Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from............... to ...............
Commission file number 1-10546
MOLECULAR BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3078632
(State of Incorporation) (I.R.S. Identification No.)
10030 Barnes Canyon Road
San Diego, California 92121
(619) 812-7001
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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.
X Yes No
The number of shares outstanding of the issuer's common stock, $.01 par value,
as of July 31, 1998 was 18,580,095 shares.
<PAGE>
INDEX PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1. Consolidated Balance Sheets 3
March 31, 1998 and June 30, 1998
2. Consolidated Statements of Operations 4
Three Months Ended June 30, 1997 and 1998
3. Consolidated Statements of Cash Flows 5
Three Months Ended June 30, 1997 and 1998
4. Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II -OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Securities Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
Signatures 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30,
March 31, 1998
1998 (Unaudited)
---------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,064 $ 359
Marketable securities, available-for-sale 20,274 24,352
Accounts and notes receivable 1,498 13,094
License rights 8,500 -
Inventories 1,902 2,371
Prepaid expenses and other assets 400 415
---------- -----------
Total current assets 33,638 40,591
---------- -----------
Property and equipment, at cost:
Building and improvements 14,412 14,412
Equipment, furniture and fixtures 4,364 4,413
Construction in progress 471 911
---------- -----------
19,247 19,736
Less: Accumulated depreciation and amortization 7,073 7,297
---------- -----------
Total property and equipment 12,174 12,439
---------- -----------
Other assets:
Patents and license rights, net of amortization
$87 and $107, respectively 320 350
Certificate of deposit, pledged 3,000 3,000
Other assets, net 2,186 2,160
---------- -----------
Total other assets 5,506 5,510
---------- -----------
$ 51,318 $ 58,540
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,272 $ 1,272
Accounts payable and accrued liabilities 7,498 11,393
Compensation accruals 2,227 731
Deferred contract revenue 1,575 -
---------- -----------
Total current liabilities 12,572 13,396
---------- -----------
Long-term debt, net of current portion 6,082 5,764
Other noncurrent liabilities 1,500 1,500
Commitments and contingencies (Note 2)
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000 shares
authorized, 17,846,237 and 18,575,245 shares
issued and outstanding, respectively 178 186
Additional paid-in capital 128,145 134,308
Accumulated deficit (96,729) (95,988)
Unrealized loss on available-for-sale securities (67) (263)
Less 40,470 shares of treasury stock, at cost (363) (363)
---------- -----------
Total stockholders' equity 31,164 37,880
---------- -----------
$ 51,318 $ 58,540
========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Revenues under collaborative agreements $ 1,250 $ 1,250
Product and royalty revenues 224 1,367
License Fees - 16,371
------------ ------------
1,474 18,988
------------ ------------
Operating expenses:
Research and development costs 2,185 2,227
Costs of products sold 1,511 1,639
Selling, general and administrative expenses 3,040 3,869
Other Nonrecurring Charges - 9,378
------------ ------------
6,736 17,113
------------ ------------
Income (loss) from operations (5,262) 1,875
Interest expense (191) (160)
Interest income 654 425
------------ ------------
Income (loss) before income taxes (4,799) 2,140
Foreign income tax provision - (1,400)
------------ ------------
Net income/(loss) $ (4,799) $ 740
============ ============
Net income (loss) per share - basic: $ (0.27) $ 0.04
============ ============
Weighted average common shares outstanding 17,752 18,512
============ ============
Net income (loss) per share - diluted: $ (0.27) $ 0.04
============ ============
Weighted average common and common equivalent shares 17,752 18,843
============ ============
outstanding
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
June 30,
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,799) $ 740
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 318 244
Write-off of former Shionogi territory license rights - 8,500
Premium received on Chugai equity investment - (2,371)
Changes in operating assets and liabilities:
Receivables (25) (11,745)
Inventories (117) (469)
Prepaid expenses and other assets 236 136
Accounts payable and accrued liabilities 941 3,895
Deferred contract revenue - (1,575)
Compensation accruals (666) (1,496)
------------- -------------
Cash used in operating activities (4,112) (4,141)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (210) (489)
Additions to patents and license rights - (50)
Decrease in other assets - 26
Change in marketable securities 4,376 (4,275)
------------- -------------
Cash provided by (used in) investing activities 4,166 (4,788)
------------- -------------
Cash flows from financing activities:
Proceeds from sale of common stock to Chugai - 8,300
Net proceeds from stock options exercised 83 242
Principal payments on long-term debt (315) (318)
------------- -------------
Cash provided by (used in) financing activities (232) 8,224
------------- -------------
Decrease in cash and cash equivalents (178) (705)
Cash and cash equivalents, beginning of period 587 1,064
------------- -------------
Cash and cash equivalents, end of period $ 409 $ 359
============= =============
Supplemental cash flow disclosures:
Interest income received $ 798 $ 575
============= =============
Interest paid $ 190 $ 159
============= =============
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation-
These interim Consolidated Financial Statements of Molecular
Biosystems, Inc. and Subsidiaries (the "Company") should be read in conjunction
with the Consolidated Financial Statements of the Company and related Notes
filed with the Company's Annual Report on Form 10-K for the year ended March 31,
1998.
