory affairs and cost-effectiveness
and reimbursement issues, and shall have significant authority and
flexibility in determining the objectives, number, design and other
features of clinical trials, with a view to maximizing the return on
development costs and expediting commercialization. In respect of
Marketing Review, the Committee is intended to provide a mechanism to
enable the parties, consistent with the other provisions of this Agreement,
to gather and share marketing and other information that will enable them
to plan and implement marketing strategies designed to accomplish their
mutual goals of (i) obtaining market leadership and maximizing distribution
of ALBUNEX in the Territory, the Additional Territory and the Nycomed
Territory, and in particular countries within each territory, and (ii)
obtaining a superior return on their respective investments while balancing
the expenses of marketing, advertising, selling and distribution against
expected increases in sales and profits. In this regard, the parties
recognize that market conditions in each territory, and in particular
countries within each territory, are constantly changing, and that
Marketing Review is intended to be a dynamic and continuing process.
The Committee shall consist of equal numbers of MBI and Mallinckrodt
representatives (up to a maximum of three representatives from each party)
and shall adopt procedures to govern its activities substantially in the
form described on Appendix 7. The parties shall give prompt written notice
to one another of any changes in their respective representatives on the
Committee.
(a) The Joint Steering Committee shall have the authority to specify
the clinical trials and other activities required to be performed under
Section 2.15(b) and the additional clinical trials required to be performed
under Section 2.15(c), and MBI shall not make any expenditure under either
of those Sections without the Committee's prior authorization. The
Committee shall have no authority regarding the allocation or expenditure
of the $10 million that MBI is required to spend under Section 2.15(d) (or
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any other expenditures by MBI).
(b) The Joint Steering Committee's decisions shall be guided by the
following principles, emphasizing both quality and speed:
(1) it is very important to bring a product to market in the
shortest possible time consistent with the prevailing regulatory
climate (but the quality of the clinical program, including clinical
utility and cost-effectiveness, is equally important);
(2) it is important that clinical studies be conducted and their
results presented in a thorough, well-organized and professional
manner;
(3) the Committee's decisions should be made with a sense of
urgency consistent with the prevailing regulatory climate, applying
the standard of a prudent businessman who has a lead over his
competitors and wants to maintain that lead, and with a view towards
operating by consensus and in a manner intended to emphasize
partnership and a commonality of interests; and
(4) it is important to achieve the broadest possible market
penetration in each significant market at the earliest possible date,
consistent with a responsibly conducted product launch.
(c) In the event of a dispute over a matter relating to Clinical
Review that cannot be resolved by the Committee, MBI and Mallinckrodt shall
attempt to resolve the dispute informally in light of the guiding
principles in Section 2.16(b). If MBI and Mallinckrodt are unable to
resolve the dispute, they shall each designate as a referee an unaffiliated
person with senior-level credentials in the medical, scientific, clinical
and administrative areas relevant to the Committee's activities, and the
two referees shall attempt to resolve the dispute. If they are unable to
do so within a reasonable period, they shall jointly appoint a third person
with similar qualifications to act as an arbitrator. In reaching a
decision, the arbitrator shall take into account such matters as he
considers appropriate, and may require the parties to provide a written
statement or oral presentation in support of their respective positions.
The arbitrator's decision shall be binding on MBI and Mallinckrodt. During
the pendency of the dispute, (i) Mallinckrodt shall not withhold (and
neither the referees nor any arbitrator appointed by them shall have
authority to excuse or delay) any payments due from Mallinckrodt to MBI
under this Agreement and (ii) MBI shall deposit all payments received from
Mallinckrodt under Section 2.15 during the pendency of the dispute in a
segregated account in MBI's name. This account may be invested in
short-term U.S. Treasury obligations or in any other manner approved by
Mallinckrodt (which shall not unreasonably withhold its approval), and MBI
may transfer the earnings to its general operating accounts. MBI and
Mallinckrodt shall each pay the fees and expenses of its own referee and
one-half of the fees and expenses of any arbitrator that the two referees
appoint.
(d) In the event of a dispute over a matter relating to Marketing
Review that cannot be resolved by the Committee, MBI and Mallinckrodt shall
attempt to resolve the dispute
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informally in light of the guiding principles in Section 2.16(b). If MBI
and Mallinckrodt are unable to resolve the dispute, the dispute shall not
be referred to referees or subject to arbitration (under Section 2.16(c),
Section 12.01 or otherwise) and Mallinckrodt's position shall be
controlling (as long as it does not involve any cash expenditure by MBI).
(e) In order to assist the Joint Steering Committee in its Marketing
Review, MBI and Mallinckrodt shall establish a joint marketing team (the
"Joint Marketing Team") to make recommendations to the Joint Steering
Committee regarding the timing, budget, manner and other considerations
relevant to the contemplated product launch of ALBUNEX (including, but not
limited to, the Current Product) in any territory or in a particular
country or countries within any territory. These recommendations may
include the use of co-promotion strategies, if considered appropriate. The
Joint Marketing Team shall consist of equal numbers of MBI and Mallinckrodt
representatives and shall adopt procedures to govern its activities
substantially similar to the procedures adopted by the Joint Marketing Team
to govern its activities. The Joint Marketing Team will engage the
services of an independent marketing consultant to give advice regarding
the product launch of FS in the Territory and the Nycomed Territory. The
consulting firm appointed by the Joint Steering Committee shall have a
national or international reputation. Mallinckrodt shall pay the fees and
expenses of the consulting firm appointed under this Section 2.16(e) but
MBI and Mallinckrodt shall jointly own all reports and studies prepared by
such consulting firm pursuant to its appointment under this Section 2.16.
(f) The authority of the Joint Steering Committee in respect of
Clinical Review shall continue indefinitely but shall cease upon 30 days'
prior written notice from Mallinckrodt or MBI to the other given at any
time after the latest of: (i) the date that ALBUNEX is approved for sale
in the United States and in the European Union for an intravenous
myocardial perfusion indication; (ii) the date that ALBUNEX is approved for
sale in the United States and in the European Union for a radiology
indication; (iii) the date that MBI has expended, in accordance with the
direction of the Joint Steering Committee (by a unanimous vote of its
members), the $10 million that MBI is required to spend under Section
2.15(b) and the $5 million that MBI may be required to spend under Section
2.15(c) (as this latter amount may be increased by agreement of the
parties); or (iv) the date that Mallinckrodt ceases to be the exclusive
distributor and sales representative for ALBUNEX sold in and throughout any
territory (except for sub-distributors appointed by Mallinckrodt or an
Affiliate of Mallinckrodt). The authority of the Joint Steering Committee
in respect of Marketing Review shall continue indefinitely but shall cease
in respect of Marketing Review for any territory on the date that
Mallinckrodt ceases to be the exclusive distributor and sales
representative for ALBUNEX sold in and throughout that territory (except
for sub-distributors appointed by Mallinckrodt or an Affiliate of
Mallinckrodt).
ARTICLE 4
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AMENDMENT OF ARTICLE 3 OF ARDA
4.1 NEW SECTION 3.02B. The following provision is added as Section 3.02B
of ARDA:
3.02B ADDITIONAL QUALIFICATION ON EXCLUSIVITY IN NYCOMED TERRITORY.
