FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
Commission File Number 0-15313
BIO-TECHNOLOGY GENERAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3033811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
70 Wood Avenue South, Iselin, New Jersey 08830
(Address of principal executive offices)
(908) 632-8800
(Registrant's telephone number, including area code)
Former address: Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, par value $.01 per share,
outstanding as of October 30, 1997 47,069,304
<PAGE>
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996.................. 3
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1997 and 1996............................... 4
Consolidated Statement of Changes in
Stockholders' Equity for the nine
months ended September 30, 1997........................... 5
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 1997 and 1996............................... 6
Notes to Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................. 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................17
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<PAGE>
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1977 1996
(Unaudited)
- -------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents........................... $14,355 $ 7,005
Short-term investments.............................. 19,856 12,760
Accounts receivable................................. 23,686 18,273
Inventories......................................... 4,785 5,328
Deferred income taxes............................... 1,627 6,000
Prepaid expenses and other current assets........... 572 350
-------- --------
Total current assets............................... 64,881 49,716
Deferred income taxes................................ 9,379 9,379
Severance pay funded................................. 2,355 2,318
Property and equipment, net.......................... 7,104 6,039
Intangibles, net..................................... 2,804 3,451
Patents, net......................................... 430 538
Other assets......................................... 3,029 2,134
-------- --------
Total assets....................................... $ 89,982 $ 73,575
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans............................... $ 399 $ 266
Current portion of long-term debt................... 13 291
Accounts payable.................................... 1,014 3,358
Other current liabilities........................... 6,308 5,175
-------- --------
Total current liabilities.......................... 7,734 9,090
-------- --------
Long-term liabilities................................ 4,180 3,927
-------- --------
Stockholders' equity:
Preferred stock - $.01 par value; 4,000,000
shares authorized; no shares issued................ -- --
Common stock - $.01 par value; 150,000,000 shares
authorized; issued: 47,053,000 (45,682,000 at
December 31, 1996)................................. 471 457
Capital in excess of par value...................... 134,759 129,130
Deficit............................................. (56,822) (68,613)
Less - treasury stock at cost, 83,000 shares........ (340) (340)
- deferred compensation........................ -- (76)
-------- --------
Total stockholders' equity......................... 78,068 60,558
-------- --------
Total liabilities and stockholders' equity......... $ 89,982 $ 73,575
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
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<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------------------------------
1996 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales............................. $29,496 $39,523 $10,182 $10,558
Contract fees............................. 3,796 6,706 1,001 6,240
Other revenues............................ 963 1,025 624 695
Interest income........................... 775 1,120 322 424
------- ------- ------- -------
35,030 48,374 12,129 17,917
------- ------- ------- -------
Expenses:
Research and development.................. 8,901 11,781 2,966 4,458
Cost of product sales .................... 5,531 6,303 2,163 1,509
General and administrative................ 5,892 6,228 1,641 2,271
Marketing and sales....................... 4,691 6,432 1,788 2,439
Commissions and royalties................. 1,573 991 292 798
Interest and finance...................... 111 234 35 69
Write-off in connection with
litigation.............................. 1,383 -- -- --
------- ------- ------- -------
28,082 31,969 8,885 11,544
------- ------- ------- -------
Income before income taxes................. 6,948 16,405 3,244 6,373
Income taxes............................... -- 4,614 -- 1,891
------- ------- ------- -------
Net income ................................ $ 6,948 $11,791 $ 3,244 $ 4,482
======= ======= ======= =======
Earnings per share......................... $ 0.15 $ 0.23 $ 0.07 $ 0.09
======= ======= ======= =======
Weighted average number of shares
outstanding.............................. 47,915 51,966 48,812 51,691
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<CAPTION>
Common Stock
-------------- Capital in Total
Par Excess of Treasury Deferred Stockholders'
Shares Value Par Value Deficit Stock Compensation Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996......... 45,682 $457 $129,130 $(68,613) $(340) $(76) $60,558
Issuance of common stock. ......... 3 43 43
Exercise of stock options.......... 1,282 13 5,043 5,056
Exercise of warrants............... 52 1 255 256
Issuance of common stock
on conversion
of convertible debt.............. 34 288 288
Amortization of deferred
compensation...................... 76 76
Net income for nine months
