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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, 1999
Commission File Number 0-15313
BIO-TECHNOLOGY GENERAL CORP.
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(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)
(732) 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 November 10, 1999:
52,911,647
1
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INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998.................. 3
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1999 and 1998............................... 4
Consolidated Statement of Changes in
Stockholders' Equity for the
nine months ended September 30, 1999...................... 5
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 1999 and 1998............................... 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........................ 16
2
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PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 1999
(Unaudited) December 31, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 16,671 $ 9,431
Short-term investments....................... 64,274 37,602
Accounts receivable -- trade................. 48,322 52,429
-- other................. 544 15,968
Inventories ................................. 5,335 4,978
Deferred income taxes........................ 1,053 5,407
Prepaid expenses and other current assets.... 351 344
-------- --------
Total current assets......................... 136,550 126,159
Severance pay funded........................... 2,126 2,233
Property and equipment, net.................... 17,490 9,442
Intangibles, net............................... 1,233 1,728
Patents, net................................... 301 404
Other assets................................... 2,780 2,629
-------- --------
Total assets................................. $160,480 $142,595
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans........................ $ 1,341 $ 288
Accounts payable............................. 2,558 5,359
Other current liabilities.................... 11,197 10,153
-------- --------
Total current liabilities.................. 15,096 15,800
-------- --------
Long-term liabilities.......................... 3,922 3,818
-------- --------
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: 52,795,000
(51,934,000 at December 31, 1998).......... 528 519
Capital in excess of par value............... 165,528 161,164
Deficit...................................... (20,500) (36,396)
Less - treasury stock at cost, 83,000 shares. (340) (340)
Accumulated other comprehensive income....... (3,754) (1,970)
-------- --------
Total stockholders' equity................. 141,462 122,977
-------- --------
Total liabilities and stockholders' equity. $160,480 $142,595
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Product sales................. $50,164 $50,554 $14,916 $ 17,895
Contract fees................. 14,809 2,353 10,176 609
Other revenues................ 2,450 564 1,234 289
Interest income............... 3,167 2,182 1,156 774
------- ------- ------- ---------
70,590 55,653 27,482 19,567
------- ------- ------- ---------
Expenses:
Research and development...... 15,389 13,176 6,412 4,203
Cost of product sales......... 8,987 7,733 2,865 2,727
General and administrative.... 8,822 6,299 2,927 1,918
Marketing and sales........... 11,766 9,345 3,442 3,395
Commissions and royalties..... 2,684 557 1,967 214
Interest and finance.......... 81 65 21 25
------- ------- ------- ---------
47,729 37,175 17,634 12,482
------- ------- ------- ---------
Income before income taxes...... 22,861 18,478 9,848 7,085
Income taxes.................... 6,965 5,543 3,059 2,058
------- ------- ------- ---------
Net income...................... $15,896 $12,935 $ 6,789 $ 5,027
======= ======= ======= =========
Earnings per common share:
Basic......................... $ 0.30 $ 0.27 $ 0.13 $ 0.10
======= ======= ======= =========
Diluted....................... $ 0.30 $ 0.26 $ 0.12 $ 0.10
======= ======= ======= =========
Weighted average number of
common and common equivalent
shares:
Basic......................... 52,164 48,022 52,483 48,437
====== ====== ====== ======
Diluted....................... 53,485 50,616 54,701 49,710
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
4
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other Total
Par Excess of Treasury Comprehensive Stockholders'
Shares Value Par Value Deficit Stock Income Equity
(Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 .......... 51,934 $519 $161,164 $(36,396) $(340) $(1,970) $122,977
Comprehensive income:
Net income for nine months
ended September 30, 1999 ........ 15,896 15,896
Unrealized loss on marketable
securities, net ................. (1,784) (1,784)
--------
Total comprehensive income: 14,112
--------
Issuance of common stock ............ 192 2 1,012 1,014
Exercise of stock options ........... 669 7 3,352 3,359
------ ---- -------- -------- ----- ------- --------
Balance, September 30, 1999 ......... 52,795 $528 $165,528 $(20,500) $(340) $(3,754) $141,462
====== ==== ======== ======== ===== ======= ========
The accompanying notes are an integral part of this consolidated statement.