Mallinckrodt's appointment under Section 3.01(c) as the exclusive
distributor and exclusive sales representative for ALBUNEX sold in and
throughout the Nycomed Territory is subject to the additional qualification
that:
(1) if one or more Competitive Products are being sold in an
Index Country; and
(2) if Mallinckrodt's sales of Related Albunex Products in that
Index Country during any Primary Measurement Period do not equal or
exceed 100% of the sales in that Index Country of the Competitive
Product having the highest sales (by revenues) during the same period;
and
(3) pursuant to Section 3.02B(b), MBI requests the Secondary
Measurement Period to start; and
(4) if Mallinckrodt's sales of the same Related Albunex Products
during the Secondary Measurement Period, as reported to the Joint
Steering Committee by Mallinckrodt pursuant to Section 3.02B(b) or by
an independent marketing consultant pursuant to Section 3.02B(c), do
not equal or exceed 100% of the sales of the Competitive Product
having the highest sales (by revenues) during the same period,
then MBI shall have the right to require Mallinckrodt to appoint a third
party designated by MBI and approved by Mallinckrodt (whose approval shall
not be unreasonably withheld) as a distributor of the Related Albunex
Products in that Index Country, as provided in Section 3.02B(d).
(a) Mallinckrodt's sales of Related Albunex Products shall be
measured by the aggregate Net Sales during the Primary or Secondary
Measurement Period, as the case may be, of each of the separate Albunex
Products comprising the Related Albunex Products. Sales of Competitive
Products shall be measured in a substantially equivalent manner. If the
necessary information is unavailable to permit sales of Competitive
Products to be measured in a substantially equivalent manner, both
Mallinckrodt's sales and sales of Competitive Products shall be measured
using an alternative methodology acceptable to MBI and Mallinckrodt.
(b) Mallinckrodt shall monitor sales of all Competitive Products, if
any, and shall informally report to the Joint Steering Committee at least
quarterly on sales of Competitive Products and formally report to the
Committee on sales of Competitive Products during each Primary Measurement
Period as soon as the relevant information
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becomes available. If Mallinckrodt's sales of Related Albunex Products in
an Index Country during any Primary Measurement Period, as reported to the
Joint Steering Committee by Mallinckrodt pursuant to this Section 3.02B(b)
or by an independent marketing consultant pursuant to Section 3.02B(c), do
not equal or exceed 100% of the sales in that Index Country of the
Competitive Product having the highest sales (by revenues) during the same
period, MBI may request the Secondary Measurement Period to start by
written notice to Mallinckrodt within 30 days after the Joint Steering
Committee's receipt of Mallinckrodt's report or the report of the
independent marketing consultant, as the case may be. Mallinckrodt shall
report to the Joint Steering Committee on sales of all Competitive Products
during the Secondary Measurement Period as soon as the relevant information
becomes available.
(c) If MBI reasonably questions the accuracy of any report by
Mallinckrodt to the Joint Steering Committee pursuant to Section 3.02B(b),
the Joint Steering Committee shall promptly engage the services of an
independent marketing consultant to review Mallinckrodt's report and
independently determine sales of Competitive Products during the Primary or
Secondary Measurement Period, as the case may be. If the report by the
independent marketing consultant confirms Mallinckrodt's report to the
Joint Steering Committee, MBI shall pay the independent marketing
consultant's fees and expenses; and if the report by the independent
marketing consultant does not confirm Mallinckrodt's report to the Joint
Steering Committee, Mallinckrodt shall pay the independent marketing
consultant's fees and expenses. Each consulting firm appointed by the
Joint Steering Committee shall have a national or international reputation.
(d) MBI's right under this Section 3.02B to require Mallinckrodt to
appoint a third party designated by MBI (and approved by Mallinckrodt) as a
distributor of Related Albunex Products in an Index Country shall become
exercisable, subject to Section 3.02B(e), if and when (i) pursuant to
Section 3.02B(b), Mallinckrodt reports to the Joint Steering Committee, or
(ii) pursuant to Section 3.02B(c), an independent marketing consultant
reports to the Joint Steering Committee, that Mallinckrodt's sales of
Related Albunex Products during the Secondary Measurement Period did not
equal or exceed 100% of the sales of the Competitive Product having the
highest sales (by revenues) during the same period. If MBI's right becomes
exercisable, MBI's right shall remain exercisable for a period of 180 days
and may be exercised at any time during this period by written notice to
Mallinckrodt. If MBI exercises its right:
(1) Mallinckrodt shall promptly negotiate the terms of a
distribution agreement with the third party designated by MBI (and
approved by Mallinckrodt) and shall propose terms generally consistent
with the terms of comparable distribution agreements that Mallinckrodt
has entered into with other parties. Mallinckrodt shall keep MBI
reasonably informed of its negotiations with the third party.
(2) If for any reason any third party that MBI initially or
subsequently designates (and Mallinckrodt approves) fails or refuses
to enter into a distribution agreement with Mallinckrodt on the terms
described in Section 3.02B(d)(1) within
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90 days after Mallinckrodt begins negotiations, MBI shall have the
right, which may be exercised only once in respect of any Index
Country, to designate a new third party (subject to Mallinckrodt's
approval, which shall not be unreasonably withheld) with whom
Mallinckrodt shall be required to negotiate a distribution agreement
in accordance with this Section 3.02B(d).
Any distribution agreement that Mallinckrodt otherwise may be required to
enter into under this Section 3.02B(d) may be entered into by an Affiliate
of Mallinckrodt.
(e) MBI's right under this Section 3.02B to require Mallinckrodt to
appoint a third party designated by MBI (and approved by Mallinckrodt) as a
distributor of Related Albunex Products in an Index Country shall not
become exercisable under Section 3.02B(d) if:
(1) the Related Albunex Products are not substantially
equivalent or superior in their clinical profiles (in terms of safety
and efficacy) to the clinical profile of the Competitive Product
having the highest sales (by revenues) during the Primary Measurement
Period; or
(2) the approval (in respect of both regulatory approval and
pricing approval) for the commercial sale in the Index Country of any
Related Albunex Product did not occur within six months after the
first commercial sale of the Competitive Product having the highest
sales (by revenues) during the Primary Measurement Period; or
(3) Mallinckrodt's appointment under Section 3.01(c) as the
exclusive distributor and exclusive sales representative for ALBUNEX
sold in and throughout the Nycomed Territory has become co-exclusive
pursuant to MBI's exercise of its option under Section 3.02(b) of ARDA
or pursuant to Section 9.01(a) or (b) of ARDA.
4.2 AMENDMENT OF SECTION 3.06(a). Section 3.06(a) of ARDA is amended to
read as follows:
3.06 DUTIES OF MALLINCKRODT. In addition to its other duties
hereunder, Mallinckrodt shall:
(a) Treat ALBUNEX as an important contrast product in the same manner
that Mallinckrodt traditionally prepares for the marketing of and markets
its important contrast line of products for purposes of Mallinckrodt's
pre-marketing, marketing, sales and distribution efforts and expenditures.
By way of guidance in the interpretation of Mallinckrodt's responsibilities
under this section, Mallinckrodt has informed MBI that it considers ALBUNEX
to have the potential to be a leading product within Mallinckrodt's product
portfolio in terms of its importance to Mallinckrodt's revenues and net
income, and that Mallinckrodt will support the pre-market preparation,
product launch, marketing
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support and distribution of ALBUNEX in a manner that will maximize
Mallinckrodt's return on the product given its potential at the time that
further investment in the product is considered. Mallinckrodt's marketing,
sales and distribution efforts regarding ALBUNEX shall place emphasis on
all relevant clinical indications of ALBUNEX, market segments and
appropriate geographical regions in the Territory, the Additional Territory
and the Nycomed Territory, and the recruitment of medical and scientific
opinion leaders;
4.3 AMENDMENT OF SECTION 3.07. Section 3.07 of ARDA is amended to read as
follows:
3.07 MARKETING.
(a) Promptly after Mallinckrodt's annual marketing and sales plan for
ALBUNEX is approved internally each year, Mallinckrodt shall provide MBI
with an appropriately detailed summary of the plan for MBI's internal use.