ended September 30, 1997.......... 11,791 11,791
------ ---- -------- -------- ----- ----- -------
Balance, September 30, 1997........ 47,053 $471 $134,759 $(56,822) $(340) $ -- $78,068
====== ==== ======== ======== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Nine Months
Ended September 30,
-------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $11,791 $ 6,948
Adjustments to reconcile net income to net
cash provided by operating activities:
Write-off in connection with litigation........................... -- 1,383
Depreciation and amortization..................................... 2,359 2,325
Provision for severance pay....................................... 276 586
Loss (gain) on sales of short-term investments and fixed assets... (7) (42)
Deferred income taxes............................................. 4,373 --
Common stock as payment for services.............................. 43 57
Changes in: receivables........................................... (5,413) (4,264)
inventories........................................... 543 (1,306)
prepaid expenses and other current assets............. (222) (849)
accounts payable...................................... (2,344) 508
other assets.......................................... (895) (8)
other current liabilities............................. 1,266 1,228
------- -------
Net cash provided by operating activities............................ 11,770 6,566
------- -------
Cash flows from investing activities:
Short-term investments............................................... (12,533) (3,168)
Capital expenditures................................................. (2,571) (1,951)
Severance pay funded................................................. (37) (289)
Intangibles ....................................................... -- (56)
Changes in patents................................................... (36) (146)
Proceeds from sales of fixed assets and short-
term investments................................................... 5,458 6,026
-------- -------
Net cash (used in) provided by investing activities.................. (9,719) 416
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock............................... 5,312 5,170
Interest on Series B Notes........................................... (9) (14)
Repayment of Notes................................................... (4) --
-------- -------
Net cash provided by financing activities............................ 5,299 5,156
-------- -------
Net increase in cash and cash equivalents............................. 7,350 12,138
Cash and cash equivalents at beginning of year........................ 7,005 6,886
-------- -------
Cash and cash equivalents at end of period............................ $14,355 $19,024
======== =======
Supplementary Information
- -------------------------
Non-cash investing and financing activities:
Conversions of convertible debt...................................... $ 288 $ 87
Other information:
Interest paid ....................................................... $ 27 $ 15
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Statement on Adjustments
-------------------------
In the opinion of management, the condensed consolidated financial statements
include all adjustments, consisting of only normal recurring accruals,
considered necessary for a fair presentation. Due to fluctuations in quarterly
revenues earned, operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year. The accounting
policies continue unchanged from December 31, 1996. For further information,
refer to the Consolidated Financial Statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
Note 2: Write-Off in connection with Litigation
---------------------------------------
On December 1, 1994, Genentech, Inc. filed a lawsuit against BTG in the United
States District Court for the District of Delaware alleging that BTG's
importation of human growth hormone ("hGH") infringed two Genentech process
patents. In January 1995, BTG commenced an action against Genentech in the
United States District Court for the Southern District of New York seeking,
among other things, declaratory judgments as to the non-infringement, invalidity
and unenforceability of such Genentech patents as well as damages resulting from
Genentech's actions in the ITC proceedings. The Delaware action was consolidated
with the New York action, and in August 1995 the United States District Court
for the Southern District of New York granted a preliminary injunction
prohibiting the commercial introduction in the U.S. of BTG's hGH. In April 1996
the CAFC rejected BTG's appeal of the grant of the preliminary injunction. In
May 1996 the CAFC rejected BTG's request for a rehearing and a rehearing en
banc. BTG filed a petition for a writ of certiorari with the U.S. Supreme Court,
which was denied in October 1996. BTG is now precluded from marketing and
distributing its human growth hormone in the United States pending the outcome
of the patent infringement action. During 1995, the Company incurred total legal
fees relating to this litigation of approximately $824,000, which amount was
initially capitalized but subsequently written off in the first quarter of 1996
following the CAFC decision. In addition, the Company wrote-off previously
capitalized expenses incurred in connection with the preparation for launch of
hGH in the United States.
Note 3: Convertible Notes
-----------------
The Company has called for redemption all its outstanding (i) Series B 11%
Senior Secured Convertible Notes due October 15, 1998 (the "11% Notes") and (ii)
11% Convertible Senior Subordinated Debentures due 2006 (the "11% Debentures").