</TABLE>
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 15,896 $ 12,935
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 2,586 2,328
Provision for severance pay....................... 104 26
Loss on sales of short-term investments........... 361 (229)
Gain on sales of fixed assets..................... (5) --
Deferred income taxes............................. 4,354 4,834
Common stock as payment for services.............. 30 46
Changes in:
receivables..................................... 19,531 (8,463)
inventories..................................... (357) (633)
prepaid expenses and other current assets (7) 183
accounts payable ............................... (2,801) 793
other assets ................................... (388) (75)
other current liabilities ...................... 2,097 2,155
-------- --------
Net cash provided by operating activities............. 41,401 13,900
-------- --------
Cash flows from investing activities:
Short-term investments.............................. (44,642) (20,694)
Capital expenditures................................ (9,579) (1,968)
Changes in patents.................................. (108) (98)
Changes in intangibles.............................. (151) --
Severance pay used ................................. 107 173
Proceeds from sales of fixed assets................. 44 --
Proceeds from sales of short-term investments....... 15,825 10,361
--------- --------
Net cash used in investing activities................. (38,504) (12,226)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.............. 4,343 5,717
-------- --------
Net increase in cash and cash equivalents............. 7,240 7,385
Cash and cash equivalents at beginning of year........ 9,431 9,329
-------- --------
Cash and cash equivalents at end of period............ $ 16,671 $ 16,714
======== ========
SUPPLEMENTARY INFORMATION
Other information:
Income tax paid..................................... $ 2,595 $ 464
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<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, 1998. 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,
1998.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three and nine months ended September 30, 1999
compared with three and nine months ended September 30, 1998
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, 1998.
OVERVIEW
The Company is engaged in the research, development, manufacture and
marketing of biopharmaceutical products. Through a combination of internal
research and development, acquisitions, collaborative relationships and
licensing arrangements, BTG has developed a portfolio of therapeutic products,
including six products that have received regulatory approval for sale, of which
five are currently being marketed. The Company seeks both broad markets for its
products as well as specialized markets where it can seek Orphan Drug status and
potential marketing exclusivity.
The Company was founded in 1980 to develop, manufacture and market novel
therapeutic products. The Company's overall administration, licensing, human
clinical studies, marketing activities, quality assurance and regulatory affairs
are primarily coordinated at the Company's headquarters in Iselin, New Jersey.
Pre-clinical studies, research and development activities and manufacturing of
the Company's genetically engineered products are primarily carried out through
its wholly owned subsidiary in Rehovot, Israel.
8
<PAGE>
RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales.................... 71.0% 90.8% 54.3% 91.4%
Contract fees.................... 21.0 4.2 37.0 3.1
Other revenues................... 3.5 1.0 4.5 1.5
Interest income.................. 4.5 4.0 4.2 4.0
----- ----- ----- -----
Total....................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Expenses:
Research and development......... 21.8% 23.7% 23.3% 21.5%
Cost of product sales............ 12.7 13.9 10.4 13.9
General and administrative....... 12.5 11.3 10.7 9.8
Marketing and sales.............. 16.7 16.8 12.5 17.4
Commissions and royalties........ 3.8 1.0 7.2 1.1
Interest and finance............. 0.1 0.1 0.1 0.1
----- ----- ----- -----
Total........................ 67.6 66.8 64.2 63.8
----- ----- ----- -----
Income before taxes................ 32.4 33.2 35.8 36.2
Income taxes....................... 9.9 10.0 11.1 10.5
----- ----- ----- -----
Net income......................... 22.5% 23.2% 24.7% 25.7%
===== ===== ===== =====
</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.
9
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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
---------------- ------------------
1999 1998 1999 1998
----- ----- ----- -----
Oxandrin....................... 39.2% 62.0% 40.9% 65.0%
Bio-Tropin..................... 32.5 26.0 20.3 23.0
BioLon......................... 13.3 10.0 17.5 10.0
Delatestryl.................... 13.8 1.0 20.4 1.0
Other.......................... 1.2 1.0 0.9 1.0
----- ----- ----- -----
Total.................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
The Company believes that its product mix will fluctuate from quarter to
quarter as it continues to focus on: (i) increasing market penetration of its
existing products; (ii) expanding into new markets; and (iii) commercializing
additional products.