These interim Consolidated Financial Statements of the Company have not
been audited by independent public accountants. However, in the opinion of the
Company, all adjustments required for a fair presentation of the financial
position of the Company as of June 30, 1998, and the results of its operations
for the three-months ended June 30, 1997 and 1998, and its cash flows for the
three-months ended June 30, 1997 and 1998, have been made. The results of
operations for these interim periods are not necessarily indicative of the
operating results for the full year.
(2) Commitments and Contingencies-
In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid
on a variety of independent grounds under U.S. patent law. In addition to
requesting that all of the patents in question be declared invalid, the
complaint requests a declaration that, contrary to defendants' contentions, the
Company and Mallinckrodt do not infringe the defendants' patents, and asks that
defendants be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON, the Company's second generation ultrasound contrast agent, and
will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the
complaint on juridictional grounds. In January 1998, the court dismissed each of
the defendants except Nycomed, ruling that the court lacked jurisdiction over
those defendants with respect to the Company's claims of patent invalidity and
non infringement. The court's ruling does not purport to rule on the merits of
the Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus
activated a patent infringement lawsuit (the "Sonus Case") which it had filed in
August 1997 against the Company and Mallinckrodt in the United States District
Court for the Western District of Washington. Although the complaint was filed
in August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. These two patents are the same patents for which the Company was
seeking a declaration of invalidity in the MBI Case. As discussed below, in
conjunction with the reexamination proceedings, the PTO has issued a final
rejection of all claims of the patents involved in the Sonus Case.
Beginning in July 1997, the Company received the first of five notices
from the PTO granting the Company's petitions for reexamination which it had
filed with respect to five patents held by three potential competitors, Sonus,
Nycomed and ImaRx. Each of the five notices stated there was a substantial new
question of patentability raised by the Company's petitions with respect to all
claims of the patents. Each of the patents in the reexamination process is
related to the use of perfluorocarbon gases in ultrasound contrast agents and is
included among the patents for which the Company was seeking a declaration of
invalidity in the MBI Case (and for which the Company is continuing to seek a
declaration of invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in
connection with the Company's patent reexamination petitions filed against
Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of
these patents based on prior art not previously disclosed to the PTO by Sonus,
Nycomed or ImaRx during prosecution of their patent applications. In June 1998,
the PTO issued a final rejection of all claims of the two Sonus patents involved
in the Sonus Case. If the PTO's rejection is maintained on any appeal
subsequently filed by Sonus, the two Sonus patents will be invalid. If the PTO
rejection of the Nycomed patent is maintained through further proceedings before
the patent examiner and on any appeal, the PTO rejection will invalidate the
patent which, by a counterclaim in the MBI Case, Nycomed is attempting to assert
against the Company and Mallinckrodt to block the manufacture and sale of
OPTISON.
Litigation or administrative proceedings relating to these matters
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, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, 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.