An aggregate of $154,750 principal amount to the 11% Notes is outstanding and
$92,000 principal amount of the 11% Debentures is outstanding. The 11% Notes are
convertible into shares of Common Stock at a conversion price of $1.75. The 11%
Debentures are convertible into shares of Common Stock at a conversion price of
$8.75. In April 1997, $148,000 aggregate principal amount of the Company's 7
1/2% Convertible Senior Subordinated Notes due April 15, 1997 (the "7 1/2%
Notes") were converted into an aggregate of approximately 14,100 shares of
Common Stock; the remaining $4,000 principal amount of the 7 1/2% Notes was
repaid on April 15, 1997, the maturity date for such notes.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Three and nine months ended September 30, 1997
compared with three and nine months ended September 30, 1996
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items; introductions and advancements in
development of products, and plans and objectives related thereto; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements" as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, changes
and delays in product development plans and schedules, changes and delays in
product approval and introduction, customer acceptance of new products, changes
in pricing or other actions by competitors, patents owned by the Company and its
competitors, changes in healthcare reimbursement, risk of operations in Israel,
risk of product liability, governmental regulation, dependence on third parties
to manufacture products and commercialize products, general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Results of Operations:
- ----------------------
Overview
The following tables set forth for the fiscal periods indicated the
percentage of revenues represented by certain items reflected on the Company's
statement of operations.
-8-
<PAGE>
<TABLE>
<CAPTION>
Nine Three Months
Months Ended Ended
September 30, September 30,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales ....................... 81.7% 84.2% 58.9% 83.9%
Contract fees ....................... 13.9 10.8 34.8 8.3
Other revenues ...................... 2.1 2.8 3.9 5.1
Interest income ..................... 2.3 2.2 2.4 2.7
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Expenses:
Research and development ............ 24.4% 25.4% 24.9% 24.5%
Cost of product sales ............... 13.0 15.8 8.4 17.8
General and administrative .......... 12.9 16.8 12.7 13.5
Marketing and sales ................. 13.3 13.4 13.6 14.8
Commissions and royalties ........... 2.0 4.5 4.4 2.4
Interest and finance ................ 0.5 0.3 0.4 0.3
Write-off in connection
with litigation ................... -- 4.0 -- --
----- ----- ----- -----
Total 66.1 80.2 64.4 73.3
----- ----- ----- -----
Income before income taxes ............ 33.9 19.8 35.6 26.7
Income taxes .......................... 9.5 -- 10.6 --
----- ----- ----- -----
Net income ............................ 24.4% 19.8% 25.0% 26.7%
===== ===== ===== =====
</TABLE>
The Company has historically derived its revenues from product sales as
well as from collaborative arrangements with third parties, under which the
Company may earn up-front contract fees, may receive funding for additional
research (including funding from the Chief Scientist of the State of Israel), is
reimbursed for producing certain experimental materials, may be entitled to
certain milestone payments, may sell product at specified prices, and may
receive royalties on sales of product. The Company anticipates that product
sales will constitute the majority of its revenues in the future. Revenues have
in the past displayed and will in the immediate future continue to display
significant variations due to changes in demand for its products, new product
introductions by the Company and its competitors, the obtaining of new research
and development contracts and licensing arrangements, the completion or
termination of such contracts and arrangements, the timing and amounts of
milestone payments, and the timing of regulatory approvals of products.
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<PAGE>
The following table summarizes the Company's sales of its commercialized
products as a percentage of total product sales for the periods indicated:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Oxandrin ................ 47% 35% 66% 62%
Bio-Tropin .............. 37 48 13 22
BioLon .................. 12 12 17 15
Other ................... 4 5 4 1
--- --- --- ---
Total ................ 100% 100% 100% 100%
=== === === ===
The Company believes that its product mix will change significantly as it
continues to focus on: (i) increasing market penetration of its existing
products; (ii) expanding into new markets; and (iii) commercializing additional
products.