As previously announced, as a result of a slowing in the rate of
increase of Oxandrin prescriptions, Olsten Health Services, Inc. ("Olsten"),
BTG's wholesale and retail distributor for Oxandrin in the United States, has
decided to adjust future purchases to effect an adjustment in inventory. The
timing and magnitude of the adjustment are the subject of ongoing discussions
between Olsten and BTG, and will depend in large part on end-user demand for
Oxandrin. As a result, purchases of Oxandrin by Olsten will be lower than in
1998. The Company expects during 1999 to introduce Oxandrin to promote weight
gain in patients with involuntary weight loss and pressure ulcers. Successful
penetration of this new market could lead to a more rapid rate of Oxandrin
prescription growth.
The following table summarizes the Company's U.S. and international
product sales as a percentage of total product sales for the period indicated:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States.................. 51.2% 63.0% 65.4% 66.0%
International.................. 48.8 37.0 34.6 34.0
------ ------ ------ ------
Total.................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Comparison of Nine Months Ended September 30, 1999 and September 30, 1998
Revenues. Total revenues increased 27% in the nine months ended
September 30, 1999 to $70,590,000 from $55,653,000 in the nine months ended
September 30, 1998. Product sales decreased by $390,000, or 1%, in the first
nine months of 1999 from the comparable prior period, as increased sales of
human growth hormone ("hGH"), BioLon and Delatestryl to BTG's distributors were
completely offset by decreased sales of Oxandrin. Oxandrin sales to Olsten
decreased $11,761,000, or 37%, in the first nine months of 1999 compared to the
first nine months of 1998. The decrease in sales to Olsten was due to Olsten's
change in policy to reduce the amount of Oxandrin inventory it carries; however,
end-user sales of Oxandrin by Olsten increased by 22% and prescriptions
increased by 29% in the first nine months of 1999 compared to the first nine
months of 1998. The decrease in sales to Olsten was partially offset by
$2,153,000 of sales of Oxandrin to third parties for distribution overseas.
Product sales of hGH, BioLon and Delatestryl increased $3,360,000, $1,805,000
and $6,322,000, or 26%, 37% and 950%, respectively. The increase in sales of hGH
were primarily due to increased sales in Japan resulting from Sumitomo
Pharmaceutical Co., Ltd. commencing distribution of the Company's hGH in Japan
in January 1999. The increase in sales of Delatestryl, which is also distributed
on behalf of the Company by Olsten, is primarily the result
10
<PAGE>
of the U.S. Food and Drug Administration stopping production of a competing
injectable testosterone product currently used to treat men with hypogonadism
(testosterone deficiency).
Contract fees and other revenues 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"). Contract
fees represented 21% of total revenues in the nine months ended September 30,
1999 compared to 4% in the nine months ended September 30, 1998. Of the contract
fees earned in the nine months ended September 30, 1999, $10,000,000 or 68% of
total contract fees, was earned in respect of a strategic alliance with Teva
Pharmaceutical Industries Ltd. focusing on the development and global
commercialization of several generic recombinant therapeutic products. Of the
remainder, $4,197,000, or 28% of total contract fees, was earned in respect of
the license of distribution rights for Insulin on a substantially worldwide
basis. Of the contract fees earned in the nine months ended September 30, 1998,
$1,000,000, or 42% of total contract fees, was earned in respect of the license
of distribution rights for BioLon in the United States, and $425,000, $412,000
and $400,000, or 18%, 18% and 17% of total contract fees, respectively, were
earned in respect of the Company's oral contraceptive regimen, insulin and
hepatitis-B vaccine products, respectively. Other revenue increased $1,886,000
to $2,450,000 in the nine months ended September 30, 1999, primarily due to
royalties received from Organon, Inc. in respect of the Company's patented oral
contraceptive dosing regimen and settlement of prior amounts owed to the Company
by the Chief Scientist. Interest income increased $985,000, or 45%, over the
comparable prior period primarily as a result of increased cash balances
(including short-term investments) resulting mainly from exercise of warrants
(which expired December 31, 1998) and options and cash flow from operations
subsequent to September 30, 1998.