(3) Earnings per Share -
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). The statement specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS). SFAS 128 requires companies to compute net income (loss) per share under
two different methods, basic and diluted per share data for all periods for
which an income statement is presented. Basic earnings per share was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if net income were divided by the weighted-average
number of common shares and potential common shares from outstanding stock
options for the quarter ended June 30, 1998. Potential common shares were
calculated using the treasury stock method and represent incremental shares
issuable upon exercise of the Company's outstanding options. For the quarter
ended June 30, 1997, the diluted loss per share calculation excludes effects of
outstanding stock options as such inclusion would be anti-dilutive. The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share for the quarters ended
June 30, 1997 and June 30, 1998.
<TABLE>
<CAPTION>
Quarter Ended
June 30,
1997 1998
----------- -----------
<S> <C> <C>
NET INCOME (LOSS) $ (4,799) $ 740
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) available to common stockholders (4,799) 740
Weighted average common shares outstanding 17,752 18,512
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE: $ (0.27) $ 0.04
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) available to common stockholders $ (4,799) $ 740
Weighted average common shares outstanding 17,752 18,512
Common stock options outstanding (unless anti-dilutive) - 331
Total weighted avg common shares and equivalents 17,752 18,843
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE: $ (0.27) $ 0.04
=========== ===========
</TABLE>
(4) The Chugai Agreement -
In April, 1998, the Company entered into a cooperative development and
marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan.
The parties entered into this strategic alliance which covers Japan, Taiwan and
South Korea, to develop OPTISON (which may be marketed under a different name)
and ORALEX, as well as related products. The Company granted Chugai an exclusive
license to develop, manufacture, and market these products in the subject
territory, for which the Company received an up-front license fee of $14
million. With respect to licensed products manufactured by Chugai, Chugai will
pay the Company a royalty on net sales. For licensed products manufactured by
the Company, the Company will receive royalties on net sales, the amount of
which will depend upon the sales volume, in addition to a transfer price based
on average net sales per unit from the previous quarter. Additionally, Chugai
purchased 691,883 shares of the Company's common stock at a premium of 40% over
the then-prevailing market price. This premium was equal to $2.4 million and was
recognized as revenue in the current quarter. The equity investment was valued
at $8.3 million. The Company is also eligible to receive milestone payments of
up to $20 million based on Chugai's achievement of certain Japanese product
development and regulatory goals.
The accompanying consolidated statements of operations incorporate
the impact of the Chugai transaction. Pro forma unaudited consolidated operating
results of the Company for the quarter ended June 30, 1998, excluding the impact
of the Chugai transaction, are summarized below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
Results Pro forma
Including Impact of Results
Chugai Chugai Excluding
Transaction Transaction Chugai
-----------------------------------------
<S> <C> <C> <C>
Revenues $ 18,988 $ 16,371 $ 2,617
Operating Expenses (17,113) (9,378) (7,735)
Interest Income, Net 265 - 265
-----------------------------------------
Income (Loss) before income taxes $ 2,140 $ 6,993 $ (4,853)
Foreign income taxes (1,400) (1,400) -
=========================================
Net Income (Loss) $ 740 $ 5,593 $ (4,853)
=========================================
Net Income (Loss) per share - Basic $ 0.04 $ 0.31 $ (0.27)
Weighted Avg Common Shares Outstanding 18,512 659 17,853
Net Income (Loss) per share - Diluted $ 0.04 $ 0.31 $ (0.27)
Weighted Avg Common and Common 18,843 659 18,184
Equivalent Shares Outstanding
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only.
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management discussion and analysis should be read in
conjunction with (1) the current Consolidated Financial Statements and (2) the
Company's Consolidated Financial Statements and related Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations in its
Annual Report on Form 10-K for the year ended March 31, 1998.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, regulatory approval,
research and development activities and similar matters. A variety of factors
could cause the Company's actual results and experience to differ materially
from the Company's anticipated results or other expectations. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include the expense and uncertain outcome of
the litigation described under the caption "Recent Events," including the
possibility of injunctive relief to competitors prohibiting the sale of
OPTISON(TM); a ruling by the Patent and Trademark Office ("PTO") in the pending
patent reexamination proceedings favoring competitors' patents; delays or an
inability to bring OPTISON(TM) to market in Europe as a result of regulatory
delays or patent litigation; difficulties and delays with respect to the
performance of clinical trials; delays by regulatory authorities in approving
additional indications for OPTISON(TM), including the evaluation of myocardial
perfusion; manufacturing problems; difficulties and delays with respect to
marketing and sales activities; general uncertainties accompanying the
development and introduction of new products; and other risk factors reported
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
Recent Events
In April, 1998, the Company entered into a cooperative development and
marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan.