The following table summarizes the Company's U.S. and international product
sales as a percentage of total product sales for the period indicated:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
United States ........... 49% 34% 69% 62%
International ........... 51 66 31 38
--- --- --- ---
Total ................ 100% 100% 100% 100%
=== === === ===
Comparison of Nine Months Ended September 30, 1997 and September 30, 1996
Revenues. Total revenues increased 38% in the first nine months of 1997
to $48,374,000 from $35,030,000 in the first nine months of 1996. Product sales
increased $10,027,000, or 34%, in the first nine months of 1997 from the
comparable prior period, primarily driven by increased sales of Oxandrin in the
United States and increased sales of BioLon to BTG's distributors. Oxandrin
sales increased $8,306,000, primarily as a result of the Company's increased
marketing efforts, growing awareness of the product and the relatively small
sales base in the comparable period in 1996, as the product had just been
introduced by BTG in December 1995. BioLon sales increased approximately
$1,319,000 over the comparable period in 1996, while sales of the Company's
human growth hormone ("hGH") only increased approximately $404,000 over the
comparable 1996 period. Contract fees and other revenue are primarily generated
from licensing and distribution arrangements and partial research and
development funding by the Chief Scientist of the State of Israel (the "Chief
Scientist"). In the nine months ended September 30, 1997, BTG recognized revenue
of $6,706,000 as contract fees, of which $3,000,000 represents fees from the
grant of an exclusive right to a third party to evaluate one of the Company's
products under development, and $3,000,000 represents an initial licensing fee
received in connection with the licensing of worldwide
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<PAGE>
distribution rights (other than the United States, Canada, Israel and Japan) for
the Company's superoxide dismutase ("SOD") product for bronchopulmonary
dysplasia and other respiratory indications to Ares - Serono ("Serono"). In the
nine months ended September 30, 1996, BTG received $2,500,000 in contract fees
as a result of the termination of a sublicensing agreement and the licensing of
distribution rights in the United States for the Company's Silkis product, and
$1,000,000 as a one-time payment by a third party for the exclusive right to
evaluate one of the Company's products under development. Interest income
increased $345,000, or 45%, over the comparable prior period primarily as a
result of increased cash balances (including short-term investments) resulting
from option and warrant exercises and cash flow from operations subsequent to
September 30, 1996.
Research and Development Expense. Research and development expense
increased 32% in the nine months ended September 30, 1997 to $11,781,000 from
$8,901,000 in the comparable period in 1996. The increase was primarily
attributable to expenses associated with the Company's Phase III clinical
trials, principally for its SOD product and new dosage formulations for
Oxandrin, and post-approval Phase IV clinical studies to provide additional
clinical support for the use of Oxandrin to treat disease-related weight loss
conditions other than AIDS-related weight loss.
Cost of Product Sales. Cost of product sales increased $772,000, or 14%, in
the nine months ended September 30, 1997 to $6,303,000 from $5,531,000 in the
comparable period in 1996. The increase is primarily attributable to increased
product sales. Cost of product sales as a percentage of product sales for the
first nine months of 1997 decreased to 15.9% from 18.8% for the comparable prior
year period. This decrease was primarily due to increased sales of Oxandrin as a
percentage of total product sales and technical improvements to the
manufacturing process which reduced the cost of manufacture. Oxandrin has a
relatively low cost of manufacture as a percentage of product sales, while
BioLon has the highest cost to manufacture as a percentage of product sales.
Cost of product sales as a percentage of product sales varies from year to year
and quarter to quarter depending on the quantity and mix of products sold.
General and Administrative Expense. General and administrative expense
increased in the nine months ended September 30, 1997 to $6,228,000 versus
$5,892,000 in the comparable prior period. As a percentage of revenues, general
and administrative expense decreased to 12.9% of revenues in the first nine
months of 1997 versus 16.8% of revenues in the comparable prior year period,
primarily as a result of the growth in product sales.
Marketing and Sales Expense. Marketing and sales expense increased 37% in
the nine months ended September 30, 1997 to $6,432,000 from $4,691,000 for the
prior year period. This increase is primarily due to additional marketing and
sales expenses, primarily resulting from increased personnel and increased
advertising, promotional and market research activities, resulting from the
growth of the Company's product sales. As a percentage of revenues, marketing
and sales expense remained relatively constant due to the proportional increase
in revenues.