Research and Development Expense. Research and development expense
increased in the nine months ended September 30, 1999 by $2,213,000 or 17% as
compared to the same period last year. The increase in research and development
in the nine months ended September 30, 1999 as compared to the comparable period
last year was primarily related to the development of a new formulation for one
of its existing products, partially offset by the termination in 1998 of the
Company's Phase III clinical trial for its superoxide dismutase which is now
being conducted as a Phase II trial.
Cost of Product Sales. Cost of product sales increased $1,254,000, or
16%, in the nine months ended September 30, 1999 to $8,987,000 from $7,733,000
in the nine months ended September 30, 1998. Cost of product sales as a
percentage of product sales increased to 17.9% as compared to 15.3% in the
comparable period last year. Cost of product sales increased, both in absolute
terms and as a percentage of revenues, primarily as a result of increased sales
of Delatestryl and BioLon and decreased sales of Oxandrin. Oxandrin and human
growth hormone have a relatively low cost of manufacture as a percentage of
product sales, while Delatestryl and BioLon have 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 40% in the nine months ended September 30, 1999 to $8,822,000 versus
$6,299,000 in the comparable prior period. As a percentage of revenues, general
and administrative expense increased to 12.5% of revenues in the nine months
ended September 30, 1999 versus 11.3% of revenues in the comparable prior year
period. The increase derived mainly from legal fees resulting from the
reactivation in the fourth quarter of 1998 of the Company's declaratory judgment
action against Genentech in respect of the Company's hGH in the United States as
well as increased compensation costs.
Marketing and Sales Expense. Marketing and sales expense increased 26%
in the nine months ended September 30, 1999 to $11,766,000 from $9,345,000 for
the prior year period. As a percentage of revenues, marketing and sales expense
decreased to 16.7% from 16.8% for the nine months ended September 30, 1998 due
to the fact that revenues increased at a slightly faster rate than marketing and
sales expenses. However, as a percentage of product sales these expenses
increased to 23.5% in 1999 from 18.5% in 1998. These expenses primarily related
to the sales and marketing force in the United States that the Company
established to promote distribution of Oxandrin in the United States. The
increase was primarily due to additional marketing and sales expenses, primarily
resulting from increased personnel and increased advertising, promotional and
market research activities.
Commissions and Royalties. Commissions and royalties were $2,684,000 in
the nine months ended September 30, 1999, as compared to $557,000 in the nine
months ended September 30, 1998. These expenses consist primarily of royalties
to entities from which the Company licensed certain of its products and to the
Chief Scientist. However, the increase in the nine months ended September 30,
1999 resulted mainly from the accrual of $1,485,000, net, of commissions
received in respect of Serono's sales of its human growth hormone to Olsten,
which commissions the Company expects it will be required to refund because the
Company expects that Olsten will return most of the human growth hormone product
to Serono because
11
<PAGE>
it is anticipated that most of the product will be expired before it is sold.
BTG has terminated its agreement with Serono pursuant to which it was
co-promoting, through the Company's distribution channel with Olsten, Serono's
recombinant human growth hormone products in the United States.
Income Taxes. Provision for income taxes for the nine months ended
September 30, 1999 was $6,965,000, representing 30% of income before income
taxes as compared to $5,543,000, or 30% of income before income taxes, in the
nine months ended September 30, 1998. The Company's consolidated tax rate
differs from the statutory rate because of Israeli tax benefits, research and
experimental tax credits and similar items which reduce the tax rate.
Earnings per Common Share. The Company had approximately 4.1 million and
2.9 million additional basic and diluted weighted average shares outstanding,
respectively, for the nine month period ended September 30, 1999, as compared to
the same period in 1998. The increased number of basic shares was primarily the
result of the issuance, subsequent to September 30, 1998, of approximately
3,146,000 shares upon the exercise of warrants that expired on December 31,
1998, as well as the exercise of options. The increase in the number of diluted
shares was the result of the increased number of shares outstanding, partially
offset by fewer outstanding options being considered common equivalent shares
because their exercise price was above the average fair market value of the
Common Stock for the first nine months of 1999, which average fair market value
was lower than in the first nine months of 1998.