(b) Mallinckrodt shall, from time to time and in its sole discretion,
establish the prices at which ALBUNEX shall be sold by it or its
Affiliates. Terms of all sales, including but not limited to credit,
billing and shipments, shall be established by Mallinckrodt in its sole
discretion.
(c) If (i) Mallinckrodt or an Affiliate of Mallinckrodt proposes to
enter into a distribution or other agreement for the sale and distribution
of ALBUNEX with a third party other than a third party designated by MBI
purusant to Section 3.02B (a "Distributor"), (ii) the agreement would
require the Distributor to make upfront payments to Mallinckrodt or its
Affiliate as a condition of being appointed a distributor and (iii) the
agreement would require Mallinckrodt or its Affiliate to pay a commission
(or make other payments) to the Distributor in respect of the Distributor's
sales of ALBUNEX to end users, then:
(1) Mallinckrodt or its Affiliate shall consult with MBI
regarding the allocation between them of the benefit of the upfront
payments and the burden of the commissions (or other) payments;
(2) MBI shall have 30 days from the date that Mallinckrodt or
its Affiliate provides MBI with written notice of the relevant details
in which to give written notice to Mallinckrodt or its Affiliate of
the portion, if any (but in no event exceeding 40% without the written
consent of Mallinckrodt or its Affiliate), of the upfront payments
from the Distributor that MBI elects to have paid over to MBI;
(3) if MBI elects to have Mallinckrodt or its Affiliate pay over
a portion of the upfront payments from the Distributor, Mallinckrodt
or its Affiliate shall do so within 30 days after receipt of the
upfront payments, and MBI shall reimburse Mallinckrodt or its
Affiliate, within 30 days after receipt of written notice of payment,
for the same percentage of each commission (or other) payment that
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Mallinckrodt or its Affiliate pays to the Distributor in accordance
with the terms of the distribution or other agreement; and
(4) if MBI does not elect to have Mallinckrodt or its Affiliate
pay over any portion of the upfront payments, or if MBI fails to
respond within 30 days to the written notice from Mallinckrodt or its
Affiliate of the relevant details, neither Mallinckrodt (or its
Affiliate) nor MBI shall have any obligation to the other in respect
of the upfront and commission (or other) payments.
(d) If (i) Mallinckrodt or an Affiliate of Mallinckrodt enters into a
distribution or other agreement for the sale and distribution of ALBUNEX
with a Distributor, (ii) the agreement requires the Distributor to make
upfront payments to Mallinckrodt or its Affiliate as a condition of being
appointed a distributor and (iii) the agreement does not require
Mallinckrodt or its Affiliate to pay a commission (or make other payments)
to the Distributor in respect of the Distributor's sales of ALBUNEX to end
users, then Mallinckrodt or its Affiliate shall pay 40% of the upfront
payments to MBI within 30 days after receipt of the upfront payments.
(e) If Mallinckrodt or an Affiliate of Mallinckrodt enters into a
distribution or other agreement for the sale and distribution of ALBUNEX
with a third party designated by MBI pursuant to Section 3.02B (a
"MBI-Designated Distributor"), then:
(A) Mallinckrodt or its Affiliate shall pay 40% of the upfront
payments, if any, paid by the MBI-Designated Distributor to MBI within
30 days after receipt of the upfront payments; and
(B)MBI shall reimburse Mallinckrodt or its Affiliate for 40% of
each commission (or other payment), if any, paid to the MBI-Designated
Distributor within 30 days after receipt of written notice of payment
from Mallinckrodt or its Affiliate.
(f) Sections 3.07(c), (d) and (e) shall not apply in respect of any
territory if and when Mallinckrodt is entitled to manufacture ALBUNEX for
sale in that territory pursuant to Section 7.01(c).
ARTICLE 5
MISCELLANEOUS
5.1 INTERPRETATION. As amended by this Amendment, ARDA remains in full
force and effect. In the event of inconsistency or conflict between any
provisions of this Amendment and the provisions of ARDA, the provisions of this
Amendment shall control.
5.2 RESEARCH QUANTITIES. MBI has received requests from researchers and
clinicians for samples of the Current Product. MBI may (but shall not be
required to) fill these requests if doing so is legally permissible as long as
the quantities provided are minimal and intended
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only for non-clinical basic research. MBI shall keep Mallinckrodt promptly and
fully informed of MBI's activities in this regard.
5.3 COUNTERPARTS. This Amendment may be signed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
In witness, the parties have executed this Amendment.
MALLINCKRODT MEDICAL, INC.
By /s/ J.C. Carlile
------------------------------------
Name: J.C. Carlile
--------------------------
Title:
--------------------------
MOLECULAR BIOSYSTEMS, INC.
By /s/ Bobba Venkatadri
------------------------------------
Name: Bobba Venkatadri
Title: President
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Exhibit 10.11
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE
("Agreement") is entered into as of the 10th day of September, 1996 by and
between SHIONOGI & CO., LTD., a Japanese corporation, having its principal
offices at 1-8 Doshomachi 3-chome, Chuo-ku, Osaka 541, Japan ("Shionogi")
and MOLECULAR BIOSYSTEMS, INC., a Delaware corporation, having its principal
offices at 10030 Barnes Canyon Road, San Diego, California, 92121 USA ("MBI")
to resolve any and all pending disputes between them.
W I T N E S S E T H:
WHEREAS, Shionogi and MBI (jointly referred to as the "Parties") have
entered into a License and Cooperative Development Agreement dated March 2,
1989, as amended September 14, 1993, which provided, INTER ALIA, for MBI's
granting of a license to Shionogi for certain rights to AlbunexR in Japan, The
Republic of China (Taiwan) and The Republic of Korea (South Korea) ("License
Agreement");
WHEREAS, the Parties have served each other with notices of
termination of the License Agreement;
WHEREAS, the License Agreement contains an arbitration clause
requiring the Parties to resolve their respective disputes through the American
Arbitration Association;
WHEREAS, each of the Parties has filed a Demand for Arbitration
(collectively, "Demands for Arbitration") against the other, and such Demands
for Arbitration are currently pending before the American Arbitration
Association in New York, New York, in a proceeding entitled SHIONOGI & CO., LTD.
V. MOLECULAR BIOSYSTEMS, INC., AAA Case No. 13-T-133-00300-96 ("Arbitration");
Page 1 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
WHEREAS, the Parties recognize the risks and expense inherent in all
arbitration, litigation or formal dispute resolution;
WHEREAS, the Parties desire to enter into this Agreement to compromise
and settle the issues of the Arbitration and other related matters without an
admission of liability or fault by either Shionogi or MBI;
WHEREAS, the Parties desire to resolve and settle all disputes between
the Parties including, but not limited to, the claims raised in the Arbitration,
upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained in this Agreement, the Parties do promise and agree as follows:
1. INCORPORATION OF RECITALS. The foregoing recitals are hereby incorporated
into this Agreement as fully and effectually as if they were set forth at
length in this paragraph.