Commissions and Royalties. Commissions and royalties were $991,000, or 2.0%
of total revenues, in the nine months ended September 30, 1997, as compared to
$1,573,000, or 4.5% of total revenues, in the same period last year. These
expenses consist primarily of royalties to entities from which the Company
licensed certain of its products and to the Chief Scientist. Commissions and
royalties in 1997 consist primarily of a royalty payment in respect of the
Company's SOD product resulting from the licensing of distribution rights for
the Company's SOD product to Serono. Commissions and royalties in 1996 include a
royalty payment in respect of BTG's Silkis product resulting from the
termination of its European licensee's sublicense and the licensing of
distribution rights for Silkis in the United States and royalties to the Chief
Scientist in respect of a product for which the Company's royalty obligations to
the Chief Scientist were completed in 1996.
-11-
<PAGE>
Write-off in Connection with Litigation. In the first quarter of 1996, BTG
wrote off $1,383,000 of capitalized expenses related to hGH. This write-off
resulted from the affirmation by the United States Court of Appeals for the
Federal Circuit of a preliminary injunction obtained by Genentech, Inc.
prohibiting the Company from marketing its human growth hormone in the United
States.
Income Taxes. Income taxes for the nine months ended September 30, 1997
were $4,614,000, representing approximately 28% of income before income taxes.
The Company's consolidated tax rate differs from the statutory rate because of
Israeli tax benefits, research and development tax credits and similar items
which reduce the tax rate. In the nine months ended September 30, 1996 the
Company did not record any income taxes as any interim tax provision would be
offset by available net operating loss carryforwards.
Net Income. Net income for the nine months ended September 30, 1996
includes a write-off of previously capitalized expenses of $1,383,000, or $0.03
per share. The Company had approximately 4.1 million additional weighted average
shares outstanding for the nine month period ended September 30, 1997, as
compared to the same period in 1996, primarily as a result of the increase in
the price of the Common Stock (which resulted in more outstanding options being
considered common equivalent shares because their exercise price was below the
average fair market value of the Common Stock), and the issuance of
approximately 2.3 million shares upon the exercise of outstanding options
subsequent to September 30, 1996, primarily in the last quarter of 1996 and the
first quarter of 1997.
Comparison of Three Months Ended September 30, 1997 and September 30, 1996
Revenues. Total revenues increased 48% in the third quarter of 1997 to
$17,917,000 from $12,129,000 in the third quarter of 1996. Product sales
increased $376,000, or 4%, in the third quarter of 1997 from the comparable
prior period, primarily driven by increased sales of Oxandrin in the United
States, partially offset by a decrease in sales of hGH. Oxandrin sales increased
$661,000. Although hGH sales for the nine months ended September 30, 1997
increased $404,000 over the comparable 1996 nine month period, hGH sales
decreased approximately $894,000 in the third quarter of 1997 from the
comparable quarter in 1996 as the Company's Japanese distributor ordered
substantially all its anticipated 1997 hGH product requirements in the first
half of 1997. Contract fees and other revenue are primarily generated from
licensing and distribution arrangements and partial research and development
funding by the Chief Scientist of the State of Israel. Contract fees represented
34.8% of total revenues in the third quarter of 1997 compared to 8.3% in the
third quarter of 1996. In the third quarter of 1997 BTG recognized revenue of
$6,240,000 as contract fees, of which $3,000,000 represents fees from the grant
of an exclusive right to a third party to evaluate one of the Company's products
under development, and $3,000,000 represents an initial licensing fee received
in connection with the licensing of worldwide distribution rights (other than
the United States, Canada, Israel and Japan) for the Company's SOD product for
bronchopulmonary dysplasia and other respiratory indications to Serono. In the
third quarter of 1996 BTG received $1,000,000 as a one-time payment by a third
party for the exclusive right to evaluate one of the Company's products under
development. Interest income increased $102,000, or 32%, over the comparable
prior period primarily as a result of increased cash balances (including
short-term investments) resulting from option exercises and cash flow from
operations subsequent to September 30, 1996.
Research and Development Expense. Research and development expense
increased 50% in the third quarter of 1997 to $4,458,000 from $2,966,000 in the
third quarter of 1996. The increase was primarily attributable to expenses
associated with the Company's Phase III clinical trials, principally for its
superoxide dismutase product and new dosage formulations for Oxandrin, and
post-approval Phase IV
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<PAGE>
clinical studies to provide additional clinical support for the use of Oxandrin
to treat disease-related weight loss conditions other than AIDS-related weight
loss.