The parties entered into this strategic alliance which covers Japan, Taiwan and
South Korea, to develop OPTISON (which may be marketed under a different name)
and ORALEX, as well as related products. The Company granted Chugai an exclusive
license to develop, manufacture, and market these products in the subject
territory, for which the Company received an up-front license fee of $14
million. With respect to licensed products manufactured by Chugai, Chugai will
pay the Company a royalty on net sales. For licensed products manufactured by
the Company, the Company will receive royalties on net sales, the amount of
which will depend upon the sales volume, in addition to a transfer price based
on average net sales per unit from the previous quarter. Additionally, Chugai
purchased 691,883 shares of the Company's common stock at a premium of 40% over
the then-prevailing market price. The equity investment was valued at $8.3
million. The Company is also eligible to receive milestone payments of up to $20
million based on Chugai's achievement of certain Japanese product development
and regulatory goals.
In May, 1998, OPTISON, the Company's second-generation contrast agent
for cardiac ultrasound imaging, received final marketing authorization by the
European Agency for the Evaluation of Medicinal Products for use in patients
with suspected or known cardiovascular disease. The authorization covers all 15
member states of the European Union. Also in May, 1998, the Company and
Mallinckrodt announced that they had launched OPTISON in Germany, Austria, and
the United Kingdom. Initial shipments of OPTISON to European customers were sent
within 24 hours of product approval.
In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc.
("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx
Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco
- - seeking declarations that certain of their ultrasound contrast agent patents
are invalid.
The complaint alleges that each of the defendants' patents is invalid
on a variety of independent grounds under U.S. patent law. In addition to
requesting that all of the patents in question be declared invalid, the
complaint requests a declaration that, contrary to defendants' contentions, the
Company and Mallinckrodt do not infringe the defendants' patents, and asks that
defendants be enjoined from proceeding against the Company and Mallinckrodt for
infringement until the status of defendants' patents has been determined by the
court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges
that each defendant has claimed or is likely to claim that its patent or patents
cover OPTISON, the Company's second generation ultrasound contrast agent, and
will attempt to prevent its commercialization.
All of the defendants except Nycomed filed motions to dismiss the
complaint on juridictional grounds. In January 1998, the court dismissed each of
the defendants except Nycomed, ruling that the court lacked jurisdiction over
those defendants with respect to the Company's claims of patent invalidity and
non infringement. The court's ruling does not purport to rule on the merits of
the Company's claims; the dismissal was based solely on jurisdictional grounds.
Following Sonus's dismissal as a defendant in the MBI Case, Sonus
activated a patent infringement lawsuit (the "Sonus Case") which it had filed in
August 1997 against the Company and Mallinckrodt in the United States District
Court for the Western District of Washington. Although the complaint was filed
in August 1997, Sonus had agreed not to proceed with the Sonus Case until the
jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges
that the manufacture and sale of OPTISON by the Company and Mallinckrodt
infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for
a declaration of invalidity and non-infringement with respect to the Sonus
patents. These two patents are the same patents for which the Company was
seeking a declaration of invalidity in the MBI Case. As discussed below, in
conjunction with the reexamination proceedings, the PTO has issued a final
rejection of all claims of the patents involved in the Sonus Case.
Beginning in July 1997, the Company received the first of five notices
from the PTO granting the Company's petitions for reexamination which it had
filed with respect to five patents held by three potential competitors, Sonus,
Nycomed and ImaRx. Each of the five notices stated there was a substantial new
question of patentability raised by the Company's petitions with respect to all
claims of the patents. Each of the patents in the reexamination process is
related to the use of perfluorocarbon gases in ultrasound contrast agents and is
included among the patents for which the Company was seeking a declaration of
invalidity in the MBI Case (and for which the Company is continuing to seek a
declaration of invalidity in the case of Nycomed's patents).