2. DEFINITIONS. The terms used in this Agreement have the meanings given them
in the License Agreement, except as follows:
a. "Agreement" means this Settlement Agreement and Mutual Release.
b. "AlbunexR Demand" means any request from a customer or potential
customer for AlbunexR, or for an ultrasound contrast imaging
agent, within the indications approved for AlbunexR by the MHW.
c. "AlbunexR-related Business" means the business activities
involved in Shionogi's role with regard to AlbunexR.
d. "Clinical Data" means any data maintained, gathered, compiled, or
Page 2 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
generated by Shionogi or anyone acting on Shionogi's behalf and
submitted to the MHW for the purpose of obtaining NDA Approval.
e. "FS069" means MBI's second generation ultrasound contrast imaging
agent consisting of perfluoropropane-filled microspheres in human
serum albumin.
f. "Import License" means approval obtained from the MHW to import
AlbunexR into Japan.
g. "MHW" means the Ministry of Health and Welfare of Japan.
h. "NDA" means a new drug application submitted to the MHW by
Shionogi pertaining to AlbunexR.
i. "NDA Approval" means the AlbunexR NDA approval granted to
Shionogi by the MHW to import and manufacture AlbunexR.
j. "New Licensee" means a person or entity to whom or which MBI
grants some or all of MBI's rights to market and sell AlbunexR in
Japan.
3. DATE AND TIME REFERENCE. All acts, obligations or events required to be
performed or to take place under this Agreement by a given date shall be
performed according to the date and time zone of Japan.
4. MONETARY SETTLEMENT. MBI shall pay Shionogi a total of eight million, five
hundred thousand U.S. dollars ($8,500,000.00), payable via wire transfer of
immediately available federal funds to an account specified by Shionogi, as
follows:
a. Three million U.S. dollars ($3,000,000.00) before the close of
the third business day following the complete execution of this
Agreement by the
Page 3 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
Parties and their counsel.
b. Two million U.S. dollars ($2,000,000.00) on or before September
10, 1997;
c. Two million U.S. dollars ($2,000,000.00) on or before September
10, 1998; and
d. One million five-hundred thousand U.S. dollars ($1,500,000.00) on
or before September 10, 1999.
5. CONSENT TO JURISDICTION AND STIPULATED JUDGMENT IN THE EVENT OF
NON-PAYMENT.
a.Concurrently with the execution of the Agreement, MBI shall
execute a Confession of Judgment and Statement Authorizing Entry
of Judgment and shall obtain from qualified counsel an Attorney's
Certificate of Examination (collectively, "Stipulated Judgment"),
all in the forms attached hereto as Exhibits A-1, A-2 and A-3,
which could be filed in Los Angeles County Superior Court for
entry and enforcement in the event of non-payment of any of the
payments provided for in Paragraph 4, above.
b. In the event of non-payment, prior to the filing and enforcement
of the Stipulated Judgment, Shionogi shall tender notice of
non-payment in accordance with Paragraph 17, below, and shall
provide MBI a three (3) business day period within which to
tender payment to Shionogi of those sums then due under Paragraph
4, above. If Shionogi does not receive such payment within such
three (3) business day period, then all sums due under Paragraph
4, above, shall be accelerated and payable immediately without
further regard to the dates otherwise set forth in said
Page 4 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
paragraph, and Shionogi may proceed to file and to otherwise
enforce the Stipulated Judgment without further notice to MBI.
c. MBI shall not contest the jurisdiction of the Los Angeles County
Superior Court for purposes of permitting the filing and
enforcement of the Stipulated Judgment. For jurisdictional
purposes, performance of the Agreement shall be deemed to be in
Los Angeles County and within the territorial limits of the
Central District of the Los Angeles County Superior Court.
d. The Stipulated Judgment shall be kept confidential by Shionogi
and shall not be filed, published or released to anyone until
such time MBI has failed to make a payment called for in
Paragraph 4, above, or other than as reasonably necessary to
Shionogi's employees, accountants, attorneys, or other
professional representatives, or other than as Shionogi may be
legally required to disclose the Stipulated Judgment by
appropriate governmental authorities, and only then by reason of
a court order, subpoena or request bearing the force of law. The
provisions of this paragraph shall survive only for a period of
five (5) years from the date the Parties have entered into this
Agreement.
6. DOCUMENT ACCESSIBILITY AND STORAGE.
a. Within five (5) business days from Shionogi's receipt of a
written request from MBI, Shionogi shall make available to
MBI during regular business hours at Shionogi's corporate
office in Osaka, Japan, Clinical Data and other documentary
information, exclusive of any document subject to the
attorney-client privilege and/or attorney-work product
privilege
Page 5 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
("Privileged Document"), pertaining to AlbunexR and in
Shionogi's possession, custody or control. Notwithstanding
the foregoing, any Privileged Document shall be made
available to MBI only if the Privileged Document constitutes
safety- or efficacy-related data pertaining to AlbunexR and
such data is not otherwise made available by Shionogi to
MBI. In the event Shionogi waives the attorney-client
privilege by reason of it producing a Privileged Document to
a third party, Shionogi shall immediately notify MBI and
make such document available to MBI in the manner stated
above.
b. Within fourteen (14) calendar days from the date that the
Parties enter into this Agreement, Shionogi shall provide to
MBI a copy of the NDA and all correspondence exchanged
between Shionogi, on the one hand, and the MHW, on the other
hand, to obtain NDA Approval.
c. Shionogi shall remain the custodian of all Clinical Data and
other documentary information pertaining to AlbunexR, which
is in Shionogi's possession, custody or control. In the
event that Shionogi should desire to discard all or any
portion of such Clinical Data or other documentary
information pertaining to AlbunexR, Shionogi shall tender
notice of the same to MBI in accordance with Paragraph 17,
below, and shall afford MBI twenty (20) calendar days within
which to notify Shionogi whether MBI will elect to take
possession of such documents which Shionogi desires to
discard ("Election"). If MBI makes such Election, Shionogi
shall
Page 6 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
make such documents available to MBI, F.O.B. at Shionogi's
corporate offices in Osaka, Japan. If MBI fails to make a
timely Election, or to take possession of such documents
within thirty (30) calendar days from the date of MBI's
timely Election, Shionogi may discard such documents without
further notification to MBI.
d. The provisions of this paragraph shall survive only for a
period of five (5) years from the date the Parties have
entered into this Agreement.
Page 7 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
7. DATA, APPROVALS, LICENSES.
a. MBI shall work diligently to procure a New Licensee and have
that New Licensee apply to the MHW for a new Import License
as soon as practicable. Shionogi shall make available to
the New Licensee during regular business hours at Shionogi's
corporate offices in Osaka, Japan, all Clinical Data in
Shionogi's possession, custody or control, within five (5)
business days from Shionogi's receipt of a written request
from the New Licensee. In addition, Shionogi shall
cooperate in transferring the NDA Approval to a New Licensee
until the NDA Approval transfer is effected, provided that
the New Licensee has submitted to the MHW a notice of
transfer of NDA Approval and has applied for a new Import
License by September 30, 1996. If the New Licensee has
applied to the MHW for transfer of NDA Approval and a new
Import License within the specified period, Shionogi shall
cooperate to preserve its NDA Approval and its Import
License until the transfer of the NDA Approval can legally
be effected or until December 31, 1996, whichever occurs
first.
b. If, despite reasonable efforts by MBI to procure a New
Licensee, MBI is unable to do so by September 30, 1996,
Shionogi shall agree to a one-time extension to and
including November 15, 1996, for the New Licensee to apply
for a transfer of NDA Approval and to apply for a new Import
License ("Extension"). If the Extension is exercised,
Shionogi shall cooperate to preserve its NDA Approval and
its Import License until the
Page 8 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
transfer can be legally effected and shall continue to
cooperate with any subsequent transfer of the NDA Approval
until February 14, 1997. In no event shall Shionogi's
obligations to cooperate extend beyond February 14, 1997.
c. With respect to AlbunexR, Shionogi makes no representation
regarding any actions by the MHW or any other governmental
agencies, including whether the MHW shall allow the transfer
of its NDA Approval, or the application for a new Import
License to the New Licensee.