Cost of Product Sales. Cost of product sales decreased $654,000, or 30%, in
the third quarter of 1997 to $1,509,000 from $2,163,000 in the third quarter of
1996. Cost of product sales as a percentage of product sales for the third
quarter of 1997 decreased to 14.3% from 21.2% for the comparable prior year
period. This decrease was primarily due to increased sales of Oxandrin as a
percentage of total product sales and technical improvements to the
manufacturing process which reduced the cost of manufacture. Oxandrin has a
relatively low cost of manufacture as a percentage of product sales, while
BioLon has the highest cost to manufacture as a percentage of product sales.
Cost of product sales as a percentage of product sales varies from year to year
and quarter to quarter depending on the quantity and mix of products sold.
General and Administrative Expense. General and administrative expense
increased in the third quarter of 1997 to $2,271,000 versus $1,641,000 in the
comparable prior period. As a percentage of revenues, general and administrative
expense decreased to 12.7% of revenues in the third quarter of 1997 versus 13.5%
of revenues in the comparable prior year period as a result of the growth in
revenues.
Marketing and Sales Expense. Marketing and sales expense increased 36% in
the third quarter of 1997 to $2,439,000 from $1,788,000 for the prior year
period. As a percentage of revenues, marketing and sales expense decreased to
13.6% from 14.8% for the second quarter of 1996. This decrease is primarily due
to the growth of the Company's revenues.
Commissions and Royalties. Commissions and royalties were $798,000, or 4.4%
of total revenues, in the third quarter of 1997, as compared to $292,000, or
2.4% of total revenues, in the third quarter of 1996. These expenses consist
primarily of royalties to entities from which the Company licensed certain of
its products and to the Chief Scientist. Commissions and royalties in 1997
consist primarily of a royalty payment in respect of the Company's SOD product
resulting from the licensing of distribution rights for the Company's SOD
product to Serono. Commissions and royalties in 1996 include royalties to the
Chief Scientist in respect of a product for which the Company's royalty
obligations to the Chief Scientist were completed in 1996.
Income Taxes. Income taxes for the three months ended September 30, 1997
were $1,891,000, representing 29.7% of income before income taxes. The Company's
consolidated tax rate differs from the statutory rate because of Israeli tax
benefits, research and development tax credits and similar items which reduce
the tax rate. In the three months ended September 30, 1996 the Company did not
record any income taxes as any interim tax provision would be offset by
available net operating loss carryforwards.
Net Income. The Company had approximately 2.9 million additional weighted
average shares outstanding for the three month period ended September 30, 1997,
as compared to the same period in 1996, primarily as a result of the increase in
the price of the Common Stock (which resulted in more outstanding options being
considered common equivalent shares because their exercise price was below the
average fair market value of the Common Stock), and the issuance of
approximately 2.3 million shares upon the exercise of outstanding options
subsequent to September 30, 1996, primarily in the last quarter of 1996 and the
first quarter of 1997.
The increase in net income for the third quarter of 1997 was dependent in
large part on the significant level of contract fees received in the third
quarter. Although the Company believes that product sales in the fourth quarter
will exceed product sales in the fourth quarter of 1996 and the third quarter of
1997, and although the Company is unable to project its fourth quarter results,
the Company believes that
-13-
<PAGE>
the significant effect of contract fees on third quarter net income will make it
difficult for fourth quarter net income to exceed third quarter net income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital at September 30, 1997 was $57,147,000 as
compared to $40,626,000 at December 31, 1996.
The major portion of the Company's revenues is derived from product sales.
In addition, the Company derives revenue from collaborative arrangements, under
which the Company may earn up-front contract fees, may receive funding for
additional research, is reimbursed for producing certain experimental materials,
may be entitled to certain milestone payments, may sell product at specified
prices and may receive royalties on sales of product. Revenues have in the past
displayed and will in the immediate future continue to display variations due to
changes in demand for its products, introductions of new products by
competitors, the obtaining of new research and development contracts and
licensing arrangements, the completion or termination of such contracts and
arrangements, the timing and amounts of milestone payments and the timing of
regulatory approvals of products.