Comparison of Three Months Ended September 30, 1999 and September 30, 1998
Revenues. Total revenues increased 40% in the third quarter of 1999 to
$27,482,000 from $19,567,000 in the third quarter of 1998. Product sales
decreased by $2,979,000, or 17%, in the third quarter of 1999 from the
comparable prior period, as decreased sales of Oxandrin and human growth hormone
were only partially offset by increased sales of BioLon and Delatestryl to BTG's
distributors. Oxandrin sales to Olsten decreased $5,496,000, or 47%, in the
three months ended September 30, 1999 compared to the same period in 1998. The
decrease in sales to Olsten was due to Olsten's change in policy to reduce the
amount of Oxandrin inventory it carries; however, end-user sales of Oxandrin by
Olsten increased by 21% and prescriptions increased by 33% in the third quarter
of 1999 compared to the third quarter of 1998. hGH sales decreased $1,110,000,
or 27%, in the period, reflecting quarterly variations in purchasing based on
the operational needs of the Company's distributors. Product sales of BioLon and
Delatestryl increased $790,000 and $2,866,000 or 43% and 1,538%, respectively.
The increase in sales of Delatestryl, which is also distributed on behalf of the
Company by Olsten, is primarily the result of the U.S. Food and Drug
Administration stopping production of a competing injectable testosterone
product currently used to treat men with hypogonadism (testosterone deficiency).
Contract fees and other revenues 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 37.0% of
total revenues in the third quarter of 1999 compared to 3.1% in the third
quarter of 1998. Of the contract fees earned in the third quarter of 1999,
$10,000,000, or 98% of total contract fees, was earned in respect of a strategic
alliance with Teva Pharmaceuticals Ltd. focusing on the development and global
commercialization of several generic recombinant therapeutic products. Of the
contract fees earned in the third quarter of 1998, $500,000, or 82% of total
contract fees, was earned in respect of the license of distribution rights for
BioLon in the United States. Other revenue increased $945,000 to $1,234,000 in
the three months ended September 30, 1999, primarily due to royalties received
from Organon, Inc. in respect of the Company's patented oral contraceptive
dosing regimen. Interest income increased $382,000, or 49%, over the comparable
prior period primarily as a result of increased cash balances (including
short-term investments) resulting mainly from exercise of warrants (which
expired December 31, 1998) and options and cash flow from operations subsequent
to September 30, 1998.
Research and Development Expense. Research and development expense
increased 53% in the third quarter of 1999 to $6,412,000 from $4,203,000 in the
third quarter of 1998. The increase in research and development expenditures in
the three month ended September 30, 1999 is mainly attributable to the
development of a new formulation for one of its existing products.
Cost of Product Sales. Cost of product sales increased $138,000, or 5%,
in the third quarter of 1999 to $2,865,000 from $2,727,000 in the third quarter
of 1998. Cost of product sales as a percentage of product sales increased to
19.2% as compared to 15.3% in the comparable period last year. Cost of product
sales increased, both in absolute terms and as a percentage of revenues,
primarily as a result of increased sales of Delatestryl and BioLon and decreased
sales of Oxandrin and hGH. Oxandrin and human growth hormone have a relatively
low cost of manufacture as a percentage of product sales, while Delatestryl and
BioLon have 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.
12
<PAGE>
General and Administrative Expense. General and administrative expense
increased 53% in the third quarter of 1999 to $2,927,000 versus $1,918,000 in
the comparable prior period. As a percentage of revenues, general and
administrative expense increased to 10.7% of revenues in the third quarter of
1999 versus 9.8% of revenues in the comparable prior year period. The increase
derived mainly from legal fees resulting from the reactivation in the fourth
quarter of 1998 of the Company's declaratory judgment action against Genentech
in respect of the Company's hGH in the United States as well as increased
compensation costs.