8. FS069 ASSIGNMENT. Shionogi hereby assigns to MBI any and all of its rights
to FS069 under the License Agreement. Shionogi makes no representation
regarding any actions by the MHW, or any other governmental agency, which
may be taken with respect to FS069.
9. ALBUNEXR SALES SUPPORT. Shionogi shall continue to meet AlbunexR Demand
within Japan until MBI has secured a New Licensee for Japan, provided,
however, that if a New Licensee has not applied to the MHW for transfer of
the NDA Approval or has not filed an application for a new Import License
within the period (including the Extension period) provided in Paragraph 7,
above, Shionogi shall be under no further duty to supply AlbunexR to users
in Japan or otherwise meet AlbunexR Demand. Under no circumstance is
Shionogi at any time required to engage in any further promotion or
advertising of AlbunexR. Under no circumstance shall Shionogi's agreement
in Paragraph 7, above, to cooperate to preserve its NDA Approval and its
Import License, obligate Shionogi in any way to meet AlbunexR Demand after
December 31, 1996.
Page 9 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
10. TERMINATION OF LICENSE AGREEMENT.
a. The Parties hereby acknowledge the termination of the
License Agreement and all licenses granted to Shionogi
thereunder, and the return to MBI of all rights and licenses
thereunder, except for a short-term, revocable,
non-exclusive grant of rights to Shionogi for the sole
purpose of permitting Shionogi to undertake its duties under
Paragraphs 6, 7 and 9, above. The limited rights maintained
by Shionogi under this paragraph shall terminate upon the
MHW's transfer of Shionogi's NDA Approval and the granting
of a new Import License to a New Licensee, or February 14,
1997, whichever occurs first.
b. Shionogi shall continue to make reports on AlbunexR
quarterly sales required under the License Agreement and on
any adverse event on which Shionogi is notified by any
doctor.
11. DISMISSAL. Concurrently with the execution of this Agreement, Shionogi and
MBI shall dismiss all Demands for Arbitration with prejudice and shall
execute and file a Stipulation to Dismiss Arbitration with Prejudice, in
the form attached hereto as Exhibit "B", with the American Arbitration
Association, which stipulation will, when filed, be sufficient to effect
such a dismissal of the Arbitration with prejudice as to the Parties, and
each of them. The Parties shall do all other things reasonably necessary,
including signing any additional documents, in order to accomplish such
dismissal.
12. MUTUAL RELEASES.
a. Subject to the obligations imposed upon the Parties by this
Agreement,
Page 10 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
Shionogi and MBI hereby release and absolutely and forever
discharge each other, and all of their respective past and
present parent companies, affiliated companies, directors,
officers, shareholders, employees, agents, representatives,
attorneys, successors and assigns, of and from any and all
claims, demands, damages, debts, liability, accounts,
reckonings, obligations, costs, expenses, liens, actions and
causes of action, whether known or unknown, suspected or
unsuspected (all of which sometimes are referred to
collectively as the "Released Claims") which they now have,
own or hold or at any time heretofore ever had, owned or
held or could, should or may hereafter have, own or hold
including, but not limited to, those arising out of or
related to the allegations in the Parties' respective
Demands for Arbitration or alleged conduct and business
practices referred to in the Demands for Arbitration and in
the Arbitration itself.
b. The Parties respectively acknowledge that they are familiar
with Section 1542 of the California Civil Code, which
provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR."
The Parties waive and relinquish any rights and benefits
which they have or
Page 11 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
may have under Section 1542 of the California Civil Code to
the full extent they may lawfully waive all such rights and
benefits pertaining to the subject matter of this Agreement.
The parties hereto acknowledge that they are aware that they
may hereafter discover facts in addition to or different
from those which they now know or believe to be true with
respect to the subject matter of this Agreement, but that it
is their intention hereby to fully, finally, and forever
settle and release any and all Released Claims, known and
unknown, suspected and unsuspected, which do now exist, may
exist, or heretofore have existed between them, and further
acknowledge that in furtherance of such intention, the
releases given in this Agreement shall be and remain in
effect as full and complete releases notwithstanding the
discovery or existence of any such additional or different
facts.
c. Shionogi hereby acknowledges that the payments under
Paragraph 4, above, will, when received in their entirety
by Shionogi, constitute full and complete satisfaction and
discharge of any and all Released Claims referenced in
Paragraph 12(a), above.
d. The Parties acknowledge and agree that the sole
consideration for executing this Agreement and
for releasing the Released Claims is the payment by
MBI and receipt by Shionogi of the sums due under
Paragraph 4, above, and the exchange of releases set forth
in this paragraph.
13. INDEMNIFICATION. The releases and dismissal with prejudice set forth
hereinabove shall
Page 12 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
not extend to the indemnification provisions contained in Article XI,
Section 11.5, subdivisions (c) and (d), of the License Agreement relating
to patent infringement and products liability claims, respectively, or to
any representation or warranty made in this Agreement. In the event
Shionogi transfers its Clinical Data and/or NDA Approval to a New Licensee
designated by MBI, MBI agrees to indemnify Shionogi from liability based on
any and all claims asserted by the New Licensee against Shionogi, except to
the extent that such liability arises out of activities undertaken by
Shionogi after the date of transfer of the NDA Approval to the New Licensee
or after February 14, 1997, whichever occurs first.
14. CONFIDENTIALITY. The Parties agree to keep the terms of this Agreement
confidential, other than as reasonably necessary to the Parties' respective
employees, accountants, attorneys, or other professional representatives,
or as each of the Parties may be legally required to disclose such terms by
appropriate governmental authorities, and only then by reason of the
issuance of a court order, subpoena, or request having the force of law.
Provided, however, each party shall be allowed to announce or disseminate
that this Agreement allows MBI to re-acquire the exclusive licensing and
other rights to manufacture and market Albunex-Registered Trademark-
in the Far East for $8,500,000.00 to be paid in installments. The
provisions of this paragraph shall survive only for a period of five (5)
years from the date the Parties have entered into this Agreement.
15. REPRESENTATIONS AND WARRANTIES OF SHIONOGI. Shionogi represents and
warrants to MBI:
a. that at all times subsequent to the execution of the License
Agreement and prior to the execution of this Agreement,
Shionogi has, to the best of its
Page 13 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
knowledge, filled all material orders it received for
Albunex-Registered Trademark- and provided information
about Albunex-Registered trademark- in response to any
material inquiries about ultrasound contrast imaging agents.
b. that it maintains an NDA Approval for the sale of
Albunex-Registered Trademark- within Japan and has a license
from the MHW to import Albunex-Registered Trademark-
to Japan both of which are current and in full force as of
the date of the Agreement.
c. that it does not now or never has had any reason to believe
that any written report made to MBI by Shionogi under the
License Agreement contains false information.
d. that at all times subsequent to the execution of the License
Agreement and prior to the execution of this Agreement,
Shionogi has conducted all Albunex-Registered Trademark-
-related business in Japan in a manner that has not violated
any applicable law, rule or regulation of any Japanese
governmental authority;
e. that Shionogi is a business entity validly organized under
the laws of Japan;
f. that Shionogi and the individual executing the Agreement on
Shionogi's behalf are empowered and authorized to make,
execute, deliver and perform this Agreement and the actions
contemplated by it;
g. that Shionogi's execution and delivery of this Agreement and
its performance hereunder have been duly authorized by all
necessary action; and
h. that this Agreement, when executed, shall constitute the
legal, valid and binding obligation of Shionogi, enforceable
against it in accordance with its
Page 14 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
terms.