The cash flows of the Company have fluctuated significantly due to the
impact of net income and losses, capital spending, working capital requirements,
the issuance of Common Stock and other financing activities. The Company expects
that cash flow in the near future will be primarily determined by the levels of
net income and financings, if any, undertaken by the Company. Net cash increased
by $12,138,000 and $7,350,000 in the nine months ended September 30, 1996 and
1997, respectively.
Net cash provided by operating activities was $6,566,000 and $11,770,000 in
the nine months ended September 30, 1996 and 1997, respectively. Net income was
$6,948,000 and $11,791,000 in the same periods, respectively. In the nine months
ended September 30, 1996, net cash provided by operating activities was less
than net income primarily because of an increase in receivables and inventory of
$4,264,000 and $1,306,000, respectively, partially offset by a write-off of
capitalized expenses of $1,383,000, an increase in current liabilities of
$1,736,000 and depreciation and amortization of $2,325,000. In the nine months
ended September 30, 1997, net income and net cash provided by operating
activities were approximately the same, as deferred income taxes of $4,373,000,
a decrease in inventories of $543,000 and depreciation and amortization of
$2,359,000 were completely offset by a $5,415,000 increase in receivables, an
$1,078,000 net decrease in current liabilities and an $895,000 increase in other
assets.
Net cash provided by (used in) investing activities was $416,000 and
$(9,719,000) in the nine months ended September 30, 1996 and 1997, respectively.
Net cash used in investing activities included capital expenditures of
$1,951,000 and $2,571,000 in these periods, respectively, primarily for
laboratory and manufacturing equipment and, in 1997, leasehold improvements and
furniture and fixtures associated with the expansion of the Company's New Jersey
headquarters. The remainder of the net cash provided by (used in) investing
activities was primarily for purchases and sales of short-term investments.
Net cash provided by financing activities was $5,156,000 and $5,294,000 in
the nine months ended September 30, 1996 and 1997, respectively. Cash flows from
financing activities were primarily affected by net proceeds from issuances of
Common Stock of $5,170,000 and $5,312,000 in these periods, respectively. Net
proceeds from the sale of Common Stock include $3,400,000 from exercises of
warrants to purchase 567,607 shares of Common Stock which expired in May 1996;
the remainder of such net proceeds in both periods result from option and
warrant exercises.
-14-
<PAGE>
BTG does not currently have any material commitments for capital
expenditures.
The Company maintains its funds in money market funds, commercial paper and
other liquid debt instruments.
The Company manages its Israeli operations with the object of protecting
against any material net financial loss in U.S. dollars from the impact of
Israeli inflation and currency devaluation on its non-U.S. dollar assets and
liabilities. The Bank of Israel's monetary policy is to manage the exchange rate
while allowing the Consumer Price Index to rise by approximately 8% in 1995, 11%
in 1996 and 6% in the nine month period ended September 30, 1997. In each of
1995 and 1996 the Shekel was devalued by approximately 4% against the U.S.
dollar, and was devalued by approximately 8% in the nine months ended September
30, 1997. As a result, for those expenses linked to the Israeli Shekel, such as
salaries and rent, this resulted in corresponding increases in these costs in
U.S. dollars in 1995 and 1996, and a decrease in these costs in U.S. dollars in
the nine months ended September 1997. To the extent that expenses in Shekels
exceed the Company's income in Shekels (which to date have consisted primarily
of research and development funding from the Chief Scientist and product sales
in Israel), the devaluations of Israeli currency have been and will continue to
be a benefit to the Company's financial condition. However, should the Company's
income in Shekels exceed its expenses in Shekels in any material respect, the
devaluation of the Shekel will adversely affect the Company's financial
condition. Further, to the extent the devaluation of the Shekel with respect to
the U.S. dollar does not substantially offset the increase in the cost of local
goods and services in Israel, the Company's financial results will be adversely
affected as local expenses expressed in U.S. dollar terms will increase. There
can be no assurance that the government of Israel will continue to devalue the
Shekel from time to time to offset the effects of inflation in Israel.