Marketing and Sales Expense. Marketing and sales expense increased 1% in
the third quarter of 1999 to $3,442,000 from $3,395,000 for the prior year
period. As a percentage of revenues, marketing and sales expense decreased to
12.5% from 17.4% for the third quarter of 1998 due to the fact that revenues
increased at a faster rate than marketing and sales expense. However, as a
percentage of product sales these expenses increased to 23.1% in 1999 from 19.0%
in 1998. These expenses primarily related to the sales and marketing force in
the United States that the Company established to promote distribution of
Oxandrin in the United States. The increase was primarily due to additional
marketing and sales expenses, primarily resulting from increased personnel and
increased advertising, promotional and market research activities.
Commissions and Royalties. Commissions and royalties were $1,967,000 in
the third quarter of 1999, as compared to $214,000 in the third quarter of 1998.
These expenses consist primarily of royalties to entities from which the Company
licensed certain of its products and to the Chief Scientist. However, the
increase in the three months ended September 30, 1999 resulted mainly from the
accrual of $1,485,000, net, of commissions received in respect of Serono's sales
of its human growth hormone to Olsten, which commissions the Company expects it
will be required to refund because the Company expects that Olsten will return
most of the human growth hormone product to Serono because it is anticipated
that most of the product will be expired before it is sold.
Income Taxes. Provision for income taxes for the three months ended
September 30, 1999 was $3,059,000, representing 31% of income before income
taxes as compared to $2,058,000, or 29% of income before income taxes, in the
third quarter of 1998. The Company's consolidated tax rate differs from the
statutory rate because of Israeli tax benefits, research and experimental tax
credits and similar items which reduce the tax rate.
Earnings per Common Share. The Company had 4.0 million and 5.0 million
additional basic and diluted weighted average shares outstanding, respectively,
for the three month period ended September 30, 1999, as compared to the same
period in 1998. The increased number of basic shares was primarily the result of
the issuance, subsequent to September 30, 1998, of approximately 3,146,000
shares upon the exercise of warrants that expired on December 31, 1998 as well
as the exercise of options. The increase in the number of diluted shares was the
result of the increased number of shares outstanding, and more outstanding
options being considered common equivalent shares because their exercise price
was below the average fair market value of the Common Stock for the third
quarter of 1999, which average fair market value was higher than in the third
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1999 was $121,454,000 as
compared to $110,359,000 at December 31, 1998.
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 $7,240,000 and $7,385,000 in the nine months ended September 30, 1999 and
1998, respectively. Short-term investments increased $26,672,000 and $8,014,000
net, respectively, in these periods.
Net cash provided by operating activities was $41,401,000 and
$13,900,000 in the nine months ended September 30, 1999 and 1998, respectively.
Net income was $15,896,000 and $12,935,000 in the same periods, respectively. In
the nine months ended September 30, 1999, net cash provided by operating
activities was greater than net income primarily because of a decrease in
receivables of $19,531,000, deferred income taxes of $4,354,000, depreciation
and amortization of $2,586,000 and an increase in other current liabilities of
$2,097,000, partially offset by a decrease in accounts payable of $2,801,000. In
the nine months ended September 30, 1998, net cash provided by operating
activities was greater than net income primarily because of deferred income
taxes of $4,834,000, an increase in current liabilities of $2,948,000 and
depreciation and amortization of $2,328,000, partially offset by an increase in
receivables and inventories of $8,463,000 and $633,000, respectively.
13
<PAGE>
Net cash used in investing activities was $38,504,000 and $12,226,000 in
the nine months ended September 30, 1999 and 1998, respectively. Net cash used
in investing activities included capital expenditures of $9,579,000 and
$1,968,000 in these periods, respectively, consisting in 1999 of approximately
$6,250,000 to purchase a new manufacturing facility, with the remainder in both
periods primarily for laboratory, manufacturing and general office equipment.
The remainder of the net cash used in investing activities was primarily for
purchases and sales of short-term investments.
Net cash provided by financing activities was $4,343,000 and $5,717,000
in the nine months ended September 30, 1999 and 1998, respectively, which are
net proceeds from issuances of Common Stock, primarily as a result of exercise
of stock options.