16. REPRESENTATIONS AND WARRANTIES OF MBI. MBI represents and warrants to
Shionogi:
a. that MBI is a business entity validly organized under the
laws of Delaware;
b. that MBI and the individual executing the Agreement on
MBI's behalf are empowered and authorized to make, execute,
deliver and perform this Agreement and the actions
contemplated by it;
c. that MBI's execution and delivery of this Agreement,
including execution and delivery of the
Stipulated Judgment, and MBI's performance hereunder
have been duly authorized by all necessary action; and
d. that this Agreement, when executed, shall constitute the
legal, valid and binding obligation of MBI, enforceable
against MBI in accordance with its terms.
17. NOTICES. All notices, requests, demands, processes and other communications
hereunder shall be in writing and shall be deemed to have been duly given
if: (1) personally delivered, when receipt is acknowledged; or delivered by
an internationally-recognized overnight courier service, when received; or
facsimile transmission, upon completion of transmission, if transmission is
during the recipient's normal business hours and receipt of transmission is
confirmed by the recipient; and (2) addressed as follows:
Page 15 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
TO SHIONOGI:
Shionogi & Co., Ltd.
1-8, Doshomachi 3-chome, Chuo-ku
Osaka 541, JAPAN
Telephone: 06-202-2161
Facsimile: 06-229-0987
Attention: Mr. Yoshihiko Shiono
President
WITH A COPY TO:
Julia Tachikawa, Esq.
1299 Ocean Avenue, Fifth Floor
Santa Monica, California 90401
Telephone: (310) 319-3250
Facsimile: (310) 458-6290
TO MBI:
Molecular Biosystems, Inc.
10030 Barnes Canyon Road
San Diego, California 92121-2789
Telephone: (619) 452-0681
Facsimile: (619) 452-6187
Attention: Kenneth J. Widder, M.D.
Chairman and Chief Executive Officer
Page 16 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
WITH A COPY TO:
Craig P. Colmar, Esq.
Johnson and Colmar
300 South Wacker Drive, Suite 1000
Chicago, Illinois 60606
Telephone: (312) 922-1980
Facsimile: (312) 922-9283
18. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Representations and
Warranties made in Paragraphs 15 and 16, above, shall survive only for a
period of five (5) years from the date the Parties have entered into this
Agreement.
19. COSTS AND EXPENSES. The Parties shall bear their own respective costs and
expenses associated with their respective claims under the License
Agreement including, but not limited to, their respective attorneys' fees
and Arbitration fees incurred in connection with this Agreement, the
Demands for Arbitration, or any other matter relating or leading up to the
Arbitration.
20. CHOICE OF LAW, VENUE AND SUBMISSION TO JURISDICTION. This Agreement, its
interpretation and enforcement shall be governed by the laws of the state
of California without regard for California's choice of law provisions.
Venue for any action arising out of this Agreement shall be in the Central
District of the Los Angeles County Superior Court. Shionogi and MBI shall
submit to the personal jurisdiction of the Los Angeles County Superior
Court for any such action.
21. CLAIMS NOT ASSIGNED. Each of the Parties represents and warrants that it
is the sole and lawful owner of all claims it is releasing under Paragraph
12, above, and that it has not heretofore assigned or transferred, or
offered to transfer, any such claims to any person,
Page 17 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
corporation or entity.
22. NO ADMISSION OF LIABILITY. This Agreement reflects a compromise of
disputed claims. It does not constitute and is not to be construed as an
admission of liability by either of the Parties.
23. SUCCESSORS, ETC. The terms of this Agreement shall be binding upon and
shall inure to the benefit of each of the Parties and their respective
partners, agents, representatives, attorneys, insurers, employees,
licensees, predecessors, successors, heirs, assigns, directors, officers,
shareholders, executors, administrators, and/or any other person or persons
who may in any fashion claim an interest in the subject matter hereof
through either of the Parties.
24. INDEPENDENT COUNSEL. Shionogi and MBI each hereby warrants and represents
to the other that it has consulted with and has been represented by
independent counsel in making the settlement, release, and other matters
provided for in this Agreement, and with respect to the advisability of
executing this Agreement. Each of the Parties, together with its
attorneys, has made such investigation of the facts pertaining to this
Agreement and to the settlement and releases provided for in this Agreement
as it has deemed necessary, and, in entering into this Agreement, each of
the Parties has relied upon its investigations and the investigations of
its attorneys and representatives and has not relied upon any
representations by any representative of the other party, except as to
those representations set forth in Paragraphs 15 and 16, above.
25. ATTORNEYS' FEES. In the event of any action, suit or other proceeding
brought by one of the Parties concerning the negotiation, interpretation,
validity, performance or breach of
Page 18 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
this Agreement, the prevailing party shall recover all of such party's
actual attorneys' fees, expenses and costs, not limited to costs of suit,
incurred in each and every such action, suit or other proceeding, including
any and all appeals or petitions relating thereto, and the collection of
such fees, expenses and costs.
26. AMENDMENTS. This Agreement will not be amended, modified or supplemented
nor any term or condition hereof waived except in a writing signed by the
authorized representatives of each of the Parties.
27. CAPTIONS. The captions of sections of this Agreement are for convenience
and reference only and are not to be considered in construing this
Agreement.
28. CONSTRUCTION OF AGREEMENT. All Parties to this Agreement acknowledge that
they and their counsel have reviewed and revised this Agreement and that
the normal rules of construction to the effect that any ambiguities are to
be resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments hereto. This Agreement
shall not be construed either for or against any party hereto but shall be
given a reasonable interpretation in accordance with the plain meaning of
its terms and the intent of the Parties as reflected in this Agreement.
29. ENTIRE AGREEMENT. The Parties agree that this Agreement shall be final and
binding upon the Parties, their successors and assigns, and any changes in
this Agreement, whether by additions, deletions, waivers, amendments or
modifications, may be made only in writing and signed by both of the
Parties. This Agreement and the Exhibits annexed hereto constitute a
single, integrated written contract expressing the entire agreement of the
Parties concerning the subject matter hereof. No covenants, agreements,
representations
Page 19 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
or warranties of any kind whatsoever have been made by either party hereto,
except as specifically set forth in this Agreement. All prior discussions
and negotiations with respect to the subject matter hereof have been and
are merged and integrated into, and are superseded by, this Agreement.
30. SEVERABILITY. If any provision of this Agreement is held unenforceable or
in conflict with the laws of any jurisdiction, the provision shall be
regarded as severable from this Agreement and the remaining provisions
shall remain in full force.
31. COOPERATION. The Parties shall cooperate with one another in signing such
documents and instruments as may be necessary or desirable in performing
this Agreement.
32. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
all of which taken together shall constitute one and the same instrument.
Facsimile signatures shall be deemed original until original signatures are
supplied.
Page 20 of 22
<PAGE>
Settlement Agreement and Mutual Release
between Shionogi & Co., Ltd. and
Molecular Biosystems, Inc.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and delivered in their respective names by their authorized
representatives as of the date and year first above written.
MOLECULAR BIOSYSTEMS, INC.
By: /s/ Kenneth J. Widder
-----------------------------------
Its Authorized Officer
Kenneth J. Widder, M.D.
Chairman and Chief Executive Officer
SHIONOGI & CO., LTD.