At September 30, 1997, intangibles, net consist of (i) $1,840,000 (net of
amortization) relating to the repurchase of all rights to hGH previously
licensed to The DuPont Merck Pharmaceutical Company, together with all rights to
all data generated in pharmacological, toxicological and clinical studies and
encompassed in the Investigational New Drug Application and New Drug Application
files then pending with the U.S. Food and Drug Administration for the treatment
of human growth hormone-deficient children and (ii) $964,000 (net of
amortization) relating to the reacquisition of all rights to human growth
hormone licensed to Smithkline Beecham.
The Company is party to several proceedings relating to patents owned by it
or others. The Company cannot predict the costs of such proceedings, and there
can be no assurance that such costs will not be significant. Should the Company
be unsuccessful in any of these proceedings, it may be unable to commercialize
the products which are the subject of such proceedings in certain countries, and
may be unable to produce the products in Israel, which could have a material
adverse effect on the Company's revenues and results of operations.
The Company believes that its remaining cash resources as of September 30,
1997, together with anticipated product sales, scheduled payments to be made to
BTG under its current agreements with pharmaceutical partners, the proceeds from
sales of equity and continued funding from the Chief Scientist at current
levels, will be sufficient to fund the Company's current operations for the
foreseeable future. There can, however, be no assurance that product sales will
occur as anticipated, that scheduled payments will be made by third parties,
that current agreements will not be canceled, that the Chief Scientist will
continue to provide funding at current levels, or that unanticipated events
requiring the expenditure of funds will not occur. The satisfaction of the
Company's future cash requirements will depend in large part on the status of
commercialization of the Company's products, the Company's ability to enter into
additional research and development and licensing arrangements, and the
Company's ability
-15-
<PAGE>
to obtain additional equity investments, if necessary. There can be no assurance
that the Company will be able to obtain additional funds or, if such funds are
available, that such funding will be on favorable terms. In addition, the
indentures under which the Company's debt securities were issued limit the
ability of the Company to satisfy its cash requirements through borrowings or
the issuance of debt securities. The Company continues to seek additional
collaborative research and development and licensing arrangements in order to
provide revenue from sales of certain products and funding for a portion of the
research and development expenses relating to the products covered, although
there can be no assurance that the Company will be able to obtain such
agreements.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
Subsequent to December 31, 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on the weighted average number of shares actually
outstanding during the year. Diluted EPS includes the effect of potential
dilution from the exercise of outstanding dilutive stock options and warrants
into common stock using the treasury stock method. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997, and
earlier application is not permitted. When adopted, the Company will be required
to restate its EPS data for all prior periods presented. Had the Company applied
the principles of SFAS 128, earnings per share data for the three and nine
months ended September 30, 1997 and 1996 would be as follows:
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
BASIC EPS
Net Income $ 0.25 $ 0.16 $ 0.10 $ 0.07
======= ======= ======= =======
DILUTED EPS
Net income $ 0.23 $ 0.15 $ 0.09 $ 0.07
======= ======= ======= =======
Shares used in calculation
('000s)
Basic EPS 46,651 44,043 46,883 44,510
======= ======= ======= =======
Diluted EPS 51,966 47,915 51,691 48,812
======= ======= ======= =======
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
---------
None
(b) Reports on Form 8-K:
--------------------
None
-17-
<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.
BIO-TECHNOLOGY GENERAL CORP.
----------------------------
(Registrant)
By: /s/ SIM FASS
------------------------------------------
Sim Fass
Chairman, President and
Chief Executive Officer,
Principal Executive Officer
/s/ YEHUDA STERNLICHT
------------------------------------------
Yehuda Sternlicht
Vice President-Finance and
Chief Financial Officer,
Principal Financial and Accounting Officer
Dated: October 31, 1997
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,355
<SECURITIES> 19,856
<RECEIVABLES> 23,686
<ALLOWANCES> 0
<INVENTORY> 4,785
<CURRENT-ASSETS> 64,881
<PP&E> 7,104
<DEPRECIATION> 0
<TOTAL-ASSETS> 89,982
<CURRENT-LIABILITIES> 7,734
<BONDS> 260
0
0
<COMMON> 471
<OTHER-SE> 77,597
<TOTAL-LIABILITY-AND-EQUITY> 89,982
<SALES> 39,523
<TOTAL-REVENUES> 48,374
<CGS> 6,303
<TOTAL-COSTS> 31,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> 16,405
<INCOME-TAX> 4,614
<INCOME-CONTINUING> 11,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,791
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