The Company purchased a manufacturing facility in Israel for
approximately $6,250,000. The Company will initially locate its production
activities for Bio-Hep-B and Fibrimage at this new facility, and will thereafter
move the remainder of its production activities to this facility. The Company
expects the initial production facility will be ready by the end of 2000. The
Company expects it will cost approximately $35 million to complete the
production facility (excluding the cost of purchasing the facility).
The Company maintains its funds in money market funds, commercial paper
and other liquid debt instruments.
The Company manages its Israeli operations with the objective of
protecting against any material net financial loss in U.S. dollars from the
impact of Israeli inflation and currency devaluations on its non-U.S. dollar
assets and liabilities. The cost of the Company's operations in Israel, as
expressed in dollars, is influenced by the extent to which any increase in the
rate of inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the Israeli Shekel in relation to the U.S. dollar. The rate of
inflation (as measured by the consumer price index) was approximately 7% in 1997
and 9% in 1998, while the Shekel was devalued by approximately 9% and 18%,
respectively. In the nine months ended September 30, 1999 the consumer price
index increased at the rate of approximately 1% while the Shekel's value in
relation to the U.S. dollar decreased by approximately 3%. As a result, for
those expenses linked to the Israeli Shekel, such as salaries and rent, this
resulted in corresponding decreases in these costs in U.S. dollars. To the
extent that expenses in Shekels exceed BTG's revenues in Shekels (which to date
have consisted primarily of research 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 BTG's financial condition. However, should
BTG's revenues in Shekels exceed its expenses in Shekels in any material
respect, the devaluation of the Shekel will adversely affect BTG'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 costs of local
goods and services in Israel, BTG's financial results will be adversely affected
as local expenses measured in U.S. dollars will increase.
At September 30, 1999, intangibles, net consist mainly of (i) $975,000
(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) $108,000 (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, 1999, 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 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.
14
<PAGE>
YEAR 2000
The Company uses and relies on a variety of information technologies,
computer systems and scientific and manufacturing equipment containing
computer-related components (such as programmable logic controllers and other
embedded systems). Certain of the Company's computer systems and equipment use
two digit fields rather than four digit fields to define the applicable year. As
a result, such systems may not be able to distinguish between dates in the 20th
century and the 21st century. This could cause system or equipment shutdowns,
failures or miscalculations resulting in inaccuracies in computer output or
disruptions of operations, including inaccurate processing of financial
information and/or temporary inabilities to process transactions, manufacture
products or engage in normal business activities.
The Company has conducted an evaluation of the actions necessary to
ensure that its business critical computer systems and equipment will be able to
function without disruption with respect to the application of dating systems in
the Year 2000. This evaluation was completed by the end of 1998, following which
the Company upgraded, replaced and tested its computer systems and equipment so
as to be able to operate without disruption due to Year 2000 issues. The Company
expects to complete all its remediation efforts before the end of 1999. However,
there can be no assurance that any required remedial actions will be able to be
completed on a timely basis. If the Company is unable to complete its remedial
actions in the necessary time frame, contingency plans will be developed to
address those business critical systems which may not be Year 2000 compliant.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a number of third parties that provide goods, services and
information to the Company. These include contract manufacturers, suppliers,
licensees, vendors, research partners and financial institutions. If any of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, which systems and equipment are outside the
control of the Company, it could affect the Company's ability to manufacture
products or engage in normal business activities. The Company has made contact
with all of its significant customers, suppliers, vendors and partners to
determine the extent to which the Company is vulnerable to their failures and to
ascertain their Year 2000 compliance and risk. Based on these responses, the
Company believes that its significant customers, suppliers, vendors and partners
will be Year 2000 compliant.
The total cost of the Year 2000 systems evaluation and remediation is
being funded through operating cash flows and the Company is expensing these
costs. While the total cost to obtain Year 2000 compliance is not known at this
time, the Company currently expects the cost to be less than $100,000, of which
approximately $70,000 has been expended through September 30, 1999. The actual
cost, however, could exceed this estimate. The Company believes that such cost
will not have a material effect on the Company's financial position, results of
operations or cash flows.
15
<PAGE>
PART II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
16
<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 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: November 10, 1999
17
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