In late 1997 and early 1998, the PTO issued office actions in
connection with the Company's patent reexamination petitions filed against
Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of
these patents based on prior art not previously disclosed to the PTO by Sonus,
Nycomed or ImaRx during prosecution of their patent applications. In June 1998,
the PTO issued a final rejection of all claims of the two Sonus patents involved
in the Sonus Case. If the PTO's rejection is maintained on any appeal
subsequently filed by Sonus, the two Sonus patents will be invalid. If the PTO
rejection of the Nycomed patent is maintained through further proceedings before
the patent examiner and on any appeal, the PTO rejection will invalidate the
patent which, by a counterclaim in the MBI Case, Nycomed is attempting to assert
against the Company and Mallinckrodt to block the manufacture and sale of
OPTISON.
Litigation or administrative proceedings relating to these matters
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, either on acceptable terms or at all. If the Company were
required to obtain a license necessary to commercialize OPTISON, 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.
Liquidity and Capital Resources
At June 30, 1998, the Company had net working capital of $27.2 million
compared to $21.1 million at March 31, 1998. Cash, cash equivalents, marketable
securities and certificates of deposit pledged were $27.7 million at June 30,
1998 compared to $24.3 million at March 31, 1998. The cash balance at June 30,
1998 does not include $9.5 million of the $22.3 million in up-front payments due
from Chugai, which will be received in quarterly installments during fiscal
1999.
For the next several years, the Company expects to incur substantial
additional expenditures associated with product development. The Company
anticipates that its existing resources, including the proceeds of the public
offering in May 1996, up-front license fees received from Chugai, and interest
thereon, plus payments under its collaborative agreement with Mallinckrodt and
Chugai, will enable the Company to fund its operations for at least the next
eighteen 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, or at all.
Results of Operations
Revenues Under Collaborative Agreements. Revenues under collaborative
agreements were $1.3 million for the quarter ended June 30, 1998 compared to
$1.3 million for the same quarter in the prior year. These revenues in both
years 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. Revenues from product sales and royalties
were $1.4 million for the quarter ended June 30, 1998, compared to $224,000 for
the same quarter in the prior year. Product revenues come from the Company's
sales of OPTISON to Mallinckrodt, in the case of the quarter ended June 30,
1998, and from the Company's sales of ALBUNEX(R) to Mallinckrodt in the case of
the quarter period ended June 30, 1997, and were recognized upon shipment of the
product.
The transfer price for the Company's sales of OPTISON to Mallinckrodt
is approximately equal to 40% of Mallinckrodt's average net sales price to its
end users of the product for the immediately preceding quarter. Pursuant to
ARDA, the average net sales price to end users is calculated by dividing the net
sales for the preceding quarter by the total number of units shipped to end
users whether paid for or shipped as samples. Consistent with industry practice,
the Company considers samples a marketing expense and as such the cost of
samples is recorded as selling, general and administrative expense.
The transfer price for the Company's sales of ALBUNEX to Mallinckrodt
was determined pursuant to ARDA and was approximately equal to 40% of
Mallinckrodt's average net sales price to its end users of the product.
Royalty revenues are pursuant to a licensing agreement between the
Company and Abbott Laboratories.
License Fees. Revenues for the most recent quarter also include $16.4
million recognized in connection with MBI's partnership with Chugai
Pharmaceutical Co., Ltd., announced on April 8, 1998.
Costs of Products Sold. Cost of products sold totaled $1.6 million for
the quarter ended June 30, 1998, 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 same quarter in the prior year, cost of products sold
totaled $1.5 million. The Company anticipates an increase in its gross profit
margins if and when OPTISON sales volume increases. 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 $5.5 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 market acceptance of OPTISON
and are therefore uncertain.
Research and Development Costs. For the quarter ended June 30, 1998,
the Company's research and development costs totaled $2.2 million, as compared
to $2.2 million for the same period in 1997.
Selling, General and Administrative Expenses. For the quarter ended
June 30, 1998, the Company's selling, general and administrative expenses
totaled $3.9 million, as compared to $3.0 million for the same quarter in 1997.
This increase in the current year is primarily due to continuing legal expenses,
and marketing costs associated with the launch of OPTISON.