By: /s/ Yoshihiko Shiono
-----------------------------------
Its Authorized Officer
Yoshihiko Shiono
President
APPROVED AS TO FORM:
LeBOEUF, LAMB, GREENE & MACRAE
725 S. Figueroa Street
Los Angeles, California 90017-5436
By: /s/ Dean Hansell
--------------------------
Dean Hansell
ROGERS & WELLS
444 South Flower Street
Los Angeles, California 90071-2901
By: /s/ Terry O. Kelly
--------------------------
Terry O. Kelly
Page 21 of 22
<PAGE>
Exhibit 10.34
FIRST AMENDMENT
TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("this Amendment") dated as of
April 30, 1996, is between MOLECULAR BIOSYSTEMS, INC., a Delaware Corporation
(the "Corporation") and BOBBA VENKATADRI ("Employee").
RECITALS
A. The Corporation and the Employee are parties to an Employment
Agreement effective November 1, 1995 ("the Agreement").
B. Paragraph 7 (a) provides in part: "This Agreement may not be
changed... but only by way of an instrument in writing signed by the parties
referring to this Agreement."
C. The Corporation and the Employee wish to amend the Agreement with
respect to the Employee's home in Pennsylvania
THEREFORE, in consideration of the mutual promises contained herein and in
the Agreement, the Corporation and the Employee agree as follows:
1. Paragraph 5(f)(i) shall be stricken in its entirety and replaced by
the following:
f. REAL ESTATE
(i) The Employee shall be responsible for sale of Employee's home
located at 300 Barn Hill Road, Westchester, Pennsylvania 19382. If
the Employee's home is sold on or before April 30, 1998, the
Corporation shall be responsible for paying the non-recurring costs
which are incurred by Employee in the sale of the home. These costs
shall include costs which are normally borne by the seller of a home,
such as real estate agent fees, escrow fees and closing costs. The
Employee shall be responsible for these costs if the home is sold
after the above date. The Corporation shall also be responsible for
paying all reasonable expenses for storage, movement and insurance of
household goods incurred in connection with the sale of Employee's
home whether or not the home is sold before April 30, 1998. For the
purposes of this paragraph, the home will be considered "sold" when
the sales contract is signed and the escrow period closes.
<PAGE>
The Corporation shall not be required to pay for the services of a
professional property management company to maintain, market, or
sell the Employee's home.
AGREED:
MOLECULAR BIOSYSTEMS, INC.
/s/ Steven Lawson
--------------------------------------------------
Steven Lawson
Vice President, Legal Affairs and
General Counsel
/s/ Bobba Venkatadri
--------------------------------------------------
Bobba Venkatadri
<PAGE>
Exhibit 10.36
MBI-VENKATADRI
PARTNERSHIP AGREEMENT
THIS AGREEMENT is made as of October 18, 1996, by (i) Molecular Biosystems,
Inc., a Delaware corporation ("MBI"), and (ii) Bobba Venkatadri ("Mr.
Venkatadri") and Annapurna Bobba ("Mrs. Venkatadri") (together, the
"Venkatadris") (also referred to individually as "Partner", or collectively as
the "Partners").
RECITALS:
A. The Partners wish to purchase real estate to be used as a principal
residence by the Venkatadris located at 13397 Wyngate Point, San Diego,
California 92130 (the "Property").
B. The Partners will own the Property as tenants in common.
C. The Partners desire to set out the terms of their partnership as
follows.
NOW, THEREFORE, in consideration of their mutual promises, the Partners
agree as follows:
1. PURCHASE OF THE PROPERTY. The Venkatadris will have sole
responsibility for selecting the Property and for negotiating, financing (other
than as provided by MBI herein) and consummating the purchase of the Property.
2. CAPITAL CONTRIBUTIONS. MBI will contribute $300,000 ("MBI's Initial
Capital Contribution") towards the purchase of the Property. Such contribution
will be made at the time of the closing of the purchase of the Property. The
Venkatadris will contribute the difference between MBI's Initial Capital
Contribution and the purchase price of the Property (such purchase price to be
known as the "Original Purchase Price").
3. PERCENTAGE OWNERSHIP INTERESTS. Each Partner will own an undivided
interest in the Property as tenants in common (although as between them, the
Venkatadris' interest may be held in joint tenancy), with their percentage
ownership interests in the Property (the "Interests") calculated as follows:
(a) MBI's Interest shall be derived by dividing MBI's Initial Capital
Contribution by the Original Purchase Price, with the result expressed as a
percentage; and
(b) The Venkatadris' Interest shall be equal to the sum of 100% minus MBI's
Interest.
Each Partner's Interest will remain constant, unless recalculated as provided in
Section 6 below or as otherwise agreed upon by the Partners.
<PAGE>
4. TITLE AND OTHER DOCUMENTATION. The Venkatadris will ensure that title
to the Property is held in the names of MBI and the Venkatadri as tenants in
common and that any and all real estate, tax, financing or other records reflect
their ownership as tenants in common. The Venkatadris agree to execute and
cooperate in the recording of any and all documents necessary to evidence the
rights and obligations of the Partners contained in this Agreement.
5. OBLIGATIONS WITH RESPECT TO THE PROPERTY. The Venkatadris shall
maintain the Property and keep it in good condition and repair and shall be
responsible for all expenses in connection with maintenance, financing and
ownership of the Property, including, but not limited to, mortgage payments,
upkeep, taxes and other assessments, insurance, homeowner association fees, if
any, repairs and improvements (the latter of which shall be at the Venkatadris'
option) and utilities. The Venkatadris shall maintain liability insurance in
amounts approved by MBI and all-risk property insurance coverage on the
Property, including, without limitation, fire, extended coverage, and vandalism
and malicious mischief in an amount which is not less than 100% of the
replacement cost of the Property. The Venkatadris shall also maintain flood
insurance if the Property is located in an area designated by the Federal
Emergency Management Agency or any other applicable governmental or
quasi-governmental authority having jurisdiction over the Property as a special
flood hazard area. The Venkatadris shall ensure that MBI is named as an
additional insured under all of the insurance policies entered into pursuant to
this Section.
6. FAILURE TO PERFORM OBLIGATIONS. In the event that the Venkatadris fail
or refuse for any reason to perform his obligations under Section 5 above, MBI
may perform such obligations upon written notice to Mr. Venkatadri. MBI may, at
its option, recoup the cost of its performance (the "Performance Cost") as
follows:
(a) deduct the Performance Cost from any payments (including compensation)
due to Mr. Venkatadri by MBI; or
(b) recalculate the Interests as follows:
(i) MBI's recalculated Interest shall be derived by dividing (A) two
times the sum of the Performance Cost PLUS MBI's Initial Capital
Contribution by (B) the Original Purchase Price, with the result
expressed as a percentage; and
(ii) The Venkatadris' recalculated Interest shall be equal to the sum
of 100% minus MBI's recalculated Interest.
In the event of such recalculation of the Interests, the Performance
Cost may also be referred to herein as "MBI's Additional Capital
Contribution."
2
<PAGE>
7. PURCHASE OF MBI'S INTEREST IN EVENT OF MR. VENKATADRI'S TERMINATION.
(a) AGREED VALUATION. In the event of the termination of Mr. Venkatadri's
employment for any reason, the Partners shall agree on a valuation of the
Property within 30 days of such termination. If the Partners fail to reach
agreement on valuation within such 30-day period, each Partner shall select
a certified appraiser to perform an appraisal of the Property at each
selecting Partner's expense. The average of the two appraisals shall be
known as the Agreed Valuation.