Other Nonrecurring Charges and Foreign Income Taxes. Total operating
expenses for the quarter were $17.1 million compared to $6.7 million for the
same quarter in 1998. The increase is primarily due to a non-cash, non-recurring
expense of $8.5 million related to the sale to Chugai of territory rights
previously reacquired from Shionogi. Additionally, the company paid $1.4 million
in foreign taxes related to the Chugai alliance.
Interest Expense and Interest Income. Interest expense for the quarter
ended June 30, 1998 amounted to $160,000, compared to $191,000 for the same
period in the prior year, and consisted of mortgage interest on the Company's
manufacturing building and interest on a note payable which is secured by the
tangible assets of the Company. The interest rate on the mortgage was 8% in June
1998. The note payable 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 9.5% in June 1998.
Interest income for the quarter ended June 30, 1998 was $425,000
compared to $654,000 for the same quarter in the prior year. The decrease in
interest income in the current year is due to lower average cash and marketable
securities balances. The Company's cash is invested primarily in short-term,
fixed principal investments, such as U.S. Government agency issues, corporate
bonds, certificates of deposit and commercial paper.
Pro forma Results. See Note 4 in Notes to the Financial Statements for
a discussion of quarterly results excluding the impact of the Chugai
transaction.
<PAGE>
Prospective Information
The Company is involved in several legal and administrative proceedings
which could result in a substantial cost to the Company. Given the complexity of
the legal and factual issues and the uncertainty of litigation, 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. For a detailed discussion of these matters, see "Recent Events."
PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
See "Recent Events" in Part I, Item 2, which is incorporated by
reference in this response.
Item 2-4 - The Company has nothing to report with respect to these items during
the quarter ended June 30, 1998.
Item 5 - OTHER INFORMATION
Dates for Submission of Stockholder Proposals:
Any stockholder of the Company who wishes to present a proposal to be
considered at the 1999 Annual Meeting of Stockholders and who, pursuant to Rule
14a-8 of the Securities and Exchange Commission, wishes to have the proposal
included in the Company's proxy statement and form of proxy for that meeting,
must submit the proposal in writing to the Company at 10070 Barnes Canyon Road,
San Diego, California 92121, so that it is received by February 16, 1999.
Any stockholder of the Company who wishes to present a proposal to be
considered at the 1999 Annual Meeting of Stockholders, but to do so outside of
the processes of Rule 14a-8, must submit the proposal in writing to the Company
at 10070 Barnes Canyon Road, San Diego, California 92121, so that it is received
by April 30, 1999.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
A Current Report on Form 8-K dated April 7, 1998, was filed on April 22, 1998,
reporting (1) a Cooperative Development and Marketing Agreement effective March
31, 1998 between the Company and Chugai Pharmaceutical Co., Ltd., and (2) a
Common Stock Purchase Agreement effective March 31, 1998 between the Company and
Chugai Pharmaceutical Co., Ltd.
A Current Report on Form 8-K dated May 18,1998, was filed on May 22, 1998,
reporting that OPTISON received final marketing authorization by the European
Agency for the Evaluation of Medicinal Products for use in patients with
suspected or known cardiovascular disease.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLECULAR BIOSYSTEMS, INC.
/s/ Gerard Wills
Gerard A. Wills
Vice President Finance and
Chief Financial Officer
8/11/98
Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the consolidated financial statements of Molecular
Biosystems, Inc. dated June 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 359
<SECURITIES> 24,352
<RECEIVABLES> 13094
<ALLOWANCES> 0
<INVENTORY> 2371
<CURRENT-ASSETS> 40,591
<PP&E> 12,439
<DEPRECIATION> 6,714
<TOTAL-ASSETS> 58,540
<CURRENT-LIABILITIES> 13,396
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 133,419
<TOTAL-LIABILITY-AND-EQUITY> 37,880
<SALES> 1367
<TOTAL-REVENUES> 18,988
<CGS> 1,639
<TOTAL-COSTS> 17,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 265
<INCOME-PRETAX> 2,140
<INCOME-TAX> 1400
<INCOME-CONTINUING> 740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 740
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0
</TABLE>