(b) PAYMENT AND CALCULATION OF PURCHASE PRICE. Within (i) 3 years of the
date of termination in the event of an Involuntary Termination, (ii) 2
years of the date of termination in the event of a termination for any
reason other than Involuntary Termination or Voluntary Termination, or
(iii) 1 year from the date of termination in the event of a Voluntary
Termination, Mr. Venkatadri (or his estate) shall purchase MBI's Interest
for a purchase price equal to the following:
the sum of (A) the product of (x) MBI's Interest (as it may be
recalculated in accordance with Section 6) MULTIPLIED BY (y) the
Agreed Valuation, PLUS (B) interest at the prime rate as published
in the Wall Street Journal, accrued from the date of Mr. Venkatadri's
termination to the date of purchase (the "Termination Purchase
Price"), but in no event less than the sum of (C) MBI's Initial
Capital Contribution plus (D) MBI's Additional Capital Contribution.
(c) PURCHASE BY THIRD PARTY. In the event that Mr. Venkatadri is unable or
unwilling to purchase MBI's Interest, the Venkatadris may sell the Property
to a third party, and Mr. Venkatadri shall be deemed to have complied with
his purchase obligation under this Section if a third party purchaser pays
MBI the Termination Purchase Price. MBI shall cooperate with the
Venkatadris in effectuating a sale to a third party under the circumstances
described herein.
(d) DEFINITIONS. The following terms used in this Section shall have the
meanings assigned to them below:
(i) "Involuntary Termination" shall be deemed to have occurred if Mr.
Venkatadri's employment is terminated by MBI because he dies or cannot
perform his normal duties on a full-time basis by reason of any
physical or mental impairment for a period of 6 consecutive months or
8 months out of any 12-month period.
(ii) "Voluntary Termination" shall be deemed to have occurred if Mr.
Venkatadri's employment is terminated by Mr. Venkatadri, other than in
the event of a Constructive Termination.
(iii) "Constructive Termination" shall be deemed to have occurred if
Mr. Venkatadri's employment is terminated by Mr. Venkatadri within 3
months
3
<PAGE>
following (A) any reduction in his annual base salary (I.E., exclusive
of bonuses or other compensation) or (B) a relocation of his place of
employment more than 35 miles from San Diego if the costs of such
relocation are not paid for by MBI.
8. SALE OF PROPERTY DURING MR. VENKATADRI'S EMPLOYMENT.
(a) PURCHASE OF REPLACEMENT PROPERTY. During the term of Mr. Venkatadri's
employment by MBI, the Venkatadris may sell the Property and purchase new
property to be used as their principal residence in the San Diego,
California area (or other area in the event of an MBI-required relocation)
(the "Replacement Property"). The Venkatadris may reinvest all of the
proceeds of the sale in the Replacement Property.
(b) PERCENTAGE OWNERSHIP INTERESTS IN REPLACEMENT PROPERTY. Each Partner
will own an undivided interest in the Replacement Property as tenants in
common, with their percentage ownership interests in the Replacement
Property (the "Replacement Interests") calculated as follows:
(i) MBI's Replacement Interest shall be derived by dividing (A) the
sum of (x) MBI's Initial Capital Contribution PLUS (y) MBI's
Additional Capital Contributions, if any plus (2) the amount in excess
of the sum of (x) plus (y) that MBI would have received if no
Replacement Property had been purchased, by (B) the purchase price of
the Replacement Property, with the result expressed as a percentage;
and
(ii) The Venkatadris' Replacement Interest shall be equal to the sum
of (A) 100% minus (B) MBI's Replacement Interest.
(c) RETURN OF EXCESS TO MBI. In the event that the sum of MBI's Initial
Capital Contribution and MBI's Additional Capital Contributions, if any, is
greater than the purchase price of the Replacement Property, the
Venkatadris will return such excess to MBI within 10 days after the closing
of the purchase of the Replacement Property.
(d) CONTINUING RIGHTS AND OBLIGATIONS WITH RESPECT TO REPLACEMENT PROPERTY.
All of the Partners' rights and obligations hereunder with respect to the
Property will continue with respect to the Replacement Property.
9. BOOKS AND RECORDS. The Venkatadris shall keep books and records
relating to the maintenance, financing, taxation and ownership of the Property,
which may be inspected upon reasonable notice by MBI.
10. TRANSFERS OR ENCUMBRANCES. Neither Partner shall sell, transfer,
assign, pledge, or otherwise encumber or divest himself of ownership or control
of the Property or his or its Interest, whether voluntarily or by operation of
law, except as expressly permitted hereunder or with the prior written consent
of the other Partner. Notwithstanding the foregoing, MBI
4
<PAGE>
may assign its Interest to an entity which it owns or controls. If any
encumbrance affecting the Interest of a Partner or the Property exists in
violation of these restrictions, the Partner who granted or permitted the
encumbrance shall immediately proceed at his or its expense to remove the
encumbrance, and shall hold the other Partner harmless from any loss or expense
suffered as a consequence of the encumbrance.
11. TAXABILITY OF PAYMENTS. In the event that Mr. Venkatadri is deemed to
receive taxable income for any payment or reimbursement by MBI under this
Agreement, such payments will be grossed up to account for all applicable income
taxes.
12. AMENDMENT. This Agreement may be amended only by a written agreement
signed by all of the parties who are bound by this Agreement at the time.
13. NOTICES. Any notice or other communication given under this Agreement
shall be duly given if, and only if, it is in writing and is delivered in person
to the intended recipient or is sent by certified mail, postage prepaid,
addressed, in MBI's case, to MBI at its principal office, and addressed, in the
Venkatadris' case, to Mr. Venkatadri at his residence as it appears on MBI's
books and records. A party may change his address for this purpose by giving
notice of the change in the requisite manner.
14. CAPTIONS. The captions of particular sections and subsections of this
Agreement have been inserted for convenience only and shall not affect the terms
of this Agreement.
15. GOVERNING LAW. This Agreement shall be governed by the substantive
laws of the State of Delaware.
16. BINDING EFFECT. This Agreement shall be binding on, an shall inure to
the benefit of, the parties and their respective heirs, legal representatives,
successors, and permitted assigns.
*
*
*
*
*
5
<PAGE>
IN WITNESS the parties have signed this Agreement on the date first given above.
Dated: October 18, 1996
MOLECULAR BIOSYSTEMS, INC.
By: /s/ Gerard A. Wills
----------------------------------------------
Its: Vice President, Finance and CFO
----------------------------------------
/s/ Bobba Venkatadri
--------------------------------------------
BOBBA VENKATADRI
/s/ Annapurna Bobba
---------------------------------------------
MRS. ANNAPURNA BOBBA
6
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements, File Numbers 33-723, 33-24508, 33-37872, 33-78564,
33-78572 and 333-02389.
ARTHUR ANDERSEN LLP
San Diego, California
May 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF MOLECULAR BIOSYSTEMS, INC.
DATED MARCH 31,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 587
<SECURITIES> 40,827
<RECEIVABLES> 902
<ALLOWANCES> 3
<INVENTORY> 342
<CURRENT-ASSETS> 51,407
<PP&E> 19,622
<DEPRECIATION> 6,434
<TOTAL-ASSETS> 70,159
<CURRENT-LIABILITIES> 7,564
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 51,569
<TOTAL-LIABILITY-AND-EQUITY> 70,159
<SALES> 626
<TOTAL-REVENUES> 10,851
<CGS> 4,748
<TOTAL-COSTS> 25,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 810
<INCOME-PRETAX> (13,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,284)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> 0
</TABLE>
